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CPKF: Second Quarter Shows Good Loan Growth and Asset Quality Improvement

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 9-19-13

Excluding the one-time aftertax gain from the sale of securities of $713,500 ($0.21 per share), CPKF’s diluted EPS was $0.55, $0.13 below our estimate, largely due to a higher-than-expected loan loss provision as the Company beefed up loan loss reserves.

Positively, asset quality measures improved markedly during the quarter following a couple of quarters of weak performance, mainly reflecting a $5.7 million, or 54%, decline in restructured loans to $4.8 million as loans encompassing 2 client lending relationships returned to performing status.

We are cutting our 2013 diluted EPS estimate by $0.14 to $2.36, largely reflecting the shortfall from our second quarter estimate caused by the outsized loan loss provision. In addition, we are tweaking our 2014 diluted EPS estimate and lowering it by $0.03 to $2.52 from $2.55.

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.

Chesapeake Financial Shares, Inc. is a financial 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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