Douglas Bready, executive vice president and loan officer of Texas State Bank, is business-borrower happy. He'd "do just about anything to say 'Yes'" to them.

Judging by the numbers, his customers are pretty happy about him too.

The $643 million-asset bank in McAllen, near the Mexican border, is one of the most prolific community bank providers of small - sometimes tiny - loans to small businesses in Texas. It has more than $70 million in commercial real estate and operating loans of less than $100,000 each to more than 1,300 borrowers in the Rio Grande Valley. The average loan is $42,000, according to Mr. Bready, and "a good many" are under $10,000.

The only community bank in the state with a bigger portfolio of small commercial loans is nearby Victoria (Tex.) Bank and Trust, which is nearly three times the size of Texas State Bank.

"We're a pretty unique bank," Mr. Bready said.

Indeed, such "uniqueness" takes on added importance in Texas in these days of merger mania. Community banks that want to stay independent have to be able to create a franchise value that the larger, out-of-state banks can't create on their own. Conversely, in order to come to the merger table in a position of strength, community banks have to show they have cranking loan functions that will add value for the acquirer, and help secure a hefty premium.

In Texas, which has a humming economy driven in large part by small- business growth, small-business lending is the ticket.

"We have a very clear niche," said Jay Freeman, executive vice president in charge of general banking at Victoria Bank and Trust.

The five banks in the above chart have the biggest portfolios of $100,000-or-less commercial loans among Texas banks with less than $3 billion of assets. All are healthy - some are hugely profitable - and all have several operational similarities.

First, they have decentralized the loan approval process, giving high- denomination lending authority to local branch personnel. Second, they keep their administration and data processing functions in-house, and thus can customize their systems for the nontraditional commercial borrowers that come in for those loans of a few thousand dollars.

Finally, of the 42 Texas banks under $3 billion of assets that emphasize small-business lending, only two have more than $1 billion of assets. Most are less than $500 million.

"We have all the inefficiencies of branch banking and it takes a lot of work tracking files and loan documentation," said Jeryl Story, head of loan administration at Tyler's Southside Bank, which has $22 million in business loans with a paltry average balance of $17,000.

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