Aided by improved credit quality and strong loan and deposit growth, Prosperity Bancshares Inc. in Houston reported earnings of $35.1 million in the second quarter, up 10.5% from the same quarter in 2010.

Diluted earnings per share increased 10.3%, to 75 cents, a penny better than the estimates of analysts polled by Thomson Reuters.

In a news release Friday, Chairman and Chief Executive Officer David Zalman attributed the earnings growth largely to an initiative launched late last year that challenged employees to increase organic loan growth by $1 billion by the end of 2012. Though the company is still far from that goal, Zalman noted that total loans have increased by 10.3% in the last two quarters and deposits are up by 13.4%.

Those gains helped the $9.6 billion-asset Prosperity boost its net interest income by 3.8% year over year, to $80.6 million, and widen its net interest margin by six basis points, to 4.06%.

A reduced provision for loan losses also helped boost profits. Prosperity set  aside $1.4 million for loan losses in the quarter, compared to $3.3 million in last year's second quarter. In all, nonperforming assets fell from $21.9 million, or 0.27% of assets, to $12.7 million, or 0.15% of assets.

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