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CPKF: Reducing 2014 EPS Estimate

By Ann Heffron, CFA, CPA

We are slicing our 2014 diluted EPS estimate for Chesapeake Financial Shares, Inc. (CPKF) by $0.25 to $1.70 from $1.95 primarily for two reasons.

Click here to download a free copy of the CPKF research report: CPKF 4-21-14

First, we are decreasing our estimate for the net interest margin by 5 basis points to 4.40% from 4.45%, with this cutting net interest income by about $550,000. Second, we have lopped off $450,000 from our projection for noninterest income as we have doubled our estimate for the combined loss from sales of securities and OREO to $900,000 from $450,000.

In total, these two changes have caused our estimates for pretax earnings and net earnings to decline by $1 million and $800,000, respectively.

We also note that while our estimate for total noninterest expense, including compensation costs, remains $29.3 million, the composition has shifted somewhat. We have cut our estimate for total compensation costs by $0.6 million, as we have significantly reduced our expectations for 2014 bonus accruals. This is totally offset by a $0.6 million rise in miscellaneous noninterest expense for increased legal costs associated with credit issues. 

To review CPKF’s fourth quarter, net earnings fell 9% to $1.2 million, while 2013’s fourth quarter diluted EPS slumped by $0.03, or 9%, to $0.36 from $0.39 posted in 2012’s fourth quarter. We had been expecting a better quarter and had estimated that the Company would earn $0.47 per diluted share, roughly on par with the third quarter’s $0.45, but $0.11 more than CPKF actually posted.

For full-year 2013, CPKF reported $7.4 million, or $2.21 per diluted share, down 4% from the $7.7 million, or $2.32 per diluted share, posted in 2012. This includes a one-time $1.06 million pretax gain on the sale of securities ($710,000 or $0.21 per share on an aftertax basis) in the second quarter. Excluding this item, net earnings were $6.6 million or $1.99 per share, down 14% from 2012. Primary contributors to this result were an almost doubling in the loan loss provision to $1.13 million from $0.6 million in the prior year and a $2.0 million, or 7%, rise in noninterest expense to $29.8 million, partially offset by a 3-point decline in the effective tax rate to 17.9% from 20.9%

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.

Chesapeake Financial Shares, Inc. is a financial holding company headquartered in Kilmarnock, Virginia, with $662 million in total assets at December 31, 2013. 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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