Chesapeake Financial Shares Inc. (OTCQX:CPKF), the parent company of Chesapeake Bank and Chesapeake Wealth Management, reported impressive earnings for Q1 2024, with a significant 303.9% increase from the previous quarter, totaling $2.75 million.
CEO Jeffrey Szyperski credited efforts made in 2023 for the strong performance.
In this discussion with Proactive, Szyperski reflected on the bank's turnaround and shared his confidence about the bank's growth trajectory in 2024 and beyond.
Proactive: The company released its first-quarter earnings for 2024, showcased by a remarkable 303.9% increase from the fourth quarter of 2023. Considering the challenges faced in the banking industry last year, could you discuss the changes that led to this significant improvement?
Jeffrey Szyperski: Last year there were a fair amount of things we put through in 4Q that caused the quarter to be lower than it would normally be. We think 1Q 2024 is more indicative of our run rate going forward. It's still going to be a tough year in 2024 with the interest rate environment, and the inverted yield curve and it appears we might not get a Fed rate decrease this year. But we bolstered our balance sheet in 2023 to guard ourselves for what we knew was going to be a difficult 2024. We feel confident about our earnings going forward in our specialty lines of business, particularly Flexent and Chesapeake Payment Systems, which are off to a very strong start in 2024.
People often consider the prevailing rates, especially concerning mortgages. However, for a bank like yours, the banking environment is heavily influenced by these rates, shaping much of your operations. How does the actions of the Fed hold importance in how things unfold both for your customers and your operations?
The inverted yield curve, even more so than the rate cuts, really make a difference for us banks. It tends to do is it tends to make short term deposit rates be a little bit higher than the longer-term loan rates and causes a compression of the margin. Our cost of funds at the end of the first quarter is 2.18%, which is very favorable compared to peers, but is way higher than it was 18 months ago. That's where banks are feeling it the most is deposit pricing pressure.
You mentioned Chesapeake Payment Systems and Flexent, highlighting their resilience despite the challenging market conditions. Were you surprised by their performance, or is their ability to withstand such conditions by design?
Those two are somewhat countercyclical to the bank, so it did not surprise us. Chesapeake Payment Systems is a merchant acquiring subsidiary for us. After all, consumers are still spending. It’s a nationwide business for us, so we are subject to vagaries of the national market so (Chesapeake Payment Systems) staying up is good. We’ve also added some more business that will also come to fruition more in 2024.
The Flexent side has been roughly level, but that is countercyclical. When the credit market gets tight, that typically does better. They are still recovering from, the PPP program when all the free government money reduced their book of business by about a half in the space of six months. But we're back to 2019 levels.
You mentioned implementing numerous safeguards in 2023 for the upcoming year. Looking ahead to 2024, can you elaborate on your confidence in your current position and your plans to maintain this trajectory moving forward?
We bolstered our balance sheet last year, repositioning some assets that provided the longer-term yield. That's paying some benefits to us going forward. Our specialty lines of business, Flexent and CPS, are both on growth curves and we anticipate that continuing. We have a low loan to deposit ratio. We're about 68% as of the end of the quarter, which means we do not have to fight for every deposit like other financial institutions do. While we're still responsive to our customers, we don't feel that we are getting pulled by the nose ring down that higher cost of funds and that's why our cost of funds is lower than our peers.
Long story short, we're very optimistic that Q1 is the run rate going through the rest of 2024. Our PE ratio right now is only 8.5 to 9%, which is significantly lower than our peers. From a stock perspective, we think we can have a little better upside there given the consistency of our earnings.
Quotes have been lightly edited for style and clarity