CPKF Chesapeake Financial Shares Inc (QX)

CPKF: Better-than-Expected Third Quarter

Ann Heffron, CFA

CPKF reported 2011 third quarter net earnings of $1.8 million, or $0.56 per diluted share, $0.04 better than our $0.52 diluted EPS estimate. This outperformance primarily reflected positive variances in both net interest income and other noninterest expense relative to our third quarter estimates, partially offset by a larger-than-expected loan loss provision.

Compared to the year-ago quarter, net income dropped 7% from $1.9 million and diluted EPS fell by 5% from $0.59, with the better EPS performance reflecting share buybacks. The primary reason for 2011’s slippage versus 2010’s third quarter was a $0.3 million, or 10.8%, increase in total compensation costs to $3.3 million, partly offset by a lower effective tax rate that declined to 24.4% from 26.9%.

In addition, CPKF just announced it was maintaining its $0.10 quarterly dividend, payable on or before December 15, 2011 to shareholders of record as of December 1, 2011. Earlier in the year, CPKF hiked the dividend 9% (4.3% in April and 4.5% in March) and had a a 6-for-5 stock split that occurred in April.

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 through the rankings in the past four years, reflecting its solid financial performance during this difficult banking environment.

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 $631 million in total assets at September 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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