By Ann Heffron, CFA, CPA

We are raising our 2013 diluted EPS estimate by $0.05 to $2.50, largely reflecting Chesapeake Financial Shares' (CPKF) strong first quarter that came in a nickel better than our estimate, driven by strong growth in the merchant card, cash flow, and mortgage banking businesses. Our initial 2014 diluted EPS estimate is calling for a gain of $0.05 to $2.55. Our 2013 estimate represents an 8% increase over 2012’s $2.32, itself an 8% gain over 2011’s $2.16, while our 2014 estimate is a 2% advance from our 2013 estimate.

Click here to download a free copy of the CPKF research report: CPKF 6-20-13

Our estimates are supported by strong net interest margins (4.51% in 2013 and 4.40% in 2014) and decent loan growth (2 ½% in 2013 and 4% in 2014), though we expect only modest gains in noninterest income as we have reduced our expectations for expansion in two key areas, services charges on deposit accounts due to lower customer usage and cash flow income, stemming from increased competitive pricing pressures. Positively, both 2013 and 2014 should benefit from strong expense control, with noninterest expense rising less than 1% in both years. The estimated tangible efficiency ratio will display improvement, falling 30 basis points to 71.0% in 2013 and an additional 40 basis points to 70.6% in 2014.

CPKF hiked its quarterly dividend twice in 2012, most recently by 9% to $0.12, following a 10% increase earlier in 2012. Notably, CPKF has increased the annual dividend payment every year for the past twenty-one years since 1991.

In December, CPKF completed a tender offer to repurchase $1.5 million of company stock (about 2% of outstanding shares) at $18.50 per share.

We note that American Banker recently ranked CPKF 17^th (down one notch from 16^th a year ago) out of all banks nationally with less than $2 billion in total assets, which includes approximately 6,000 banks, and #2 of all banks in Virginia. This ranking was based upon three-year average returns on equity, which for Chesapeake Financial was 14.10%. The Company has steadily risen through the rankings in the past five years, reflecting its solid financial performance during this difficult banking environment.

Chesapeake Financial Shares, Inc. is a bank holding company headquartered in Kilmarnock, Virginia, with $644 million in total assets at March 31, 2013. CPKF is predominantly a small business lender with 12 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 five 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. In addition, CPKF opened a commercial loan production office in Richmond, Virginia in mid-August 2011.

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