SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                    Commission file number
    December 31, 1997                                0-9439

                      INTERNATIONAL BANCSHARES CORPORATION
              (Exact Name of Registrant as Specified in its Charter)

              TEXAS                                      74-2157138
      (State of Incorporation)              (I.R.S. Employer Identification No.)
      1200 SAN BERNARDO AVENUE
      LAREDO, TEXAS 78042-1359                   AREA CODE (956) 722-7611
  (Address of principal executive             (Registrant's telephone number)
   office and Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

                                                    NAME OF EACH EXCHANGE ON
       TITLE OF EACH CLASS                              WHICH REGISTERED
       -------------------                              ----------------
              None                                              None

Securities Registered Pursuant to Section 12(g) of the Act:
                         COMMON STOCK ($1.00 PAR VALUE)
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1998 was $529,836,489.

As of March 20, 1998, there were 11,260,197 shares of the Registrant's Common
Stock outstanding.

Portions of the following documents are incorporated by reference into the
designated parts of this Form 10-K: (a) Annual Report to security holders for
the fiscal year ended December 31, 1997 (in Parts I and II) and (b) proxy
statement dated April 20, 1998 (in Part III).
<PAGE>
                                    CONTENTS

                                     PART I

                                                                     PAGE

Item 1.   Business...........................................          3
Item 2.   Properties.........................................         25
Item 3.   Legal Proceedings..................................         26
Item 4.   Submission of Matters to a Vote of
            Security Holders.................................         26


                                     PART II

Item 5.   Market for the Registrant's Common Stock
            and Related Security Holder Matters..............         26
Item 6.   Selected Financial Data............................         27
Item 7.   Management's Discussion and Analysis of
            Financial Condition and Results of
             Operations......................................         27
Item 8.   Financial Statements and Supplementary Data........         27
Item 9.   Changes In and Disagreements with Accountants on
            Accounting and Financial Disclosure..............         27


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.         27
Item 11.  Executive Compensation.............................         27
Item 12.  Security Ownership of Certain Beneficial
            Owners and Management............................         27
Item 13.  Certain Relationships and Related Transactions.....         27


                                              PART IV

Item 14.  Exhibits, Financial Statement Schedules
            and Reports on Form 8-K..........................         28


Signatures...................................................         31


                                        2
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Item 1. BUSINESS

GENERAL

      International Bancshares Corporation (the "Company") is a bank holding
company with four bank subsidiaries providing commercial and retail banking
services through 76 main banking and branch facilities located in 25 communities
in South and Southeast Texas. The Company was incorporated under the General
Corporation Law of the State of Delaware in 1979 and has its principal corporate
offices in Laredo, Texas. Effective June 7, 1995, the Company's state of
incorporation was changed from Delaware to Texas. The Company was organized for
the purpose of operating as a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended, and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "FRB"). As a registered bank holding company, the Company may own
one or more banks and may engage directly, or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act and by the FRB. The Company's principal
assets at December 31, 1997 consisted of all the outstanding capital stock of
four Texas state banking associations (the "Banks" or "bank subsidiaries"). All
of the Company's bank subsidiaries are members of the Federal Deposit Insurance
Corporation.

     The bank subsidiaries are in the business of gathering funds from various
sources and investing these funds in order to earn a return. Funds gathering
primarily takes the form of accepting demand and time deposits from individuals,
partnerships, corporations and public entities. Investments principally are made
in loans to various individuals and entities as well as in debt securities of
the U.S. Government and various other entities whose payments are guaranteed by
the U.S. Government. Historically, the bank subsidiaries have primarily focused
on providing commercial banking services to small and medium sized businesses
located in its trade area and international banking services. In recent years,
the bank subsidiaries have also emphasized consumer and retail banking,
including mortgage lending and credit card services, as well as branches
situated in retail locations and grocery stores.

        The Company's philosophy focuses on customer service as represented by
its motto, "We Do More." The Banks maintain a strong commitment to their local
communities by, among other things, appointing selected members of the
communities in which the Banks' branches are located to local advisory boards
(the "local boards"). The local boards direct the operations of the branches,
with the supervision of the Bank's board of directors, and assist in introducing
prospective customers to the Banks as well as developing or modifying products
and services to meet customer needs. The Banks function largely on an autonomous
basis, and the Company believes that such decentralized structure enhances the
commitment of the Banks to the communities in which their branches are located.
In contrast to many of its principal competitors, the credit decisions of the
Banks are made locally and promptly. The Company believes that the knowledge and
expertise afforded by the local boards are key components to sound credit
decisions.

        Expense control is an essential element in the Company's profitability.
The Company has centralized virtually all of the Banks' back office support and
investment functions in order to achieve consistency and cost efficiencies in
the

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delivery of products and services. The Company's efficiency ratio (other
operating expenses divided by net interest income and other operating income)
currently stands at 51% and has been under 57% for each of the last five years,
which the Company believes is well below national peer group ratios. One of the
benefits derived from such operating efficiencies is that the Company is not
subjected to undue pressure to generate interest income from high-risk loans.
Accordingly, the Company believes it is able to be more selective and
conservative with respect to its credit decisions. Despite this lack of economic
pressure, the Banks aggressively pursue, with the help of the local boards,
quality credits with an emphasis on loans to small and medium sized businesses.

        During the last eight years, IBC, as defined below, has been an active
acquiror of financial institutions and banking assets in its trade area. The
community focus of IBC and the involvement of the local boards has resulted in
IBC becoming aware of acquisition possibilities in the ordinary course of its
business and in many instances before other potential purchasers. IBC's decision
to pursue an acquisition is based on a multitude of factors, including the
ability to efficiently assimilate the operations and assets of the acquired
entity, the cost efficiencies to be attained and the growth potential of the
market.

      On July 28, 1980, the Company acquired all of the outstanding shares of
its predecessor, International Bank of Commerce ("IBC"), which is today the
flagship bank of the Company, representing 85% of the Company's banking assets.
IBC was chartered under the banking laws of Texas in 1966 and has its principal
place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is
a wholly-owned subsidiary of the Company. Since the acquisition of the flagship
bank in 1980, the Company formed three banks and acquired $1,818,036,000 in
assets and assumed $1,734,178,000 of deposits in numerous acquisition
transactions, which totals are as of the acquisition date and do not take into
account any runoff or other subsequent events. In addition to the acquisitions,
IBC has also focused on deposit growth from its traditional banking activities.

        Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of approximately $17,613,000 at such
date. These assets will be amortized on a straight line basis over a fifteen
year period.

        Effective March 7, 1997, IBC purchased certain assets and assumed
certain liabilities of five branches of Bank of America Texas, N. A., Irving,
Texas. IBC purchased loans of approximately $381,000 and assumed deposits of
approximately $84,834,000 and received cash and other assets in the amount of
approximately $84,799,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $3,705,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.

        Effective November 21, 1996, IBC purchased certain assets and assumed
certain liabilities of three branches of Home Savings of America F.S.B.,
Irwindale, California. IBC purchased loans of approximately $769,000 and assumed
deposits of approximately $196,813,000 and received cash and other assets in the
amount of

                                        4
<PAGE>
approximately $196,081,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $9,670,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.

        Effective June 27, 1996, IBC purchased certain assets and assumed
certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal
savings bank organized under the laws of the United States. At the date of
closing, total loans acquired were approximately $21,408,000, deposits assumed
were approximately $132,133,000 and cash and other assets received were in the
amount of approximately $110,756,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $6,599,000 at such date. These assets are being amortized on a
straight line basis over a fifteen year period.

        For more information regarding the acquisition transactions of the
Company during the last three years, see note 2 of notes to Consolidated
Financial Statements of the Company located on page 27 of the 1997 Annual Report
which is incorporated herein by reference.

        In addition to IBC, the Company has three other bank subsidiaries. The
three additional banks are (i) Commerce Bank, a Texas state banking association
which commenced operations in 1982, located in Laredo, Texas ("Commerce Bank");
(ii) International Bank of Commerce, a Texas state banking association which
commenced operations in 1984, located in Brownsville, Texas ("IBC-Brownsville");
and (iii) International Bank of Commerce, a Texas state banking association
which commenced operations in 1984, located in Zapata, Texas ("IBC-Zapata").

        The Company also has four non-banking subsidiaries. They are (i) IBC
Life Insurance Company, a Texas chartered subsidiary which reinsures a small
percentage of credit life and accident and health risks related to loans made by
bank subsidiaries, (ii) IBC Trading Company, an export trading company which is
currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bank holding
company incorporated in the State of Delaware, and (iv) IBC Capital Corporation,
a company incorporated in the State of Delaware for the purpose of holding
certain investments of the Company.

SERVICES AND EMPLOYEES

        The Company, through its bank subsidiaries, IBC, Commerce Bank, IBC
Zapata and IBC Brownsville, is engaged in the business of banking, including the
acceptance of checking and savings deposits and the making of commercial, real
estate, personal, home improvement, automobile and other installment and term
loans. Certain of the bank subsidiaries are very active in facilitating
international trade along the United States border with Mexico and elsewhere.
The international banking business of the Company includes providing letters of
credit, making commercial and industrial loans, and a nominal amount of currency
exchange. As part of its international strategy the Company also aims to provide
a full array of banking services to "maquiladoras," including, account and
payroll services. A "maquiladora" is a type of assembly or manufacturing plant
under Mexican law which is typically owned by a United States company and
located on Mexico's northern border for the purpose of temporarily importing
materials to be assembled in Mexico

                                        5
<PAGE>
and re-exported to the United States. Each bank subsidiary also offers other
related services, such as credit cards, travelers' checks, safety deposit,
collection, notary public, escrow, drive-up and walk-up facilities and other
customary banking services. Additionally, each bank subsidiary makes available
certain securities products through third party providers. The bank subsidiaries
also make banking services available during traditional and nontraditional
banking hours through their network of 152 automated teller machines, and
through their branches situated in retail locations and grocery stores. To date,
as part of the Company's expansion of its retail banking services, 27 grocery
store branches have been opened.

        The Company owns U.S. and Texas service mark registrations for
"INTERNATIONAL BANK OF COMMERCE" and the related United States and Mexico logo
as well as "INTERNATIONAL BANK OF COMMERCE CENTRE" and "ITS A BRIGHTER
CHRISTMAS". In addition, the Company owns Texas service mark registrations for
"CHECK 'N SAVE" and "WALL STREET INTERNATIONAL" and the related design. Also,
IBC is investigating the availability of service mark registrations related to
certain proprietary products.

        No material portion of the business of the Company may be deemed
seasonal and the deposit and loan base of the Company's bank subsidiaries are
diverse in nature. There has been no material effect upon the Company's capital
expenditures, earnings or competitive position as a result of Federal, State or
local environmental regulation.

        As of December 31, 1997 the Company and its subsidiaries employed
approximately 1,152 persons full-time and 158 persons part-time.

COMPETITION

        The Company is the largest minority-owned bank holding company in the
United States, with more than a majority of its common stock being held by
Hispanic shareholders. The Company is the second largest independent Texas bank
holding company. The primary market area of the Company is South and Southeast
Texas, an area bordered on the east by the Houston area, to the northwest by San
Antonio, to the southwest by Laredo and to the southeast by Brownsville. The
Company has increased its market share in its primary market area over the last
seven years through strategic acquisitions. The Company, through its bank
subsidiaries, competes for deposits and loans with other commercial banks,
savings and loan associations, credit unions and nonbank entities, which nonbank
entities serve as an alternative to traditional financial institutions and are
considered to be formidable competitors.

        The Company and its bank subsidiaries do a significant amount of
business for customers domiciled in Mexico, with an emphasis in Northern Mexico.
Deposits from persons and entities domiciled in Mexico comprise a significant
portion of the deposit base of the Company's bank subsidiaries. Such deposits
comprised approximately 35%, 39% and 43% of the Company's bank subsidiaries'
total deposits as of December 31, 1997, 1996 and 1995, respectively.

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<PAGE>
SUPERVISION AND REGULATION

        GENERAL - THE COMPANY. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earnings of the
Company are affected by the fiscal and monetary policies of the Federal Reserve
System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.

        FRB APPROVALS. The Company is a registered bank holding company within
the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking. The Company is required to file with the FRB annual reports and
other information regarding the business operations of itself and its
subsidiaries. It is also subject to examination by the FRB. Under the BHCA, a
bank holding company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of any voting stock of any company which
is not a bank or bank holding company, and must engage only in the business of
banking, managing, controlling banks, and furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of any company provided such shares do not constitute
more than 5% of the outstanding voting shares of the company and so long as the
FRB does not disapprove such ownership. Another exception to this prohibition is
the ownership of shares of a company the activities of which the FRB has
specifically determined to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto. The restrictions on the
activities of bank holding companies could change significantly if the
Glass-Steagall Act of 1935 is reformed. Current congressional debate over
reforming the Glass-Steagall Act is centered around whether enhanced bank powers
should be conducted within a holding company or through affiliates. It is
impossible to predict at this time whether any of the reform proposals will
pass, or what effect the proposals would have on the Company or its
subsidiaries.

        The BHCA and the Change in Bank Control Act of 1978 require that,
depending on the circumstances, either FRB approval must be obtained or notice
must be furnished to the FRB and not disapproved prior to any person or company
acquiring "control" of a bank holding company, such as the Company, subject to
certain exceptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of

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the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities where
the bank holding company, such as the Company, has registered Securities under
Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act").

        As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.

        INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which
rewrote federal law governing the interstate expansion of banks in the United
States. Effective as of September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any State
in the United States, provided that the target bank meets the minimum age (up to
a maximum of five years, which is the maximum Texas has adopted) established by
the host State. Under the Interstate Banking Act, an anti-concentration limit
will bar interstate acquisitions that would give a bank holding company control
of more than ten percent (10%) of all deposits nationwide or thirty percent
(30%) of any one State's deposits, or such higher or lower percentage
established by the host State. The anti-concentration limit in Texas has been
set at twenty percent (20%) of all federally insured deposits in Texas. As of
December 31, 1997, many of Texas' largest bank holding companies had either
merged with or been acquired by out-of-state banking concerns.

        In addition to providing for interstate acquisitions of banks by bank
holding companies, the Interstate Banking Act provides for interstate branching
by permitting mergers between banks domiciled in different States beginning June
1, 1997. The Interstate Banking Act provides that States may opt out of
interstate branching by enacting non-discriminatory legislation prohibiting
interstate bank mergers before June 1, 1997. If a State opts out, no bank in any
other state may establish a branch in that State either through merger or
formation. A bank whose home State opts out of interstate branching may not
participate in any interstate merger transaction. In 1995, Texas passed
legislation opting out of the interstate branching provisions of The Interstate
Banking Act until September 1999. No accurate prediction can be made at this
time as to how this legislation will affect the Company and/or its bank
subsidiaries.

        FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of

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non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Banking Commissioner (as herein defined) may bring enforcement proceedings
against a bank holding company in Texas.

        COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends
from borrowed funds and discourages payments that would affect capital adequacy.
The FRB has issued policy statements which generally state that bank holding
companies should serve as a source of financial and managerial strength to their
bank subsidiaries, and generally should not pay dividends except out of current
earnings, and should not borrow to pay dividends if the bank holding company is
experiencing capital or other financial problems.

        GENERAL - BANK SUBSIDIARIES. All of the bank subsidiaries of the Company
are state banks subject to regulation by, and supervision of, the Texas
Department of Banking and the FDIC. All of the bank subsidiaries of the Company
are members of the FDIC, which currently insures the deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, each member
bank pays a statutory assessment and is subject to the rules and regulations of
the FDIC. The premiums increase incrementally based on the rating of the member
bank.

        DIFA. The FDIC reduced the insurance premiums it charges on bank
deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of
$2,000.00 for "well capitalized" banks, effective January 1, 1996. Premiums
related to deposits assessed by the Savings Association Insurance Fund ("SAIF"),
including savings association deposits acquired by banks, continued to be
assessed at a rate of between 23 cents and 31 cents per $100.00 of deposits. On
September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted
and signed into law. DIFA reduced the amount of semiannual FDIC insurance
premiums for savings association deposits acquired by banks to the same levels
assessed for deposits insured by BIF.

        DIFA also provided for a special one-time assessment imposed on deposits
insured by the SAIF, including such deposits held by banks, to recapitalize the
SAIF up to statutory required levels. The Company paid the one-time assessment
in the first quarter of 1997 in the amount of $3.3 million in connection with
the SAIF recapitalization.

        DIFA further provides for assessments to be imposed on insured
depository institutions with respect to deposits insured by the BIF (in addition
to assessments currently imposed on depository institutions with respect to
SAIF-insured deposits) to pay amounts due on bonds issued by the Financing
Corporation used to fund the federal thrift bailout. During 1997, the Company
paid $660,000 for the FICO assessment and the Company believes similar amounts
will be assessed per year through 1999 (or earlier if no savings associations
exist prior to December 31, 1999) in connection with such bond payments.

        CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently
required to meet certain minimum regulatory capital guidelines utilizing total
capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31,
1997 the Company's ratio of total capital-to-risk-weighted assets was 15.20%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
exposure into

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account in assessing capital adequacy, and encouraging the holding of liquid,
low-risk assets. At least one-half of the minimum total capital must be
comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is comprised
of common shareholders' equity. The core deposit intangibles and goodwill of
$47,788,000 booked in connection with all the financial institution acquisitions
of the Company are deducted from the sum of core capital elements when
determining the capital ratios of the Company.

        In addition, the FRB has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets ("leverage ratio")
equal to three percent for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating. All other bank holding
companies will generally be required to maintain a leverage ratio of at least
four to five percent. The Company's leverage ratio at December 31, 1997 was 6.41
percent. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the FRB will continue to consider a "tangible tier 1 leverage ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The FRB has not advised the Company of any specific minimum leverage
ratio or tangible tier 1 leverage ratio applicable to it.

        Each of the Company's bank subsidiaries is subject to similar capital
requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a
leverage ratio in excess of five percent as of December 31, 1997. As of that
date, the federal banking agencies had not advised any of the bank subsidiaries
of any specific minimum leverage ratio applicable to it.

        Effective December 19, 1992, the federal bank regulatory agencies
adopted regulations which mandate a five-tier scheme of capital requirements and
corresponding supervisory actions to implement the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The regulations include requirements for the capital categories that
will serve as benchmarks for mandatory supervisory actions. Under the
regulations, the highest of the five categories would be a well capitalized
institution with a total risk-based capital ratio of 10%, a Tier 1 risk-based
capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution would be
prohibited from declaring any dividends, making any other capital distribution
or paying a management fee if the capital ratios drop below the levels for an
adequately capitalized institution, which are 8%, 4% and 4%, respectively. The
corresponding provisions of FDICIA mandate corrective actions be taken if a bank
is undercapitalized. Based on the Company and each of the bank subsidiaries
capital ratios as of December 31, 1997, the Company and each of the bank
subsidiaries were classified as "well capitalized" under the applicable
regulations.

        In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997,

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the federal banking agencies jointly adopted regulations that amend the
risk-based capital standards to incorporate measures for market risk. Applicable
banking institutions will be required to adjust their risk-based capital ratio
to reflect market risk. On December 19, 1996, the FFIEC revised the Uniform
Financial Institutions Rating System commonly referred to as the CAMEL rating
system. A sixth component addressing sensitivity to market risk was added.
Sensitivity to market risk reflects the degree to which changes in interest
rates, foreign exchange rates, commodity prices or equity prices can adversely
affect a financial institution's earnings or economic capital.

        INSOLVENCY. The Banking Commissioner of Texas (the "Banking
Commissioner") may determine to close a Texas state bank when she finds that the
interests of depositors and creditors of a state bank are jeopardized through
its insolvency or imminent insolvency and that it is in the best interest of
such depositors and creditors that the bank be closed.

        DEPOSITOR PREFERENCE STATUTE. Under federal law, deposits and certain
claims for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver.

        TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act
("Act") became effective and the Texas Banking Code of 1943 was repealed. The
purpose of the Act was to modernize and streamline the Texas banking laws. One
of the many significant provisions of the Act adopts by reference the Texas
Business Corporation Act, subject to modification by the Banking Commissioner.
Among other matters, these corporate provisions will permit Texas state banks to
merge with non-banking business entities, while national banks are only
permitted to merge with banking entities. During 1997, the Texas Constitution
was amended to permit home equity lending in Texas effective January 1, 1998 and
the Company's bank subsidiaries are currently offering home equity loans. At
present, no accurate prediction can be made as to how this legislation will
affect the Company or its bank subsidiaries.

        CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required
to assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The FDIC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. In 1995, the CRA regulations were rewritten and
the new regulations and examination procedures were designed to emphasize
performance over paperwork and process. Each bank subsidiary received either an
"outstanding" or "satisfactory" CRA rating in its most recently completed
examination. Further, there are fair lending laws which prohibit discrimination
in connection with lending decisions.

        BSA.  The bank subsidiaries are required to report certain deposit
transactions to the U.S. Treasury Department pursuant to the Bank Secrecy Act
("BSA"). During 1997, the Financial Crimes Enforcement Network and the federal

                                       11
<PAGE>
banking regulators amended the BSA regulations regarding suspicious activity
reporting, funds transfer recordkeeping and the definition and designation of
exempt customers. The bank subsidiaries' compliance with BSA is examined
regularly by the FDIC and the Texas Department of Banking as well as the
internal auditors of the Company.

        SECTION 23A. The Company, IBC and the other bank subsidiaries of the
Company are "affiliates" within the meaning of Section 23A of the Federal
Reserve Act which sets forth certain restrictions on loans and extensions of
credit between a bank subsidiary and affiliates, on investments in an
affiliate's stock or other securities, and on acceptance of such stock or other
securities as collateral for loans. Such restrictions prevent a bank holding
company from borrowing from any of its bank subsidiaries unless the loans are
secured by specific obligations. Further, such secured loans and investments by
a bank subsidiary are limited in amount, as to a bank holding company or any
other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to
the bank holding company and its affiliates, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Certain restrictions do not apply to 80% or
more owned sister banks of bank holding companies. Each bank subsidiary of the
Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act
requires that the terms of affiliate transactions be comparable to terms of
similar non-affiliate transactions.

        LENDING RESTRICTIONS. The operations of the Banks are also subject to
lending limit restrictions pertaining to the extension of credit and making of
loans to one borrower. The scope and requirements of such laws and regulations
have been expanded significantly in recent years. Further, under the BHCA and
the regulations of the FRB thereunder, the Company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements with respect to any
extension of credit or provision of property or services; however, recently the
FRB adopted a rule relaxing tying restrictions by permitting a bank holding
company to offer a discount on products or services if a customer obtains other
products or services from such company.

        BANK DIVIDENDS. The ability of the Company to pay dividends is largely
dependent on the amount of cash derived from dividends declared by its bank
subsidiaries. The payment of dividends by any bank or bank holding company is
affected by the requirement to maintain adequate capital as discussed above. At
December 31, 1997, there was an aggregate of approximately $55,701,000 available
for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata
and IBC Brownsville under the applicable restrictions, assuming that each of
such banks continues to be classified as "well capitalized". Further, the
Company could expend the entire $55,701,000 and continue to be classified as
"well capitalized". Note 17 of notes to Consolidated Financial Statements of the
Company located on page 44 of the 1997 Annual Report is incorporated herein by
reference.

        FDICIA. In 1991, Congress enacted FDICIA. FDICIA emphasizes the
regulatory focus of protecting the Bank Insurance Fund. The FDIC was granted an
expanded supervisory role in connection with all federally insured financial
institutions. FDICIA firmly links supervision to bank capital. FDICIA provides
for mandatory early intervention procedures that are triggered by diminishing
capital of a financial institution. Specifically, FDICIA requires the FDIC to
establish a system of risk-based assessments for federal deposit insurance, by
which banks that pose

                                       12
<PAGE>
a greater risk of loss to the FDIC (based on their capital levels and the FDIC's
level of supervisory concern) will pay a higher insurance assessment.

        As a result of FDICIA, the authority of the FDIC over state-chartered
banks was expanded. FDICIA limits state-chartered banks to only those principal
activities permissible for national banks, except for other activities
specifically approved by the FDIC. The new Texas Banking Act includes a parity
provision which establishes procedures for state banks to notify the Banking
Commissioner if the bank intends to conduct any activity permitted for a
national bank that is otherwise denied to a state bank. The Banking Commissioner
has thirty (30) days to prohibit the activity.

        During 1996, the Office of the Comptroller of the Currency (the "OCC")
adopted a major overhaul of its rules governing corporate applications,
practices, and notices. The new rule incorporates a risk-based approach to
corporate applications and activities of national banks. The new rule includes
authority for operating subsidiaries to conduct for the first time activities
beyond those permitted for national banks directly. Under the new rule, an
operating subsidiary engaged in activities not permissible for the parent bank
must observe certain separateness requirements. National banks must file
applications for prior OCC approval to establish, or acquire, operating
subsidiaries engaged in activities that are not permissible for the parent bank
and the OCC may grant such approval on a case by case basis. Pursuant to the
Texas parity provision, a Texas state bank may be permitted to engage in such
activities permitted for national banks if notice is provided to the Banking
Commissioner and the Banking Commissioner does not prohibit the activity.

        As part of the Small Business Job Protection Act of 1996, financial
institutions are now eligible to make an S election for federal income tax
purposes. To qualify as an S corporation, a financial institution must (i) not
use the reserve method of accounting for bad debts, (ii) have only one class of
stock, (iii) have no more than seventy-five shareholders, and (iv) have no
foreign shareholders. The Company currently does not qualify for the S election.

        YEAR 2000. Many existing computer programs use only two digits to
identify a year. These programs were designed and developed without considering
the impact of the upcoming change in the century. If uncorrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.

        The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan provides for addressing critical and noncritical issues,
with the assignment of responsibility and target dates for completion. Testing
of core applications, such as mainframe software and hardware and some platform
software, is largely complete and reflects that they will be Year 2000
compliant. The Company is expensing applicable costs incurred as a result of
addressing the Year 2000 issue.

        The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution

                                       13
<PAGE>
of any Year 2000 issue represent a known material event or uncertainty that is
reasonably likely to affect its future financial results, or cause its reported
financial information not to be indicative of future operating results or future
financial condition.

        Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.

                   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

        The main areas in which the Company has directed its lendable assets are
(i) commercial, financial and industrial loans; (ii) real estate loans; and
(iii) loans to individuals for household, family and other consumer
expenditures. The relationship that these three categories of loans bear to the
total assets of the Company and other detailed statistical information about the
business of the Company are presented on the following pages.

                                       14
<PAGE>
                     DISTRIBUTION OF ASSETS, LIABILITIES AND
                              SHAREHOLDERS' EQUITY

        The following table sets forth a comparative summary of average interest
earning assets and average interest bearing liabilities and related interest
yields for the years ended December 31, 1997, 1996 and 1995 (Dollars in
Thousands) (Note 1). Nonaccrual loans have been included in assets for the
purpose of this analysis:
<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                      ----------------------------------------------------------------------------------------------
                                                   1997                           1996                             1995
                                      ----------------------------    ----------------------------    ------------------------------
                                      AVERAGE             AVERAGE     AVERAGE             AVERAGE     AVERAGE             AVERAGE
                                      BALANCE  INTEREST  RATE/COST    BALANCE  INTEREST  RATE/COST    BALANCE  INTEREST  RATE/COST
                                      -------  --------  ---------    -------  --------  ---------    -------  --------  ---------
<S>                                <C>          <C>        <C>     <C>          <C>        <C>     <C>          <C>        <C>
          ASSETS
Interest earning assets:
   Loans, net of unearned discounts:
     Domestic                      $ 1,152,566  $115,527   10.02%  $ 1,073,524  $108,852   10.14%  $ 1,086,515  $115,064   10.59%
     Foreign                           128,923    11,821    9.17       126,067    10,331    8.19       115,621     9,347    8.08
   Investment securities:

     Taxable                         2,121,927   146,820    6.92     1,449,211    99,411    6.86     1,381,781    91,178    6.60
     Tax-exempt                          1,348        90    6.68        23,916     1,292    5.40        33,668     1,825    5.42
   Time deposits with banks                404        47   11.63           708        53    7.49           917        43    4.69
   Federal funds sold                   14,906     1,120    7.51        32,369     1,540    4.76       13,004        991    7.62
   Other                                 2,565       307   11.97         2,576       300   11.65        3,668        419   11.42
                                   -----------  --------           -----------  --------           -----------  --------
     Total interest-earning assets $ 3,422,639  $275,732    8.06   $ 2,708,371  $221,779    8.19   $ 2,635,174  $218,867    8.31

Non-interest earning assets:

   Cash and due from banks         $   144,573                     $    94,972                     $    84,277
   Bank premises and equipment, net    105,800                          85,584                          76,065
   Other assets                        117,381                          89,450                          74,451
   Less allowance for possible
    loan losses                        (23,075)                        (19,866)                        (18,794)
                                   -----------                     -----------                     -----------
      Total                        $ 3,767,318                     $ 2,958,511                     $ 2,851,173
                                   ===========                     ===========                     ===========
  LIABILITIES AND
   SHAREHOLDERS' EQUITY
Interest bearing liabilities:
   Savings and interest bearing
     demand deposits               $   722,559  $ 22,152    3.07   $   617,090  $ 18,390    2.98   $   548,917  $ 16,741    3.05
 Time deposits:
     Domestic                          905,157    46,456    5.13       645,782    32,065    4.97       555,446    28,028    5.05
     Foreign                           821,214    42,957    5.23       748,343    37,652    5.03       678,908    34,050    5.02
 Securities sold under
     repurchase agreements
     and federal funds purchased       301,511    15,754    5.23       236,223    12,151    5.14       444,379    25,594    5.76
 Other borrowings                      331,308    18,052    5.45       137,404     7,114    5.18       122,133     7,948    6.51
                                   -----------  --------           -----------  --------           -----------  --------
         Total interest bearing
            liabilities            $ 3,081,749  $145,371    4.72   $ 2,384,842  $107,372    4.50   $ 2,349,783  $112,361    4.78

Non-interest bearing liabilities:
   Demand deposits                     361,379                         297,539                         269,218
   Other liabilities                    26,261                          21,927                          17,269
Shareholders' equity                   297,929                         254,203                         214,903
                                   -----------                     -----------                     -----------
          Total                    $ 3,767,318                     $ 2,958,511                     $ 2,851,173
                                   ===========                     ===========                     ===========
          Net interest income                  $130,361                         $114,407                        $106,506
                                               ========                         ========                        ========
          Net yield on interest
            earning assets                                  3.81%                           4.22%                           4.04%
                                                            ====                            ====                            ====
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.

                                       15
<PAGE>
                    INTEREST RATES AND INTEREST DIFFERENTIAL

     The following table analyzes the changes in net interest income during 1997
and 1996 and the relative effect of changes in interest rates and volumes for
each major classification of interest earning assets and interest-bearing
liabilities. Nonaccrual loans have been included in assets for the purpose of
this analysis, which reduces the resulting yields (Note 1):
<TABLE>
<CAPTION>
                                 1997 COMPARED TO 1996        1996 COMPARED TO 1995
                                ------------------------    ------------------------
                                NET INCREASE (DECREASE)      NET INCREASE (DECREASE)
                                        DUE TO                       DUE TO
                                ------------------------    ------------------------
                                VOLUME    RATE    TOTAL     VOLUME     RATE    TOTAL
                                ------    ----    -----     ------     ----    -----
                                 (Dollars in Thousands)      (Dollars in Thousands)
<S>                           <C>      <C>      <C>      <C>        <C>      <C>
Interest earned on:
  Loans, net of unearned discounts:
    Domestic                  $  5,732 $   943  $ 6,675  $ (1,330)  $(4,882) $(6,212)
    Foreign                       (497)  1,987    1,490       846       138      984
  Investment securities:
    Taxable                     48,343    (934)  47,409     4,528     3,705    8,233
    Tax-exempt                  (1,002)   (200)  (1,202)     (529)       (4)    (533)
  Time deposits with banks         -        (6)      (6)      (16)       26       10
  Federal funds sold              (248)   (172)    (420)  (84,272)   84,821      549
  Other                            -         7        7      (127)        8     (119)
                              -------- -------  -------  --------   -------  -------
  Total interest income       $ 52,328 $ 1,625  $53,953  $(80,900)  $83,812  $ 2,912

 Interest incurred on:
  Savings and interest
    bearing demand deposits   $  4,630 $  (868) $ 3,762  $  2,092   $  (443) $ 1,649
  Time deposits:
    Domestic                    15,689  (1,298)  14,391     4,568      (531)   4,037
    Foreign                      8,765  (3,460)   5,305     3,482       120    3,602
    Securities sold under
    repurchase agreements and
    federal funds purchased      3,828    (225)   3,603   (11,836)   (1,607) (13,443)
  Other borrowings              11,367    (429)  10,938       636    (1,470)    (834)
                              -------- -------  -------  --------   -------  -------
  Total interest expense      $ 44,279 $(6,280) $37,999  $ (1,058)  $(3,931) $(4,989)
                              -------- -------  -------  --------   -------  -------

Net interest income           $  8,049 $ 7,905  $15,954  $(79,842)  $87,743  $ 7,901
                              ======== =======  =======  ========   =======  =======
</TABLE>
(Note 1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.

                                       16
<PAGE>
                            INTEREST RATE SENSITIVITY

     The net interest rate sensitivity as of December 31, 1997 is illustrated in
the following table. This information reflects the balances of assets and
liabilities whose rates are subject to change. As indicated in the table, the
Company is liability sensitive during the early time periods and is asset
sensitive in the longer periods. The table shows the sensitivity of the balance
sheet at one point in time and is not necessarily indicative of the position at
future dates.
<TABLE>
<CAPTION>
                                          RATE/MATURITY  RATE/MATURITY  RATE/MATURITY  RATE/MATURITY
     December 31, 1997                       3 MONTHS    OVER 3 MONTHS    OVER 1 YR        OVER
     (Dollars in Thousands)                  OR LESS       TO  1 YR       TO 5 YRS         5 YRS        TOTAL
     =========================================================================================================
     SECTION A
     ---------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>             <C>           <C>
     RATE SENSITIVE ASSETS

     FEDERAL FUNDS SOLD                 $     7,975           -              -               -     $     7,975
     DUE FROM BANK INTEREST EARNING             993           495             99             -           1,587
     INVESTMENT SECURITIES                  141,079       241,414      1,531,902         669,063     2,583,458
     LOANS, NET OF NON-ACCRUALS           1,019,836       132,905        202,490          90,231     1,445,462
     ---------------------------------------------------------------------------------------------------------
     TOTAL EARNING ASSETS               $ 1,169,883   $   374,814    $ 1,734,491     $   759,294   $ 4,038,482
     ---------------------------------------------------------------------------------------------------------
     CUMULATIVE EARNING ASSETS          $ 1,169,883   $ 1,544,697    $ 3,279,188     $ 4,038,482
     =========================================================================================================
     SECTION B
     ---------------------------------------------------------------------------------------------------------
     RATE SENSITIVE LIABILITIES

     TIME DEPOSITS                      $   849,327   $   849,947    $   205,705     $       285   $ 1,905,264
     OTHER INTEREST BEARING DEPOSITS        819,759           -              -               -         819,759
     FED FUNDS PURCHASED AND REPOS          425,853        52,556            -               -         478,409
     OTHER BORROWINGS                       490,000           -              -               -         490,000
     ---------------------------------------------------------------------------------------------------------
     TOTAL INTEREST BEARING LIABILITIES $ 2,584,939   $   902,503    $   205,705     $       285   $ 3,693,432
     ---------------------------------------------------------------------------------------------------------
     CUMULATIVE SENSITIVE LIABILITIES   $ 2,584,939   $ 3,487,442    $ 3,693,147     $ 3,693,432
     =========================================================================================================
     SECTION C

     ---------------------------------------------------------------------------------------------------------
     REPRICING GAP                      $(1,415,056)  $ (527,689)    $ 1,528,786     $   759,009   $   345,050
     CUMULATIVE REPRICING GAP            (1,415,056)  (1,942,745)       (413,959)        345,050       345,050
     RATIO OF INTEREST-SENSITIVE
        ASSETS TO LIABILITIES                   .45          .42            8.43             -            1.09
     RATIO OF CUMULATIVE, INTEREST-
        SENSITIVE ASSETS TO LIABILITIES         .45          .44             .89            1.09
     =========================================================================================================
</TABLE>
                                       17
<PAGE>
                              INVESTMENT SECURITIES

     The following table sets forth the carrying value of investment securities
as of December 31, 1997, 1996 and 1995:

                                         YEARS ENDED DECEMBER 31,
                                 ---------------------------------------
                                    1997          1996          1995
                                 -----------   -----------   -----------
                                            (Dollars in Thousands)
     U.S. Treasury securities
       Held to maturity          $       -             -             -
       Available for sale            202,123         5,020         7,058
     Mortgage-backed securities

       Held to maturity                  -             -           1,044
       Available for sale          2,347,722     1,734,484     1,408,705
     Obligations of states and
      political subdivisions
       Held to maturity                  695           858           -
       Available for sale                520         1,014        29,975
     Equity securities
       Held to maturity                  -             -             -
       Available for sale             30,383        16,201        14,694
     Other securities
       Held to maturity                2,015         1,990         1,865
                                 -----------   -----------   -----------
           Total                 $ 2,583,458   $ 1,759,567   $ 1,463,341
                                 ===========   ===========   ===========

     The following tables set forth the contractual maturities of investment
securities at December 31, 1997 and the average yields of such securities,
except for the totals which reflect the weighted average yields. Actual
maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
                                              AVAILABLE FOR SALE
                                                  MATURING
                      -----------------------------------------------------------------
                                          AFTER ONE        AFTER FIVE
                          WITHIN          BUT WITHIN       BUT WITHIN           AFTER
                         ONE YEAR         FIVE YEARS       TEN YEARS         TEN YEARS
                         --------         ----------       ---------         ---------
                         ADJUSTED          ADJUSTED         ADJUSTED         ADJUSTED
                       COST   YIELD      COST   YIELD     COST   YIELD     COST   YIELD
                      ------ --------  ------- -------  ------- --------  -------------
                                             (Dollars in Thousands)
<S>                   <C>      <C>    <C>       <C>    <C>       <C>
U.S. Treasury and
  obligations of
  other U.S. Govern-
  ment agencies       $ 2,148  5.63%  $    989  6.38%  $198,769  7.28%       -      -  %
Mortgage-backed
  securities           12,075  6.76    206,573  7.33    522,722  7.51   1,574,085  7.57
Obligations of states
  and political
  subdivisions            -     -           71  6.20        484  7.70        -      -
Equity securities      29,629  6.00       -      -         -      -          -      -
                      -------  ----   --------  ----   --------  ----   ---------  ----
          Total       $43,852  6.19%  $207,633  7.32%  $721,975  7.45%  1,574,085  7.57%
                      =======  ====   ========  ====   ========  ====   =========  ====
</TABLE>
                                       18
<PAGE>
<TABLE>
<CAPTION>
                                          HELD TO MATURITY MATURING
                        ---------------------------------------------------------------
                                          AFTER ONE        AFTER FIVE
                           WITHIN         BUT WITHIN       BUT WITHIN           AFTER
                          ONE YEAR        FIVE YEARS       TEN YEARS         TEN YEARS
                        ------------     ------------     ------------     ------------
                          ADJUSTED         ADJUSTED         ADJUSTED         ADJUSTED
                        COST   YIELD     COST   YIELD     COST   YIELD     COST   YIELD
                        ----   -----     ----   -----     ----   -----     ----   -----
                                             (Dollars in Thousands)
<S>                    <C>     <C>     <C>      <C>      <C>     <C>       <C>
Obligations of states
  and political
  subdivisions         $ 175   8.19%   $  520   8.20%    $ -       - %     $  -     - %
Other securities          25   7.88     1,605   7.73       385   7.11         -     -
                         ---            -----              ---               ---

         Total         $ 200   8.15%   $2,125   7.84%    $ 385   7.11%     $  -     - %
                         ===            =====              ===               ---
</TABLE>
Mortgage-backed securities are primarily securities issued by the Federal Home
Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage
Association ("Fannie Mae").

                                 LOAN PORTFOLIO

     The amounts of loans outstanding, by classification, at December 31, 1997,
1996, 1995, 1994 and 1993 are shown in the following table:
<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                            ----------------------------------------------------------
                               1997        1996        1995        1994        1993
                            ----------  ----------  ----------  ----------  ----------
                                                 (Dollars in Thousands)
<S>                         <C>         <C>         <C>         <C>         <C>
Commercial, financial
  and agricultural          $  792,124  $  719,151  $  718,364  $  664,449  $  611,612
Lease financing receivables      8,840       3,910       3,910       3,910       4,323
Real estate-mortgage           188,122     193,101     200,998     201,998     180,777
Real estate-construction        59,239      32,610      39,527      46,584      21,326
Consumer                       272,478     161,594     124,843     122,751      88,452
Foreign                        130,401     128,932     120,748     106,707     107,771
                            ----------  ----------  ----------  ----------  ----------
     Total loans             1,451,204   1,239,298   1,208,390   1,146,399   1,014,261
Unearned discount               (6,508)     (3,303)     (3,479)     (3,885)     (2,547)
                            ----------  ----------  ----------  ----------  ----------
     Loans, net of
       unearned discount    $1,444,696  $1,235,995  $1,204,911  $1,142,514  $1,011,714
                            ==========  ==========  ==========  ==========  ==========
</TABLE>
     The table on the following page shows the amounts of loans (excluding lease
financing receivables, real estate mortgages and consumer loans) outstanding as
of December 31, 1997 which, based on remaining scheduled repayments of
principal, are due in the years indicated. Also, the amounts due after one year
are classified according to the sensitivity to changes in interest rates:

                                       19
<PAGE>
                                                    MATURING
                                 ----------------------------------------------
                                             AFTER ONE
                                  WITHIN     BUT WITHIN      AFTER
                                 ONE YEAR    FIVE YEARS   FIVE YEARS      TOTAL
                                 --------    ----------   ----------      -----
                                              (Dollars in Thousands)
Commercial, financial and
  agricultural                   $302,513     $386,640     $102,971     $792,124
Real estate - construction         35,601       13,906        9,732       59,239
Foreign                            65,625       57,499        7,277      130,401
                                 --------     --------     --------     --------
          Total                  $403,739     $458,045     $119,980     $981,764
                                 ========     ========     ========     ========

                                               INTEREST SENSITIVITY
                                              ----------------------
                                                FIXED      VARIABLE
                                                RATE         RATE
                                              ---------    ---------
                                               (Dollars in Thousands)
Due after one but within five years           $  82,280    $ 375,764
Due after five years                             38,096       81,884
                                              ---------    ---------
          Total                               $ 120,376    $ 457,648
                                              =========    =========

     The following table presents information concerning the aggregate amount of
non-accrual, past due and restructured domestic loans; certain loans may be
classified in one or more category:

                                            YEARS ENDED DECEMBER 31,
                            ----------------------------------------------------
                              1997       1996       1995        1994       1993
                            -------    -------    -------     -------    -------
                                            (Dollars in Thousands)
Loans accounted for on
  a non-accrual basis       $ 5,014    $ 3,363    $ 5,291     $ 2,895    $ 5,371
Loans contractually past
  due ninety days or more
  as to interest or prin-
  cipal payments              9,700      5,075      7,954       5,605      3,777
Loans accounted for as
  "troubled debt restruc-
  turings"                      363      1,462      2,742       1,990      3,170

     The following table presents information concerning the aggregate amount of
non-accrual and past due foreign loans extended to persons or entities in Mexico
or to the Mexican Government, certain loans may be classified in one or more
category:

                                            YEARS ENDED DECEMBER 31,
                            ----------------------------------------------------
                              1997       1996      1995        1994       1993
                            -------    -------    -------     -------    -------
                                             (Dollars in Thousands)
Loans accounted for on
  a non-accrual basis       $   728    $ 1,062    $   942     $   732    $   733
Loans contractually past
  due ninety days or more
  as to interest or prin-
  cipal payments              2,096      1,321        944       1,086        759

                                       20
<PAGE>
     The gross income that would have been recorded during 1997 on non-accrual
and restructured loans in accordance with their original contract terms was
$524,000 on domestic loans and $78,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1997 was $1,000 on domestic loans
and none for foreign loans.

     The non-accrual loan policy of the bank subsidiaries is to discontinue the
accrual of interest on loans when management determines that it is probable that
future interest accruals will be uncollectible. Interest income on non-accrual
loans is recognized only to the extent payments are received or when, in
management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals. Under special circumstances, a loan may be
more than 90 days delinquent as to interest or principal and not be placed on
non-accrual status. When any of the above occurs, loan officers are required to
recommend placing a loan on non-accrual status by sending a memo to the senior
loan officer who gives instructions to the commercial note teller that the loan
is on non-accrual status. When a loan is placed on non-accrual status, any
interest accrued but not paid is reversed and charged to operations against
interest income.

     The preceding tables indicate that there are certain loans technically past
due 90 days or more on performing status. This situation generally results when
a bank subsidiary has a borrower who is experiencing financial difficulties but
not to the extent that requires a restructuring of indebtedness. The majority of
this category is composed of loans that are considered to be adequately secured
and/or for which there has been a recent payment.

     The Company believes, after reviewing each bank subsidiary's loan
portfolio, that the majority of the loans with a loss potential have been
included under the categories of past due and non-accrual. Adjustments to the
loan loss allowance have been made for other credits that may have
characteristics indicating a potential for future non-performing status and some
possible loss.

     The following table presents certain information about cross-border
outstanding loans, acceptances, and accrued interest thereon, related to Mexico:

                                                YEARS ENDED DECEMBER 31,
                                      ---------------------------------------
                                         1997           1996           1995
                                      ---------      ---------      ---------
                                                (Dollars in Thousands)
Loans:
  Commercial, financial, industrial
    and agricultural                  $  91,945      $  86,861      $  90,541
  Real estate-mortgage                   18,416         20,591         10,254
  Consumer                               20,040         21,480         19,953
                                      ---------      ---------      ---------
                                        130,401        128,932        120,748
  Less allowance for possible
    loan losses                          (1,184)        (1,101)        (1,035)
                                      ---------      ---------      ---------
           Net loans                  $ 129,217      $ 127,831      $ 119,713
                                      =========      =========      =========
Accrued interest receivable           $   1,198      $   1,317      $   1,191
                                      =========      =========      =========

                                       21
<PAGE>
                         SUMMARY OF LOAN LOSS EXPERIENCE

     The following table summarizes loan balances at the end of each year and
average loans outstanding during the year; changes in the allowance for possible
loan losses arising from loans charged-off and recoveries on loans previously
charged-off by loan category; and additions to the allowance which have been
charged to expense:
<TABLE>
<CAPTION>
                                               AT YEARS ENDED DECEMBER 31,
                                   ------------------------------------------------------
                                      1997       1996      1995       1994        1993
                                   ---------- ---------- ---------- ---------- ----------
                                                   (Dollars in Thousands)
<S>                                <C>        <C>        <C>        <C>        <C>
Loans, net of unearned discounts,
  outstanding at December 31,      $1,444,696 $1,235,995 $1,204,911 $1,142,514 $1,011,714
                                   ========== ========== ========== ========== ==========
Average loans outstanding during
  the year (Note 1)                $1,281,489 $1,199,591 $1,202,136 $1,055,246 $  941,381
                                   ========== ========== ========== ========== ==========
Balance of allowance
  at January 1,                      $ 21,036   $ 18,455   $ 17,025   $ 13,831   $ 10,055
Provision charged to expense            7,740      6,630      5,150      3,804      4,540
                                   ---------- ---------- ---------- ---------- ----------
Loans charged-off:
  Domestic:
  Commercial, financial
   and agricultural                    (1,503)    (1,518)    (2,248)    (1,073)    (1,299)
  Real estate-mortgage                   (279)      (261)      (619)      (685)      (569)
  Consumer                             (4,552)    (3,363)    (1,849)      (816)      (556)
  Foreign                                  (2)       (23)       (48)      (148)       (49)
                                   ---------- ---------- ---------- ---------- ----------
Total loans charged-off                (6,336)    (5,165)    (4,764)    (2,722)    (2,473)
                                   ---------- ---------- ---------- ---------- ----------
Recoveries credited to allowance:
  Domestic:
  Commercial, financial
   and agricultural                       270        305        190        236        663
  Real estate mortgage                    382         51         80        968        146
  Consumer                                250        755        229        237        136
  Foreign                                  95          5        110        227         67
                                   ---------- ---------- ---------- ---------- ----------
Total recoveries                          997      1,116        609      1,668      1,012
                                   ---------- ---------- ---------- ---------- ----------
Net loans charged-off:                 (5,339)    (4,049)    (4,155)    (1,054)    (1,461)
                                   ---------- ---------- ---------- ---------- ----------
Allowance acquired in purchase
  transactions                          1,079        -          435        444        697
                                   ---------- ---------- ---------- ---------- ----------
Balance of allowance
  at December 31,                    $ 24,516   $ 21,036   $ 18,455   $ 17,025   $ 13,831
                                   ========== ========== ========== ========== ==========
Ratio of net loans charged-off
  during the year to average
  loans outstanding during
  the year (Note 1)                      .42%       .34%       .35%      .10%      .16%
                                   ---------- ---------- ---------- ---------- ----------
Ratio of allowance to loans, net
  of unearned discounts, out-
  standing at December 31,              1.70%      1.70%      1.53%     1.49%     1.37%
                                   ========== ========== ========== ========== ==========
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated
         on the basis of month-end balances.

                                       22
<PAGE>
    Each bank subsidiary has always provided an amount for possible loan losses
sufficient both to cover net loan losses sustained and to maintain an
appropriate balance in the allowance for possible loan losses that considers the
element of risk which is estimated to be present in outstanding loans. The
aggregate allowance for possible loan losses of all bank subsidiaries
approximated 1.70% of total loans of bank subsidiaries, net of unearned income,
at both December 31, 1997 and 1996.

    The amount charged against 1997 earnings and the other years presented as a
provision for possible loan losses was the sum required to bring the allowance
to the point which management of each bank subsidiary considers adequate to
cover potential loan losses. Such a determination is based on a continual and
conservative review process of the loan portfolio performed by senior officers
of each bank subsidiary who consider certain factors, including but not limited
to, previous loss experience in portfolio segments and assessment of current
economic conditions.

    The allowance for possible loan losses has been allocated based on the
amount management has deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following categories of loans at
the dates indicated and the percentage of loans to total loans in each category:

<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31,
                    ----------------------------------------------------------------------------------------------------------------
                          1997                  1996                   1995                   1994                   1993
                    ------------------    -----------------     -------------------     ------------------   -----------------------
                               PERCENT              PERCENT                 PERCENT                PERCENT              PERCENT
                    ALLOWANCE OF LOANS    ALLOWANCE OF LOANS     ALLOWANCE OF LOANS     ALLOWANCE OF LOANS    ALLOWANCE OF LOANS
                    --------- --------    --------- --------     --------- --------     --------- --------    --------- --------
                                                              (Dollars in Thousands)
<S>                 <C>           <C>     <C>          <C>       <C>          <C>       <C>          <C>      <C>          <C>
Commercial,
  financial and
  agricultural      $ 13,993      54.6%   $ 12,911     58.0%     $ 11,506     59.4%     $ 10,274     58.0%    $  8,813     60.3%
Lease financing
  receivables            156       0.6          70      0.3            63      0.3            61      0.3           62      0.4
Real estate
  mortgage             3,323      12.9       3,467     15.6         3,219     16.6         3,123     17.6        2,605     17.8
Real estate
  construction         1,047       4.1         586      2.6           633      3.3           720      4.1          307      2.1
Consumer               4,813      18.8       2,901     13.1         1,999     10.4         1,898     10.7        1,275      8.8
Foreign                1,184       9.0       1,101     10.4         1,035     10.0           949      9.3          769     10.6
                    --------     -----    --------    -----      --------    -----      --------    -----     --------    -----
                    $ 24,516     100.0%   $ 21,036    100.0%     $ 18,455    100.0%     $ 17,025    100.0%    $ 13,831    100.0%
                    ========     =====    ========    =====      ========    =====      ========    =====     ========    =====
</TABLE>
                                       23
<PAGE>
                                    DEPOSITS

     The average amount of deposits, based on month-end balances and interest
expense is summarized for the years indicated in the following table:

                                           FOR THE YEARS ENDED DECEMBER 31,
                                      ------------------------------------------
                                         1997            1996           1995
                                      -----------     -----------    -----------
                                                  (Dollars in Thousands)
Deposits:
   Demand - non-interest bearing
          Domestic                    $   317,759     $   256,186    $   234,793
          Foreign                          43,620          41,353         34,425
                                      -----------     -----------    -----------
          Total demand non-interest
            bearing                       361,379         297,539        269,218
                                     -----------     -----------    -----------
   Savings and interest bearing demand
          Domestic                        560,956         459,451        382,028
          Foreign                         161,603         157,639        166,889
                                      -----------     -----------    -----------
          Total savings and interest
            bearing demand                722,559         617,090        548,917
                                      -----------     -----------    -----------
   Time certificates of deposit
     $100,000 or more:
          Domestic                        363,471         280,550        250,103
          Foreign                         602,170         546,643        493,747
     Less than $100,000:
          Domestic                        541,686         365,232        305,343
          Foreign                         219,044         201,700        185,161
                                      -----------     -----------    -----------
   Total time, certificates of
       deposit                          1,726,371       1,394,125      1,234,354

   Total deposits                     $ 2,810,309     $ 2,308,754    $ 2,052,489
                                      ===========     ===========    ===========
Interest Expense:
   Savings and interest
     bearing demand
          Domestic                    $    17,559     $    14,079    $    12,341
          Foreign                           4,593           4,311          4,400
                                      -----------     -----------    -----------
   Total savings and interest
     bearing demand                        22,152          18,390         16,741
                                      -----------     -----------    -----------
   Interest, certificates of
     deposit $100,000 or more:
          Domestic                         19,256          14,193         13,151
          Foreign                          32,532          28,561         25,713
     Less than $100,000
          Domestic                         27,200          17,872         14,877
          Foreign                          10,425           9,091          8,337
                                      -----------     -----------    -----------
   Total interest, certificates
     of deposit                            89,413          69,717         62,078
                                      -----------     -----------    -----------
     Total interest expense           $   111,565     $    88,107    $    78,819
                                      ===========     ===========    ===========

                                       24
<PAGE>
     Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997 are summarized as follows:

                                                    DECEMBER 31, 1997
                                                    -----------------
                                                  (Dollars in Thousands)

      3 months or less                                  $  523,171
      Over 3 but through 12 months                         491,802
      Over 12 months                                        87,022
                                                        ----------
           Total                                        $1,101,995
                                                        ==========

                           RETURN ON EQUITY AND ASSETS

     Certain key ratios for the Company for the years ended December 31, 1997,
1996 and 1995 follows (Note 1):

                                                YEARS ENDED DECEMBER 31,
                                             -----------------------------
                                             1997         1996        1995
                                             ----         ----        ----

Percentage of net income to:
   Average shareholders' equity             16.41%       17.45%      18.64%
   Average total assets                      1.30         1.50        1.41
Percentage of average shareholders'
   equity to average total assets            7.91         8.59        7.54
Percentage of cash dividends per share
   to net income per share                  11.37         9.87        8.65

(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.

                               FOREIGN ACTIVITIES

     Information regarding foreign activities has been provided in the preceding
sections and Note 11 of notes to consolidated financial statements located on
page 37 of the 1997 Annual Report to Shareholders which is incorporated herein
by reference.

Item 2.  PROPERTIES

     The principal offices of the Company and IBC are located at 1200 San
Bernardo Avenue, Laredo, Texas in a modern building owned and completely
occupied by the Company and IBC and containing approximately 97,000 square feet.
The bank subsidiaries of IBC have a total of 76 main banking and branch
facilities. All the facilities are customary to the banking industry. Most of
the bank subsidiaries own their banking facilities and the remainder are leased.
The facilities are located in Laredo, San Antonio, Houston, Zapata, the Rio
Grande Valley of Texas and the Coastal Bend area of Texas.

     As Texas state-chartered banks, no bank subsidiary of the Company may,
without the prior written consent of the Banking Commissioner, invest an amount
in excess of its capital and certified surplus in bank facilities, furniture,
fixtures and equipment. None of the Company's bank subsidiaries exceed such
limitation.

                                       25
<PAGE>
Item 3.  LEGAL PROCEEDINGS

     The Company and its bank subsidiaries are involved in various legal
proceedings that are in various stages of litigation. Some of these actions
allege "lender liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company and its subsidiaries have determined,
based on discussions with their counsel, that any material loss in such actions,
individually or in the aggregate, is remote or the damages sought, even if fully
recovered, would not be considered material to the financial condition or
results of operations of the Company and its subsidiaries. However, many of
these matters are in various stages of proceedings and further developments
could cause management to revise its assessment of these matters.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Since the 1997 Annual Meeting of Shareholders of the Company held on May
15, 1997, no matter was submitted to a vote of Registrant's security holders
through the solicitation of proxies or otherwise.

Executive Officers of the Registrant

     Certain information is set forth in the following table concerning the
executive officers of the Company, each of whom has been elected to serve until
the 1998 Annual Meeting of shareholders and until his successor is duly elected
and qualified.

<TABLE>
<CAPTION>
                                                                         OFFICER OF THE
     NAME                   AGE          POSITION OF OFFICE              COMPANY SINCE
     ----                   ---          ------------------              -------------
<S>                          <C>         <C>                                  <C>
Dennis E. Nixon              55          Chairman of the Board and            1979
                                         President of the Company,
                                         Chief Executive Officer of IBC

Leonardo Salinas             64          Vice President of the Company        1982
                                         and Senior Executive Vice
                                         President of IBC

R. David Guerra              45          Vice President of the Company        1986
                                         and President of IBC McAllen
                                         Branch

Arnoldo Cisneros             46          Treasurer of the Company and         1982
                                         and Executive Vice President
                                         of IBC
</TABLE>
There are no family relationships among any of the named persons. Each executive
officer has held the same position or another executive position with the
Company of IBC during the past five years.

                                     Part II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
            MATTERS

     The information set forth under the caption "Common Stock and Dividends"
located on page 12 and 13 of Registrant's 1997 Annual Report is incorporated
herein by reference.

                                       26
<PAGE>
Item 6.  SELECTED FINANCIAL DATA

     The information set forth under the caption "Selected Financial Data"
located on page 1 of Registrant's 1997 Annual Report is incorporated herein by
reference.

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

     The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" located on pages 2
through 13 of Registrant's 1997 Annual Report is incorporated herein by
reference.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements located on pages 15 through 52 of
Registrant's 1997 Annual Report are incorporated herein by reference.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     There is incorporated in this Item 10 by reference (i) that portion of the
Company's definitive proxy statement dated April 20, 1998, appearing on pages 2
and 3 under the caption "Election of Directors" and (ii) that portion of Part I
of this report entitled "Executive Officers of the Registrant" is incorporated
herein by reference.

Item 11.  EXECUTIVE COMPENSATION

     There are incorporated in this Item 11 by reference those portions of the
Company's definitive proxy statement dated April 20, 1998, on pages 5 through 8
appearing under the heading "Executive Compensation"; provided, however, that
such incorporation by reference shall not include the information referred to in
item 402(a) (8) of Securities and Exchange Commission Regulation S-K.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     There are incorporated in this Item 12 by reference those portions of the
Company's definitive proxy statement dated April 20, 1998, appearing on pages 3
and 5 under the captions "Principal Shareholders" and "Security Ownership of
Management".

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated in this Item 13 by reference that portion of the
Company's definitive proxy statement dated April 20, 1998, appearing on pages 9
and 10 under the caption "Interest of Management in Certain Transactions".

                                       27
<PAGE>
                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  DOCUMENTS

          1.  The consolidated financial statements of the Company and
              subsidiaries are incorporated into Item 8 of this report by
              reference from the 1997 Annual Report to shareholders filed as an
              exhibit hereto and they include:

              Independent Auditors' Report

              Consolidated:

              Statements of Condition as of December 31, 1997 and 1996
              Statements of Income for the years ended December 31, 1997, 1996
              and 1995 Statements of Shareholders' Equity for the years ended
              December 31, 1997, 1996 and 1995

              Statements of Cash Flows for the years ended December 31, 1997,
              1996 and 1995
              Notes to Financial Statements

          2.  All Financial Statement Schedules are omitted as the required
              information is inapplicable or the information is presented in the
              financial statements or related notes.

          3. The following exhibits are filed as a part of this Report:

               (3)(a)*- Articles of Incorporation of International Bancshares
                        Corporation incorporated herein as an exhibit by
                        reference to the Current Report, Exhibit 3.1 therein,
                        under the Securities Exchange Act of 1934, filed by
                        Registrant on Form 8-K with the Securities and Exchange
                        Commission on June 20, 1995, SEC File No. 09439.

               (3)(b)*- By-Laws of International Bancshares Corporation
                        incorporated herein as an exhibit by reference to the
                        Current Report, Exhibit 3.2 therein, under the
                        Securities Exchange Act of 1934, filed by Registrant on
                        Form 8-K with the Securities and Exchange Commission on
                        June 20, 1995, SEC File No. 0-9439

                (10)*-  Sublease between Commerce Bank and Americity Federal
                        Savings Bank incorporated herein as an exhibit by
                        reference to the Annual Report, Exhibit 11(b) therein,
                        under the Securities Exchange Act of 1934, filed by
                        Registrant on Form 10-K with the Securities and Exchange
                        Commission on March 23, 1982, SEC File No. 0-9439

                (10a)*- Purchase and Assumption Agreement dated June 29, 1990 by
                        and between the Resolution Trust Corporation, receiver
                        of Valley Federal Savings Association and New Valley
                        Federal Savings Association incorporated herein as an
                        exhibit by reference to the Annual Report, Exhibit 10(a)
                        therein, under the Securities Exchange Act of 1934,
                        filed by Registrant on Form 10-K with the Securities and
                        Exchange Commission on March 30, 1992, SEC File No.
                        0-9439

                                       28
<PAGE>
                (10b)*- Purchase and Assumption Agreement for Oakar transaction
                        dated June 29, 1990 between New Valley Federal Savings
                        Association, International Bancshares Corporation and
                        International Bank of Commerce incorporated herein as an
                        exhibit by reference to the Annual Report, Exhibit 10(b)
                        therein, under the Securities Exchange Act of 1934,
                        filed by Registrant on Form 10-K with the Securities and
                        Exchange Commission on March 30, 1991, SEC File No.
                        0-9439

                (10c)*- Purchase and Assumption Agreement dated June 21, 1991 by
                        and between the Resolution Trust Corporation, receiver
                        of Travis Federal Savings and Loan Association and New
                        Travis Federal Savings Association incorporated herein
                        as an exhibit by reference to the Annual Report, Exhibit
                        10(C) therein, under the Securities Exchange Act of
                        1934, filed by Registrant on Form 10-K with the
                        Securities and Exchange Commission on March 30, 1992,
                        SEC File No. 0-9439

                (10d)*- Oakar Agreement dated June 21, 1991 between New Travis
                        Federal Savings Association and International Bank of
                        Commerce incorporated herein as an exhibit by reference
                        to the Annual Report, Exhibit 10(d) therein, under the
                        Securities Exchange Act of 1934, filed by Registrant on
                        Form 10-K with the Securities and Exchange Commission on
                        March 30, 1992, SEC File No. 0-9439

               (10e)*+- The 1987 International Bancshares Corporation Key
                        Contributor Stock Option Plan as amended and restated
                        (formerly the International Bancshares Corporation 1981
                        Incentive Stock Option Plan) incorporated herein as an
                        exhibit by reference to Exhibit 28 to the Registration
                        Statement on Form S-8 filed with the Securities and
                        Exchange Commission on July 13, 1987, SEC File No.
                        33-15655.

                (10f)*- Merger Agreement by and between International Bank of
                        Commerce, Michigan National Corporation and First State
                        Bank and Trust Company, dated May 5, 1994 incorporated
                        herein by reference to Exhibit 10(f) of the Form 10Q
                        filed with the Securities and Exchange Commission on
                        August 15, 1994, SEC File No. 0-9439.

                (10g)*- Merger Agreement by and between International Bank of
                        Commerce, and The Bank of Corpus Christi, dated August
                        19, 1994 incorporated herein by reference to Exhibit
                        10(g) of Form 10-Q filed with the Securities and
                        Exchange Commission on November 14, 1994, SEC File No.
                        0-9439.

                (10h)*- Merger Agreement by and between International Bank of
                        Commerce, and Stone Oak National Bank, dated February
                        28, 1995, incorporated by reference to Exhibit 10(h) of
                        the Registrant's Quarterly Report on Form 10Q for the
                        period ended March 31, 1995, filed with the Securities
                        and Exchange Commission on May 15, 1995, SEC File No.
                        0-9439.

                (10i)*- Agreement and Plan of Merger dated as of June 7, 1995,
                        by and between International Bancshares Corporation, a
                        Delaware corporation, and International Bancshares
                        Corporation, a Texas corporation, incorporated herein by
                        reference to Exhibit 2 of the Current Report on Form 8-K
                        filed with the Securities and Exchange Commission on
                        June 20, 1995, SEC File No. 0-9439.

                (10j)*- Purchase and Assumption Agreement dated as of February
                        27, 1996, by and between International Bank of Commerce,
                        River Valley Bank, F.S.B. and Western Capital Holdings,
                        Inc. incorporated herein, by reference to Exhibit 10(j)
                        of the Registrant's Annual Report on Form 10-K filed
                        with the Securities and

                                       29
<PAGE>
                        Exchange Commission on April 1, 1996, SEC File No.
                        09439.

                (10k)*- Purchase of Asset and Liability Agreement dated as of
                        July 30, 1996, by and between International Bank of
                        Commerce and Home Savings of America F.S.B. incorporated
                        herein by reference to Exhibit 10(k) of the Registrant's
                        Quarterly Report on Form 10-Q filed with the Securities
                        and Exchange Commission on November 13, 1996.

               (10l)*+- The 1996 International Bancshares Corporation Stock
                        Option Plan incorporated herein by reference to Exhibit
                        99.1 to the Post Effective Amendment No. 1 to Form S-8
                        filed with the Securities and Exchange Commission on
                        March 21, 1997, SEC File No. 33-15655.

               (10m)*+- Executive Incentive Compensation Plan of the Registrant
                        incorporated herein by reference to exhibit "A" of the
                        Registrant's Proxy Statement filed with the Securities
                        Exchange Commission on April 15, 1997, SEC file no.
                        09439.

                (10n)   Agreement and Plan of Merger by and among International
                        Bancshares Corporation, University Bancshares, Inc., Joe
                        L. Allbritton and Robert L. Allbritton, dated as of
                        August 15, 1997.

                (13)**- International Bancshares Corporation 1997 Annual Report

                (21)-   List of Subsidiaries of International Bancshares
                        Corporation as of March 20, 1998

                (23)-   Accountants' Consent

                (27)-   Financial Data Schedule
              ----------------------------
              *  Previously filed

              ** Deemed filed only with respect to those portions thereof
                 incorporated herein by reference

              +  Executive Compensation Plans and Arrangements

(b)       REPORTS ON FORM 8-K

          Registrant filed a current report on Form 8-K dated November 12, 1997,
          covering Item 5 - Other Events and Item 7 - Financial Statements and
          Exhibits, in connection with the acquisition of University Bank,
          located in Houston, Texas. Registrant filed a current report on Form
          8-K dated January 6, 1998, covering Item 5 - Other Events and Item 7 -
          Financial Statements and Exhibits, announcing that negotiations with
          Pacific USA Holdings Corp. regarding the proposed purchase of assets
          of Pacific Southwest Bank had been terminated. Registrant filed a
          current report on Form 8-K dated March 11, 1998, covering Item 5 -
          Other Events and Item 7 - Financial Statements and Exhibits,
          announcing that Registrant's Common Stock had been listed on the
          Nasdaq National Market.

                                       30
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                            INTERNATIONAL BANCSHARES CORPORATION
                                                         (Registrant)

                                                By:    /s/ DENNIS E. NIXON
                                                       Dennis E. Nixon
                                                       President

                                                Date:  MARCH 27, 1998

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

          SIGNATURES                     TITLE                      DATE
          ----------                     -----                      ----

 /s/ DENNIS E. NIXON          President and Director          MARCH 27, 1998
---------------------------   (Principal Executive Officer)
 Dennis E. Nixon

 /s/ ARNOLDO CISNEROS         Secretary-Treasurer             MARCH 27, 1998
---------------------------   (Principal Financial Officer)
 Arnoldo Cisneros

 /s/ LEONARDO SALINAS         Vice President and              MARCH 27, 1998
---------------------------   Director
 Leonardo Salinas

 /s/ LESTER AVIGAEL           Director                        MARCH 27, 1998
---------------------------
 Lester Avigael

 /s/ IRVING GREENBLUM         Director                        MARCH 27, 1998
---------------------------
 Irving Greenblum

 /s/ R. DAVID GUERRA          Director                        MARCH 27, 1998
---------------------------
 R. David Guerra

 /s/ RICHARD E. HAYNES        Director                        MARCH 27, 1998
---------------------------
 Richard E. Haynes

 /s/ ROY JENNINGS, JR.        Director                        MARCH 27, 1998
---------------------------
 Roy Jennings, Jr.

                              Director
---------------------------                                   -----------------
 Sioma Neiman

 /s/ ALBERTO A. SANTOS        Director                        MARCH 27, 1998
---------------------------
 Alberto A. Santos

 /s/ ANTONIO R. SANCHEZ JR.   Director                        MARCH 27, 1998
---------------------------
 Antonio R. Sanchez Jr.

 /s/ PEGGY J. NEWMAN          Director                        MARCH 27, 1998
---------------------------
 Peggy J. Newman

                                       31
<PAGE>
                                  Exhibit Index

Exhibit (10n) - Agreement and Plan of Merger by and among International
                Bancshares Corporation, University Bancshares, Inc., Joe L.
                Allbritton and Robert L. Allbritton, dated as of August 15, 1997

Exhibit 13 -    International Bancshares Corporation 1997 Annual Report, page 77

Exhibit 21 -    List of Subsidiaries of International Bancshares Corporation as
                of March 20, 1998, page 130

Exhibit 23 -    Accountants' Consent, page 131

Exhibit 27 -    Financial Data Schedule, page 132

                                       32
<PAGE>
                INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                                   (Consolidated)

                               SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                      AT OR FOR THE YEARS ENDED DECEMBER 31,
                           ----------------------------------------------------------
                               1997        1996       1995        1994        1993
                           ----------  ----------  ----------  ----------  ----------
                                  (Dollars in Thousands, Except Per Share Data)

BALANCE SHEET
<S>                        <C>         <C>         <C>         <C>         <C>
   Assets ...............  $4,517,846  $3,351,231  $2,935,606  $2,659,392  $2,115,786
   Net loans ............   1,420,180   1,214,959   1,186,456   1,125,489     997,883
   Deposits .............   3,175,560   2,662,153   2,143,346   2,061,638   1,723,919
   Other borrowed funds .     490,000     239,000      66,500     123,500       4,500
   Shareholders' equity .     341,244     283,767     245,761     178,536     163,055

INCOME STATEMENT

   Interest income ......  $  275,732  $  221,779  $  218,867  $  159,260  $  131,829
   Interest expense .....     145,371     107,372     112,361      66,754      51,155
                           ----------  ----------  ----------  ----------  ----------
   Net interest income ..     130,361     114,407     106,506      92,506      80,674
   Provision for possible
     loan losses ........       7,740       6,630       5,150       3,804       4,540
   Non-interest income ..      36,776      30,194      26,009      20,945      25,935
   Non-interest expense .      85,745      73,457      68,989      58,355      60,236
                           ----------  ----------  ----------  ----------  ----------
   Income before income
     taxes ..............      73,652      64,514      58,376      51,292      41,833

   Income taxes .........      24,771      20,164      18,315      13,402       9,971
                           ----------  ----------  ----------  ----------  ----------
   Net income ...........  $   48,881  $   44,350  $   40,061  $   37,890  $   31,862
                           ==========  ==========  ==========  ==========  ==========
   Per common share:
     Basic ..............  $     4.79  $     4.40  $     4.02  $     3.84  $     3.28

     Diluted ............  $     4.62  $     4.31  $     3.95  $     3.79  $     3.25

   Cash dividend per
     share ..............  $      .50  $     0.50  $      .50  $     1.10        --
</TABLE>
    Note 1:  See note l of notes to the consolidated financial statements
regarding the adoption of Statement of Financial Accounting Standards No. 115.

    Note 2: See note 2 of notes to the consolidated financial statements
regarding the acquisitions made by International Bancshares Corporation and its
subsidiaries in 1997, 1996 and 1995.

    Note 3: See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds of the Company and its subsidiaries.


                                        1
<PAGE>
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis represents an explanation of significant
changes in the financial position and results of operations of International
Bancshares Corporation (the "Company") on a consolidated basis for the three
year period ended December 31, 1997. The Company is a bank holding company with
four bank subsidiaries operating in 76 main banking and branch facilities in
South and Southeast Texas and four non-bank subsidiaries. The following
discussion should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and the Selected Financial Data
and Consolidated Financial Statements included elsewhere herein.

                              Results of Operations

Net income for 1997 was $48,881,000 or $4.79 per share - basic ($4.62 per share
-diluted) compared with $44,350,000 or $4.40 per share - basic ($4.31 per share
-diluted) in 1996 and $40,061,000 or $4.02 per share - basic ($3.95 per share -
diluted) in 1995.

Total assets at December 31, 1997 grew 35% to $4,517,846,000 from $3,351,231,000
at December 31, 1996 while net loans increased 17% to $1,420,180,000 at December
31, 1997 from $1,214,959,000 at December 31, 1996. Deposits at December 31, 1997
were $3,175,560,000, an increase of 19% over the $2,662,153,000 at December 31,
1996. Deposits at December 31, 1996 were $2,662,153,000, an increase of 24% over
the $2,143,346,000 at December 31, 1995. Total assets at December 31, 1996 grew
14% to $3,351,231,000 from $2,935,606,000 at December 31, 1995 while net loans
increased 2% to $1,214,959,000 at December 31, 1996 from $1,186,456,000 at
December 31, 1995. The increase in assets and deposits during 1997 was partially
attributable to the acquisition of The University Bank and five branches of Bank
of America Texas, N. A. See note 2 of notes to Consolidated Financial
Statements. The aggregate amount of repurchase agreements, short term fixed
borrowings and certificates of indebtedness with the Federal Home Loan Bank of
Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") increased to $855,000,000 at December 31,
1997 from the $237,000,000 at December 31, 1996. Such funds were used to expand
the earning asset base of the Company.

Net interest income in 1997 increased by $15,954,000, or 14%, over that in 1996
despite the slight decrease in the net yield on average interest earning assets
of .41% from 4.22% in 1996 to 3.81% in 1997. The net yield on average interest
earning assets increased by .18% in 1996 to 4.22% from 4.04% in 1995 while net
interest income increased by $7,901,000 or 7% over 1995. A 26.4% increase in
average interest earning assets from $2,708,371,000 in 1996 to $3,422,639,000 in
1997 and a 2.8% increase from $2,635,174,000 in 1995 to $2,708,371,000 in 1996
contributed to the continued increase in net interest income for 1997 and 1996,
respectively. The Company experienced a .13% decrease in the yield on average
interest earning assets to 8.06% in 1997 from 8.19% in 1996. In 1996 a .12%
decrease was reflected in the yield on average interest earning assets to 8.19%
from 8.31% in 1995 and a decrease was reflected on the rates paid on average
interest bearing liabilities to 4.50% in 1996 from 4.78% in 1995.

Net interest income is the spread between income on interest earning assets,
such as loans and securities, and the interest expense on liabilities used to
fund those assets, such as deposits, repurchase agreements and funds borrowed.
Net interest

                                        2
<PAGE>
income is affected by both changes in the level of interest rates and changes in
the amount and composition of interest earning assets and interest bearing
liabilities.

As part of its strategy to manage interest rate risk, the Company strives to
manage both assets and liabilities so that interest sensitivities match. One
method of calculating interest rate sensitivity is through gap analysis. A gap
is the difference between the amount of interest rate sensitive assets and
interest rate sensitive liabilities that reprice or mature in a given time
period. Positive gaps occur when interest rate sensitive assets exceed interest
rate sensitive liabilities, and negative gaps occur when interest rate sensitive
liabilities exceed interest rate sensitive assets. A positive gap position in a
period of rising interest rates should have a positive effect on net interest
income as assets will reprice faster than liabilities. Conversely, net interest
income should contract somewhat in a period of falling interest rates.
Management can quickly change the Company's interest rate position at any given
point in time as market conditions dictate. Additionally, interest rate changes
do not affect all categories of assets and liabilities equally or at the same
time. Analytical techniques employed by the Company to supplement gap analysis
include simulation analysis to quantify interest rate risk exposure. The gap
analysis prepared by management is reviewed by the Investment Committee of the
Company twice a year. Management currently believes that the Company is properly
positioned for interest rate changes; however if management determines at any
time that the Company is not properly positioned, it will strive to adjust the
interest rate sensitive assets and liabilities in order to minimize the effect
of interest rate changes.

Non-interest income increased 22% in 1997 to $36,776,000 over $30,194,000 in
1996 and increased 16% over $26,009,000 in 1995. The 1997 and 1996 increases in
non-interest income were primarily due to the increases in service charges. The
increases in service charges were attributable to the amount of account
transaction fees received as a result of the deposit growth and increased
collection efforts.

Expense control is an essential element in the Company's profitability. This is
achieved through maintaining optimum staffing levels, an effective budgeting
process, and internal consolidation of bank functions. The Company's efficiency
ratio (other operating expenses divided by net interest income and other
operating income) has been under 57% for each of the last five years, which the
Company believes is well below national peer group ratios. Non-interest expense
includes such items as salaries and wages and employee benefits, net occupancy
expenses, equipment expenses and other operating expenses such as FDIC
insurance. Non-interest expense increased 17% in 1997 to $85,745,000 from
$73,457,000 in 1996 and increased 6% from $68,989,000 in 1995. The 1997 and 1996
increases in non-interest expense were primarily due to the increased operations
at certain of the bank subsidiaries as a result of acquisitions.

Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 1997, the Company's
acquisition activity as well as its efforts to increase its loan volume resulted
in an increase of 7.4% in average domestic loans and a increase of 2.3% in
average foreign loans for an increase in total average loans of 6.8% over 1996.
The average yield for these loans decreased .12% for domestic loans and
increased by .97% for foreign loans in 1997 as compared to 1996. The Company
experienced a decrease of 1% in average domestic loans and a 9% increase in
average foreign loans in 1996 as compared to 1995. The yield for these loans
decreased .45% for domestic loans and increased by .11% for foreign loans in
1996 as compared to 1995. Although the economic conditions in the U.S./Mexico
border region have improved, loan demand has not improved significantly.
Competition

                                        3
<PAGE>
for loans in the Company's market area has intensified and has resulted in loan
pricing by certain competitors which management believes is not commensurate
with the risk associated with making such loans. The result of which has been a
reduction of the Company's market penetration for loans.

The Company experienced an increase of 46% in average balances of taxable
investment securities from $1,449,211,000 for 1996 to $2,121,927,000 for 1997
and an increase of 5% from $1,381,781,000 for 1995 to $1,449,211,000 for 1996.
These trends were the results of continued increases in deposits, repurchase
agreements and borrowings during 1997 and 1996 providing the Company with
available funds for investments.

The allowance for possible loan losses increased 17% from $21,036,000 at
December 31, 1996 to $24,516,000 at December 31, 1997 and increased 14% from
$18,455,000 at December 31, 1995 to $21,036,000 at December 31, 1996. The
provision for possible loan losses charged to expense increased 17% from
$6,630,000 in 1996 to $7,740,000 in 1997 and increased 29% from $5,150,000 in
1995 to $6,630,000 in 1996. Increases in the allowance for possible loan losses
were largely due to Management's belief that conservative allowance allocations
should be maintained in a period when the business cycle is deemed to be mature.
The allowance for possible loan losses was 1.69% of total loans at December 31,
1997 compared to 1.70% at 1996 and 1.53% at 1995. Nonperforming assets as a
percentage of total loans and total assets were 1.23% and .40%, respectively, at
December 31, 1997, and .99% and .37% at December 31, 1996, respectively. Loans
accounted for on a non-accrual basis increased 30% from $4,425,000 at December
31, 1996 to $5,742,000 at December 31, 1997. As loans are placed on non-accrual
status, interest previously accrued and recorded is reversed unless the loans
are well secured and in the process of collection. Foreclosed assets increased
13% from $4,874,000 at December 31, 1996 to $5,510,000 at December 31, 1997. The
increases in the non-performing loans and foreclosed assets were primarily due
to consumer credit problems and other credit problems that a financial
institution faces in the normal course of business. In 1996, non-accruals
decreased 29% from $6,233,000 at December 31, 1995 to $4,425,000 at December 31,
1996 and foreclosed assets decreased 48% from $9,372,000 at December 31, 1995 to
$4,874,000 at December 31, 1996.

The allowance for possible loan losses consists of the aggregate loan loss
allowances of the bank subsidiaries. The allowances are established through
charges to operations in the form of provisions for possible loan losses. Loan
losses (or recoveries) are charged (or credited) directly to the allowances. The
provision for possible loan losses of each bank subsidiary is determined by
management of each bank upon consideration of several factors such as loss
experience in relation to outstanding loans and the existing level of its
allowance; independent appraisals for significant properties; a continuing
review and appraisal of its loan portfolio with particular emphasis on problem
loans by management and the credit department staff of International Bank of
Commerce, Laredo, Texas ("IBC"), the Company's largest bank subsidiary; results
of examinations by bank examiners and continuous review of current and
anticipated economic conditions in the market area served by the bank
subsidiaries. Management of each of the bank subsidiaries, along with management
of the Company, continually review the allowances to determine whether
additional provisions should be made after considering the preceding factors.

The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an

                                        4
<PAGE>
exposure beyond any collateral coverage is apparent and when no further
collection of the portion of the loan so exposed is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged off when 90 days past
due.

While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a loan is likely to be uncollectible and
that it should be wholly or partially charged off as a loss is an exercise of
judgment. Similarly, the determination of the adequacy of the allowance for
possible loan losses can be made only on a subjective basis. It is the judgment
of the Company's management that the allowance for possible loan losses at
December 31, 1997 was adequate to absorb possible losses from loans in the
portfolio at that date.

On December 31, 1997, the Company had $4,517,846,000 of consolidated assets of
which approximately $130,401,000 or 3% were related to loans outstanding to
borrowers domiciled in Mexico. The loan policies of the Company's bank
subsidiaries generally require that loans to borrowers domiciled in Mexico be
primarily secured by assets located in the United States or have credit
enhancements, in the form of guarantees, from significant United States
corporations. The composition of such loans and the related amounts of allocated
allowance for possible loan losses as of December 31, 1997 were as follows:

                                                                     RELATED
                                                     AMOUNT OF    ALLOWANCE FOR
                                                       LOANS     POSSIBLE LOSSES
                                                     --------    ---------------
                                                        (Dollars in Thousands)
Secured by certificates of deposit in
      United States banks ........................   $ 55,187        $   27
Secured by United States real estate .............     32,457           324
Secured by other United States collateral
      (securities, gold, silver, etc.) ...........     13,520           286
Direct unsecured Mexican sovereign debt
      (principally former FICORCA debt) ..........      1,821           176
Other ............................................     27,416           371
                                                     --------        ------
                                                     $130,401        $1,184
                                                     ========        ======

The transactions for the year ended December 31, 1997 in that portion of the
allowance for possible loan losses related to Mexican debt were as follows:

                                                 (Dollars in Thousands)
Balance at January 1, 1997                              $ 1,101
   Charge-offs                                              (19)
   Recoveries                                               102
                                                        -------
Net recoveries                                               83
Balance at December 31, 1997                            $ 1,184
                                                        =======

                                        5
<PAGE>
                         LIQUIDITY AND CAPITAL RESOURCES

The maintenance of adequate liquidity provides the Company's bank subsidiaries
with the ability to meet potential depositor withdrawals, provide for customer
credit needs, maintain adequate statutory reserve levels and take full advantage
of high-yield investment opportunities as they arise. Liquidity is afforded by
access to financial markets and by holding appropriate amounts of liquid assets.
The bank subsidiaries of the Company derive their liquidity largely from
deposits of individuals and business entities. In recent years, deposit growth
has largely been attributable to acquisitions. Historically, the Mexico based
deposits of the Company's bank subsidiaries have been a stable source of
funding. Deposits from persons and entities domiciled in Mexico comprise a
significant although declining portion of the deposit base of the Company's bank
subsidiaries. Such deposits comprised approximately 35%, 39% and 43% of the
Company's bank subsidiaries' total deposits as of December 31, 1997, 1996 and
1995, respectively. Other important funding sources for the Company's bank
subsidiaries during 1997 and 1996 have been wholesale liabilities with, FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.

The Company's funds management policy's primary focus is to measure and manage
the earnings to interest rate risk. The earliest and most simplistic concept of
interest rate risk and its measurement is the gap report, which is used to
generate a rough estimate of the vulnerability of net interest income to changes
in market rates as implied by the relative repricings of assets and liabilities.
The gap report calculates the difference between the amounts of assets and
liabilities repricing across a series of intervals in time, with emphasis
typically placed on the one-year period. This difference, or gap, is usually
expressed as a percentage of total assets.

If an excess of liabilities over assets matures or reprices within the one-year
period, the balance sheet is said to be negatively gapped. This condition is
sometimes interpreted to suggest that an institution is liability-sensitive,
indicating that earnings would suffer from rising rates and benefit from falling
rates. If a surplus of assets over liabilities occurs in the one-year time
frame, the balance sheet is said to be positively gapped, suggesting a condition
of asset sensitivity in which earnings would benefit from rising rates and
suffer from falling rates.

The gap report thus consists of an inventory of dollar amounts of assets and
liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 17 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 1997.

                                        6
<PAGE>
The detailed inventory of balance sheet items contained in gap reports is the
starting point of income simulation analysis. Income simulation analysis also
focuses on the variability of net interest income and net income, but without
the limitations of gap analysis. In particular, gone is the fundamental, but
often unstated, assumption of the gap approach that every balance sheet item
that can reprice will do so to the full extent of any movement in market
interest rates.

Accordingly, income simulation analysis captures not only the potential of
assets and liabilities to mature or reprice but also the probability that they
will do so. Moreover, income simulation analysis focuses on the relative
sensitivities of these balance sheet items and projects their behavior over an
extended period of time in a motion picture rather than snapshot fashion.
Finally, income simulation analysis permits management to assess the probable
effects on balance sheet items not only of changes in market interest rates but
also of proposed strategies for responding to such changes. The Company and many
other institutions rely primarily upon income simulation analysis in measuring
and managing exposure to interest rate risk.

At December 31, 1997, based on these simulations, a rate shift of 200 basis
points in earnings will not vary more than 6 percent of projected 1998 after-tax
net income. A 200 basis point rise in interest rates is a hypothetical rate
scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market developments.

All the measurements of risk described above are made based upon the Company's
business mix and interest rate exposures at the particular point in time. The
exposure changes continuously as a result of the Company's ongoing business and
its risk management initiatives. While management believes these measures
provide a meaningful representation of the Company's interest rate sensitivity,
they do not necessarily take into account all business developments that affect
on net income, such as changes in credit quality or the size and composition of
the balance sheet.

Principal sources of liquidity and funding for the Company are dividends from
subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company closely monitors the dividend
restrictions and availability from the bank subsidiaries as disclosed in Note 17
to the Consolidated Financial Statements. At December 31, 1997, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries
as dividends was approximately $55,701,000, assuming that each bank subsidiary
continues to be classified as "well capitalized" under the applicable
regulations. The restricted capital of the bank subsidiaries was approximately
$241,187,000 as of December 31, 1997. The undivided profits of the bank
subsidiaries were approximately $121,015,000 as of December 31, 1997.

As of December 31, 1997, the Company has outstanding $490,000,000 in short-term
and long-term borrowed funds. In addition to borrowed funds and dividends, the
Company has a number of other available alternatives to finance the growth of
its existing banks as well as future growth and expansion.

The Company maintains an adequate level of capital as a margin of safety for its
depositors and shareholders. At December 31, 1997, shareholders' equity was
$341,244,000 compared to $283,767,000 at December 31, 1996, an increase of
$57,477,000 or 20%. This increase in capital resulted primarily from the
retention of earnings.


                                        7
<PAGE>
During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio
of 3% for the most highly-rated bank holding companies and at least 4% to 5% for
all other bank holding companies. The Company's leverage ratio (defined as
stockholders' equity less goodwill and certain other intangibles divided by
average quarterly assets) was 6.41% at December 31, 1997 and 7.80% at December
31, 1996. The core deposit intangibles and goodwill of $47,788,000 as of
December 31, 1997, booked in connection with financial institution acquisitions
of the Company, are deducted from the sum of core capital elements when
determining the capital ratios of the Company.

The FRB has adopted risk-based capital guidelines which assign risk weightings
to assets and off-balance sheet items. The guidelines also define and set
minimum capital requirements (risk-based capital ratios). Under the final 1992
rules, all banks are required to have core capital (Tier 1) of at least 4.0% of
risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1
capital consists principally of shareholders' equity less goodwill and certain
other intangibles, while total capital consists of core capital, certain debt
instruments and a portion of the reserve for credit losses. In order to be
deemed well capitalized pursuant to the regulations, an institution must have a
total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and
a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital
ratios of 13.95% and 16.02% and risk weighted total capital ratios of 15.20% and
17.27% for December 31, 1997 and 1996, respectively, which are well above the
minimum regulatory requirements and exceed the well capitalized ratios (see note
17 to notes to Consolidated Financial Statements).

The Company had 2,085,945 treasury shares as of March 20, 1998. The Company does
not have a formal stock repurchase program; however, the Company occasionally
repurchases shares of Common Stock, including repurchases related to the
exercise of stock options through the surrender of other shares of Common Stock
of the Company owned by the option holders. As of December 31, 1997, the Company
had repurchased shares in the cumulative total amount of $14,534,000. The Board
of Directors has stated that it will not approve repurchases of more than a
total of $16,000,000. While the Board has increased previous caps related to
treasury shares once they were met, there are no assurances that an increase of
the $16,000,000 cap will occur in the future. The Company has no definite plans
for the treasury shares; however, the treasury shares may be used to fulfill
option exercises under the Company's Stock Option Plan.

During the past few years the Company has expanded its banking facilities. Among
the activities and commitments the Company funded during 1997 and 1996 were
certain capital expenditures relating to the modernization and improvement of
several existing bank facilities and the expansion of the bank branch network.

                                    YEAR 2000

Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.

The Company has developed and implemented a plan to deal with the Year 2000
problem. The plan provides for addressing critical and noncritical issues, with
the assignment of responsibility and target dates for completion. Testing of
core applications, such as mainframe software and hardware and some platform
software, is largely complete and

                                        8
<PAGE>
reflects that they will be Year 2000 compliant. The Company is expensing
applicable costs incurred as a result of addressing the Year 2000 issue.

The Company does not expect that the cost of addressing the Year 2000 issue will
be a material event or uncertainty that would cause its reported financial
information not to be indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition.

Additionally, the federal bank regulators have enforcement powers with respect
to Year 2000 compliance. Failure to institute an acceptable Year 2000 readiness
plan could result in the disapproval of expansion applications filed with bank
regulatory agencies or the imposition of cease and desist orders or civil money
penalties.

                              EFFECTS OF INFLATION

The principal component of earnings is net interest income, which is affected by
changes in the level of interest rates. Changes in rates of inflation affect
interest rates. It is difficult to precisely measure the impact of inflation on
net interest income because it is not possible to accurately differentiate
between increases in net interest income resulting from inflation and increases
resulting from increased business activity. Inflation also raises costs of
operation, primarily those of employment and services.

                            FORWARD LOOKING INFORMATION

Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate," "expect,"
"intend" and project," as well as other words or expressions of similar meaning
are intended to identify forward-looking statements. Readers are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date of this annual report. Such statements are based on current
expectations, are inherently uncertain, are subject to risks and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors.

Factors that could cause actual results to differ materially from any results
that are projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include, among others, the following possibilities:
(I) changes in local, state, national and international economic conditions,
(II) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (III) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as their customers, competitors and
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, and (IV) increased
competition from both within and without the banking industry. It is not
possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement, or to disclose any facts,
events or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement.

                                        9
<PAGE>
                      ADOPTION OF NEW ACCOUNTING STANDARDS

The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
Loan-Income Recognition and Disclosure," effective January 1, 1995. These are
applicable to all creditors and to all loans, uncollateralized as well as
collateralized, except consumer loans. These Statements require that impaired
loans be measured based on (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's observable
market price; or (3) the fair value of the collateral if the loan is collateral
dependent. The adoption of these accounting standards did not have a material
effect on the Company's consolidated financial position or results of operations
since the Company's previous recognition and measurement policies regarding
non-performing loans were consistent with the accounting requirements for
impaired loans.

The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996.
This Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles which must be disposed. Long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell, except for assets that are covered by APB
Opinion No. 30. Adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.

The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights"
effective January 1, 1996. This Statement requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights that are capitalized after the adoption of
this Statement based on one or more of the predominant risk characteristics of
the underlying loans. Impairment should be recognized through a valuation
allowance for each impaired stratum. The adoption of this accounting standard
did not have a material effect on the Company's consolidated financial position,
results of operation or liquidity.

In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 permits companies to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of stock option fair value.
Therefore, as permitted, the Company will continue to apply the existing
accounting rules under APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS No.
123 had been applied.

Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies," have been met and also provides guidance with
respect to the measurement of remediation liabilities. Such accounting is
consistent with the Company's previous method of accounting for environmental
remediation costs and

                                       10
<PAGE>
therefore, adoption of this new Statement did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.

In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to be effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1997. These Statements are to be applied prospectively. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this accounting standard did not have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces primary EPS
and fully diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the basic EPS
computation to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options are considered in
earnings per share calculations if dilutive, using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted SFAS No.
128 in 1997, accordingly, all prior-period earnings per share data presented in
the accompanying consolidated financial statements has been restated to conform
to the requirements of SFAS No. 128.

In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 129 lists required
disclosures about capital structure that had been included in a number of
previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997.

                 ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect


                                       11
<PAGE>
that the adoption of SFAS 130 will have a material impact on the Company's
financial position, results of operation, or liquidity.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Management of the Company does not expect
that adoption of SFAS No. 131 will have a material impact on the Company's
financial position, results of operation, or liquidity.

                             COMMON STOCK AND DIVIDENDS

The Company had issued and outstanding 11,260,197 shares of $1.00 par value
Common Stock held by approximately 1,721 holders of record at March 20, 1998.
The book value of the stock at December 31, 1997 was $32.90 per share compared
with $27.86 per share, adjusted for stock dividends, one year ago.

On August 28, 1995, the Common Stock began to trade on the OTC Bulletin Board
under the trading symbol IBNC; however, trading in the Common Stock of the
Company has not been extensive and such trades cannot be characterized as
amounting to an active trading market. The Common Stock is not listed on any
exchange. As of March 4, 1998, the Common Stock was listed on the Nasdaq
National Market under the trading symbol IBOC. Some of the transactions in the
Company's stock are handled privately; however, brokerage firms, acting
independently of the Company, handle many of the transactions for buyers and
sellers of the stock on a negotiated basis.

The following table sets forth the approximate high and low bid prices in the
Company's Common Stock, adjusted for stock dividends during 1996 and 1997, as
quoted on the OTC Bulletin Board, as recorded by local brokerage firms or from
information in the Company's records for each of the quarters in the two year
period ended December 31, 1997. Some of the quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

                                                   HIGH       LOW
                                                   ----       ---
           1997:
                   First quarter                 $ 55.38   $ 48.00
                   Second quarter                  53.50     44.80
                   Third quarter                   64.00     50.50
                   Fourth quarter                  78.50     61.88

                                                   HIGH       LOW
                                                   ----       ---
           1996:
                   First quarter                 $ 32.80   $ 32.80
                   Second quarter                  32.00     29.60
                   Third quarter                   34.40     32.40
                   Fourth quarter                  40.00     37.60

                                       12
<PAGE>
The Company's Common Stock prices, because of the limited market, do not
necessarily represent the actual fair market value during the above periods and,
in the opinion of the Board of Directors, should not be relied upon as
representative of such market value.

The Company in 1997 and 1996 paid a $4,426,000 and $3,507,000, or $0.50 per
share respectively, special cash dividend to the shareholders. In addition, the
Company has issued stock dividends during the last five year period as follows:

                             DATE                   STOCK DIVIDEND
                             ----                   --------------
                         May 20, 1993                    25 %
                         May 19, 1994                    25
                         May 19, 1995                    25
                         May 17, 1996                    25
                         May 15, 1997                    25

                                       13
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
International Bancshares Corporation:

We have audited the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International
Bancshares Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.

                                      /s/ KPMG PEAT MARWICK LLP


San Antonio, Texas
March 20, 1998

                                       14
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                        Consolidated Statements of Condition

                             December 31, 1997 and 1996

                               (Dollars in Thousands)

     ASSETS                                              1997           1996
                                                     -----------    -----------
Cash and due from banks ..........................   $   229,788    $   135,992
Federal funds sold ...............................         7,975         36,000
                                                     -----------    -----------
             Total cash and cash equivalents .....       237,763        171,992

Time deposits with banks .........................         1,587            198

Investment securities:
  Held to maturity
    (Market value of $2,705 on December 31, 1997
    and $2,840 on December 31, 1996) .............         2,710          2,848
  Available for sale
    (Amortized cost of $2,547,545 on December 31,
    1997 and $1,739,198 on December 31, 1996) ....     2,580,748      1,756,719
                                                     -----------    -----------
             Total investment securities .........     2,583,458      1,759,567
Loans:
   Commercial, financial and agricultural ........       792,124        719,151
   Lease financing receivables, net ..............         8,840          3,910
   Real estate - mortgage ........................       188,122        193,101
   Real estate - construction ....................        59,239         32,610
   Consumer ......................................       272,478        161,594
   Foreign .......................................       130,401        128,932
                                                     -----------    -----------
             Total loans .........................     1,451,204      1,239,298

   Less unearned discounts .......................        (6,508)        (3,303)
                                                     -----------    -----------
             Loans, net of unearned discounts ....     1,444,696      1,235,995

   Less allowance for possible loan losses .......       (24,516)       (21,036)
                                                     -----------    -----------
             Net loans ...........................     1,420,180      1,214,959
                                                     -----------    -----------
Bank premises and equipment, net .................       129,621         94,195
Accrued interest receivable ......................        31,271         22,913
Other assets .....................................       113,966         87,407
                                                     -----------    -----------
             Total assets ........................   $ 4,517,846    $ 3,351,231
                                                     ===========    ===========

                                                                   (Continued)

                                       15
<PAGE>
                INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Consolidated Statements of Condition, Continued

                               (Dollars in Thousands)

     LIABILITIES AND SHAREHOLDERS' EQUITY                1997           1996
     ------------------------------------            -----------    -----------
Liabilities:
   Deposits:
     Demand - non-interest bearing ...............   $   450,537    $   346,162
     Savings and interest bearing demand .........       819,759        684,867
     Time ........................................     1,905,264      1,631,124
                                                     -----------    -----------
             Total deposits ......................     3,175,560      2,662,153

   Securities sold under repurchase agreements ...       478,409        148,483
   Other borrowed funds ..........................       490,000        239,000
   Other liabilities .............................        32,633         17,828
                                                     -----------    -----------
             Total liabilities ...................     4,176,602      3,067,464
                                                     -----------    -----------
Shareholders' equity:
   Common stock of $1.00 par value ...............
     Authorized 15,000,000 shares;
     issued 13,196,469 shares in 1997
     and 10,353,202 shares in 1996 ...............        13,196         10,353
   Surplus .......................................        19,012         11,935
   Retained earnings .............................       301,988        260,134
   Net unrealized holding gains on
     available for sale securities,
     net of deferred income taxes ................        21,582         11,388
                                                     -----------    -----------
                                                         355,778        293,810
   Less cost of shares in treasury,
     2,079,126 shares in 1997 and
     1,599,788 shares in 1996 ....................       (14,534)       (10,043)
                                                     -----------    -----------
             Total shareholders' equity ..........       341,244        283,767
                                                     -----------    -----------
             Total liabilities and
                shareholders' equity .............   $ 4,517,846    $ 3,351,231
                                                     ===========    ===========

          See accompanying notes to consolidated financial statements.

                                       16
<PAGE>
                INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                          Consolidated Statements of Income

                    Years ended December 31, 1997, 1996 and 1995

                  (Dollars in Thousands, Except Per Share Amounts)

                                                  1997       1996        1995
                                                --------   --------   ---------
Interest income:
   Loans, including fees ....................   $127,348   $119,183   $ 124,411
   Time deposits with banks .................         47         53          43
   Federal funds sold .......................      1,120      1,540         991
   Investment securities:
     Taxable ................................    146,820     99,411      91,178
     Tax-exempt .............................         90      1,292       1,825
   Other ....................................        307        300         419
                                                --------   --------   ---------
             Total interest income ..........    275,732    221,779     218,867
                                                --------   --------   ---------
Interest expense:
   Savings and interest bearing demand
     deposits ...............................     22,152     18,390      16,741
   Time deposits ............................     89,413     69,717      62,078
   Federal funds purchased and securities
     sold under repurchase agreements .......     15,754     12,151      25,594
   Other borrowings .........................     18,052      7,114       7,948
                                                --------   --------   ---------
             Total interest expense .........    145,371    107,372     112,361
                                                --------   --------   ---------
             Net interest income ............    130,361    114,407     106,506

Provision for possible loan losses ..........      7,740      6,630       5,150
                                                --------   --------   ---------
             Net interest income after
                provision for possible
                loan losses .................    122,621    107,777     101,356
                                                --------   --------   ---------
Non-interest income:
   Service charges on deposit accounts ......     18,511     15,642      13,522
   Other service charges, commissions
     and fees ...............................      8,295      6,780       5,717
   Investment securities transactions, net ..        484         31          (2)
   Other income .............................      9,486      7,741       6,772
                                                --------   --------   ---------
             Total non-interest income ......     36,776     30,194      26,009
                                                --------   --------   ---------

                                                                    (Continued)

                                       17
<PAGE>
                INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Consolidated Statements of Income, Continued

                    Years ended December 31, 1997, 1996 and 1995

                  (Dollars in Thousands, Except Per Share Amounts)

                                              1997         1996         1995
                                          -----------  -----------  -----------
Non-interest expense:
   Employee compensation and benefits ..       33,431       28,882       25,701
   Occupancy ...........................        6,258        5,336        5,105
   Depreciation of bank premises and
     equipment .........................        8,256        7,024        5,478
   Regulatory and deposit insurance fees        1,803        3,813        4,578
   Legal expense including settlements .        2,036        2,043        5,045
   Net cost of operations for other real
     estate owned ......................          161          308          558
   Lease asset expenses ................          931          931          471
   Stationary and supplies .............        3,026        2,479        2,176
   Other ...............................       29,843       22,641       19,877
                                          -----------  -----------  -----------
             Total non-interest expense        85,745       73,457       68,989
                                          -----------  -----------  -----------
             Income before income
                taxes ..................       73,652       64,514       58,376
Income taxes ...........................       24,771       20,164       18,315
                                          -----------  -----------  -----------
             Net income ................  $    48,881  $    44,350  $    40,061
                                          ===========  ===========  ===========
Basic earnings per common share:
   Net Income ..........................  $      4.79  $      4.40  $      4.02
                                          ===========  ===========  ===========
   Weighted average number of shares
     outstanding .......................   10,194,910   10,086,879    9,965,899
Diluted earnings per common share:
   Net Income ..........................  $      4.62  $      4.31  $      3.95
                                          ===========  ===========  ===========
   Weighted average number of shares
     outstanding .......................   10,569,990   10,298,981   10,152,144

          See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
                     INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                        Consolidated Statements of Shareholders' Equity

                         Years ended December 31, 1997, 1996 and 1995

                                    (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                             UNREALIZED GAIN (LOSS)
                                                                                                ON AVAILABLE
                                                   NUMBER      COMMON     RETAINED                FOR SALE    TREASURY
                                                  OF SHARES     STOCK     EARNINGS    SURPLUS    SECURITIES    STOCK        TOTAL
                                                   --------    --------    -------   ---------    --------    --------    ---------
<S>                                                   <C>      <C>         <C>       <C>          <C>         <C>         <C>
Balances at January 1, 1995 ....................      6,466    $  6,466    $10,154   $ 185,685    $(16,611)   $ (7,158)   $ 178,536
 Net income ....................................       --          --         --        40,061        --          --         40,061
 Stock dividends:
    Shares issued ..............................      1,625       1,625       --        (1,625)       --          --           --
    Cash dividends .............................       --          --         --        (2,771)       --          --         (2,771)
 Purchase of treasury stock ....................       --          --         --          --          --          (624)        (624)
 Exercise of stock options .....................         69          69        483        --          --          --            552
 Net change in unrealized loss
    on available for sale
    securities, net of deferred
    income taxes ...............................       --          --         --          --        30,007        --         30,007
                                                   --------    --------    -------   ---------    --------    --------    ---------
Balances at December 31, 1995 ..................   $  8,160    $  8,160    $10,637   $ 221,350    $ 13,396    $ (7,782)   $ 245,761
   Net income ..................................       --          --         --        44,350        --          --         44,350
   Stock dividends:
     Shares issued .............................      2,059       2,059       --        (2,059)       --          --           --
     Cash dividends ............................       --          --         --        (3,507)       --          --         (3,507)
   Purchase of treasury stock ..................       --          --         --          --          --        (2,261)      (2,261)
   Exercise of stock options ...................        134         134        831        --          --          --            965
   Tax effect of non-qualified stock
      options exercised ........................       --          --          467        --          --          --            467
    Net change in unrealized gain
     on available for sale
     securities, net of deferred
     income taxes ..............................       --           --        --           --       (2,008)                  (2,008)
                                                   --------    --------    -------   ---------    --------    --------    ---------
Balances at December 31, 1996 ..................     10,353    $ 10,353    $11,935   $ 260,134    $ 11,388    $(10,043)   $ 283,767
   Net income ..................................       --          --         --        48,881        --          --         48,881
   Stock dividends:
      Shares issued ............................      2,601       2,601       --        (2,601)       --          --           --
      Cash dividends ...........................       --          --         --        (4,426)       --          --         (4,426)
  Purchase of treasury stock ...................       --          --         --          --          --        (4,491)      (4,491)
  Exercise of stock options ....................        176         176      1,602        --          --          --          1,778
  Sale of stock ................................         66          66      4,934        --          --          --          5,000
  Tax effect of  non-qualified stock
     options exercised .........................       --          --          541        --          --          --            541
  Net change in unrealized gain
     on available for sale
     securities, net of deferred
     income taxes ..............................       --          --         --          --        10,194        --         10,194
                                                   --------    --------    -------   ---------    --------    --------    ---------
Balances at December 31, 1997 ..................     13,196    $ 13,196    $19,012   $ 301,988    $ 21,582    $(14,534)   $ 341,244
                                                   ========    ========    =======   =========    ========    ========    =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995

                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                  1997                  1996                1995
                                                                              -----------           -----------           ---------
<S>                                                                           <C>                   <C>                   <C>
Operating activities:
  Net income .......................................................          $    48,881           $    44,350           $  40,061
  Adjustments to reconcile net income to net cash
provided by operating activities:
      Provision for possible loan losses ...........................                7,740                 6,630               5,150
      Recoveries on charged-off loans ..............................                  997                 1,116                 609
      Net profit of operations for other real
       estate owned ................................................                  161                   308                 558
      Lease asset expenses .........................................                  931                   931                 471
      Depreciation of bank premises and equipment ..................                8,256                 7,024               5,478
      Accretion of investment securities discounts .................               (1,445)               (1,382)             (1,736)
      Amortization of investment securities premiums ...............               10,017                 6,762              10,831
      Realized (gain) loss on investment securities
        transactions, net ..........................................                 (484)                  (31)                  2
      Gain on sale of bank premises and equipment ..................                  (51)                 (115)                (11)
      Increase in accrued interest receivable ......................               (7,145)                 (709)               (333)
      Increase in other liabilities ................................               12,676                 1,996               5,484
                                                                              -----------           -----------           ---------
           Net cash provided by operating activities ...............               80,534                66,880              66,564
                                                                              -----------           -----------           ---------
Investing activities:
  Cash acquired in purchase transactions ...........................              102,664               284,395               7,123
  Proceeds from maturities of securities ...........................                2,660                   582              30,154
  Proceeds from sales of available for sale
    securities .....................................................              229,287               441,151             154,506
  Purchases of available for sale securities .......................           (1,366,791)           (1,038,351)           (490,489)
  Principal collected on mortgage-backed securities ................              355,675               285,822             209,262
  Proceeds from matured time deposits with banks ...................                  198                 2,295                 297
  Purchases of time deposits with banks ............................                 (603)                 (693)             (1,602)
  Net increase in loans ............................................              (74,777)              (15,003)            (30,154)
  Net decrease (increase)in other assets ...........................                2,743                (6,829)             (2,909)
  Purchases of bank premises and equipment .........................              (24,626)              (16,068)            (11,582)
  Proceeds from sale of bank premises
    and equipment ..................................................                  101                   545                  48
                                                                              -----------           -----------           ---------
            Net cash used in investing activities ..................             (773,469)              (62,145)           (135,346)
                                                                              -----------           -----------           ---------
</TABLE>
                                                                     (Continued)
                                       20
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                Consolidated Statements of Cash Flows, Continued

                  Years ended December 31, 1997, 1996 and 1995

                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                 1997                   1996                 1995
                                                                              ---------            -----------            ---------
<S>                                                                           <C>                  <C>                    <C>
Financing activities:
  Net increase in non-interest bearing demand
    deposits ......................................................           $  57,137            $    27,831            $   3,486
  Net increase (decrease) in savings and
    interest bearing demand deposits ..............................              23,996                 58,604              (34,712)
  Net increase in time deposits ...................................             141,511                103,426               24,614
  Net increase (decrease) in federal funds purchased
    and securities sold under repurchase agreements ...............             287,201               (314,119)             168,864
  Proceeds from issuance of other borrowed funds ..................             997,347              1,181,000               93,500
  Principal payments on other borrowed funds ......................            (746,347)            (1,008,500)            (150,500)
  Purchase of treasury stock ......................................              (4,491)                (2,261)                (624)
  Proceeds from stock transactions ................................               6,778                    965                  552
  Payment of cash dividends .......................................              (4,400)                (3,489)              (2,762)
  Payments of cash dividends in lieu of fractional
    shares ........................................................                 (26)                   (18)                  (9)
                                                                              ---------            -----------            ---------
           Net cash provided by financing activities ..............             758,706                 43,439              102,409
                                                                              ---------            -----------            ---------
           Increase in cash and cash equivalents ..................              65,771                 48,165               33,627

Cash and cash equivalents at beginning of year ....................             171,992                123,827               90,200
                                                                              ---------            -----------            ---------
Cash and cash equivalents at end of year ..........................           $ 237,763            $   171,992            $ 123,827
                                                                              =========            ===========            =========
Supplemental cash flow information:
  Interest paid ...................................................           $ 148,825            $   107,187            $ 114,685
  Income taxes paid ...............................................              23,815                 19,059               18,966

Supplemental schedule of noncash investing and
financing activities relating to various
  purchase transactions:
    Loans acquired ................................................           $ 140,112            $    22,177            $  37,043
    Investment securities and other assets acquired ...............              93,382                 22,442               54,087
    Deposit and other liabilities assumed .........................             336,158                329,014               98,253
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
                INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                     Notes to Consolidated Financial Statements

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of International Bancshares Corporation
("Corporation") and Subsidiaries (the Corporation and Subsidiaries collectively
referred to herein as the "Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The following
is a description of the more significant of those policies.

CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Corporation
and its wholly-owned bank subsidiaries, International Bank of Commerce, Laredo
("IBC"), Commerce Bank, International Bank of Commerce, Zapata, International
Bank of Commerce, Brownsville, and the Corporation's wholly-owned non-bank
subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC
Trading Company and IBC Capital Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation.

The Company, through its bank subsidiaries, is engaged in the business of
banking, including the acceptance of checking and savings deposits and the
making of commercial, real estate, personal, home improvement, automobile and
other installment and term loans. The primary markets of the Company are South
and Southeast Texas. Each bank subsidiary is very active in facilitating
international trade along the United States border with Mexico and elsewhere.
Although the Company's loan portfolio is diversified, the ability of the
Company's debtors to honor their contracts is primarily dependent upon the
economic conditions in the Company's trade area. In addition, the investment
portfolio is directly impacted by fluctuations in market interest rates. The
Company and its bank subsidiaries are subject to the regulations of certain
Federal agencies as well as the Texas Department of Banking and undergo periodic
examinations by those regulatory authorities. Such agencies may require certain
standards or impose certain limitations based on their judgements or changes in
law and regulations.

The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance sheets
and income and expenses for the periods. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near-term relate to the determination
of the allowance for possible loan losses.

Per Share Data

All share and per share information has been restated giving retroactive effect
to stock dividends distributed.

                                                                     (Continued)

                                       22
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                     Notes to Consolidated Financial Statements

INVESTMENT SECURITIES

The Company classifies debt and equity securities into one of these categories:
held-to maturity, available-for-sale, or trading. Such classifications are
reassessed for appropriate classification at each reporting date. Securities
classified as "held-to-maturity" are carried at amortized cost for financial
statement reporting, while securities classified as "available-for-sale" and
"trading" are carried at their fair value. Unrealized holding gains and losses
are included in net income for those securities classified as "trading", while
unrealized holding gains and losses related to those securities classified as
"available-for-sale" are excluded from net income and reported at a net amount
as a separate component of shareholders' equity until realized.

Mortgage-backed securities held at December 31, 1997 and 1996 represent
participating interests in pools of long-term first mortgage loans originated
and serviced by the issuers of the securities. Premiums and discounts are
amortized using the straight-line method over the contractual maturity of the
loans adjusted for anticipated prepayments. Income recognized under the straight
line method is not materially different from income that would be recognized
under the level yield or "interest method". Mortgage-backed securities are
either issued or guaranteed by the U.S. Government or its agencies. Market
interest rate fluctuations can affect the prepayment speed of principal and the
yield on the security.

UNEARNED DISCOUNTS

Consumer loans are frequently made on a discount basis. The amount of the
discount is subsequently included in interest income ratably over the term of
the related loans under the sum-of-the-digits (Rule of 78's) method. Income
recognized under the sum-of-the-digits method is not materially different than
income that would be recognized under the level yield or "interest method".

PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

The allowance for possible loan losses is maintained at a level considered
adequate by management to provide for potential loan losses. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The provision for possible loan losses is the amount which, in the
judgement of management, is necessary to establish the allowance for possible
loan losses at a level that is adequate to absorb known and inherent risks in
the loan portfolio.

Management believes that the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's bank
subsidiaries allowances for possible loan losses. Such agencies may require the
Corporation's bank subsidiaries'

                                                                     (Continued)

                                       23
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

to recognize additions or reductions to their allowances based on their
judgments of information available to them at the time of their examination.

Impaired loans are measured based on (1) the present value of expected future
cash flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or (3) the fair value of the collateral if the loan is
collateral dependent.

NON-ACCRUAL LOANS

The non-accrual loan policy of the Corporation's bank subsidiaries is to
discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be uncollectible. Interest income
on non-accrual loans is recognized only to the extent payments are received or
when, in management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals.

OTHER REAL ESTATE OWNED

Other real estate owned is comprised of real estate acquired by foreclosure and
deeds in lieu of foreclosure. Other real estate is carried at the lower of the
recorded investment in the property or its fair value less estimated costs to
sell such property (as determined by independent appraisal). Prior to
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan losses
if necessary. Any subsequent write-downs are charged against other non-interest
expenses. Operating expenses of such properties and gains and losses on their
disposition are included in other non-interest expenses.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on straight-line and accelerated methods over the
estimated useful lives of the assets. Repairs and maintenance are charged to
operations as incurred and expenditures for renewals and betterments are
capitalized.

INCOME TAXES

The Company recognizes certain income and expenses in different time periods for
financial reporting and income tax purposes. The provision for deferred income
taxes is based on the asset and liability method and represents the change in
the deferred income tax accounts during the year, including the effect of
enacted tax rate changes.






                                                                     (Continued)

                                       24
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

STOCK OPTIONS

Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

NET INCOME PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces primary EPS
and fully diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the basic EPS
computation to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options are considered in
earnings per share calculations if dilutive, using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted SFAS No.
128 in 1997, accordingly, all prior-period earnings per share data presented in
the accompanying consolidated financial statements has been restated to conform
to the requirements of SFAS No. 128.

CAPITAL STRUCTURE

In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 129 lists required
disclosures about capital structure that had been included in a number of
previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997. Adoption of SFAS
No. 129 did not have a material effect or significantly alter the Company's
consolidated financial statements.

                                                                     (Continued)

                                       25
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

ACQUISITIONS AND AMORTIZATION OF INTANGIBLES

Operations of companies acquired in purchase transactions are included in the
consolidated statements of income from the respective dates of acquisition. The
excess of the purchase price over net identifiable assets acquired (goodwill)
and core deposit intangibles are included in other assets and are being
amortized over varying remaining lives not exceeding 15 years.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of

The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996.
This Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles which must be disposed. Long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell, except for assets that are covered by APB
Opinion No. 30. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.

CONSOLIDATED STATEMENT OF CASH FLOWS

For purposes of the statement of cash flows, the Company considers all
short-term investments with a maturity at date of purchase of three months or
less to be cash equivalents. Also, the Company reports transactions related to
deposits with other financial institutions, customer time deposits and loans to
customers on a net basis.

ENVIRONMENTAL REMEDIATION

Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies," have been met and also provides guidance with
respect to the measurement of remediation liabilities. Such accounting is
consistent with the Company's previous method of accounting for environmental
remediation costs and therefore, adoption of this new Statement did not have a
material impact on the Company's financial position, results of operations or
liquidity.

ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS

In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to

                                                                     (Continued)

                                       26
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

be effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1997. These Standards are to be
applied prospectively. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of the Statement did
not have a material impact on the Company's financial position, results of
operations or liquidity.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect that the adoption
of SFAS 130 will have a material impact on the Company's financial position,
results of operation, or liquidity.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Management of the Company does not expect
that adoption of SFAS No. 131 will have a material impact on the Company's
financial position, results of operation, or liquidity.

(2)  ACQUISITIONS

Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of approximately $17,613,000 at such
date. These assets are being amortized on a straight line basis over a fifteen
year period.

                                                                     (Continued)

                                       27
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                     Notes to Consolidated Financial Statements

Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash or other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 at such date. These assets are being amortized on a straight line
basis over a fifteen year period.

Effective November 21, 1996, IBC purchased certain assets and assumed certain
liabilities of three branches of Home Savings of America F.S.B., Irwindale,
California. IBC purchased loans of approximately $769,000 and assumed deposits
of approximately $196,813,000 and received cash and other assets in the amount
of approximately $196,081,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $9,670,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.

Effective June 27, 1996, IBC purchased certain assets and assumed certain
liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal savings
bank organized under the laws of the United States. At the date of closing,
total loans acquired were approximately $21,408,000, deposits assumed were
approximately $132,133,000 and cash and other assets received were in the amount
of approximately $110,756,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $6,599,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.

Effective September 8, 1995, Stone Oak National Bank, in San Antonio, Texas, a
national banking association organized under the laws of the United States, was
merged with and into IBC. At the date of closing, total assets acquired were
approximately $18,000,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $1,387,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.

Effective February 1, 1995, The Bank of Corpus Christi, Corpus Christi, Texas a
state bank organized under the laws of the state of Texas, was merged with and
into IBC. At the date of closing, total assets acquired were approximately
$80,000,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$4,062,000 at such date. These assets are being amortized on a straight line
basis over a fifteen year period.


                                                                     (Continued)

                                       28
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(3) Investment Securities

The amortized cost and estimated market value by type of investment security at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                     HELD TO MATURITY
                                 ----------------------------------------------------------
                                              GROSS        GROSS       ESTIMATED
                                 AMORTIZED  UNREALIZED   UNREALIZED     MARKET      CARRYING
                                   COST       GAINS       LOSSES         VALUE        VALUE
                                 -------      -----       ------         -----        -----
                                                   (Dollars in Thousands)
<S>                              <C>           <C>          <C>          <C>          <C>
Obligations of states and
  political subdivisions ..      $  695        $--          $(5)         $  690       $  695
Other securities ..........       2,015         --           --           2,015        2,015
                                 ------        ---          ---          ------       ------

Total investment securities      $2,710        $--          $(5)         $2,705       $2,710
                                 ======        ===          ===          ======       ======

                                                         AVAILABLE FOR SALE
                                 --------------------------------------------------------------------
                                                  GROSS       GROSS        ESTIMATED
                                  AMORTIZED     UNREALIZED  UNREALIZED       MARKET        CARRYING
                                    COST          GAINS       LOSSES         VALUE           VALUE
                                 ----------      -------      ------       ----------      ----------
                                                   (Dollars in Thousands)

U.S. Treasury securities ..      $  201,906      $   218      $  (1)      $  202,123      $  202,123
Mortgage-backed securities        2,315,455       32,367       (100)       2,347,722       2,347,722
Obligations of states and
  political subdivisions ..             555            4        (40)             520             520
Equity securities .........          29,629          754       --             30,383          30,383
                                 ----------      -------      -----       ----------      ----------

Total investment securities      $2,547,545      $33,343      $(141)      $2,580,748      $2,580,748
                                 ==========      =======      =====       ==========      ==========
</TABLE>
                                                                     (Continued)

                                       29
<PAGE>
                  INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                        Notes to Consolidated Financial Statements

The amortized cost and estimated market value of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
                                             HELD TO MATURITY          AVAILABLE FOR SALE
                                            ------------------      --------------------------
                                                       ESTIMATED                  ESTIMATED
                                           AMORTIZED    MARKET      AMORTIZED       MARKET
                                             COST       VALUE         COST           VALUE
                                            ------      ------      ----------      ----------
                                                        (Dollars in Thousands)
<S>                                         <C>         <C>         <C>             <C>
Due in one year or less ..............      $  200      $  200      $    2,148      $    2,147
Due after one year through five years        2,125       2,120           1,060           1,081
Due after five years through ten years         385         385         199,253         199,415
Mortgage-backed securities ...........        --          --         2,315,455       2,347,722
Equity securities ....................        --          --            29,629          30,383
                                            ------      ------      ----------      ----------
Total investment securities ..........      $2,710      $2,705      $2,547,545      $2,580,748
                                            ======      ======      ==========      ==========
</TABLE>
The amortized cost and estimated market value by type of investment security at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                                     HELD TO MATURITY
                                  ----------------------------------------------------
                                             GROSS       GROSS     ESTIMATED
                                AMORTIZED  UNREALIZED  UNREALIZED   MARKET    CARRYING
                                  COST       GAINS      LOSSES      VALUE      VALUE
                                 ------      ------     ------     ---------  --------
                                                   (Dollars in Thousands)
<S>                              <C>         <C>         <C>       <C>         <C>
Mortgage-backed securities       $  858      $ --        $(8)      $  850      $  858
Other securities ..........       1,990        --         --        1,990       1,990
                                 ------      ------      ---       ------      ------

Total investment securities      $2,848      $ --        $(8)      $2,840      $2,848
                                 ======      ======      ===       ======      ======

                                                         AVAILABLE FOR SALE
                                 ---------------------------------------------------------------------
                                                 GROSS        GROSS         ESTIMATED
                                 AMORTIZED     UNREALIZED   UNREALIZED       MARKET         CARRYING
                                   COST           GAINS       LOSSES          VALUE           VALUE
                                 ----------      -------      -------       ----------      ----------
                                             (Dollars in Thousands)

U.S. Treasury securities ..      $    4,942      $    78      $  --         $    5,020      $    5,020
Mortgage-backed securities        1,716,996       18,536       (1,048)       1,734,484       1,734,484
Obligations of states and
  political subdivisions ..           1,059            1          (46)           1,014           1,014
Equity securities .........          16,201         --           --             16,201          16,201
                                 ----------      -------      -------       ----------      ----------
Total investment securities      $1,739,198      $18,615      $(1,094)      $1,756,719      $1,756,719
                                 ==========      =======      =======       ==========      ==========
</TABLE>
                                                                     (Continued)

                                       30
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

Mortgage-backed securities are primarily securities issued by the Federal Home
Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae").

The amortized cost and fair market value of investment securities pledged to
qualify for fiduciary powers and to secure public monies as required by law and
for repurchase agreements was $1,486,262,000 and $1,506,894,000, respectively,
at December 31, 1997.

Proceeds from the sale of securities available-for-sale were $229,287,000,
$441,151,000 and $154,506,000 during 1997, 1996 and 1995, respectively. Gross
gains of $619,000 and gross losses of $135,000 were realized in 1997 primarily
from the sale of available-for-sale mortgage-backed securities. Gross gains and
losses of $1,953,000 and $1,922,000 and $541,000 and $543,000 were realized in
1996 and 1995, respectively.

During 1995, the Company transfered certain securities from held-to-maturity to
available-for-sale as allowed for under the Financial Accounting Standards
Board's Special Report on the Implementation of Statement of Financial
Accounting Standards No. 115. Effective November 30, 1995, securities with an
amortized cost of $484,196,000 were reclassified from held-to-maturity to
available-for-sale. The unrealized gain as of the date of the transfer was
$4,366,000.

The Company maintains the required level of stock at the Federal Home Loan Bank
of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity securities
and is recorded at cost and totaled $28,361,000 at December 31, 1997.

(4)  ALLOWANCE FOR POSSIBLE LOAN LOSSES

A summary of the transactions in the allowance for possible loan losses for the
years ended December 31, 1997, 1996 and 1995 is as follows:

                                           1997           1996           1995
                                         --------       --------       --------
                                                      (Dollars in Thousands)

Balance at January 1 ..............      $ 21,036       $ 18,455       $ 17,025
                                         --------       --------       --------
  Losses charged to allowance .....        (6,336)        (5,165)        (4,764)
  Recoveries credited to allowance            997          1,116            609
                                         --------       --------       --------
  Net losses charged to allowance .        (5,339)        (4,049)        (4,155)

  Provision charged to operations .         7,740          6,630          5,150
                                         --------       --------       --------
  Allowances acquired in purchase
    transactions ..................         1,079           --              435
                                         --------       --------       --------
Balance at December 31 ............      $ 24,516       $ 21,036       $ 18,455
                                         ========       ========       ========

                                                                     (Continued)
                                       31
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                       Notes to Consolidated Financial Statements

Loans accounted for on a non-accrual basis at December 31, 1997, 1996 and 1995
amounted to $5,742,000, $4,425,000 and $6,233,000, respectively. The effect of
such non-accrual loans reduced interest income by $602,000, $644,000 and
$1,010,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Amounts received on non-accruals are applied, for financial accounting purposes,
first to principal and then to interest after all principal has been collected.

Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review procedures.
Impaired loans included (1) all non-accrual loans, (2) loans which are 90 days
or more past due, unless they are well secured (i.e. the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and (3) other loans which management believes are impaired.
Substantially all of the Company's impaired loans are measured at the fair value
of the collateral. In limited cases the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent.

Impaired loans were $12,854,000 at December 31, 1997, $10,927,000 at December
31, 1996 and $14,287,000 at December 31, 1995. The average recorded investment
in impaired loans during 1997, 1996, and 1995 was $12,507,000, $10,940,000 and
$14,100,000, respectively. The total allowance for possible loan losses related
to these loans was $1,144,000, $972,000 and $782,000 at December 31, 1997, 1996
and 1995, respectively. Interest income on impaired loans of $777,000, $566,000
and $863,000 was recognized for cash payments received in 1997, 1996 and 1995,
respectively.

Management of the Company recognizes the risks associated with these impaired
loans. However, management's decision to place loans in this category does not
necessarily mean that the Company expects losses to occur.

The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the loss portion is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged-off when 90 days past
due.

While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a loan is likely to be uncollectible and
that it should be wholly or partially charged-off as a loss, is an exercise of
judgment. Similarly, the determination of the adequacy of the allowance for
possible loan losses can be made only on a subjective basis. It is the judgment
of the Company's management that the allowance for possible loan losses at
December 31, 1997 was adequate to absorb possible losses from loans in the
portfolio at that date.
                                                                     (Continued)

                                       32
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(5)  BANK PREMISES AND EQUIPMENT

A summary of bank premises and equipment, by asset classification, at December
31, 1997 and 1996 follows:

                                                 Estimated
                                               useful lives     1997       1996
                                               ------------     ----       ----
                                                        (Dollars in Thousands)

Bank buildings and improvements ................ 5 - 40 years $ 91,971  $66,314
Less:  accumulated depreciation ................               (14,336) (12,044)
                                                              --------  -------
                                                                77,635   54,270

Furniture, equipment and vehicles .............. 1 - 20 years   60,408   46,374
Less:  accumulated depreciation ................               (32,693) (26,949)

                                                                27,715   19,425
                                                              --------  -------
Land ...........................................                22,944   19,122
                                                              --------  -------
Real estate held for future expansion:
Land, building, furniture,
  fixture and equipment ........................ 7 - 27 years    2,215    2,215
Less:  accumulated depreciation ................                  (888)    (837)
                                                              --------  -------
                                                                 1,327    1,378
                                                              --------  -------
                Bank premises and equipment, net             $ 129,621 $ 94,195
                                                             ========= ========

                                                                     (Continued)

                                       33
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                       Notes to Consolidated Financial Statements

(6)  DEPOSITS
Deposits as of December 31, 1997 and 1996 and related interest expense for the
years ended December 31, 1997, 1996 and 1995 were as follows:

                                                      1997         1996
                                                      ----         ----
                                                    (Dollars in Thousands)
Deposits:
   Demand - non-interest bearing
         Domestic ............................       $  388,851       $  294,746
         Foreign .............................           61,686           51,416
   Total demand non-interest
     bearing .................................          450,537          346,162
   Savings and interest bearing demand
         Domestic ............................          650,806          513,086
         Foreign .............................          168,953          171,781
                                                     ----------       ----------
   Total savings and interest
     bearing demand ..........................          819,759          684,867
                                                     ----------       ----------
   Time, certificates of deposit
      $100,000 or more
         Domestic ............................          446,038          323,601
         Foreign .............................          655,957          591,066
       Less than $100,000
         Domestic ............................          567,853          501,484
         Foreign .............................          235,416          214,973
                                                     ----------       ----------
   Total time, certificates
            of deposits ......................        1,905,264        1,631,124
                                                     ----------       ----------
   Total deposits ............................       $3,175,560       $2,662,153
                                                     ==========       ==========

                                                   1997       1996        1995
                                                 -------     -------     -------
                                                (Dollars in Thousands)
Interest Expense:
   Savings and interest bearing demand
          Domestic .........................     $17,559     $14,079     $12,341
          Foreign ..........................       4,593       4,311       4,400
                                                 -------     -------     -------
   Total savings and interest
     bearing demand ........................     $22,152     $18,390     $16,741
                                                 =======     =======     =======
   Time, certificates of deposit
     $100,000 or more
          Domestic .........................     $19,256     $14,193     $13,151
          Foreign ..........................      32,532      28,561      25,713
     Less than $100,000
          Domestic .........................      27,200      17,872      14,877
          Foreign ..........................      10,425       9,091       8,337
                                                 -------     -------     -------
   Total time, certificates of deposit .....     $89,413     $69,717     $62,078
                                                 =======     =======     =======

                                                                     (Continued)

                                       34
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(7)  SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

The Company's bank subsidiaries have entered into repurchase agreements with the
FHLB, the FNMA, FHLMC and individual customers of the bank subsidiaries. The
purchasers have agreed to resell to the bank subsidiaries identical securities
upon the maturities of the agreements. Securities sold under repurchase
agreements were mortgage-backed book entry securities and averaged $301,511,000,
$236,223,000 and $444,389,000 during 1997, 1996 and 1995, respectively, and the
maximum amount outstanding at any month end during 1997, 1996 and 1995 was
$540,370,000, $477,874,000 and $552,628,000, respectively.

Further information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1997 and 1996 is set forth in the
following table:
<TABLE>
<CAPTION>
                                  COLLATERAL SECURITIES              REPURCHASE BORROWING
                            ---------------------------------   ----------------------------
                             BOOK VALUE OF    MARKET VALUE OF   BALANCE OF  WEIGHTED AVERAGE
                            SECURITIES SOLD   SECURITIES SOLD    LIABILITY    INTEREST RATE
                            ---------------   ---------------    ---------    -------------
                                            (Dollars in Thousands)
<S>                            <C>              <C>              <C>                <C>
  December 31, 1997 Term:
  Overnight agreements ..      $ 54,648         $ 55,769         $ 30,355           5.28%
  1 to 29 days ..........       399,737          403,951          378,988           5.88%
  30 to 90 days .........        24,878           25,552           16,325           5.41%
  Over 90 days ..........        64,738           66,271           52,741           5.39%
                               --------         --------         --------           ----
  Total .................      $544,001         $551,543         $478,409           5.77%
                               ========         ========         ========           ====
  December 31, 1996 Term:
  Overnight agreements ..      $ 59,730         $ 76,028         $ 50,313           4.93%
  1 to 29 days ..........        43,520           43,791           22,154           4.92%
  30 to 90 days .........        32,943           33,430           23,526           5.15%
  Over 90 days ..........        55,938           57,122           52,490           5.23%
                               --------         --------         --------           ----
  Total .................      $192,131         $210,371         $148,483           5.07%
                               ========         ========         ========           ====
</TABLE>
The book value and market value of securities sold includes the entire book
value and market value of securities partially or fully pledged under repurchase
agreements.

(8) OTHER BORROWED FUNDS

Other borrowed funds at December 31, 1997 and 1996 are $390,000,000 and
$137,000,000, respectively, of short-term fixed borrowings with the Federal Home
Loan Bank of Dallas at the market price offered at the time of funding. The
weighted average interest rate on the short-term fixed borrowings outstanding at
December 31, 1997 and 1996 was 5.91% and 5.55%, respectively, and the weighted
average interest rate for the year 1997 and 1996 was 5.72% and 5.50%,
respectively. The average daily balance on short-term fixed borrowings was
$241,407,000 and $81,154,000 during 1997 and 1996, respectively, and the maximum

                                                                     (Continued)

                                       35
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements

amount outstanding at any month end during 1997 and 1996 was $390,000,000 and
$139,000,000, respectively.

The Company had two long-term certificates of indebtedness outstanding each in
the amounts of $50,000,000 payable to the FHLB at a three month Libor floating
rate minus fifteen basis points, at both December 31, 1997 and 1996. These
certificates of indebtedness mature on June 7, 1998 and July 3, 1998 and the
borrowings are secured by a blanket lien of $133,000,000 of 1-4 family first
lien mortgage loans at both December 31, 1997 and 1996.

(9) EARNINGS PER SHARE

Basic EPS is calculated by dividing net income available to common shareholders,
by the weighted average number of common shares outstanding. The computation of
diluted EPS assumes the issuance of common shares for all dilutive potential
common shares outstanding during the reporting period. The calculation of the
basic EPS and the diluted EPS at December 31, 1997, 1996, and 1995 is set forth
in the following table:
<TABLE>
<CAPTION>
                                            Income        Shares     Per-Share
                                         (Numerator)  (Denominator)    Amount
                                         -----------  -------------   --------
                                   (Dollars in Thousands, Except Per Share Amounts)
<S>                                        <C>          <C>            <C>
December 31, 1997:
Basic EPS
  Income available to common
    stockholders                           $ 48,881     10,194,910     $ 4.79

  Dilutive potential common shares                         375,080
                                           --------     ----------
Diluted EPS                                $ 48,881     10,569,990     $ 4.62
                                           ========     ==========
December 31, 1996:
Basic EPS
  Income available to common
    stockholders                           $ 44,350     10,086,879     $ 4.40

  Dilutive potential common shares                         212,102
                                           --------     ----------
Diluted EPS                                $ 44,350     10,298,981     $ 4.31
                                           ========     ==========
December 31, 1995:
Basic EPS
  Income available to common
    stockholders                           $ 40,061      9,965,899     $ 4.02

  Dilutive potential common shares                         186,245
                                           --------     ----------
Diluted EPS                                $ 40,061     10,152,144     $ 3.95
                                           ========     ==========

</TABLE>
                                                                     (Continued)

                                       36
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(10) EMPLOYEES' PROFIT SHARING PLAN

The Company has a deferred profit sharing plan for full-time employees with one
year of continuous employment. The Company's annual contribution to the plan is
based on a percentage, as determined by the Board of Directors, of income before
income taxes, as defined, for the year. Allocation of the contribution among
officers' and employees' accounts is based on length of service and amount of
salary earned. Profit sharing costs of $1,161,000, $939,000 and $861,000 were
charged to income for the years ended December 31, 1997, 1996, and 1995,
respectively.

(11) INTERNATIONAL OPERATIONS

The Corporation provides international banking services for its customers
through its bank subsidiaries. Neither the Corporation nor its bank subsidiaries
have facilities located outside the United States. International operations are
distinguished from domestic operations on the basis of the domicile of the
customer.

Because the resources employed by the Company are common to both international
and domestic operations, it is not practical to determine net income generated
exclusively from international activities.

A summary of assets attributable to international operations at December 31,
1997 and 1996 are as follows:

                                                      1997          1996
                                                   ---------     ---------
                                                    (Dollars in Thousands)
Loans:
        Commercial ............................    $ 110,361     $ 107,452
        Others ................................       20,040        21,480
                                                   ---------     ---------
                                                     130,401       128,932
        Less allowance for possible loan losses       (1,184)       (1,101)
                                                   ---------     ---------
                 Net loans ....................    $ 129,217     $ 127,831
                                                   =========     =========
        Accrued interest receivable ...........    $   1,198     $   1,317
                                                   =========     =========

At December 31, 1997, the Company had $9,820,000 in outstanding international
commercial letters of credit to facilitate trade activities. The letters of
credit are issued primarily in conjunction with credit facilities which are
available to various Mexican banks doing business with the Company.

Income directly attributable to international operations was $11,821,000,
$10,331,000 and $9,447,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

                                                                     (Continued)

                                       37
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(12) INCOME TAXES

The Company files a consolidated U.S. Federal income tax return. The current and
deferred portions of income tax expense (benefit) included in the consolidated
statements of income are presented below for the years ended December 31:

                                              1997     1996      1995
                                            -------  -------  --------
                                              (Dollars in Thousands)
Current
   U.S ...................................  $23,565  $19,643  $ 19,271
   Foreign ...............................       67       80        22
   State .................................     --       --        --
                                            -------  -------  --------
            Total current taxes ..........   23,632   19,723    19,293

 Deferred ................................    1,139      441      (978)
                                            -------  -------  --------
            Total income taxes ...........  $24,771  $20,164  $ 18,315
                                            =======  =======  ========
Total income tax expense differs from the amount computed by applying the U.S.
Federal income tax rate of 35% for 1997, 1996 and 1995 to income before income
taxes. The reasons for the differences for the years ended December 31 are as
follows:

                                                1997        1996        1995
                                              -------     --------     --------
                                                  (Dollars in Thousands)

Computed expected tax expense ..........      $25,846     $ 22,580     $ 20,424

Change in taxes resulting from:
   Tax-exempt interest income ............       (111)        (481)        (636)
   Lease financing .......................     (1,397)      (1,792)      (1,587)
   Other .................................        433         (143)         114
                                              -------     --------     --------
             Actual tax expense ........      $24,771     $ 20,164     $ 18,315
                                              =======     ========     ========

                                                                     (Continued)

                                       38
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are reflected below:
                                                           1997          1996
                                                         --------      --------
                                                         (Dollars in Thousands)
      Deferred tax assets:
       Loans receivable, principally due to the
         allowance for possible loan losses ........     $  8,147      $  7,290
       Other real estate owned .....................          512           533
       Accrued expenses ............................        1,181         1,076
       Other .......................................          475           582
                                                         --------      --------
       Total deferred tax assets ...................       10,315         9,481
                                                         --------      --------
      Deferred tax liabilities:
       Lease financing receivable ..................       (2,423)       (1,215)
       Bank premises and equipment, principally
         due to differences in depreciation ........       (2,078)       (2,032)
       Net unrealized gains on available for
         sale investment securities ................      (11,614)       (6,132)
       Purchase accounting adjustment ..............       (1,351)         --
       Other .......................................         (460)         (626)
                                                         --------      --------
       Total deferred tax liabilities ..............      (17,926)      (10,005)
                                                         --------      --------
                 Net deferred tax liability ........     $ (7,611)     $   (524)
                                                         ========      ========

The Company did not record a valuation allowance against deferred tax assets at
December 31, 1997 and 1996 because management has concluded it is more likely
than not the Company will have future taxable earnings in excess of the future
tax deductions.

                                                                     (Continued)

                                       39
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(13) STOCK OPTIONS

On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan
replaced the 1987 International Bancshares Corporation Key Contributor Stock
Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both
qualified incentive stock options ("ISOs") and nonqualified stock options
("NQSOs") may be granted. Options granted may be exercisable for a period of up
to 10 years from the date of grant, excluding ISOs granted to 10% shareholders,
which may be exercisable for a period of up to only five years. The following
schedule summarizes the pertinent information (adjusted for stock distributions)
with regard to stock options from January 1, 1995 through December 31, 1997
which were granted by the Company under the 1987 Plan or the 1996 Plan.

                                            OPTION PRICE      OPTIONS
                                             PER SHARE      OUTSTANDING
                                             ---------      -----------
      Balance at January 1, 1995                              616,045
            Terminated                    $ 3.33 - 6.83        (2,737)
            Granted                            24.58          244,191
            Exercised                       3.33 - 6.83       (67,779)
                                                               ------
      Balance at December 31, 1995                            789,720
            Terminated                    $ 8.54 - 26.18      (25,676)
            Granted                        30.40 - 37.20        2,500
            Exercised                       4.28 - 24.58     (134,013)
                                                              -------
      Balance at December 31, 1996                            632,531
            Terminated                    $ 6.01 - 46.40      (13,897)
            Granted                        46.40 - 65.00      354,031
            Exercised                       6.01 - 24.60     (176,424)
                                                              -------
      Balance at December 31, 1997                            796,241
                                                              =======

At December 31, 1997 and 1996, 274,861 and 247,683 options were exercisable,
respectively, and as of December 31, 1997, 112,218 shares were available for
future grants under the 1996 Plan. All options granted under the 1987 Plan and
the 1996 Plan had an option price of not less than the fair market value of the
Company's common stock at the date of grant and a vesting period of five years.

                                                                     (Continued)

                                       40
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

The following table summarizes information about stock options outstanding at
December 31, 1997:

                           OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                           -------------------            ------------------
                                 WEIGHTED-
                                  AVERAGE     WEIGHTED-                WEIGHTED-
                      NUMBER     REMAINING     AVERAGE     NUMBER       AVERAGE
     RANGE OF      OUTSTANDING  CONTRACTUAL   EXERCISE  EXERCISABLE    EXERCISE
  EXERCISE PRICES  AT 12/31/97     LIFE         PRICE   AT 12/31/97     PRICE
  ---------------  -----------     ----         -----   -----------     -----
$ 6.56 -  8.20        176,515     .70 years   $ 6.87     176,515       $ 6.87
 12.79 - 16.83         13,179    1.90 years    14.02       8,661        14.02
     26.12              5,858    2.11 years    26.12       3,513        26.12
     24.58            244,191    3.50 years    24.58      85,672        24.58
 30.40 - 37.20          2,500    3.80 years    33.80         500        33.80
 46.40 - 65.00        353,998    5.46 years    47.59        -           47.59
                      -------                            -------
$ 6.56 - 65.00        796,241                            274,861
                      =======                            =======

Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

The fair values of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:

                                          1997      1996      1995
                                          ----      ----      ----
           Expected life (years)            6         6         6
           Interest rate                  6.62%     6.53%     6.09%
           Volatility                    30.08%    41.00%    41.00%

                                                                     (Continued)

                                       41
<PAGE>
                   INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                         Notes to Consolidated Financial Statements

The following schedule shows total net income as reported and the pro forma
results:

                                                1997         1996         1995
                                                ----         ----         ----
      Net income              As reported    $ 48,881     $ 44,350     $ 40,061
                              Pro forma        47,014       43,476       39,480

      Basic earnings          As reported    $   4.79     $   4.40     $   4.02
                              Pro forma          4.61         4.31         3.96

      Diluted earnings        As reported    $   4.62     $   4.31     $   3.95
                              Pro forma          4.45         4.22         3.89

The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock including repurchases
related to the exercise of stock options through the surrender of other shares
of Common Stock of the Company owned by the option holders. Stock repurchases
are presented quarterly at the Company's Board of Director meetings and the
Board of Directors has stated that they will not permit purchases of more than a
total of $16,000,000 of stock. In the past, the Board has increased previous
caps once they were met, but there are no assurances that an increase of the
$16,000,000 cap will occur in the future.

(14) COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in various legal proceedings that are in various stages
of litigation. Some of these actions allege "lender liability" claims on a
variety of theories and claim substantial actual and punitive damages. The
Company has determined, based on discussions with its counsel, that any material
loss in such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material. However, many
of these matters are in various stages of proceedings and further developments
could cause Management to revise its assessment of these matters.

The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for the years ended December 31, 1997,
1996 and 1995 and noncancellable lease commitments at December 31, 1997 were not
significant.

Cash of approximately $58,710,000 and $40,621,000 at December 31, 1997 and 1996,
respectively, was maintained to satisfy regulatory reserve requirements.

The American Institute of Certified Public Accountants issued Statement Of
Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 was
adopted by the Company on January 1, 1996 and requires, among other things,
environmental remediation liabilities to be accrued when the criteria of SFAS
No. 5, "Accounting for Contingencies," have been met.

                                                                     (Continued)

                                       42
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Notes to Consolidated Financial Statements

The SOP also provides guidance with respect to the measurement of the
remediation liabilities. Such accounting is consistent with the Company's
previous method of accounting for environmental remediation costs and therefore,
adoption of this new Statement did not have a material impact on the Company's
financial position, results of operations or liquidity.

(15) TRANSACTIONS WITH RELATED PARTIES

In the ordinary course of business, the Corporation and its subsidiaries make
loans to directors and executive officers of the Corporation and the bank
subsidiaries, including their affiliates, families and companies in which they
are principal owners. In the opinion of management, these loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than normal risk of collectibility or present other unfavorable
features. The aggregate amounts receivable from such related parties amounted to
approximately $96,401,000 and $80,342,000 at December 31, 1997 and 1996,
respectively. During 1997, $126,363,000 of new loans were made and repayments
totaled $110,303,000. On May 21, 1996, IBC sold approximately 417.67 acres of
land in Travis County, Texas, to IBC Partners, Ltd., a Texas real estate
partnership owned by certain shareholders of the Company for an approximate
aggregate appraised value of $400,000.

(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK

In the normal course of business, the bank subsidiaries are party to financial
instruments with off-balance sheet risk to meet the financing needs of their
customers. These financial instruments include commitments to their customers.
These financial instruments involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the balance sheet. The contract amounts
of these instruments reflect the extent of involvement the bank subsidiaries
have in particular classes of financial instruments. At December 31, 1997, the
following financial instruments, whose contract amounts represent credit risks,
were outstanding:

                  Commitments to extend credit           $ 346,381,000
                  Credit card lines                        473,371,000
                  Letters of credit                         39,298,000

The bank subsidiaries' exposure to credit loss in the event of nonperformance by
the other party to the above financial instruments is represented by the
contractual amounts of the instruments. The bank subsidiaries use the same
credit policies in making commitments and conditional obligations as they do for
on-balance sheet instruments. The bank subsidiaries control the credit risk of
these transactions through credit approvals, limits and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates normally less than one year or other
termination clauses and may require the payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not

                                                                     (Continued)

                                       43
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements

necessarily represent future cash requirements. The bank subsidiaries evaluate
each customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the subsidiary banks upon extension
of credit, is based on management's credit evaluation of the customer.
Collateral held varies, but may include residential and commercial real estate,
bank certificates of deposit, accounts receivable and inventory.

Letters of credit are written conditional commitments issued by the bank
subsidiaries to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.

The bank subsidiaries make commercial, real estate and consumer loans to
customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata
counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend,
Calhoun, and Harris counties in Southeast Texas. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic conditions in these areas, especially
in the real estate and commercial business sectors.

To date, the Company has not experienced a material adverse impact related to
the 1994 devaluation of the peso in Mexico. Although the economic conditions
have improved in Mexico, the Company will continue to monitor Mexico's economic
progress.

(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS

Bank regulatory agencies limit the amount of dividends which the bank
subsidiaries can pay the Corporation, through IBC Subsidiary Corporation,
without obtaining prior approval from such agencies. At December 31, 1997, the
aggregate amount legally available to be distributed to the Corporation from
bank subsidiaries as dividends was approximately $55,701,000, assuming that each
subsidiary bank continues to be classified as "well capitalized" pursuant to the
applicable regulations. The restricted capital of the bank subsidiaries was
approximately $241,187,000. The undivided profits of the bank subsidiaries was
$121,015,000. In addition to legal requirements, regulatory authorities also
consider the adequacy of the bank subsidiaries' total capital in relation to
their deposits and other factors. These capital adequacy considerations also
limit amounts available for payment of dividends. The Corporation historically
has not allowed any subsidiary bank to pay dividends in such a manner as to
impair its capital adequacy.

The Corporation and the bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's

                                   (Continued)

                                       44
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                      Notes to Consolidated Financial Statements

capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table on the following page) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
1997, that the Corporation and the bank subsidiaries met all capital adequacy
requirements to which it is subject.

As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized" the Corporation and the bank subsidiaries must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the categorization of the Corporation or
any of the bank subsidiaries as well capitalized.

                                                                     (Continued)

                                       45
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

The Corporation's and the bank subsidiaries' actual capital amounts and ratios
for 1997 are also presented in the table.
<TABLE>
<CAPTION>
                                                                                                                   TO BE WELL
                                                                                                                 CAPITALIZED UNDER
                                                                                              FOR CAPITAL       PROMPT CORRECTIVE
                                                                          ACTUAL          ADEQUACY  PURPOSES    ACTION PROVISIONS
                                                                     ---------------    ---------------------   -------------------
                                                                     AMOUNT    RATIO      AMOUNT      RATIO     AMOUNT       RATIO
                                                                     ------    -----    ----------    -----     ------       -----
                                                                                        (GREATER    (GREATER   (GREATER    (GREATER
                                                                                         THAN OR     THAN OR    THAN OR    THAN OR
                                                                                         EQUAL TO)   EQUAL TO) EQUAL TO)   EQUAL TO)
                                                                                         ---------   --------- ---------   ---------
                                                                                             (Dollars in thousands)
<S>                                                               <C>          <C>        <C>           <C>      <C>          <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
   Consolidated .............................................     $296,235     15.20%     $155,898      8.00%    $194,872     10.00%
   International Bank of Commerce, Laredo ...................      201,776     12.10       133,378      8.00      166,722     10.00
   International Bank of Commerce, Brownsville ..............       25,305     17.07        11,862      8.00       14,827     10.00
   International Bank of Commerce, Zapata ...................       12,548     32.62         3,077      8.00        3,847     10.00
   Commerce Bank ............................................       15,949     24.09         5,296      8.00        6,620     10.00

Tier 1 Capital (to Risk Weighted Assets):

   Consolidated .............................................     $271,874     13.95%     $ 77,949      4.00%    $116,923      6.00%
   International Bank of Commerce, Laredo ...................      180,926     10.85        66,689      4.00      100,033      6.00
   International Bank of Commerce, Brownsville ..............       23,946     16.15         5,931      4.00        8,896      6.00
   International Bank of Commerce, Zapata ...................       12,067     31.37         1,539      4.00        2,308      6.00
   Commerce Bank ............................................       15,119     22.84         2,648      4.00        3,972      6.00

Tier 1 Capital (to Average Assets):

   Consolidated .............................................     $271,874      6.41%     $169,560      4.00%    $211,950      5.00%
   International Bank of Commerce, Laredo ...................      180,926      5.15       140,431      4.00      175,539      5.00
   International Bank of Commerce, Brownsville ..............       23,946      6.17        15,523      4.00       19,404      5.00
   International Bank of Commerce, Zapata ...................       12,067     10.06         4,798      4.00        5,997      5.00
   Commerce Bank ............................................       15,119     10.19         5,933      4.00        7,417      5.00
</TABLE>
                                                                     (Continued)

                                       46
<PAGE>
                 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Notes to Consolidated Financial Statements

The Corporation's and the bank subsidiaries' actual capital amounts and ratios
for 1996 are also presented in the table.
<TABLE>
<CAPTION>
                                                                                              FOR CAPITAL       PROMPT CORRECTIVE
                                                                          ACTUAL          ADEQUACY  PURPOSES    ACTION PROVISIONS
                                                                     -----------------    -------------------    -------------------
                                                                     AMOUNT    RATIO      AMOUNT      RATIO     AMOUNT       RATIO
                                                                     ------    -----      ------      -----     ------       -----
                                                                                        (GREATER    (GREATER   (GREATER    (GREATER
                                                                                         THAN OR     THAN OR    THAN OR    THAN OR
                                                                                         EQUAL TO)   EQUAL TO) EQUAL TO)   EQUAL TO)
                                                                                         ---------   --------- ---------   ---------
                                                                                             (Dollars in thousands)
<S>                                                               <C>          <C>        <C>           <C>      <C>          <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
   Consolidated .............................................     $262,413     17.27%     $121,547      8.00%    $151,933     10.00%
   International Bank of Commerce, Laredo ...................      189,462     14.49       104,591      8.00      130,739     10.00
   International Bank of Commerce, Brownsville ..............       20,429     16.69         9,794      8.00       12,243     10.00
   International Bank of Commerce, Zapata ...................       11,094     33.14         2,678      8.00        3,348     10.00
   Commerce Bank ............................................       13,384     22.76         4,705      8.00        5,881     10.00

Tier 1 Capital (to Risk Weighted Assets):
   Consolidated .............................................     $243,396     16.02%     $ 60,773      4.00%    $ 91,160      6.00%
   International Bank of Commerce, Laredo ...................      173,099     13.24        52,295      4.00       78,443      6.00
   International Bank of Commerce, Brownsville ..............       19,174     15.66         4,897      4.00        7,346      6.00
   International Bank of Commerce, Zapata ...................       10,675     31.89         1,339      4.00        2,009      6.00
   Commerce Bank ............................................       12,646     21.50         2,352      4.00        3,529      6.00

Tier 1 Capital (to Average Assets):
   Consolidated .............................................     $243,396      7.80%     $124,761      4.00%    $155,951      5.00%
   International Bank of Commerce, Laredo ...................      173,099      6.79       101,979      4.00      127,474      5.00
   International Bank of Commerce, Brownsville ..............       19,174      5.70        13,449      4.00       16,811      5.00
   International Bank of Commerce, Zapata ...................       10,675      9.97         4,282      4.00        5,353      5.00
   Commerce Bank ............................................       12,646      9.47         5,342      4.00        6,678      5.00
</TABLE>
                                                                     (Continued)

                                       47
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Notes to Consolidated Financial Statements

(18) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value estimates, methods, and assumptions for the Company's financial
instruments at December 31, 1997 and 1996 are outlined below.

                   Cash, Due From Banks and Federal Funds Sold

For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.

                            Time Deposits with Banks

As the contract interest rates are comparable to current market rates, the
carrying amount approximates fair market value.

                              Investment Securities

For investment securities, which include U. S. Treasury securities, obligations
of other U. S. government agencies, obligations of states and political
subdivisions and mortgage pass through and related securities, fair values are
based on quoted market prices or dealer quotes. Fair values are based on the
value of one unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. See disclosures of fair value of
investment securities in Note 3.

                                      Loans

Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate
and consumer loans as outlined by regulatory reporting guidelines. Each category
is segmented into fixed and variable interest rate terms and by performing and
non-performing categories.

For variable rate performing loans, the carrying amount approximates the fair
value. For fixed rate performing loans, except residential mortgage loans, the
fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market.

Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgementally determined using available market and specific borrower
information. As of December 31, 1997 and 1996, the carrying amount of net loans
was a reasonable estimate of the fair value.

                                                                     (Continued)

                                       48
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Notes to Consolidated Financial Statements

                                    Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposit accounts, savings accounts and interest bearing demand deposit
accounts, was equal to the amount payable on demand as of December 31, 1997 and
1996. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is based on currently offered rates.
As of December 31, 1997 and 1996, the carrying amount of time deposits was a
reasonable estimate of the fair value.

    Federal Funds Purchased and Securities Sold Under Repurchase Agreements,
                   Other Borrowed Funds and Subordinated Debt

Due to the contractual terms of these financial instruments, the carrying
amounts approximated fair value at December 31, 1997 and 1996.

               Commitments to Extend Credit and Letters of Credit

For commitments to extend credit and letters of credit, the carrying amount is
based on the notional amount of the agreements and fair value is based on the
discounted value of fees charged.

Fair value estimates are made at a point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.

Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include the bank premises and
equipment and core deposit value. In addition, the tax ramifications related to
the effect of fair value estimates have not been considered in the above
estimates.



                                                                     (Continued)

                                       49
<PAGE>
               INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                    Notes to Consolidated Financial Statements

(19) International Bancshares Corporation (Parent Company Only)
Financial Information

                             Statements of Condition

                              (Parent Company Only)

                           December 31, 1997 and 1996

                             (Dollars in Thousands)


  ASSETS                                                 1997            1996
                                                      ---------       ---------
Cash ...........................................      $     350       $     336
Repurchase agreements ..........................          7,500            --
Other investments ..............................          2,021             375
Notes receivable ...............................         57,209          67,401
Investment in subsidiaries .....................        251,002         199,108
Other assets ...................................         23,393          18,581
                                                      ---------       ---------
         Total assets ..........................        341,475         285,801
                                                      =========       =========
  LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Notes payable ...............................           --             2,000
   Other liabilities ...........................            231              34
                                                      ---------       ---------
         Total liabilities .....................            231           2,034

Shareholders' equity:
   Common stock ................................         13,196          10,353
   Surplus .....................................         19,012          11,935
   Retained earnings ...........................        301,988         260,134
   Net unrealized holding gains on
     available for sale securities,
     net of deferred income taxes ..............         21,582          11,388
                                                      ---------       ---------
                                                        355,778         293,810

   Less cost of shares in treasury .............        (14,534)        (10,043)
                                                      ---------       ---------
         Total shareholders' equity ............        341,244         283,767
                                                      ---------       ---------
         Total liabilities and
            shareholders' equity ...............      $ 341,475       $ 285,801
                                                      =========       =========

                                                                     (Continued)

                                       50
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                              Statements of Income

                              (Parent Company Only)

                  Years ended December 31, 1997, 1996 and 1995

                             (Dollars in Thousands)

                                                     1997       1996       1995
                                                   -------    -------    -------
Income:
   Dividends from subsidiaries ................    $17,035    $ 7,250    $13,332
   Interest income on notes receivable ........      6,134      6,944      7,218
   Interest income on time deposits
      with banks ..............................         36         15         11
   Other interest income ......................        307        299        419
   Other ......................................      4,517      4,603      3,368
                                                   -------    -------    -------
            Total income ......................     28,029     19,111     24,348
                                                   -------    -------    -------
Expenses:
   Interest expense on notes payable ..........        142        158        255
   Other ......................................        380        338        271
                                                   -------    -------    -------
            Total expenses ....................        522        496        526
                                                   -------    -------    -------
            Income before federal income
               taxes and equity in
               undistributed net income
               of subsidiaries ................     27,507     18,615     23,822

Federal income tax expense ....................      1,785      1,847      1,302
                                                   -------    -------    -------
            Income before equity
               in undistributed net
               income of subsidiaries .........     25,722     16,768     22,520
Equity in undistributed net income
   of subsidiaries ............................     23,159     27,582     17,541
                                                   -------    -------    -------
            Net income ........................    $48,881    $44,350    $40,061
                                                   =======    =======    =======

                                                                     (Continued)

                                       51
<PAGE>
              INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                            Statements of Cash Flows
                              (Parent Company Only)
                  Years ended December 31, 1997, 1996 and 1995
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                    --------    --------    --------
<S>                                                 <C>         <C>         <C>
Operating activities:
  Net income ....................................   $ 48,881    $ 44,350    $ 40,061
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Gain on sale of other real estate .........       (113)       --          --
      Increase (decrease) in other liabilities ..        197        (340)        284
      Equity in undistributed net income of
        subsidiaries ............................    (23,159)    (27,582)    (17,541)
                                                    --------    --------    --------
        Net cash provided by operating activities     25,806      16,428      22,804
                                                    --------    --------    --------
Investing activities:
  Contributions to subsidiaries .................    (18,656)    (15,625)    (10,161)
  Repayment from subsidiaries ...................        166        --          --
  Purchase of time deposits with banks ..........     (2,900)       --          (728)
  Proceeds from time deposits with banks ........      2,900        --         1,328
  Purchase of repurchase agreement with banks ...     (7,500)       --          --
  Purchase of available for sale other securities     (1,156)       (375)       --
  Net decrease (increase) in notes receivable ...     10,192       8,677      (6,125)
  Increase in other assets ......................     (5,364)     (3,617)     (3,197)
  Proceeds from sale of other real estate .......        665        --          --
                                                    --------    --------    --------
        Net cash used in investing activities ...    (21,653)    (10,940)    (18,883)
                                                    --------    --------    --------
Financing activities:
  Proceeds from issuance of other borrowed funds       6,333        --          --
  Principal payments on notes payable ...........     (8,333)       (500)     (1,000)
  Proceeds from stock transactions ..............      6,778         965         552
  Payments of cash dividends ....................     (4,400)     (3,489)     (2,762)
  Payments of cash dividends in lieu of
    fractional shares ...........................        (26)        (18)         (9)
  Purchase of treasury stock ....................     (4,491)     (2,261)       (624)
                                                    --------    --------    --------
        Net cash used in finan ing activities ...     (4,139)     (5,303)     (3,843)
                                                    --------    --------    --------
        Increase in cash and cash equivalents ...         14         185          78

Cash at beginning of year .......................        336         151          73

Cash at end of year .............................   $    350    $    336    $  1,151
                                                    ========    ========    ========
Supplemental cash flow information:
  Interest paid .................................   $    131    $    117    $    239
</TABLE>

                                       52
<PAGE>
                      INTERNATIONAL BANCSHARES CORPORATION

                             OFFICERS AND DIRECTORS

         OFFICERS                                DIRECTORS
         --------                                ---------
         DENNIS E. NIXON                         DENNIS E. NIXON
         Chairman of the Board and President     President
                                                 International Bank of Commerce
         ROY JENNINGS, JR.
         Vice Chairman of the Board              ROY JENNINGS, JR.
                                                 Investments
         ALBERTO SANTOS
         Secretary of the Board                  ALBERTO SANTOS
                                                 Investments
         R. DAVID GUERRA                         Chairman of the Board
         Vice President                          International Bank of Commerce

         LEONARDO SALINAS                        LEONARDO SALINAS
         Vice President                          Senior Executive Vice President
                                                 International Bank of Commerce
         RICHARD CAPPS
         Vice President                          LESTER AVIGAEL
                                                 Retail Merchant
         EDUARDO J. FARIAS
         Vice President                          IRVING GREENBLUM
                                                 Retail Merchant
         ARNOLDO CISNEROS
         Treasurer                               RICHARD E. HAYNES
                                                 Attorney at Law; Real
         WILLIAM J. CUELLAR                      Estate Investments
         Auditor
                                                 SIOMA NEIMAN
         LUISA D. BENAVIDES                      An International Entrepreneur
         Secretary
                                                 R. DAVID GUERRA
         IMELDA NAVARRO                          President
         Assistant Treasurer                     International Bank of Commerce
                                                 Branch in McAllen, Texas
         AMELIA A. BENAVIDES
         Assistant Secretary                     ANTONIO R. SANCHEZ, JR.
                                                 Chairman of the Board of
                                                 Sanchez O'Brien Oil & Gas
                                                 Corporation; Investments

                                                 PEGGY J. NEWMAN
                                                 Investments

                                       53