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CPKF: Good Second Quarter Prompts 13% Dividend Increase

By Ann Heffron, CFA, CPA

Chesapeake Financial Shares, Inc. (CPKF) reported second quarter diluted EPS of $0.76 that was $0.08, or 12%, better than our $0.68 estimate, as the Company recognized $1.06 million in gains from the sale of securities, which was partly offset by a $0.65 million loan loss provision and a higher effective tax rate.

Click here to download a free copy of the CPKF research report: CPKF 7-31-13

Relative to the year-ago quarter, net earnings climbed 23% to $2.5 million, while 2013’s second quarter diluted EPS advanced 23% from the $0.62 posted in 2012’s second quarter.

Sequential net income jumped 20% from first quarter’s $2.1 million and diluted EPS also gained 20% from the $0.63 posted in the first quarter of 2013. The primary reasons for the second quarter’s gain versus the first quarter were: (1) a $1.1 million positive swing in the combined gain/loss from the sales of securities and OREO to a gain of $1.0 million from a loss of $0.1 million in the first quarter; (2) a $0.55 million jump in the loan loss provision to $650,000 from $100,000; and (3) a 220 basis-point bump-up in the effective tax rate to 24.2% from 22.0%.

On July 19, 2013, CPKF hiked its quarterly dividend by 13% to $0.135 per share from $0.12 per share, payable on September 15, 2013 to shareholders of record on September 1, 2013. CPKF increased the quarterly dividend twice in 2012, by $0.02 or 20%. Notably, CPKF has increased the annual dividend payment every year for the past twenty-one years since 1991.

On October 29, 2012, CPKF announced a tender offer to repurchase up to $1.5 million of company stock at a price of $18.50 per share for shareholders of record (a 12% premium to the $16.50 share price at that time) as of October 25, 2012, with shares tendered by the close of business on December 10, 2012. As the entire $1.5 million was repurchased, this reduced shares outstanding by 2% and increased annual diluted EPS by a penny.

We note that American Banker recently ranked CPKF 17th (down one notch from 16th a year ago) out of all banks nationally with less than $2 billion in total assets, which includes approximately 6,000 banks, and #2 of all banks in <_st13a_place _w3a_st="on">Virginia. This ranking was based upon three-year average returns on equity, which for Chesapeake Financial was 14.10%. The Company has steadily risen through the rankings in the past five years, reflecting its solid financial performance during this difficult banking environment.

We are currently reviewing our estimates.

Chesapeake Financial Shares, Inc. is a bank holding company headquartered in <_st13a_city _w3a_st="on">Kilmarnock, Virginia, with $643 million in total assets at June 30, 2013. CPKF is predominantly a small business lender with 12 branch offices that serve customers in the eastern region of Virginia between the <_st13a_place _w3a_st="on">Potomac and James Rivers. These offices are located in Kilmarnock, Lively, Irvington, Mathews, Hayes, and Gloucester, with five branches in <_st13a_city _w3a_st="on">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 <_st13a_place _w3a_st="on">Richmond, Virginia in mid-August 2011. 

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