CPKF: Continue Outperform on Solid Third Quarter
Ann Heffron, CFA
We are continuing our Outperform recommendation on Chesapeake Financial Shares, Inc. (CPKF) on solid third quarter performance. CPKF reported 2011 third quarter net earnings of $1.8 million, or $0.56 per diluted share, $0.04 better than our $0.52 diluted EPS estimate. This outperformance primarily reflected positive variances in both net interest income and other noninterest expense relative to our third quarter estimates, partially offset by a larger-than-expected loan loss provision.
Compared to the year-ago quarter, net income dropped 7% from $1.9 million and diluted EPS fell by 5% from $0.59, with the better EPS performance reflecting share buybacks. The primary reason for 2011’s slippage versus 2010’s third quarter was a $0.3 million, or 10.8%, increase in total compensation costs to $3.3 million, partly offset by a lower effective tax rate that declined to 24.4% from 26.9%.
We are raising our 2011 diluted EPS estimate to $2.00 from $1.94, which represents an 18% gain from the $1.69 earned in 2010. This reflects the overage in the third quarter of $0.04 (actual results came in at $0.56 versus our $0.52 estimate), as well as a $0.01 gain in our fourth quarter EPS estimate to $0.33 from $0.32.
We are also increasing our 2012 EPS estimate to $2.10 from $2.05, a 5% gain over our 2011 estimate, with the improvement primarily the result of a 23% decline in the loan loss provision. In addition, net interest income should benefit from 4% loan growth, partly reflecting the recent opening of a commercial loan production office in Richmond, Virginia, while noninterest income will be aided by additional gains in merchant card income from CPKF’s expansion into providing bank card processing for independent sales organization (ISOs).
CPKF is maintaining its $0.10 quarterly dividend, payable on or before December 15, 2011 to shareholders of record as of December 1, 2011. Earlier in the year, CPKF hiked the dividend 9% (4.3% in April and 4.5% in March) and had a a 6-for-5 stock split that occurred in April.
We note that US Banker ranked CPKF 20th (up from 32nd about a year ago) out of all banks nationally with less than $2 billion in total assets, which includes approximately 6,000 banks, and #1 of all banks in Virginia. This ranking was based upon three-year average returns on equity, which for Chesapeake Financial was 13.40%. The Company has steadily risen through the rankings in the past four years, reflecting its solid financial performance during this difficult banking environment.
Chesapeake Financial Shares, Inc. is a bank holding company headquartered in Kilmarnock, Virginia, with $631 million in total assets at September 30, 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.
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