This last summer I had the opportunity to visit San Antonio, Texas to perform a review on a great company, Gardner Mortgage.  The Company has a disciplined management team and successful business model.  While I was visiting, I had the chance to wander around the River Walk Area.  Wow, what a cool place to hang out, have dinner and enjoy the sites.  If you get a chance, make a visit to San Antonio.

Speaking of Texas, we recently discussed the Texas Ratio in our newsletter

For some of you that didn’t see it, The Texas Ratio is one measure of a bank’s financial strength and sometimes is an indicator of banks that may fail. 

The Texas Ratio is calculated by dividing the value of a lender’s non-performing assets by the sum of its tangible common equity capital and loan loss reserve.  Non-performing assets are non-performing loans plus real estate owned.

The Texas Ratio was developed by Gerard Cassidy and others at RBC Capital Markets and was used during the 1980 recession in analyzing banks financial strength.  In short, when the ratio hit 1:1 or 100%, they noted that banks had a high probability of failing.  For example, if a bank has a Texas Ratio of 50, it means for every $100 of capital, it also has $50 of non-performing assets. 

If the ratio gets too high, banks can raise new money to reduce the ratio. From a shareholder perspective, raising new money dilutes their value.  If they don’t raise new money, shareholders run the risk of losing all their money if the bank fails. 

I found a web site that shows the Texas Ratio of all US Banks.  It is located HERE . Currently there are around 95 banks with ratios above 100.

Take a look at the Texas Ratio of Banks that are key players in the mortgage industry.