The largest component of noninterest income is service charges, which were $20.8 million for the year ended December 31, 2000, compared to $17.0 million for 1999 and $13.0 for 1998. These were increases of 22% and 31% , respectively for 2000 and 1999. Several factors contributed to this growth. First, during this three-year period the Company introduced several new products to their existing retail product line. Secondly, in August 1999, the Company initiated a deposit campaign encompassing all of their existing market areas and redesigned the consumer banking area which has experienced strong growth since its inception. Additionally, the number of deposit accounts grew from 116,197 at December 31, 1998 to 124,424 at December 31, 1999 and to 155,610 at December 31, 2000.

Additional areas of increased growth included investment services and factoring fee income. Factoring fee income is derived from the purchase of accounts receivable. Gross accounts receivable purchased was $27.7 million at December 31, 2000, an increase of $9.2 million from $18.5 million at December 31, 1999. Investment services income grew to $6.0 million, or 24% from the 1999 period. During the past several years, the international department and the foreign exchange division have experienced strong growth, including the addition of several experienced calling officers and an increase in referrals from the Company' s growing customer base. This addition adds to the high quality of personal service and responsiveness to customer needs. Secondly the Company introduced new services such as confirmation of letters of credit for a variety of countries and banks. The international department also has a registered broker for non-U. S. citizens which allows the Company to offer investment products in that market as well.

Noninterest Expenses

For the year ended December 31, 2000, noninterest expenses totaled $120.2 million, an increase of $15.7 million, or 15% , from $104.5 million during 1999, which had increased from $87.9 million during 1998. The increase in noninterest expenses during these periods was due primarily to salaries and employee benefits and occupancy expenses. The efficiency ratio was 61.98% , 65.07% and 64.52% for the years ended December 31, 2000, 1999 and 1998 respectively.

Salaries and employee benefits expense was $67.1 million for the year ended December 31, 2000, an increase of $9.6 million or 17% from $57.5 million for the year ended December 31, 1999. Salaries and employee benefits expense for the year ended December 31, 1999 increased $6.6 million or 13% from the same period in 1998. This increase was due primarily to hiring of additional personnel required to accommodate the Company’s growth. Total full-time equivalent employees for the years ended December 31, 2000, 1999 and 1998 were 1,313, 1,168, and 1,080, respectively.

Occupancy expense rose $1.9 million to $18.0 million in 2000. Major categories included within occupancy expense are building lease expense, depreciation expense, and maintenance contract expense. Building lease expense increased to $4.7 million in 2000 from $3.9 million in 1999, an increase of $735,000 or 19%. The Company continues to increase the rentable square feet of the Galleria corporate location to accommodate the increases in personnel. In addition, the Company leased 91,689 square feet for an operations center in downtown Houston. Depreciation expense increased $249,000 to $8.0 million for the year ended December 31, 2000. This increase was due primarily to depreciation on equipment provided to new employees and expense related to technology upgrades throughout the Company. Maintenance contract expense for the year ended December 31, 2000 was $2.5 million, an increase of $678,000 or 38% compared to $1.8 million in 1999 and $1.5 million in 1998 . The Company has purchased maintenance contracts for major operating systems throughout the organization.

During 2000 and 1999, the Company recorded, on a pre-tax basis, approximately $4.1 million and $4.5 million, respectively in merger-related expenses and other charges including investment banking fees, other professional fees and severance expenses associated with the merger of Citizens in 2000 and Fort Bend in 1999.

Income Taxes

Income tax expense includes the regular federal income tax at the statutory rate, plus the income tax component of the Texas franchise tax. The amount of federal income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of nondeductible interest expense, and the amount of other nondeductible expenses. Taxable income for the income tax component of the Texas franchise tax is the federal pre-tax income, plus certain officers salaries, less interest income from federal securities. In 2000 income tax expense was $22.6 million, an increase of $5.1 million or 29% from the $17.5 million of income tax expense in 1999 and an increase of $1.7 million or 11% from the $15.8 million of income tax expense in 1998.