Texas Ratio

The Texas Ratio is a bank-distress heuristic that divides a bank's nonperforming assets by the loss-absorbing capital it has on hand to absorb them. Specifically, the numerator sums 90+ days past due loans, nonaccrual loans, and Other Real Estate Owned (OREO); the denominator is tangible common equity plus the allowance for credit losses (ACL). Note investors and bank analysts treat the ratio as a single-number readout of "how much trouble is sitting on the balance sheet relative to the equity that can absorb it."

Why Note Investors Watch the Texas Ratio

The Texas Ratio is the cleanest public signal that a bank is approaching the point where it must sell distressed loans. Banks under capital pressure cannot indefinitely hold non-performing loans — every troubled loan ties up reserves, consumes management attention, and weighs on regulator-supervised capital ratios. When the Texas Ratio climbs into the 20-50% range, a bank is usually already in active conversations about portfolio sales; above 50%, asset disposition becomes existential.

Sourcing teams use the ratio in two ways. First, as a watchlist filter: institutions whose Texas Ratio is rising quarter-over-quarter are candidates to outreach for bulk loan pool inquiries. Second, as a pricing signal: when a seller's Texas Ratio breaches 30%, the bank's negotiating leverage drops sharply, and pool pricing reflects it.

How is the Texas Ratio Calculated?

The formula is straightforward and uses regulator-reported balance-sheet line items:

Texas Ratio = (Nonperforming Loans + OREO) / (Tangible Common Equity + ACL)

Each component is sourced from the bank's quarterly call report:

A worked example clarifies the math. Suppose a $2.4 billion community bank reports $48M of nonperforming loans, $7M of OREO, $185M of tangible common equity, and $32M of ACL:

Texas Ratio = ($48M + $7M) / ($185M + $32M) = $55M / $217M = 25.3%

A ratio of 25.3% places the bank in elevated-stress territory under FIXnotes' NPL Explorer "Texas Ratio Watch" threshold of 20%. The bank is not failing — historical failure correlation hits hardest at 100% (a 1:1 ratio of distress to capital) — but it is the kind of institution that frequently appears on quarterly bulk-sale lists.

The TCE Proxy on FDIC Data

The FDIC BankFind Suite API does not publish a separate Tangible Common Equity field. Where the rigorous formula calls for TCE, FIXnotes' NPL Explorer — and most public Texas Ratio calculators — substitute total equity (EQ) as a proxy. This systematically overstates the denominator by the amount of goodwill and intangible assets on the books, which can be significant at recently merged or acquisitive institutions. The methodology disclosure lives in the tangible common equity entry; treat any FDIC-derived Texas Ratio as the lower bound of the true value.

What is a Healthy Texas Ratio?

The 20% threshold FIXnotes uses for the "Texas Ratio Watch" card is more conservative than the classic 100% threshold from Gerard Cassidy's original RBC Capital Markets research, which observed that nearly every U.S. bank failure in the 1980s Texas oil-bust and 1990s New England real-estate recessions was preceded by a Texas Ratio crossing 1:1 (per Wikipedia's summary of the original Cassidy work). The lower 20% threshold is calibrated for note-deal-flow rather than failure prediction — banks crossing 20% are already operationally pressured to clean up the balance sheet, and that pressure is what turns into pool sales months before any regulatory action.

Regulatory action does not directly follow Texas Ratio breaches — Prompt Corrective Action tiers under 12 CFR §324 trigger off Tier 1 leverage, CET1, and total risk-based capital ratios, not the Texas Ratio. But the Texas Ratio is the leading indicator. Banks whose ratios cross 50% almost always see their Tier 1 leverage ratio deteriorate within two to four quarters.

Comparing Against Peer Cohorts

A 30% Texas Ratio means something different at a $300M community bank than at a $30B regional bank. Larger institutions typically run lower ratios because their balance sheets carry more diversified, lower-volatility loan books and richer capital cushions. FIXnotes' NPL Explorer normalizes by peer cohort size band — under $100M, $100M-$1B, $1B-$10B, and above $10B — and reports each bank's deviation from its cohort median.

A bank running 22% in a cohort where the median is 8% is more interesting for inventory sourcing than a bank running 22% in a cohort where the median is 18%; in the first case, the bank is a clear outlier with operational pressure peers do not share. See the FDIC Bankers Resource Center for the supervisory framework regulators use to evaluate capital adequacy within these size bands.

Bank vs. Credit Union — Why Texas Ratio Is Bank-Specific

The Texas Ratio is a bank metric. Credit unions report under the NCUA using different definitions — most importantly, credit union "delinquent" loans are reported under ACCT_041B as 60+ days delinquent, not the 90+ DPD threshold banks use. NCUA also publishes the Net Worth Ratio as its primary capital-adequacy measure rather than tangible common equity. A direct Texas Ratio calculation on credit union data produces a number that is not comparable to the bank metric; the LCD asymmetry is structural, not adjustable.

For credit unions, FIXnotes' NPL Explorer surfaces equivalent distress through the Net Worth Distress and 60+ Delinquency cards rather than a Texas Ratio analogue.

How Note Investors Use the Texas Ratio in Sourcing

Buyer-side workflow is straightforward:

1. Filter the universe. Pull the current quarter's FDIC call-report panel and rank by Texas Ratio.
2. Read the trend. A 22% ratio that has climbed from 12% over four quarters is a stronger signal than a flat 25%.
3. Cross-check the ACL coverage ratio. A bank with a high Texas Ratio AND a low ACL coverage ratio is under-reserved against its troubled book — the kind of seller most likely to take a steep pricing concession to get assets off the books before next quarter's call report.
4. Outreach. Banks crossing 20% are receptive to inquiry from established pool buyers; banks crossing 50% often initiate the conversation themselves through specialty brokers.

See current top 50 banks by Texas Ratio → Texas Ratio Watch.