CPKF: Raising 2012 Estimate and Target Price
Ann Heffron, CFA
Chesapeake Financial Shares, Inc. (CPKF) reported 2011 fourth quarter net earnings of $1.6 million, or $0.49 per diluted share, up 57% from the $1.0 million, or $0.31 per diluted share posted in the year-ago quarter. This compares to our fourth quarter estimate of $0.33.
There were a number of variances from our estimate. On the positive side, the loan loss provision was $0.2 million, $0.3 million lower than our estimate of $0.5 million, and the effective tax rate was 8.9% versus our estimate of 24.4%. Negatively, CPKF recorded a net loss on the sale of securities of $455,000 (compared to our $50,000 estimate), reducing noninterest income to $3.2 million (versus our $3.5 million estimate).
For full-year 2011, CPKF earned $7.0 million, or $2.16 per diluted share, up 28% from the $5.4 million, or $1.69 per diluted share, posted in 2010. This compares to our $6.5 million net earnings estimate, or $2.00 per diluted share. This year-over-year gain primarily stemmed from a 5% advance in net interest income to $22.8 million due to a 30 basis-point increase in the net interest margin to 4.70% (average loans were flat) and a 52% decline in the loan loss provision to $1.2 million.
We are raising our 2012 diluted EPS estimate to $2.20 from $2.10, principally due to the better-than-expected performance in 2011’s fourth quarter, which we expect to carry over into 2012. Our $2.20 estimate in 2012 represents a 5% gain over 2011’s $2.10, and is based upon 4% annual loan growth in 2012. CPKF opened a commercial loan production office in Richmond, Virginia in mid-August 2011, which should contribute to additional commercial and industrial lending gains for 2012. Moreover, a new array of more attractive offerings, designed specfically for customers in the cash flow business, should contribute to substantial gains in this segment.
In addition, we are increasing our target price to $17.50, indicating a 30% gain. When combined with the 3.3% dividend yield, this represents a total return of about 33%, well above our expectations for gains in the broader market index over the next year. Therefore, we are maintaining our recommendation on CPKF at Outperform.
Importantly, CPKF raised its quarterly dividend by 10% to $0.11 from $0.10 and has increased its dividend payment annually for the past twenty years.
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 $638 million in total assets at December 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.
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