Ann Heffron, CFA
CPKF: Raising Recommendation to Outperform
We are raising our recommendation on Chesapeake Financial Shares, Inc. (CPKF) to outperform from neutral due to valuation. The Company has taken a number of steps to increase returns to shareholders, including two recent dividend hikes totalling 9% and a stock split, and we don’t believe this has been reflected in the share price.
In addition, CPKF reported a strong first quarter, with diluted EPS rising 34.5% to $0.47 from $0.35. This occurred despite a 144% year-over-year increase in the loan loss provision to $0.6 million as CPKF strengthened loan loss reserves, and was mainly the result of 12.5% growth in net interest income to $5.8 million and tight control over operating expenses, which fell 2% year over year to $6.2 million, and a 2.5-point drop in the effective tax rate.
While we are lowering our 2011 diluted EPS estimate to $1.80 from $1.87, this still represents a 7% gain from the $1.69 earned in 2010, a creditable performance in a difficult lending environment, in our view. Our initial EPS estimate for 2012 is $1.90, a 6% gain over our 2011 estimate.
We note that US Banker ranked CPKF 20th (up from 32nd about a year ago) out of all banks with less than $2 billion in total assets, which includes approximately 6,000 banks. This ranking was based upon three-year average returns on equity, which for Chesapeake Financial was 13.40%. The Company has steadily risen though the rankings in the past four years, reflecting its solid financial performance.
Chesapeake Financial Shares, Inc. (CPKF or the Company) is a bank holding company headquartered in Kilmarnock, Virginia, with $603 million in total assets at March 31, 2011. CPKF is predominantly a small business lender with 11 branch offices that serve customers in the eastern region of Virginia between the Potomac and James Rivers. These offices are located in Kilmarnock, Lively, Irvington, Mathews, Hayes, and Gloucester, with four branches in Williamsburg. CPKF, which began as Lancaster National Bank on April 13, 1900, has a long history and strong ties with the communities it serves.
For a free copy of the CPKF research report, please email scr@zacks.com with CPKF as the subject.
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