CPKF: Maintain Outperform

Ann Heffron, CFA

CPKF: Maintain Outperform

We are maintaining our outperform recommendation on Chesapeake Financial Shares, Inc. (CPKF - Analyst Report). CPKF reported solid 2011 second quarter net earnings of $2.1 million, up 55% from the $1.3 million reported in the year-ago quarter, while diluted EPS increased 57% to $0.63 from $0.40, with the better EPS performance reflecting share buybacks. Our second quarter diluted EPS estimate was $0.49.

The primary reason for this improvement was a $1.1 million positive swing in securities gains and losses to a gain of $0.5 million in 2011 from a loss of $0.6 million in the year-ago quarter.

That said, CPKF surprised on the upside in a number of key fee income categories, including income from fiduciary activities ($0.5 million versus our estimate of $0.45 million), merchant card income ($1.06 million versus our $0.9 million estimate), and cash flow income ($0.95 million compared to our $0.85 million estimate as CPKF experienced cash flow asset growth for the first time since the third quarter of 2009).

Moreover, the Company has taken a number of steps to increase returns to shareholders, including two recent dividend hikes totalling 9% and a stock split, and we don’t believe this has been reflected in the share price.

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 though the rankings in the past four years, reflecting its solid financial performance.

We are reviewing our estimates and will issue a more comprehensive report when detailed financial information becomes available within the next few weeks.

Chesapeake Financial Shares, Inc. is a bank holding company headquartered in Kilmarnock, Virginia, with $620 million in total assets at June 30, 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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