CPKF: First Quarter About As Expected

Zacks Small Cap Research

By Ann Heffron, CFA, CPA
OTC:CPKF

Chesapeake Financial Shares, Inc.’s (CPKF) first quarter net earnings fell $0.8 million, or 38%, to $1.3 million, while 2014’s first quarter diluted EPS slumped by $0.24, or 39%, to $0.39 from $0.63 posted a year ago.

Click here to download a free copy of the CPKF research report: CPKF 5-21-14

This was only slightly worse than our estimate, which had called for a $0.7 million decline in net earnings to $1.4 million (off by $0.1 million) and a $0.21 drop in diluted EPS to $0.42 (off by $0.03). The primary reason for the difference between reported results and our estimate was that noninterest income fell about $0.1 million short of our projection.

The major reasons for the first quarter’s decline versus the prior-year quarter were: (1) a $0.2 million, or 15%, decline in  merchant card income to $1.0 million as CPKF cut the number of independent sales organizations (ISOs) to four from five; (2) a $0.3 million, or 34%, slide in other income to $0.7 million, partly reflecting a drop in pare-off fees due to a slump in residential mortgage refinancings; and (3) a $0.3 million, or 20%, increase in other noninterest expense, partly due to higher legal fees associated with loan problems.

The loan loss provision jumped 50% year over year to $0.15 million (the same as our estimate). Loan loss reserves increased $0.2 million from $6.3 million (1.66% of loans) at the end of the fourth quarter to $6.5 million (1.71% of loans) at March 31, 2014, and were above the $5.8 million (1.56% of loans) in the year-ago quarter.

As to other asset quality measures, CPKF recorded a net recovery of $68,000 in the first quarter. This compares to net charge-offs of $634,000 in the year-ago quarter and $87,000 in 2013’s fourth quarter.

Gross loans outstanding increased $11 million, or about 3%, year over year and $2 million, or almost 1%, sequentially to $383 million.

In 2013, CPKF hiked its quarterly dividend by 13% to $0.135 per share from $0.12 per share, following two dividend increases in 2012 totalling 20%. The total 2013 dividend payment of $0.51 represents a 13% rise over 2012’s payment of $0.45. Notably, CPKF has increased the annual dividend payment every year for the past twenty-three years since 1991. This feat was recently recognized by SNL Financial in a report that cited CPKF as one of only 20 banks in the country (and only two in Virginia) to increase dividends by at least 2% per year and at least a cumulative 30% over the past five years. The company recorded cumulative dividend growth of 51.1% over the 2008-2013 period.

We are currently reviewing our estimates and will issue a more comprehensive report when detailed financial information becomes available within the next few weeks.

Chesapeake Financial Shares, Inc. is a financial holding company headquartered in Kilmarnock, Virginia, with $669 million in total assets at March 31, 2014. CPKF is predominantly a small business lender with 12 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 five 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. In addition, CPKF opened a commercial loan production office in Richmond, Virginia in mid-August 2011.

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