To hear community banker David Zalman tell it, the only major challenge his Houston bank faces is deciding how it wants to grow.
Prosperity Bank, part of $586 million-asset Prosperity Bancshares Inc., is torn between focusing on more bank acquisitions or increasing its internal loans, which have grown 15% to 20% in each of the past two years. 
"Houston banks, including ourselves, are doing really well right now," said Mr. Zalman, Prosperity Bank's president. "I can tell by the increasing number of New York investment bankers that call on us that people are interested in this market."
As the local economy has strengthened in the past three years, so has the performance of Houston banks. Overall, Houston banks' and thrifts' return on assets increased to 1.21% through the third quarter, from 1.05% in 1996, according to Strunk & Associates, a Houston consulting firm.
That has translated to record profits at many Houston community banks.
Fourth-quarter net income at Prosperity Bancshares, for instance, jumped 47.7% in 1999, to $2 million. Sterling Bancshares Inc., a $1.9 billion-asset Houston bank, posted fourth-quarter earnings of $6.2 million, a 43.2% increase from a year earlier. And $2.7 billion-asset Southwest Bancorp. of Texas' fourth-quarter earnings climbed by 34.9%, to $8.5 million.
Houston banks credit much of their success to a local economy that has rebounded with energy prices while diversifying in recent years.
The price of light crude oil, for instance, bottomed out at $12 a barrel in February 1999. Since then it has climbed to $30 and has hovered in that range for much of the past month, according to the Greater Houston Partnership, a group that tracks the city's economic trends.
Meanwhile, the city's total employment outside the energy and manufacturing sector increased by 3.7% from December 1998 to December 1999, according to the Texas Workforce Commission.
Houston banking companies are not depending on just a strong economy to deliver results.
Coastal Bancorp Inc., a $2.9 billion-asset Houston thrift, has improved its net interest margin from 190 basis points in 1997 to 290 in 1999 by seeking out more commercial deposits and loans.
"Our relative cost of deposits has dropped, because we're attracting more demand deposits and we can pay lower CD rates," said Manuel Mehos, Coastal's chairman and chief executive officer. "That's served to improve our earnings as much as targeting commercial lending."
Sterling Bancshares boosted its lending staff by one-third in 1999 to bring the bank's number of lending officers to 80. The added staff is targeting small-business customers that had been using larger banks.
"A lot of the growth we've seen has come from increasing our market share, in addition to benefiting from the local economy," said George Martinez, Sterling's chairman. "That's a major reason we've been successful."
