To all outward appearances, Commerce Bank in Laredo, Tex., should have a difficult time making money.

To keep cash rolling in, Commerce must pay premium interest rates to wealthy Mexican investors and depositors.

And pressure on its margins doesn't stop there. Commerce competes with four larger banks in Laredo alone. To make matters worse, it must do business in a border town whose economy is dependent on Mexico and its recently devalued peso.

But during the past five years, the bank has managed to post fatter returns than its cross-town competitors and any other minority-owned bank in the country.

Its method: running lean and having almost zero loan losses, according to Commerce president Ignacio Urrabazo Jr.

"We haven't invented the wheel or done anything phenomenal," Mr. Urrabazo insisted. "We just keep everything very simple and very basic."

For the past five years, Commerce has posted a return on average assets of 1.84%, according to figures from Sheshunoff Information Services Inc., Austin, Tex.

And at Sept. 30, Commerce had a return on average assets of 1.55%, beating all other Texas banks of its asset size, $100 million to $150 million, according to Barrett Strunk & Associates, a bank consulting firm in Houston.

And the bank made those returns with about 90% of its deposits in interest-bearing accounts and an average cost of funds of about 4%. Texas banks the size of Commerce have an average cost of fund just less than 3%.

"It's not in the margins," Mr. Urrabazo said, "it's in the loan losses and salaries."

Being Hispanic-American-owned, Commerce Bank draws much of its deposit base from Mexican nationals, Mr. Urrabazo said. The bank is on the Mexican border and about 140 miles from the industrial city of Monterrey.

From there and other Mexican cities, wealthy investors bring pension fund money to the bank. Or they use jumbo certificates of deposit to diversify their investment portfolios, keeping the money out of the often unstable banking system in their home country.

To preserve a healthy bottom line - $2 million of earnings last year - Commerce keeps salaries under control and has almost no nonperforming loans.

The Laredo bank has just 33 employees to operate a bank with nearly $140 million of assets. By comparison, First Texas Bank, a Dallas lender with $135 million of assets, has 51 employees.

Commerce has no elves in the back office, nor has Mr. Urrabazo found a way to motivate employees to do more than those at other banks. To be fair, his bank has some advantages. It outsources data processing and bookkeeping and gets some of its administrative work done by its parent, International Bancshares, also based in Laredo.

Mr. Urrabazo said the bank orders supplies, makes bulk purchases, and piggybacks technology through its holding company. The parent's crown jewel is International Bank of Commerce in Laredo, which has nearly $2.5 billion of assets.

Cost-control efforts through the parent company don't stop with purchasing and back-office work. It's a doctrine.

International Bancshares is run by chairman Dennis Nixon, who is famed in Texas for cost-cutting and lean operations, according to Bill Strunk, principal of Barrett Strunk and a consultant specializing in community banks.

"You do the right thing, and you've got no problem with" Mr. Nixon, said Mr. Urrabazo.

On the lending side, Commerce restricts its activity to the United States. Mr. Urrabazo said different legal systems make cross-border loans impractical.

About 26% of the bank's loan portfolio is in commercial loans; another 20%, in commercial real estate loans.

Mr. Urrabazo said the bank has no collection employees and keeps deadbeats out of its portfolio by establishing close relationships with borrowers - a credo of community banks.

"The border is susceptible to cycles because of peso turbulence," Mr. Urrabazo said. "You anticipate the cycles, and you know who can weather them."

There is no doubt Commerce runs lean and minds its borrowers. But no matter how efficient it is, a bank still needs an open market in which to perform.

Laredo became the first port of entry into Mexico in 1851, and it since has grown to bring in $107 billion of import-export business, said Frank Leach, executive director of the Laredo Development Foundation.

Trade has helped banks, Mr. Leach said. Mexican business is one reason a city with 121,000 people has banks with $4.6 billion of total assets.

But proximity to Mexico makes banking tough, too.

During 1995, when the peso was most volatile, Laredo's unemployment rate rocketed to 14.1%, from 8.2% in 1994. In many markets, that would have translated into loan defaults.

However, Commerce has managed to keep nonperformers to just 0.03% of total loans, Mr. Urrabazo said.

"In banking, the primary (lending) decision is not always on the ratios, cash flow, and collateral," he said. "It's whether the business is a good idea." "We have gone through these cycles for 50 years."

Mr. Welch is a Dallas writer.

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