Randomly Noted

Once upon a time when financial services companies needed to shore up their capital base, they tapped the public markets. But the near meltdown of the financial system last year that felled some banks and brought others to their knees have made that old-fashioned approach very difficult. Particularly for banks that don’t have initials like “J.P.” in front of their names. And especially for little banks that might want to go public.

Enter Plains Capital, a small financial institution based in Texas that hopes to test market acceptance of the small, regional bank looking to do an initial public offering. Plains is an interesting company. It is the 10th largest bank in Texas (and while Northeasterners might scoff at that, the company does say in its preliminary prospectus that if Texas were its own country, it would be the 11th largest economy in the world). Assets are $4.2 billion and it sees decent growth potential. It has a mortgage origination business and the bank is quick to note that it sells all of the mortgages it creates, which reduces the investment exposure in bad mortgages that crippled many banks and mortgage banks. It was the number six mortgage lender in Texas.

And it is in the advisory business through First Southwest Securities. The crux of that business is public finance and related advice to municipalities. First Southwest ranked number two in the number of municipal bond offerings for the five-year period ended last year, it said in its prospectus.

The company’s business has grown or at least held fairly steady during the economic downturn. Net income for the first six months of the year was $23.12 million versus $16.3 million a year ago. Net for all of last year was $24.12 million versus $28.5 million in 2007.

The question, though, is how the looming commercial real-estate storm will hit the company. The amount of non-performing loans are ticking higher – 2.09% of total loans were non-performing at the six-month market this year versus 2.02% at the same point last year. At the end of 2007 the number was 0.96% About 50% of the loan portfolio are loans backed by real estate. At the bank, the provision for loan losses is moving higher, too. It stood at $24.8 million this past June versus $5.2 million a year earlier.

And its securities portfolio has some tough assets sitting there. In its “held for sale” account, the company holds $68 million of collateralized mortgage obligations and $35 million of other mortgage-backed securities. It also holds $40.6 million of auction-rate bonds which are backed by student loans. Both markets for mortgaged-backed securities and student loans-related bonds froze up last year and remain very illiquid and hard to price.

In the “held for maturity” account, it holds about $110 million of auction-rate bonds, $57.2 million of municipal debt, $29 million of CMOs and $19.9 million of mortgage-backed securities.

Proceeds from the offering will be used to repay  TARP funds ($92 million) borrowed from the government and to repay a $20 million loan from Morgan (the one that does have a J.P. in front of its name). Any additional funds will be used for general corporate purposes.

Underwriting will be led by J.P. Morgan.