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CPKF: Third Quarter EPS Declines from Record EPS a Year Ago

By Ann Heffron, CFA, CPA

Chesapeake Financial Shares, Inc.’s (CPKF) third quarter net earnings fell 38% to $1.5 million, while 2013’s third quarter diluted EPS slumped 39% to $0.45 from the record $0.74 posted in 2012’s third quarter. Admittedly, this was a bit disappointing to us, though we had never expected this year’s third quarter to top last year’s when CPKF achieved record earnings.

Click here to download a free copy of the CPKF research report: CPKF 11-7-13

In fact, CPKF’s third quarter diluted EPS of $0.45 was $0.20, or 31%, below our $0.65 estimate, largely due to higher-than-expected expenses.

There were some positives in the quarter. The Company reported $2 million of sequential loan growth, a provision for credit losses that was $50,000 below our $150,000 estimate, net interest income that was $0.1 million better than the $5.7 million we had projected, and growth in merchant card and cash flow income that each came in $0.1 million-plus higher than we had expected.

Still, this was more than offset by noninterest expense that was $0.7 million higher than we had anticipated. Furthermore, combined losses from the sales of securities and OREO were $0.4 million worse than our estimate.

On the positive side, CPKF recently hiked its quarterly dividend by 13% to $0.135 per share from $0.12 per share, which follows two dividend increases totalling 20% in 2012. Notably, CPKF has increased the annual dividend payment every year for the past twenty-two 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 $659 million in total assets at September 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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