CPKF: Maintain Neutral following Fourth Quarter Results - Analyst Blog

Ann Heffron, CFA

CPKF: Maintain Neutral following Fourth Quarter Results

We are maintaining our Neutral rating on Chesapeake Financial Shares, Inc. (CPKF). CPKF reported 2010 fourth quarter net earnings of $1.0 million, down 20% from the $1.3 million reported in the year-ago quarter, while diluted EPS decreased 17% to $0.38 from $0.45, with the better EPS performance reflecting share buybacks. This compares to our fourth quarter estimate of $0.49.

There were a number of variances from our estimate. On the negative side, the loan loss provision was $0.9 million, higher than our estimate of $0.6 million, and other expenses were $2.5 million versus our estimate of $1.8 million, primarily the result of one-time write-downs of other real estate owned. This was partially offset by a $0.1 million income tax credit compared to our estimate of $0.5 million in income taxes, as CPKF reversed income tax overaccruals in the prior three quarters.  

Net interest income was flat year over year at $5.5 million, and noninterest income rose 8% to $3.7 million. This was due to a 25% jump in merchant card income to $1.1 million on higher processing  volumes and a 54% decline in securities losses to $0.1 million, which were partially offset by a 20% slide in services charges on deposit accounts, hurt by changes in federal regulations, and a 16% drop in cash flow income, the result of reduced lending volumes.  

Noninterest expense rose 3% year over year, largely due to a significant increase in other expenses that were partly offset by declines in other line items. The efficiency ratio was flat at 80%.

The loan loss provision more than doubled to $0.9 million from $0.4 million in the fourth quarter of last year, as the Company continued to strengthen loan loss reserves. CPKF increased its loan loss reserves to $6.1 million (1.69% of loans) from $5.6 million (1.54% of loans) at the end of 2010's third quarter and $5.2 million at yearend 2009 (1.41% of loans).

As to other asset quality measures, CPKF charged off $0.4 million of loans in the fourth quarter, resulting in a 0.45% charge-off ratio for the loan portfolio. This compares to net charge-offs of $0.4 million for full-year 2009 and $0.1 million for all of 2008. Gross loans outstanding dropped about $4 million, or 1%, sequentially to $362 million and $3 million from the end of 2009, reflecting continued weak loan demand.

CPKF posted a 9.7% ROE and 0.67% ROA for the fourth quarter of 2010, compared to 14.2% and 0.87%, respectively, in the prior-year quarter.

Notably, CPKF just raised its quarterly dividend by 4.5% to $0.115 from $0.11, payable on March 15, 2011 to shareholders of record on March 1, 2011. This means CPKF is on track to increase its annual dividend payment every year since 1992.
 
We are currently 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 $608 million in total assets at December 31, 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 free copy of the CPKF research report, please email scr@zacks.com with CPKF as the subject.