CPKF: Shares Undervalued

Ann Heffron, CFA

CPKF: Shares Undervalued

We are maintaining our outperform recommendation on Chesapeake Financial Shares, Inc. (CPKF - Analyst Report), as it remains undervalued relative to historical norms. We have raised our target price to $14.50 and changed the holding period to twelve months from six months.

CPKF reported 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. 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, as CPKF harvested gains after repositioning its municipal securities portfolio.

Excluding gains and losses on securities and on other real estate owned in both quarters, net income was flat year over year at $1.8 million.

That said, CPKF surprised on the upside in a number of key fee income categories, including income from fiduciary activities, merchant card income, and cash flow income.

We are raising our 2011 diluted EPS estimate to $1.94 from $1.80, which represents a 15% gain from the $1.69 earned in 2010 and reflects the overage in the second quarter of $0.14 (actual results came in at  $0.63 versus our $0.49 estimate).

We have also increased our 2012 EPS estimate to $2.05 from $1.90, a 6% gain over our 2011 estimate, with the improvement primarily the result of a 28% decline in the loan loss provision.

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.

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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