Written by Ann Heffron, CFA
We are maintaining our Neutral rating on Chesapeake Financial Shares, Inc. (CPKF). CPKF reported 2010 third quarter diluted EPS of $0.71, up 33% from $0.53 a year ago. This compares to our $0.59 estimate, with the outperformance primarily reflecting stronger cost controls than expected, as total noninterest expense declined 1% year over year and 4% sequentially to $6.3 million due to reduced costs for employee benefits, occupancy, ATM expense, cash flow expense, and miscellaneous expense.
Net interest income increased 12% year over year to $5.6 million on a higher net interest margin, and noninterest income jumped 25% to $4.5 million, largely reflecting a $0.9 million positive swing in securities gains/losses to a $0.65 million gain in 2010’s third quarter from a $0.25 million loss in the 2009 quarter. This was offset by a corresponding $0.9 million increase in the loan loss provision to $1.2 million.
We are sharply increasing our diluted EPS estimates, mainly due to the third quarter overage, stronger growth in noninterest income stemming from higher estimates for merchant card income, lower losses on securities sales, and better control over operating expenses, partially offset by higher credit loss provisions. For 2010, our new estimate is $2.10 versus $1.82 previously and for 2011, it is $2.25 versus $1.92 before.
CPKF trades at a premium to the Zacks small-cap bank index on a tangible book basis, which we believe is justified given CPKF’s strong performance throughout the financial crisis, as well as our expectations for continued growth in EPS over 2010-2011, its strong profitability measures, and its solid dividend yield. With these positives already incorporated into the share price, we expect the stock to perform in line with the overall market over the next six months; hence, our Neutral recommendation.
Chesapeake Financial Shares, Inc. is a bank holding company headquartered in Kilmarnock, Virginia, with $605 million in total assets at September 30, 2010. 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.
For a copy of the CPKF research report, please email scr@zacks.com with the ticker CPKF in the title.
CHESAPEAKE FINC (CPKF): Free Stock Analysis Report
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