CEO Message

Coming off of a prolonged low interest rate environment during the pandemic, 2023 saw a continuation of Federal Reserve rate increases following on top of a pace in 2022 which hadn’t been seen in decades. During the 2022-2023 cycle, the Federal Reserve increased rates 11 times in an effort to ease inflation—525 basis points. Interestingly, despite this rapidly rising short-term rate environment, the 10-year Treasury, which investors typically flock to in a tumultuous market, was at 3.88% at year-end 2023--exactly the same as at year-end 2022. Typically, banks do best when long- term rates are higher than short-term rates, but in late 2022 Fed Funds jumped above 10-year Treasury rates and they continue to be much higher, compressing net interest margins. In addition, mortgage rates at the end of 2023 approached 8%, the highest level in 23 years, limiting the buying power of house hunters on top of the year’s soaring home prices.

Kitsap Bank continues to stay true to its course and is a stabilizing economic force in the region during economic uncertainty. Despite an increased cost of funds, inflation and wage pressures, Olympic Bancorp recorded another solid year of financial performance with Net Income for the year of $14.5 million, compared to $13.0 million in 2022.

Competition among financial institutions for deposits remains fierce and financial institutions with limited access to liquidity have no choice but to pay high rates to attract deposits. Depositors who largely left funds untouched in a sustained low interest rate environment, began moving their funds to higher yielding accounts as rates increased. Rate pressure in 2023 led to an increased cost of funds throughout the banking sector. While this increased cost of funds has impacted Kitsap Bank’s earnings, our cost of funds remains lower than the majority of our peers at a modest 0.67% for 2023 as we continue to maintain the bulk of our strong deposit base.

Kitsap Bank ended 2023 with a Leverage Ratio of 11.0%, and the Bank is considered “well-capitalized” by all regulatory standards. Our investments in solar equipment increased $12.7 million. These investments produced federal tax credits of $4.1 million, which helped drive net income after tax up 11.5% at Olympic Bancorp compared to the same period last year.

Generally Accepted Accounting Principles (GAAP) require that we fair value (“mark-to-market”) our investment portfolio that is held as “Available for Sale” and reflect the difference between purchased cost and current estimated fair value as Accumulated Other Comprehensive Income (AOCI) in Shareholder’s Equity. As of year-end 2023, we had a negative AOCI of $61.0 million, which is an improvement from the negative $76.6 million at the same time last year. A loss or gain in AOCI does not flow through operating income, but is simply a value indication of the securities portfolio at a moment in time. Fair value accounting standards are not applied to loans or deposits, but if they were, Kitsap Bank’s aggregate fair value would have increased in 2023, as our low-cost deposit base has greater value in a higher interest rate environment.

Among those technologies that our clients most enjoy are Kitsap Bank’s Interactive Teller Service (ITS) machines. The largest fleet in the Pacific Northwest, the ITS allows greater access to the local bankers you trust with expanded banking hours. We also offer robust commercial payment solutions to our business clients backed by the expertise of our business bankers who are invested in their local communities and understand the challenges and opportunities PNW business owners face. As always, our goal is to allow our clients to “bank the way they want”. Technology coupled with easy access to your trusted bankers offers convenience and the empowerment to make better financial decisions.

It is not unusual for employees to spend their entire professional careers at Kitsap Bank, with numerous individuals celebrating 30-40+ year careers with us. In addition to offering competitive salaries, benefits, training opportunities, flexible schedules, and more, we continue to evaluate our benefits offering and how it meets the needs of a younger and more diverse workforce. We are pleased to share that Kitsap Bank was again named by the Puget Sound Business Journal as a “Best Places to Work”, an award selected based upon employee feedback surveys.

The Olympic Bancorp Board of Directors had some significant changes in 2023. Longtime board member, Wade Perrow, retired. At our Annual Meeting, we were pleased to add two new Directors – Tina Pappas and Jeff Dolven. Tina is the President of NAI Puget Sound Properties, a successful Puget Sound commercial real estate firm, and she also serves on the Board of the Commercial Brokers Association. Jeff holds the position of President & CEO of Skookum Contract Services, a Bremerton- based multistate leader in manufacturing, facilities management and logistics services that employs over 1,300 people. In July we sadly lost our Director of 70 years and Vice-Chairwoman, Helen Langer Smith. Helen was a remarkable leader, business person and philanthropist who cared deeply about Kitsap Bank’s customers, employees and the community. She leaves a lasting legacy and one which we are proud to continue in her honor. Helen’s daughter, Cydly Langer Smith, continues to lead as our Chairwoman of the Board, a position she has held since 2011. Helen’s youngest daughter, Melinda Smith Pigors, has served as a Director since 2010. Upon Helen’s passing Melinda was elected by the Board to the Vice-Chairwoman position vacated by her mother.