The Texas Ratio was developed by RBC Capital Markets analyst Gerard Cassidy in the 1980’s to forecast which banks could fail during the 1980’s real estate bubble.

The ratio is devised by comparing a bank’s troubled loans to its capital. If the amount of bad loans equals or exceeds its capital, a ratio of 100% or higher, the bank might not have enough capital to cover its losses related to the bad loans on its books.

If a bank’s Texas ratio is 100% or higher it doesn’t necessarily mean the bank will fail, a bank can raise more capital to cover its losses, though not an easy thing to do these days during the credit crunch.
Here are the results for some SF banks at 9/30/09.

If you’re a community bank you live and die by it. The ratio is basically non-performing assets divided by capital plus reserves. Anything over 100 is a strong indicator of a troubled bank. Bank presidents are highly aware of their own and others Texas ratios and for the foreseeable future it will be used as a benchmark for the community banks’ health. Obviously, in our community, this all ties into the real estate market and the question on all our minds is how long do we have to wait for a recovery? Recent call reports indicate that most of our community banks have over 80% of their loan portfolios in real estate and many troubled institutions are over 90%. By the way you’re probably interested to know that the regulators are forcing banks to write down their commercial and condo portfolios to market value on a quarterly basis. This will undoubtedly result in continued losses for community and domestic banks but perhaps hidden profits for the 3rd and 4th quarters as the real estate markets recover. Another note on condos is that condo associations are underwater which dampens the rental market as the cash flow needed to provide basic services is showing an increasing deficit.