• The 0.15 percent year-over-year decrease in payroll employment for third quarter 2003, while a significant improvement from one year ago, remained well below the average growth rate of 2.4 percent during the 1990s (see Chart 1).
  
  [D]
  
  
• Employment growth in the education and health, FIRE,¹ and construction sectors balanced sharp declines in the manufacturing sector, which were led by layoffs at Boeing.
  
  ¹ The FIRE sector includes the finance, insurance, and real estate industries.
  
• In light of Washington’s weak economic growth, sales tax revenue decreased 1.6 percent for the second quarter ending June 2003, a significant contributing factor to the State’s total revenue decrease of 0.5 percent for this period. As of third quarter 2003, employment growth in state and local government slowed, only increasing year-over-year by 0.31 percent.
  
  
• As of third quarter 2003, the state’s unemployment rate increased 40 basis points to 7.6 percent, the third highest rate in the nation, behind Oregon and Alaska.
  
  
• Civilian aerospace and high-tech sector weaknesses pushed up average unemployment rates, particularly in the Portland and Tacoma metropolitan statistical areas (MSAs), while layoffs at the nuclear cleanup company Fluor Hanford forced the unemployment rate higher in Richland. Average unemployment rates within MSAs elsewhere in the state remained relatively stable or improved during the year ending third quarter 2003 (see Chart 2).
  
  [D]
  
  
• Employment weakness may affect home prices in some areas adversely. According to a PMI Mortgage Insurance Co. report, the Seattle MSA ranked fourth out of 50 metropolitan areas, for having a “high risk” of a housing price decline.

² CRE loans include mortgages secured by nonfarm-nonresidential, multifamily, and construction projects.

• Demand for commercial properties in the Seattle MSA continued to be weak. Office vacancy rates increased to 15.3 percent at the end of third quarter 2003, up from 3.4 percent three years earlier, while industrial vacancies increased from 5.5 percent to 10.7 percent over the same period (see Chart 3). According to Torto Wheaton Research data, third quarter 2003 Seattle office rents declined 29 percent from their peak in fourth quarter 2000, while industrial rents fell 32 percent since their first quarter 2000 peak. The commercial and industrial real estate markets are expected to remain soft.
  
  [D]
  
• During the year ending June 30, 2003, the median CRE loan-to-Tier 1 capital ratio among established community institutions³ increased from 314 percent to 356 percent, more than double the national ratio. The median construction and development (C&D)-to-Tier 1 capital ratio was 78.2 percent at the end of the third quarter, more than triple the 21.7 percent national ratio (see Chart 4). Concentrations among established community institutions based in the Seattle MSA were even higher, with the CRE loan-to-Tier 1 capital ratio at 408 percent, and the C&D-to-Tier 1 capital ratio at 134 percent.
  
  ³Defined as insured institutions open more than 3 years, with assets of less than $1 billion, and excludes specialty institutions.
  
  [D]
  
  
• Despite increased vacancy rates and exposures to CRE and construction loans, the median CRE loan-delinquency ratio reported by Washington’s established community institutions dropped from 0.65 percent to 0.31 percent from June 2002 to June 2003.<sup>4
  
  4</sup> Murray, Thomas. “How Long Can Bank Portfolios Withstand Problems in Commercial Real Estate?” FDIC FYI, June 23, 2003.
  
  
• Lower interest rates may have enabled property owners to reduce financing costs, thereby offsetting the effects of lower rental income. In addition, low interest rates appear to be keeping capitalization rates low and property values stable, despite deteriorating fundamentals. Other contributing factors include the tremendous growth in public, non-governmental mortgage securitization, greater regulatory oversight, and stringent CRE lending standards.

• The median return on assets (ROA) among insured institutions headquartered in Washington as of June 30, 2003, remained stable, only increasing from 1.02 percent in 2002 to 1.03 percent in 2003 at the end of second quarter, and slightly below the national median of 1.06 percent.
  
  
• Earnings trends continued to be buoyed by the performance of the state’s thrifts. Washington-based thrifts posted a median ROA of 1.20 percent through June 30, 2003, compared to 0.81 percent for thrifts nationally. Conversely, commercial banks headquartered in Washington reported a median ROA of 0.92 percent through second quarter 2003, significantly below the 1.11 percent return earned by commercial banks nationwide. Thrifts net interest margins (NIMs) benefited more than commercial banks from declining interest rates during 2001, 2002, and the first half of 2003 (see Chart 5).
  
  [D]



• One-third of institutions headquartered in the state have been in operation less than nine years. These “young” institutions are not yet as profitable as more established Washington-based insured institutions, and reported a median ROA of 0.78 percent as of second quarter 2003. Compared to older institutions, profitability among the states’ “young” institutions was held back by higher overhead and provision expenses.