**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                               to                               **

**Commissionfile number:  0-9439**

**INTERNATIONAL BANCSHARES CORPORATION**

(Exact Name of Registrantas Specified in its Charter)

| **Texas**                                         |   | **74-2157138**                        |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of Incorporation or |   | (I.R.S. Employer  Identification No.) |
| organization)                                     |   |                                  |
|                                              |   |                                  |

 

| **1200 San Bernardo Avenue**                               |
|------------------------------------------------------------|
| **Laredo,  Texas 78042 - 1359**                            |
| (Address of  principal executive office and Zip Code)      |
|                                                       |
| **(956)  722-7611**                                        |
| (Registrant’s  telephone number, including area code) |

 

Securities registered pursuant to Section 12(b) of theAct:

|            | **Title  of Each Class** |   | **Name of  each exchange on which registered** |       |
|------------|--------------------------|--------|------------------------------------------------|------------|
| ** ** | None                     |   | None                                           | ** ** |

 

Securities Registered Pursuant to Section 12(g) of theAct:

|        | **Common  Stock ($1.00 par value)** | ** ** |
|--------|-------------------------------------|------------|
|   | (Title of Class)                    |       |

 

Indicate by check mark ifthe Registrant is a well known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.   Yes  x   No  o

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or 15(d)of the Securities Act.   Yes  o   No  x

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes  x   No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K Section229.405 of this chapter is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large Accelerated Filer  x |   | Accelerated  Filer  o |   | Non-accelerated filer  o |
|--------------------------------------|--------|---------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o   No  x

The aggregate marketvalue of the voting stock held by non-affiliates of the Registrant as of June30, 2006 was $1,728,814,000 based on the closing sales price per share of theRegistrant’s common stock on such date as reported by NASDAQ.

As of February 22, 2007,there were 63,015,435 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BYREFERENCE

Portionsof the following documents are incorporated by reference into the designatedparts of this Form 10-K: (a) Annual Report to security holders for the fiscalyear ended December 31, 2006 (in Parts I and II) and (b) Proxy Statementrelating to the Company’s 2007 Annual Meeting of Shareholders (in Part III).

 

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# **CONTENTS**

| **PART I**    |
|---------------|
|          |   |   |
| Item 1.       | Business |   |   |
| Item 1A.      | Risk Factors |   |   |
| Item 1B.      | Unresolved Staff Comments |   |   |
| Item 2.       | Properties |   |   |
| Item 3.       | Legal Proceedings |   |   |
| Item 4.       | Submission of Matters to a Vote of Security Holders |   |   |
| Item 4A.      | Executive Officers of the Registrant |   |   |
|          |   |   |
| **PART II**   |
| ** **    |   |   |
| Item 5.       | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |   |
| Item  6.      | Selected  Financial Data |   |   |
| Item 7.       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |   |
| Item 7A.      | Quantitative and Qualitative Disclosures about Market  Risk |   |   |
| Item 8.       | Financial Statements and Supplementary Data |   |   |
| Item 9.       | Changes In and Disagreements with Accountants on  Accounting and Financial Disclosure |   |   |
| Item 9A.      | Controls and Procedures |   |   |
| Item  9B.     | Other  Information |   |   |
|          |   |   |
| **PART  III** |
|          |   |   |
| Item 10.      | Directors, Executive Officers and Corporate Governance |   |   |
| Item 11.      | Executive Compensation |   |   |
| Item 12.      | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |   |   |
| Item 13.      | Certain Relationships and Related Transactions, and  Director Independence |   |   |
| Item 14.      | Principal Accounting Fees and Services |   |   |
|          |   |   |
| **PART IV**   |
|          |   |   |
| Item 15.      | Exhibits, Financial Statement Schedules |   |   |

 

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##### **SpecialCautionary Notice Regarding Forward Looking Information**

Certain matters discussed in this report, excludinghistorical information, include forward-looking statements, within the meaningof Section 27A of the Securities Exchange Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended, and are subject to thesafe harbor created by these sections. Although the Company believes such forward-looking statements are basedon reasonable assumptions, no assurance can be given that every objective willbe reached.  The words “estimate,” “expect,”“intend,” “believe” and “project,” as well as other words or expressions of asimilar meaning are intended to identify forward-looking statements.  Readers are cautioned not to place unduereliance on forward-looking statements, which speak only as of the date of thisreport.  Such statements are based oncurrent expectations, are inherently uncertain, are subject to risks and shouldbe viewed with caution.  Actual resultsand experience may differ materially from the forward-looking statements as aresult of many factors.

Factors that could cause actual results to differmaterially from any results that are projected, forecasted, estimated orbudgeted by the Company in forward-looking statements include, among others,the following possibilities:

·                  Changesin interest rates and market prices, which could reduce the Company’s netinterest margins, asset valuations and expense expectations.

·                  Changesin the capital markets utilized by the Company and its subsidiaries, includingchanges in the interest rate environment that may reduce margins.

·                  Changesin state and/or federal laws and regulations to which the Company and itssubsidiaries, as well as their customers, competitors and potentialcompetitors, are subject, including, without limitation, changes in theaccounting, tax and regulatory treatment of trust preferred securities as wellas changes in banking, tax, securities, insurance and employment laws andregulations.

·                  Changesin U.S. — Mexico trade, including, without limitation, reductions in bordercrossings and commerce resulting from the Homeland Security Programs called “US-VISIT,”which is derived from Section 110 of the Illegal Immigration Reform andImmigrant Responsibility Act of 1996.

·                  Theloss of senior management or operating personnel.

·                  Increasedcompetition from both within and outside the banking industry.

·                  Changesin local, national and international economic business conditions thatadversely affect the Company’s customers and their ability to transactprofitable business with the Company, including the ability of its borrowers torepay their loans according to their terms or a change in the value of therelated collateral.

·                  Thetiming, impact and other uncertainties of the Company’s potential futureacquisitions including the Company’s ability to identify suitable potentialfuture acquisition candidates, the success or failure in the integration oftheir operations and the Company’s ability to maintain its current branchnetwork and to enter new markets successfully and capitalize on growthopportunities.

·                  Changesin the Company’s ability to pay dividends on its Common Stock.

·                  Theeffects of the litigation and proceedings pending with the Internal Revenue Serviceregarding the Company’s lease financing transactions.

·                  Additionsto the Company’s loan loss allowance as a result of changes in local, nationalor international conditions which adversely affect the Company’s customers.

·                  Politicalinstability in the United States or Mexico.

·                  Technologicalchanges.

·                  Actsof war or terrorism.

·                  Theeffect of changes in accounting policies and practices as may be adopted by theregulatory agencies, as well as the Public Company Accounting Oversight Board,the Financial Accounting Standards Board and other accounting standardssetters.

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It is not possible to foresee or identify all suchfactors.  The Company makes no commitmentto update any forward-looking statement, or to disclose any facts, events orcircumstances after the date hereof that may affect the accuracy of anyforward-looking statement, unless required by law.

**Item 1. Business**

**General**

The Company is a financial holding company with itsprincipal corporate offices in Laredo, Texas. Four bank subsidiaries providecommercial and retail banking services through more than 230 main banking andbranch facilities located in more than 90 communities in South, Central andSoutheast Texas and the State of Oklahoma. The Company was originally incorporated under the General CorporationLaw of the State of Delaware in 1979. Effective June 7, 1995, the Company’s state of incorporation was changedfrom Delaware to Texas.  The Company wasorganized for the purpose of operating as a bank holding company within themeaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”), andas such, is subject to supervision and regulation by the Board of Governors ofthe Federal Reserve System (the “FRB”). As a registered bank holding company, the Company may own one or morebanks and may engage directly, or through subsidiary corporations, in thoseactivities closely related to banking which are specifically permitted underthe BHCA and by the FRB.  Effective March13, 2000, the Company became certified as a financial holding company.  As a financial holding company, the Companymay engage in a broad list of financial and non-financial activities.  The Company’s principal assets at December31, 2006 consisted of all the outstanding capital stock of four Texas statebanking associations (the “Banks” or “bank subsidiaries”).  All of the Company’s bank subsidiaries aremembers of the Federal Deposit Insurance Corporation (the “FDIC”).

The bank subsidiaries are in the business of gatheringfunds from various sources and investing these funds in order to earn areturn.  Funds gathering primarily takesthe form of accepting demand and time deposits from individuals, partnerships,corporations and public entities. Investments principally are made in loans to various individuals andentities as well as in debt securities of the U.S. Government and various otherentities whose payments are guaranteed by the U.S. Government.  Historically, the bank subsidiaries haveprimarily focused on providing commercial banking services to small and mediumsized businesses located in their trade areas and international bankingservices.  In recent years, the banksubsidiaries have also emphasized consumer and retail banking, includingmortgage lending, as well as branches situated in retail locations and shoppingmalls.

The Company’s philosophy focuses on customer serviceas 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 theBanks’ branches are located to local advisory boards (the “local boards”). Thelocal boards direct the operations of the branches, with the supervision of thelead Bank’s board of directors, and assist in introducing prospective customersto the Banks as well as developing or modifying products and services to meetcustomer needs.  The Banks functionlargely on a decentralized basis and the Company believes that suchdecentralized structure enhances the commitment of the Banks to the communitiesin which their branches are located.  Incontrast to many of their principal competitors, the credit decisions of theBanks are made locally and promptly.  TheCompany believes that the knowledge and expertise afforded by the local boardsare key components to sound credit decisions. Expense control is an essential element in the Company’sprofitability.  The Company hascentralized virtually all of the Banks’ back office support and investmentfunctions in order to achieve consistency and cost efficiencies in the deliveryof products and services.

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On July 28, 1980, the Company acquired all of theoutstanding shares of its predecessor, International Bank of Commerce (“IBC”),which is today the flagship bank of the Company, representing the majority ofthe Company’s banking assets.  IBC waschartered under the banking laws of Texas in 1966 and has its principal placeof business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas.  It is a wholly-owned subsidiary of theCompany.  Since the acquisition of theflagship bank in 1980, the Company has formed three banks: (i) Commerce Bank, aTexas state banking association which commenced operations in 1982, located inLaredo, Texas (“Commerce Bank”); (ii) International Bank of Commerce,Brownsville, a Texas state banking association which commenced operations in1984, located in Brownsville, Texas (“IBC-Brownsville”); and (iii)International Bank of Commerce, Zapata, a Texas state banking association whichcommenced operations in 1984, located in Zapata, Texas (“IBC-Zapata”).

During the last several years, the Company hasacquired various financial institutions and banking assets in its trade areaand expanded its trade area to the State of Oklahoma.  The community-focus of the subsidiary banksand the involvement of the local boards has resulted in the Company becomingaware of acquisition possibilities in the ordinary course of its business andin many instances before other potential purchasers.  The Company’s decision to pursue anacquisition is based on a multitude of factors, including the ability toefficiently assimilate the operations and assets of the acquired entity, thecost efficiencies to be attained and the growth potential of the market.

On December 1, 2006, the Company signed a definitiveagreement pursuant to which the Company will acquire Southwest First Community,Inc. (“Southwest Community”), a bank holding company with approximately $129million in assets that owns State Bank & Trust in Beeville, Texas andCommercial State Bank in Sinton, Texas. The transaction is expected to close in the spring of 2007 and issubject to various closing conditions, including receipt of all requisiteregulatory approvals.  The Board ofDirectors of both the Company and Southwest Community and the shareholders ofSouthwest Community have approved the transaction.

On June 18, 2004, the Company acquired Local FinancialCorporation (“LFIN”), an Oklahoma based bank holding company with approximately$3.0 billion in assets.  The acquisitionwas effected pursuant to the Agreement and Plan of Merger dated as of January22, 2004 (the “Merger Agreement”).  TheCompany paid consideration totaling approximately $276.6 million in cash and2.11 million shares of Company common stock. The aggregate purchase price was$367.4 million.  Under the terms of theMerger Agreement, LFIN shareholders were entitled to elect to receive eithercash or Company shares in the merger, subject to the requirement that 75% ofLFIN’s shares be exchanged for cash and 25% be exchanged for Company stock.  Based on the elections of LFIN shareholdersand the terms of the Merger Agreement, LFIN shares held by LFIN shareholderswho elected to receive shares of Company common stock in the Merger and LFINshareholders who did not timely make a cash/stock election were exchangedentirely for shares of Company common stock. As to those LFIN shares for which an election to receive cash was timelymade, each such share was exchanged for approximately $20.59 in cash and 0.033shares of Company common stock.  Theexchange rate for those LFIN shareholders receiving Company shares in theMerger was 0.5170 shares of Company common stock for each share of LFIN.

The Company also has four direct non-bankingsubsidiaries.  They are (i) IBC LifeInsurance Company, a Texas chartered subsidiary which reinsures a smallpercentage of credit life and accident and health risks related to loans madeby bank subsidiaries, (ii) IBC Trading Company, an export trading company whichis currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bankholding company incorporated in the State of Delaware, and (iv) IBC CapitalCorporation, a company incorporated in the State of Delaware for the purpose ofholding certain investments of the Company. The Company also owns a controlling interest in Gulfstar Group I, Ltd.and related entities, which are involved in investment banking and merchantbanking activities.

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**WebsiteAccess to Reports**

The Company makes its annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports, filed or furnished pursuant to section 13(a) or 15(d) of theSecurities Exchange Act of 1934 available free of charge on or through theCompany’s internet website, www.ibc.com, as soon as reasonably practicableafter such materials are electronically filed with, or furnished to, theSecurities and Exchange Commission (“SEC”). Additionally, the Company has posted on its website a code of ethicsthat applies to its directors and executive officers (including the Company’schief executive officer and financial officer). The Company’s website also includes the charter for its Audit Committee.

**Services and Employees**

The Company, through its bank subsidiaries, IBC,Commerce Bank, IBC-Zapata and IBC-Brownsville, is engaged in the business ofbanking, including the acceptance of checking and savings deposits and themaking of commercial, real estate, personal, home improvement, automobile andother installment and term loans. Certain of the bank subsidiaries are very active in facilitatinginternational trade along the United States border with Mexico andelsewhere.  The international bankingbusiness of the Company includes providing letters of credit, making commercialand industrial loans, and providing a nominal amount of currency exchange.  Each bank subsidiary also offers otherrelated services, such as credit cards, travelers’ checks, safety deposit,collection, notary public, escrow, drive-up and walk-up facilities and othercustomary banking services.  Additionally,each bank subsidiary makes available certain securities products through thirdparty providers.  The bank subsidiariesalso make banking services available during traditional and nontraditionalbanking hours through their network of over 360 automated teller machines, andthrough their over 230 branches situated in retail locations and shoppingmalls.  Additionally, IBC introduced IBCBank Online, an Internet banking product, in order to provide customers onlineaccess to banking information and services 24 hours a day.

The Company owns U.S. service mark registrations for “INTERNATIONALBANK OF COMMERCE,” “WALL STREET INTERNATIONAL,” “INTERNATIONAL BANK OF COMMERCECENTRE,” “OVERDRAFT COURTESY,” “IBC,” “IBC CONNECTION,” “IBC ELITE,” “IBC ELITEADVANTAGE,” “IBC BANK,” “IBC OVERDRAFT COURTESY,” “BIZ RITE CHECKING,” “GOT YOUCOVERED,” “OVERDRAFT COURTESY GOT YOU COVERED,” “FREEBEE” and a design markdepicting a bee character and “IT’S A BRIGHTER CHRISTMAS” as well as a designmark depicting the United States and Mexico and a design mark depicting “WALLSTREET INTERNATIONAL.” In addition, the Company owns Texas service markregistrations for “RITE CHECK,” “THE CLUB,” “WALL STREET INTERNATIONAL,” “INTERNATIONALBANK OF COMMERCE,” “WE DO MORE,” and design marks depicting “CHECK’N SAVE” and “WALLSTREET INTERNATIONAL,” as well as a design mark depicting the United States andMexico.  The Company also owns Oklahomaservice mark registrations for “CHECK ‘N SAVE,” “RITE CHECKING,” “THE CLUB,”and “WE DO MORE.”  Also, IBC owns certainpending applications for federal registrations of other proprietary servicemarks and is regularly investigating the availability of service markregistrations related to certain proprietary products.

No material portion of the business of the Company maybe deemed seasonal and the deposit and loan base of the Company’s banksubsidiaries is diverse in nature. There has been no material effect upon theCompany’s capital expenditures, earnings or competitive position as a result ofFederal, State or local environmental regulation.

As of December 31, 2006, the Company and itssubsidiaries employed approximately 2,737 persons full-time and 690 personspart-time.

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**Competition**

The Company is the second largest independent Texasbank holding company.  The primary marketarea of the Company is South, Central and Southeast Texas, an area bordered onthe east by the Galveston area, to the northwest by Roundrock, to the southwestby Del Rio and to the southeast by Brownsville, as well as the State ofOklahoma.  The Company has increased itsmarket share in its primary market area over the last several years throughstrategic acquisitions.  The Company,through its bank subsidiaries, competes for deposits and loans with othercommercial banks, savings and loan associations, credit unions and non-bankentities, which non-bank entities serve as an alternative to traditionalfinancial institutions and are considered to be formidable competitors.  The percentage of bank-related services beingprovided by non-bank entities has increased dramatically during the lastseveral years.

The Company and its bank subsidiaries do a largeamount of business for customers domiciled in Mexico, with an emphasis inNorthern Mexico. Deposits from persons and entities domiciled in Mexicocomprise a large and stable portion of the deposit base of the Company’s banksubsidiaries.  Such deposits comprisedapproximately 30%, 28% and 28% of the bank subsidiaries’ total deposits as ofDecember 31, 2006, 2005 and 2004, respectively.

Under the Gramm-Leach-Bliley Act (“GLBA”), effectiveMarch 11, 2000, banks, securities firms and insurance companies may affiliateunder an entity known as a financial holding company which may then serve itscustomers’ varied financial needs through a single corporate structure.  GLBA has significantly changed thecompetitive environment in which the Company and its subsidiaries conductbusiness. The financial services industry is also likely to become even morecompetitive as further technological advances enable more companies to providefinancial services.  These technologicaladvances may diminish the importance of depository institutions and otherfinancial intermediaries in the transfer of funds between parties.

**Supervision and Regulation**

GENERAL-THE COMPANY. In addition to the generally applicable state and Federal laws governingbusinesses and employers, the Company and its bank subsidiaries are furtherextensively regulated by special Federal and state laws governing financialinstitutions.  These laws comprehensivelyregulate the operations of the Company’s bank subsidiaries and include, amongother matters, requirements to maintain reserves against deposits; restrictionson the nature and amount of loans that may be made and the interest that may becharged thereon; restrictions on the amounts, terms and conditions of loans todirectors, officers, large shareholders and their affiliates; restrictionsrelated to investments in activities other than banking; and minimum capitalrequirements. With few exceptions, state and Federal banking laws have as theirprincipal objective either the maintenance of the safety and soundness of theFederal deposit insurance system or the protection of consumers, rather thanthe specific protection of shareholders of the Company.  Further, the earnings of the Company areaffected by the fiscal and monetary policies of the Federal Reserve System,which regulates the national money supply in order to mitigate recessionary andinflationary pressures.  These monetarypolicies influence to a significant extent the overall growth of bank loans,investments and deposits and the interest rates charged on loans or paid ontime and savings deposits.  The nature offuture monetary policies and the effect of such policies on the future earningsand business of the Company cannot be predicted.

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FRB APPROVALS. The Company is a registered bank holding company within the meaning ofthe BHCA, and is subject to supervision by the FRB and to a certain extent theTexas Department of Banking (the “DOB”). The Company is required to file with the FRB annual reports and otherinformation regarding the business operations of itself and itssubsidiaries.  It is also subject to examinationby the FRB.  Under the BHCA, a bankholding company is, with limited exceptions, prohibited from acquiring director indirect ownership or control of any voting stock of any company which isnot a bank or bank holding company, and must engage only in the business ofbanking, managing, controlling banks, and furnishing services to or performingservices for its subsidiary banks.  Oneof the exceptions to this prohibition is the ownership of shares of any companyprovided such shares do not constitute more than 5% of the outstanding votingshares of the company and so long as the FRB does not disapprove suchownership.  Another exception to thisprohibition is the ownership of shares of a company the activities of which theFRB has specifically determined to be so closely related to banking, managingor controlling banks as to be a proper incident thereto.

The BHCA and the Change in Bank Control Act of 1978require that, depending on the circumstances, either FRB approval must beobtained or notice must be furnished to the FRB and not disapproved prior to anyperson or company acquiring “control” of a bank holding company, such as theCompany, subject to certain exceptions for certain transactions.  Control is conclusively presumed to exist ifan individual or company acquires 25% or more of any class of voting securitiesof the bank holding company.  Control isrebuttably 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 theCompany, has registered Securities under Section 12 of the Securities ExchangeAct of 1934 (the “Exchange Act”).

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

THE USA PATRIOT ACT. On October 26, 2001, the President signed into law a comprehensiveanti-terrorism legislation entitled Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism (USAPATRIOT) Act of 2001 (the “Act”).  TitleIII of the Act constitutes the USA PATRIOT ACT. The USA PATRIOT ACT and the regulations promulgated thereundersubstantially expand and change the responsibilities of U.S. financialinstitutions with respect to countering money laundering and terroristactivities. The implementing regulations impose obligations on financialinstitutions to maintain appropriate policies, procedures and controls todetect, prevent and report money laundering and terrorist financing and toverify the identity of their customers. Also, the Act requires the bank regulatory agencies to consider therecord of a bank or bank holding company in combating money launderingactivities in their evaluation of bank and bank holding company merger oracquisition transactions.  In recentyears, money laundering and the Bank Secrecy Act compliance emerged as bankregulatory enforcement priorities.  TheCompany has a program in place to monitor and enforce its policies on moneylaundering, corruption and bribery as well as its policies on prohibiting theuse of Company assets to finance or otherwise aid alleged terroristgroups.  Failure of a financialinstitution to maintain and implement adequate programs to combat moneylaundering and terrorist financing, or to comply with all the relevant laws orregulations, could have serious legal and reputational consequences for theinstitution.

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OFFICE OF FOREIGN ASSETS CONTROL REGULATION.  The United States has imposed economicsanctions that affect transactions with designated foreign countries, nationalsand others.  These are typically known asthe “OFAC” rules based on their administration by the U.S. Treasury DepartmentOffice of Foreign Assets Control (“OFAC”). The OFAC administered sanctions take many forms, including without limitation,  restrictions on trade or investment and theblocking of certain assets related to the designated foreign countries andnationals.  Blocked assets, which mayinclude bank deposits, cannot be paid out, withdrawn, set off or transferred inany manner without a license from OFAC. Failure to comply with the OFAC sanctions could have serious legal andreputational consequences.

FINANCIAL MODERNIZATION.  On November 12, 1999, the Gramm-Leach-BlileyAct of 1999 (“GLBA”) was enacted.  Thiscomprehensive legislation eliminates the barriers to affiliations among banks,securities firms, insurance companies and other financial serviceproviders.  GLBA provides for a new typeof financial holding company structure under which affiliations among theseentities may occur.  Under GLBA, afinancial holding company may engage in a broad list of financial activitiesand any non-financial activity that the FRB determines is complementary to afinancial activity and poses no substantial risk to the safety and soundness ofdepository institutions or the financial system.  In addition, GLBA permits certain non-bankingfinancial and financially related activities to be conducted by financialsubsidiaries of banks.

Under GLBA, a bank holding company may becomecertified as a financial holding company by filing a declaration with the FRB,together with a certification that each of its subsidiary banks is wellcapitalized, is well managed, and has at least a satisfactory rating under theCommunity Reinvestment Act of 1977 (“CRA”). The Company has elected to become a financial holding company under GLBAand the election was made effective by the FRB as of March 13, 2000.  During the second quarter of 2000, IBCestablished an insurance agency subsidiary which acquired two insuranceagencies.  Effective October 2, 2000, theCompany acquired a controlling interest in GulfStar Group, a Houston-basedinvestment banking firm with a securities affiliate registered under theExchange Act.  As part of the LFINacquisition, the Company acquired another securities firm registered under theExchange Act, IBC Investments, Inc.  Afinancial holding company that has a securities affiliate registered under theAct or a qualified insurance affiliate may make permissible merchant bankinginvestments.  As of December 31, 2006,the Company has made seven merchant banking investments.

In January 2001, the FRB and the Secretary of theTreasury promulgated final regulations governing the scope of permissiblemerchant banking investments.  Theinvestments that may be made under this new authority are substantially broaderin scope than the investment activities otherwise permissible for bank holdingcompanies, and are referred to as “merchant banking investments” in “portfoliocompanies.” Before making a merchant banking investment, a financial holdingcompany must either be or have a securities affiliate registered under theExchange Act or a qualified insurance affiliate.  The merchant banking investments may be madeby the financial holding company or any of its subsidiaries, other than adepository institution or subsidiary of a depository institution.  The regulations place restrictions on theability of a financial holding company to become involved in the routinemanagement or operation of any of its portfolio companies.  The regulation also generally limits theownership period of merchant banking investments to no more than ten years.

The FRB, the Office of the Comptroller of the Currency(the “OCC”), and the FDIC have adopted final rules governing the regulatorycapital treatment of equity investments in non-financial companies held bybanks, bank holding companies and financial holding companies.  The final rule was effective April 1, 2002and applies a graduated capital charge on covered equity investments whichwould increase as the proportion of such investments to Tier 1 Capitalincreases.

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PREEMPTION.  Atthe beginning of 2004, the OCC issued final rules clarifying when federal lawoverrides state law for national banks and their operating subsidiaries andconfirming that only the OCC has the right to examine and take enforcementaction against those institutions.  Thefull impact of the rules is not known yet; however, commentators anticipatethat the new rules will shield national banks from certain state consumerprotection laws which will continue to be applicable to state banks.

FINANCIAL PRIVACY. Additionally under the GLBA, federal banking regulators adopted rulesthat limit the ability of banks and other financial institutions to disclosenon-public information about consumers to non-affiliated third parties.  Pursuant to the rules, financial institutionsmust provide: (i) initial notices to customers about their privacy policies,describing the conditions under which they may disclose non-public personalinformation to non-affiliated third parties and affiliates;  (ii) annual notices of their privacy policiesto current customers; and (iii) a reasonable method for customers to “opt out”of disclosures to non-affiliated third parties. These privacy provisions affect how customer information is transmittedthrough diversified financial companies and conveyed to outside vendors.

SARBANES-OXLEY ACT OF 2002.  On July 30, 2002, President Bush signed intolaw the Sarbanes-Oxley Act of 2002.  TheSarbanes-Oxley Act represents a comprehensive revision of laws affectingcorporate governance, accounting obligations and corporate reporting.  The Sarbanes-Oxley Act is applicable to allcompanies with equity securities registered or that file reports under theSecurities Exchange Act of 1934.  Inparticular, the Sarbanes-Oxley Act establishes: (i) new requirements for auditcommittees, including independence, expertise, and responsibilities; (ii)additional responsibilities regarding certification of financial statements bythe Chief Executive Officer and Chief Financial Officer of the reportingcompany; (iii) new standards for auditors and regulation of audits; (iv)increased disclosure and reporting obligations for the reporting company andits directors and executive officers; and (v) new and increased civil andcriminal penalties for violations of the securities laws.

NASDAQ LISTING STANDARDS.  The Company is traded on the NASDAQ StockMarket.  On November 4, 2003, the SECapproved the revised listing standards of the NASDAQ Stock Market.  The new listing standards address disclosurerequirements and standards relating to board independence and other corporategovernance matters.

INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate Banking andBranching Efficiency Act of 1994 (“Interstate Banking Act”), which rewrotefederal law governing the interstate expansion of banks in the United States.Under the Interstate Banking Act, adequately capitalized, well managed bankholding companies with FRB approval may acquire banks located in any State inthe United States, provided that the target bank meets the minimum age (up to amaximum of five years, which is the maximum Texas has adopted) established bythe host State.  Under the InterstateBanking Act, an anti-concentration limit will bar interstate acquisitions thatwould give a bank holding company control of more than ten percent (10%) of alldeposits nationwide or thirty percent (30%) of any one State’s deposits, orsuch higher or lower percentage established by the host State. Theanti-concentration limit in Texas has been set at twenty percent (20%) of allfederally insured deposits in Texas.  Asallowed by the Interstate Banking Act, the Company acquired LFIN, including itsOklahoma financial institution, during 2004.

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FRB ENFORCEMENT POWERS.  The FRB has certain cease-and-desist anddivestiture powers over bank holding companies and non-banking subsidiarieswhere their actions would constitute a serious threat to the safety, soundnessor stability of a subsidiary bank.  Thesepowers may be exercised through the issuance of cease-and-desist orders orother actions.  In the event a banksubsidiary experiences either a significant loan loss or rapid growth of loansor deposits, the Company may be compelled by the FRB to invest additionalcapital in the bank subsidiary.  Further,the Company would be required to guaranty performance of the capitalrestoration plan of any undercapitalized bank subsidiary.  The FRB is also empowered to assess civilmoney penalties against companies or individuals who violate the BHCA inamounts up to $1,000,000 per day, to order termination of non-bankingactivities of non-banking subsidiaries of bank holding companies and to ordertermination of ownership and control of a non-banking subsidiary.  Under certain circumstances the Texas BankingCommissioner may bring enforcement proceedings against a bank holding companyin Texas.

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

CROSS-GUARANTEE PROVISIONS.  The Financial Institutions Reform Recoveryand Enforcement Act of 1989 (“FIRREA”) contains a “cross-guarantee” provisionwhich generally makes commonly controlled insured depository institutionsliable to the FDIC for any losses incurred in connection with the failure of acommonly controlled depository institution.

AUDIT REPORTS. Insured institutions with total assets of $1 billion or more must submitannual audit reports prepared by independent auditors to federal and stateregulators, as well as certain certifications. In some instances, the audit report of the institution’s holding companycan be used to satisfy this requirement. Auditors must receive examination reports and examination relatedcorrespondence.  In addition, financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America, management’s certifications concerningresponsibility for the financial statements, internal controls and compliancewith legal requirements designated by the FDIC, and an attestation by theauditor regarding the statements of management relating to the internalcontrols must be submitted to federal and state regulators.  For institutions with total assets of morethan $3 billion, independent auditors may be required to review quarterlyfinancial statements.  The FederalDeposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires thatindependent audit committees be formed, consisting of outside directorsonly.  The committees of suchinstitutions must include members with experience in banking or financialmanagement, must have access to outside counsel, and must not includerepresentatives of large customers.

During 1999, the SEC and the National Association ofSecurities Dealers adopted new rules, which became effective during 2000, toimprove the function of corporate audit committees. The new rules require,among other things, that the audit committee review and assess the adequacy ofits charter on an annual basis, that independent auditors review publiccompanies’ interim financial information prior to filing with the SEC and thatcompanies include in their proxy statements certain information about theiraudit committees.  The bank subsidiariesof the Company satisfy the annual audit requirement by relying on the audit ofthe Company.  The Company is also subjectto the enhanced audit committee requirements set forth in the Sarbanes-OxleyAct of 2002.

GENERAL - BANK SUBSIDIARIES.  All of the bank subsidiaries of the Companyare state banks subject to regulation by, and supervision of, the Texas DOB andthe FDIC.

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DEPOSIT INSURANCE. 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.  Deposits of eachof the bank subsidiaries are insured by the FDIC through the Deposit InsuranceFund (“DIF”) to the extent provided by law. The FDIC uses a risk-based assessment system that imposes premiums basedupon a matrix that takes into account a bank’s capital level and supervisoryrating.  During 2006, the banksubsidiaries of the Company were not required to pay any deposit insurancepremiums; however, the bank subsidiaries may be required to pay depositinsurance premiums in the future due to declines in the insurance fund orincreases in the amount of insurance coverage. Under the Federal Deposit Insurance Reform Act of 2005, which became lawin 2006, the bank subsidiaries of the Company received a one-time assessmentthat can be applied against future premiums, subject to certain limitations.  During 2006, the bank subsidiaries of theCompany paid Financing Corporation (“FICO”) assessments related to outstandingFICO bonds to the FDIC as a collection agent. The FICO is a mixed-ownership government corporation whose sole purposewas to serve as a financing vehicle for the defunct Federal Savings & LoanInsurance Corporation.

CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently required to meetcertain minimum regulatory capital guidelines utilizing total capital-to-risk-weightedassets and Tier 1 Capital elements.  AtDecember 31, 2006, the Company’s ratio of total capital-to-risk-weighted assetswas 13.61%.  The guidelines makeregulatory capital requirements more sensitive to differences in risk profilesamong banking organizations, consider off-balance sheet exposure in assessingcapital adequacy, and encourage the holding of liquid, low-risk assets.  At least one-half of the minimum totalcapital must be comprised of Tier 1 Capital elements.  Tier 1 Capital of the Company is comprised ofcommon shareholders’ equity and permissible amounts related to the trustpreferred securities.  The deductiblecore deposit intangibles and goodwill of $316,604,000 booked in connection withall the financial institution acquisitions of the Company after February 1992are deducted from the sum of core capital elements when determining the capitalratios of the Company.

In addition, the FRB has established minimum leverageratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capitalto adjusted average quarterly assets (“leverage ratio”) equal to three percentfor bank holding companies that meet certain specified criteria, includinghaving the highest regulatory rating. All other bank holding companies will generally be required to maintaina leverage ratio of at least four to five percent. The Company’s leverage ratioat December 31, 2006 was 7.36%.  Theguidelines also provide that bank holding companies experiencing internal growthor making acquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels without significant relianceon intangible assets.  Furthermore, theguidelines indicate that the FRB will continue to consider a “tangible tier 1leverage ratio” (deducting all intangibles) in evaluating proposals forexpansion or new activity.  The FRB hasnot advised the Company of any specific minimum leverage ratio or tangible Tier1 leverage ratio applicable to it.  For abank holding company to be considered “well-capitalized” under the regulatoryframework for prompt corrective action, its leverage ratio must be at least5.0%.

In March 2005, the Federal Reserve Board issued afinal rule that would continue to allow the inclusion of trust preferredsecurities in Tier 1 capital, but with stricter quantitative limits.  Under the final rule, after a five-yeartransition period ending March 31, 2009, the aggregate amount of trust preferredsecurities and certain other capital elements would be limited to 25% of Tier 1capital elements, net of goodwill, less any associated deferred taxliability.  The amount of trust preferredsecurities and certain other elements in excess of the limit could be includedin Tier 2 capital, subject to restrictions. Bank holding companies with significant international operations will beexpected to limit trust preferred securities to 15% of Tier 1 capital elements,net of goodwill; however, they may include qualifying mandatory convertiblepreferred securities up to the 25% limit. After the transition period, the Company believes that substantially allof the trust preferred securities issued by the Company will qualify as Tier 1capital.

 

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Each of the Company’s bank subsidiaries is subject tosimilar capital requirements adopted by the FDIC.  Each of the Company’s bank subsidiaries had aleverage ratio in excess of five percent as of December 31, 2006.  As of that date, the federal banking agencieshad not advised any of the bank subsidiaries of any specific minimum leverageratio applicable to it.

Effective December 19, 1992, the federal bankregulatory agencies adopted regulations which mandate a five-tier scheme ofcapital requirements and corresponding supervisory actions to implement theprompt corrective action provisions of FDICIA. The regulations include requirements for the capital categories thatwill serve as benchmarks for mandatory supervisory actions.  Under the regulations, the highest of thefive categories would be a well capitalized institution with a total risk-basedcapital ratio of 10%, a Tier 1 risk-based capital ratio of 6% and a Tier 1leverage ratio of 5%.  An institutionwould be prohibited from declaring any dividends, making any other capitaldistribution or paying a management fee if the capital ratios drop below thelevels for an adequately capitalized institution, which are 8%, 4% and 4%,respectively.  The corresponding provisionsof FDICIA mandate corrective actions are taken if a bank isundercapitalized.  Based on the Company’sand each of the bank subsidiaries’ capital ratios as of December 31, 2006, theCompany and each of the bank subsidiaries were classified as “well capitalized”under the applicable regulations.

In 1995, in accordance with FDICIA, the FDIC modifiedits risk-based capital adequacy guidelines to explicitly include a bank’sexposure to declines in the economic value of its capital due to changes ininterest rates as a factor that it will consider in evaluating a bank’s capitaladequacy.  In 1996 the bank regulatoryagencies introduced risk-based examination procedures.  Effective January 1, 1997, the federalbanking agencies jointly adopted regulations that amend the risk-based capitalstandards to incorporate measures for market risk.  Applicable banking institutions are requiredto adjust their risk-based capital ratio to reflect market risk.  Financial institutions are allowed to issuequalifying unsecured subordinated debt (Tier 3 capital) to meet a part of theirmarket risks.  The Company does not haveany Tier 3 capital.  On December 19,1996, the Federal Financial Institutions Examination Council (the “FFIEC”)revised the Uniform Financial Institutions Rating System commonly referred to asthe CAMEL rating system.  A sixthcomponent addressing sensitivity to market risk was added.  Sensitivity to market risk reflects thedegree to which changes in interest rates, foreign exchange rates, commodityprices or equity prices can adversely affect a financial institution’s earningsor economic capital.

The federal regulatory authorities’ risk-based capitalguidelines are based upon the 1988 capital accord of the Basel Committee onBanking Supervision (the “BIS”).  The BISis a committee of central banks and bank supervisors/regulators from the majorindustrialized countries that develops broad policy guidelines for use by eachcountry’s supervisors in determining the supervisory policies they apply.  In June 2004, the BIS released a new capitalaccord to replace the 1988 capital accord with an update in November 2005 (“BISII”).  BIS II would set capitalrequirements for operational risk, and refine the existing capital requirementsfor credit risk and market risk exposures. The United States federal banking agencies are developing proposedrevisions to their existing capital adequacy regulations and standards based onBIS II.  During 2006, the bankingagencies issued two notices of proposed rulemaking related to BIS II.  The proposed regulatory changes distinguishbetween internationally active banking organizations and other bankingorganizations, although the other organizations may opt to be treated as aninternationally active organization.  TheCompany is not an internationally active organization under the provisions ofBIS II and has not determined whether it would opt to apply the BIS IIprovisions applicable to internationally active organizations.  The Company cannot predict the timing orfinal form of the United States rules implementing BIS II and their impact onthe Company.  The new capitalrequirements under the new BIS II could increase the minimum capitalrequirements applicable to the Company and its subsidiaries.

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STATE ENFORCEMENT POWERS.  The Banking Commissioner of Texas may determineto close a Texas state bank when he finds that the interests of depositors andcreditors of a state bank are jeopardized through its insolvency or imminentinsolvency and that it is in the best interest of such depositors and creditorsthat the bank be closed.  The Texas DOBalso has broad enforcement powers over the bank subsidiaries, including thepower to impose orders, remove officers and directors, impose fines and appointsupervisors and conservators.

DEPOSITOR PREFERENCE. Because the Company is a legal entity separate and distinct from itsbank subsidiaries, its right to participate in the distribution of assets ofany subsidiary upon the subsidiary’s liquidation or reorganization will besubject to the prior claims of the subsidiary’s creditors.  In the event of a liquidation or otherresolution of a subsidiary bank, the claims of depositors and other general orsubordinated creditors of the bank are entitled to a priority of payment overthe claims of holders of any obligation of the institution to its shareholders,including any depository institution holding company (such as the Company) orany shareholder or creditor thereof.

CRA.  Under theCRA, the FDIC is required to assess the record of each bank subsidiary todetermine if the bank meets the credit needs of its entire community, includinglow and moderate-income neighborhoods served by the institution, and to takethat record into account in its evaluation of any application made by the bankfor, among other things, approval of the acquisition or establishment of abranch or other deposit facility, an office relocation, a merger, or theacquisition of shares of capital stock of another financial institution.  The FDIC prepares a written evaluation of aninstitution’s record of meeting the credit needs of its entire community andassigns a rating.  The FIRREA requiresfederal banking agencies to make public a rating of a bank’s performance underthe CRA.  Each bank subsidiary received a“satisfactory” CRA rating in its most recently completed examination.  Further, there are fair lending laws whichprohibit discrimination in connection with lending decisions.

CONSUMER LAWS. In addition to the laws and regulations discussed herein, the Bank isalso subject to certain consumer laws and regulations that are designed toprotect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws andregulations include the Truth in Lending Act, the Truth in Savings Act, the ElectronicFunds Transfer Act, the Expedited Funds Availability Act, the Equal CreditOpportunity Act, the Fair Housing Act, and the Fair and Accurate CreditTransactions Act of 2003, among others. These laws and regulations mandate certain disclosure requirements andregulate the manner in which financial institutions must deal with customerswhen taking deposits or making loans to such customers.  The Bank must comply with the applicableprovisions of these consumer protection laws and regulations as part of theirongoing customer relations.

AFFILIATE TRANSACTIONS.  The Company, IBC and the other banksubsidiaries of the Company are “affiliates” within the meaning of Section 23Aof the Federal Reserve Act which sets forth certain restrictions on loans andextensions of credit between a bank subsidiary and affiliates, on investmentsin an affiliate’s stock or other securities, and on acceptance of such stock orother securities as collateral for loans. Such restrictions prevent a bank holding company from borrowing from anyof its bank subsidiaries unless the loans are secured by specificobligations.  Further, such secured loansand investments by a bank subsidiary are limited in amount, as to a bankholding company or any other affiliate, to 10% of such bank subsidiary’scapital and surplus and, as to the bank holding company and its affiliates, toan aggregate of 20% of such bank subsidiary’s capital and surplus.  Certain restrictions do not apply to 80% ormore owned sister banks of bank holding companies.  Each bank subsidiary of the Company iswholly-owned by the Company. Section 23B of the Federal Reserve Act requiresthat the terms of affiliate transactions be comparable to terms of similarnon-affiliate transactions.  On October31, 2002, the Board of Governors of the Federal Reserve System adopted a finalrule (Regulation W) to implement comprehensively sections 23A and 23B of theFederal Reserve Act and provides several new exemptions consistent with thepurposes of the statute.  The final rulecombines statutory restrictions on transactions between a member bank and itsaffiliates with numerous Board interpretations and exemptions in an effort tosimplify compliance with sections 23A and 23B. The final rule was effective April 1, 2003.

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INSIDER LOANS. The restrictions on loans to directors, executive officers, principalshareholders and their related interests (collectively referred to herein as “insiders”)contained in the Federal Reserve Act and Regulation O apply to all insuredinstitutions and their subsidiaries and holding companies.  These restrictions include limits on loans toone borrower and conditions that must be met before such a loan can bemade.  There is also an aggregatelimitation on all loans to insiders and their related interests.  These loans cannot exceed the institution’stotal unimpaired capital and surplus, and the FDIC may determine that a lesseramount is appropriate.  Insiders aresubject to enforcement actions for knowingly accepting loans in violation ofapplicable restrictions.

LENDING RESTRICTIONS. The operations of the Banks are also subject to lending limitrestrictions pertaining to the extension of credit and making of loans to oneborrower.  Further, under the BHCA andthe regulations of the FRB thereunder, the Company and its subsidiaries areprohibited from engaging in certain tie-in arrangements with respect to anyextension of credit or provision of property or services; however, the FRBadopted a rule relaxing tying restrictions by permitting a bank holding companyto offer a discount on products or services if a customer obtains otherproducts or services from such company. In February 2005, the banking agencies issued best practices guidelineson overdraft protection programs which state that overdraft protection programsare an extension of credit, but are not subject to Truth-in-Lending disclosurerequirements.

DIVIDENDS.  Theability of the Company to pay dividends is largely dependent on the amount ofcash derived from dividends declared by its bank subsidiaries.  The payment of dividends by any bank or bankholding company is affected by the requirement to maintain adequate capital asdiscussed above.  The ability of theBanks, as Texas banking associations, to pay dividends is restricted underTexas law.  A Texas bank generally maynot pay a dividend reducing its capital and surplus without the prior approvalof the Texas Banking Commissioner. Dividends may not be paid from “certified surplus,” which is designatedby the Board of Directors of a Texas banking association from undivided profitsin connection with the establishment of the bank’s lending limit.  Additionally, the FDIC has the right toprohibit the payment of dividends by a bank where the payment is deemed to bean unsafe and unsound banking practice. At December 31, 2006, there was an aggregate of approximately$140,250,000 available for the payment of dividends to the Company by IBC,Commerce Bank, IBC-Zapata and IBC-Brownsville under the applicablerestrictions, assuming that each of such banks continues to be classified as “wellcapitalized,” excluding the certified surplus of each bank.  Further, the Company could expend the entire$140,250,000 and continue to be classified as “well capitalized”.  Note 20 of Notes to Consolidated FinancialStatements of the Company located on page 69 of the 2006 Annual Report isincorporated herein by reference.

POWERS.  As aresult of FDICIA, the authority of the FDIC over state-chartered banks wasexpanded.  FDICIA limits state-charteredbanks to only those principal activities permissible for national banks, exceptfor other activities specifically approved by the FDIC.  The new Texas Banking Act includes a parityprovision which establishes procedures for state banks to notify the BankingCommissioner if the bank intends to conduct any activity permitted for anational bank that is otherwise denied to a state bank.  The Banking Commissioner has thirty (30) daysto prohibit the activity.  During 1999, asuper parity provision was added to the Texas Finance Code which establishedprocedures for state banks to notify the Banking Commissioner if the bankintends to conduct any activity permitted for any depository institution in theUnited States.  The Banking Commissionerhas thirty (30) days to prohibit the activity.

FINANCIAL SUBSIDIARIES.  Under GLBA, a national bank may establish afinancial subsidiary and engage, subject to limitations on investment, inactivities that are financial in nature, other than insurance underwriting asprincipal, insurance company portfolio investment, real estate development,real estate investment and annuity issuance. To do so, a bank must be well capitalized, well managed and have a CRArating of satisfactory or better. Subsidiary banks of a financial holding company or national banks withfinancial subsidiaries must remain well capitalized and well managed in orderto continue to engage in activities that are financial in nature withoutregulatory actions or restrictions, which could include divestiture of thefinancial subsidiary or subsidiaries.  Inaddition, a bank may not acquire a company that is engaged in activities thatare financial in nature unless the bank and each affiliated bank has a CRArating of satisfactory or better.

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The powers of state-chartered banks that are notmembers of the Federal Reserve System were not directly addressed by GLBA.  However, Texas state nonmember banks shouldindirectly benefit from the enhanced powers made available to financialsubsidiaries of national banks by GLBA through the Texas parity statute, whichauthorizes state-chartered banks to engage in powers available for nationalbanks, subject to certain state and federal law restrictions.

INSTABILITY OF REGULATORY STRUCTURE.  New legislation could be adopted which wouldchange banking statutes and the operating environment of the Company and thebank subsidiaries in substantial and unpredictable ways.  Such changes could have a material effect onthe business of the Company.  The Companycannot determine the ultimate effect that potential legislation, if enacted, orimplementing regulations with respect thereto, would have upon the financialcondition or results of operations of the Company or its subsidiaries.

**Item 1A. RiskFactors**

**Risk Factors**

You should carefully consider the risks anduncertainties the Company describes below and the other information in thisAnnual Report or incorporated by reference before deciding to invest in, orretain, shares of the Company’s common stock. These are not the only risks and uncertainties that the Companyfaces.  Additional risks anduncertainties that the Company does not know about or that the Companycurrently believes are immaterial, or that the Company has not predicted, mayalso harm the Company’s business operations or adversely affect theCompany.  If any of these risks oruncertainties actually occurs, the Company’s business, financial condition,operating results or liquidity could be materially harmed.

**Risks Related to the Company’sBusiness**

***Losses from loan defaults mayexceed the allowance the Company establishes for that purpose, which could havean adverse effect on the Company’s business.***

Losses from loan defaults may exceed the allowance theCompany establishes for that purpose. Like all financial institutions, the Company maintains an allowance forpossible loan losses to provide for losses inherent in the loan portfolio.  The allowance for possible loan lossesreflects management’s best estimate of probable loan losses in the loanportfolio at the relevant balance sheet date. This evaluation is primarily based upon a review of the Company and theCompany’s historical loan loss experience, known risks contained in the loanportfolio, composition and growth of the loan portfolio, and economicfactors.  The determination of anappropriate level of loan loss allowance is an inherently difficult process andis based on numerous assumptions.  As aresult, the Company’s allowance for loan losses may not be adequate to coveractual losses, and future provisions for loan losses may adversely affect theCompany’s earnings.  The Company believesits allowance for possible loan losses is adequate at December 31, 2006.

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***If real estate values in theCompany’s target markets decline, the loan portfolio would be impaired.***

A significant portion of the Company’s loan portfolioconsists of loans secured by real estate located in the markets served by theCompany.  Real estate values and realestate markets are generally affected by, among other things, changes innational, regional, or local economic conditions;  fluctuations in interest rates and theavailability of loans to potential purchases, changes in the tax laws and othergovernmental statutes, regulations, and policies;  and acts of nature.  If real estate prices decline significantlyin any of these markets, the value of the real estate collateral securing theCompany’s loans would be reduced.  Such areduction in the value of the Company’s collateral could increase the number ofimpaired loans and adversely affect the Company’s financial performance.

***The Company’s subsidiary banksface strong competition in their market areas, which may limit their assetgrowth and profitability.***

The Company’s primary market areas are South, Centraland Southeast Texas, including Austin and Houston, and the State ofOklahoma.  The banking business in theseareas is extremely competitive, and the level of competition facing the Companymay increase further, which may limit the growth and profitability of theCompany.  Each of the Company’ssubsidiary banks experience competition in both lending and attracting fundsfrom other banks, savings institutions, credit unions and non-bank financialinstitutions located within its market area, many of which are significantlylarger institutions.  Non-bankcompetitors competing for deposits and deposit type accounts include mortgagebankers and brokers, finance companies, credit unions, securities firms, moneymarket funds, life insurance companies, and mutual funds.  For loans, the Company encounters competitionfrom other banks, savings associations, finance companies, mortgage bankers andbrokers, insurance companies, small loan and credit card companies, creditunions, pension trusts, and securities firms.

***The Company relies, in part, onexternal financing to fund the Company’s operations and the unavailability ofsuch funds in the future could adversely impact the Company’s growth strategyand prospects.***

The Company relies on deposits, repurchase agreements,advances from the Federal Home Loan Bank (“FHLB”) of Dallas and otherborrowings to fund its operations.  Thesubsidiary banks have also historically relied on certificates of deposit.  While the Company has reduced its reliance oncertificates of deposit and has been successful in promoting its transactionand non-transaction deposit products (demand deposit accounts, money market,savings and checking), jumbo deposits nevertheless constituted a large portionof total deposits at December 31, 2006. Jumbo deposits tend to be a more volatile source of funding.  Although management has historically beenable to replace such deposits on maturity if desired, no assurance can be giventhat the Company would be able to replace such funds at any given point intime.

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***The Company’s business is subjectto interest rate risk and variations in interest rates may negatively affectthe Company’s financial performance.***

The Company is unable to predict fluctuations ofmarket interest rates, which are affected by many factors, including:

·                                          Inflation;

·                                          Recession;

·                                          A rise in unemployment;

·                                          Tightening of the moneysupply; and

·                                          Domestic andinternational disorder and instability in domestic and foreign financialmarkets.

Changes in the interest rate environment may reducethe Company’s profits.  The Companyexpects that the bank subsidiaries will continue to realize income from thedifferential or “spread” between the interest earned on loans, securities andother interest-earning assets, and the interest paid on deposits, borrowingsand other interest-bearing liabilities. Net interest spreads are affected by the difference between thematurities and repricing characteristics of interest-earning assets andinterest-bearing liabilities.

***The Company is subject toextensive regulation which could adversely affect the Company including changesin U.S.-Mexico trade and travel along the Texas border.***

The Company’s operations are subject to extensiveregulation by federal, state and local governmental authorities and are subjectto various laws and judicial and administrative decisions imposing requirementsand restrictions on part or all of the Company’s operations.  Because the Company’s business is highlyregulated, the laws, rules and regulations applicable to the Company aresubject to regular modification and change. There can be no assurance that there will be no laws, rules orregulations adopted in the future, which could make compliance more difficultor expensive, or otherwise adversely affect the Company’s business, financialcondition or prospects.  Additionally,any reductions in border crossings and commerce resulting from the HomelandSecurity Programs called “US-VISIT,” which is derived from Section 110 of theIllegal Immigration Reform and Immigration Responsibility Act of 1996 couldaffect the Company negatively, and any possible negative consequences from anadverse immigration law could also have a negative affect on the Company’soperations.

***The effects of the litigation andproceedings pending with the Internal Revenue Service regarding the Company’slease financing transactions could adversely affect the Company.***

The Company is currently involved in lawsuits with theIRS relating to two lease-financing transactions that the Company entered intothrough two subsidiary partnerships.  In2006, the trial court rendered a judgment against the Company on one of thelawsuits.  The Company has appealed thetrial court’s decision.  The Company hasexpensed approximately $25,700,000 in connection with the lawsuits, whichamount is the total of tax adjustments due and the interest due on suchadjustments for both lawsuits.  Noreliable prediction can be made at this time as to the likely outcome of thelawsuits; however, if the lawsuits are decided adversely to the partnerships,the Company will not be refunded all or a portion of the $25,700,000 that the Companyhas expensed in connection with the lawsuits.

***The Company’s potential futureacquisitions could be adversely affected by a number of factors.***

Acquisitions of other financial institutions have beena key element of the Company’s growth. There are a number of factors that may impact the ability of the Companyto continue to grow through acquisition transactions, including strongcompetition from other financial institutions who are active or potentialacquirors of financial institutions in the existing or future markets of theCompany.

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***The Company relies heavily on itschief executive officer.***

The Company has experienced substantial growth inassets and deposits during the past, particularly since Dennis E. Nixon becameour President in 1979.  Although Mr.Nixon is the chief executive officer and one of the substantial shareholders,the Company does not have an employment agreement with Mr. Nixon and the lossof his services could have a material adverse effect on the Company’s businessand prospects.

**Risks Related to the Company’sIndustry**

***Changes in economic and politicalconditions could adversely affect the Company’s earnings, as our borrowers’ability to repay loans and the value of the collateral securing our loansdecline.***

The Company’s success depends, to a certain extent,upon economic and political conditions, local, national and international withrespect to Mexico, as well as governmental monetary policies.  Conditions such as inflation, recession, unemployment,changes in interest rates, changes in capital markets, money supply, politicalissues, legislative and regulatory changes and other factors beyond the Company’scontrol may adversely affect the Company’s asset quality, deposit levels andloan demand and, therefore, the Company’s earnings.  The Company is particularly affected byconditions in its primary market areas of South, Central and Southeast Texas,including Austin and Houston, and the State of Oklahoma.

***The Company depends on theaccuracy and completeness of information about customers and counterparties.***

In deciding whether to extend credit or enter intoother transactions, the Company may rely on information furnished by or onbehalf of customers and counterparties, including financial statements, creditreports and other financial information. The Company may also rely on representations of those customers,counterparties or other third parties, such as independent auditors, as to theaccuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, creditreports or other financial information could have a material adverse impact onthe Company’s business and, in turn, the Company’s financial condition andresults of operations.

***If the Company does not adjust torapid changes in the financial services industry, its financial performance maysuffer.***

The Company’s ability to deliver strong financialperformance and returns on investment to shareholders will depend in part onits ability to expand the scope of available financial services to meet theneeds and demands of its customers and its ability to stay abreast oftechnological innovations and evaluate those technologies that will enable itto compete on a cost-effective basis.

In addition to the challenge of competing againstother banks in attracting and retaining customers for traditional bankingservices, the Company’s competitors also include securities dealers, brokers,mortgage bankers, investment advisors, specialty finance and insurancecompanies who seek to offer one-stop financial services that may includeservices that banks have not been able or allowed to offer to their customersin the past.  The increasinglycompetitive environment is primarily a result of changes in regulation, changesin technology and product delivery systems and the accelerating pace ofconsolidation among financial service providers.  Such changes in the financial industry mayresult in the loss of fee income, as well as the loss of customer deposits andthe related income generated from those deposits.  The loss of these revenue streams and thelower cost deposits as a source of funds could have a material adverse effecton the Company’s financial condition and results of operations.

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Further, the costs of new technology, includingpersonnel, can be high in both absolute and relative terms.  There can be no assurance, given the fastpace of change and innovation, that the Company’s technology, either purchasedor developed internally, will meet or continue to meet the needs of the Companyand the needs of our customers.

**Risks Related to the Company’sStock**

***The Company’s stock price may bevolatile.***

Several factors could cause the Company’s stock priceto fluctuate substantially in the future. These factors include:

·              Actual or anticipated variations in earnings;

·              The Company’s announcements of developments related toits businesses;

·              Operating and stock performance of other companiesdeemed to be peers;

·              New technology used or services offered by traditionaland non-traditional competitors;

·              News reports of trends, concerns and other issuesrelated to the financial services industry; and

·              Changes in the Company’s ability to pay dividends.

The Company’s stock price may fluctuate significantlyin the future, and these fluctuations may be unrelated to the Company’sperformance.  General market pricedeclines or market volatility in the future could adversely affect the price ofits common stock, and the current market price may not be indicative of futuremarket prices.

**Item 1B.  Unresolved Staff Comments**

N/A

**Item 2.  Properties**

The principal offices of the Company and IBC arelocated at 1200 San Bernardo Avenue, Laredo, Texas and 2418 Jacaman Road,Laredo, Texas in buildings owned and completely occupied by the Company and IBCand containing approximately 125,000 square feet.  The bank subsidiaries of IBC have over 230main banking and branch facilities.  Allthe facilities are customary to the banking industry.  The bank subsidiaries own most of theirbanking facilities and the remainder are leased.  The facilities are located in the regions ofLaredo, San Antonio, Houston, Zapata, Eagle Pass, the Rio Grande Valley ofTexas, the Coastal Bend area of Texas, and throughout the State of Oklahoma.

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

21

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**Item 3.  Legal Proceedings**

The Company and its bank subsidiaries are involved invarious legal proceedings that are in various stages of litigation.  Some of these actions allege “lenderliability” claims on a variety of theories and claim substantial actual andpunitive damages.  The Company and itssubsidiaries have determined, based on discussions with their counsel that anymaterial loss in such actions, individually or in the aggregate, is remote orthe damages sought, even if fully recovered, would not be considered materialto the consolidated financial position or results of operations of the Companyand its subsidiaries.  However, many ofthese matters are in various stages of proceedings and further developmentscould cause management to revise its assessment of these matters.  Further information regarding legalproceedings has been provided in Note 17 of the Notes to consolidated financialstatements located on page 66 of the 2006 Annual Report to Shareholderswhich is incorporated herein by reference.

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

Since the 2006 Annual Meeting of Shareholders of theCompany held on May 15, 2006, no matter was submitted to a vote of Registrant’ssecurity holders through the solicitation of proxies or otherwise.

**Item 4A.  Executive Officers of the Registrant**

Certain information is set forth in the followingtable concerning the executive officers of the Company, each of whom has beenelected to serve until the 2007 annual Meeting of shareholders and until hissuccessor is duly elected and qualified.
|                 | ** ** | ** ** | ** ** | ** **                                                                                                                             | ** ** | **Officer of** |
|-----------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
| ** **      | ** ** | ** ** | ** ** | ** **                                                                                                                             | ** ** | **the**        |
| ** **      | ** ** | ** ** | ** ** | ** **                                                                                                                             | ** ** | **Company**    |
| **Name**        | ** ** | **Age**    | ** ** | **Position of Office**                                                                                                                 | ** ** | **Since**      |
| ** **      | ** ** | ** ** | ** ** | ** **                                                                                                                             | ** ** | ** **     |
| Dennis E. Nixon |       | 64         |       | Chairman of the Board of the Company since 1992 and  President of the Company since 1979, Chief Executive Officer and Director of  IBC |       | 1979           |
|            |       |       |       |                                                                                                                                   |       |           |
| R. David Guerra |       | 54         |       | Vice President of the Company since 1986 and  President of IBC McAllen Branch and Director of IBC                                      |       | 1986           |
|            |       |       |       |                                                                                                                                   |       |           |
| Imelda Navarro  |       | 49         |       | Treasurer of the Company since 1982 and Senior  Executive Vice President of IBC and Director of IBC since 2002                         |       | 1982           |

 

There are no family relationships among any of thenamed persons.  Each executive officerhas held the same position or another executive position with the Companyduring the past five years.

22

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# **PART II**

**Item 5.  Market for the Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

The information set forth under the caption “CommonStock and Dividends,” “Stock Repurchase Program,” and “Equity Compensation PlanInformation” located on pages 26 through 28 of Registrant’s 2006 Annual Reportis incorporated herein by reference.

**Item 6.  Selected Financial Data**

The information set forth under the caption “SelectedFinancial Data” located on page 1 of Registrant’s 2006 Annual Report isincorporated herein by reference.

**Item7.  Management’s Discussion andAnalysis of Financial Condition and** Results of Operations

The information set forth under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”located on pages 2 through 26 of Registrant’s 2006 Annual Report isincorporated herein by reference.

**Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk**

The information set forth under the caption “Liquidityand Capital Resources” located on pages 18 through 24 of Registrant’s 2006Annual Report is incorporated herein by reference.

**Item 8.  Financial Statements and SupplementaryData**

The consolidated financial statements located on pages31 through 77 of Registrant’s 2006 Annual Report are incorporated herein byreference.

The condensed quarterly income statements located onpages 79 and 80 of Registrant’s 2006 Annual Report are incorporated herein byreference.

**Item9.  Changes In and Disagreements withAccountants on Accounting and** Financial Disclosure

None.

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**Item 9A.  Controls and Procedures**

As of the end of the period covered by this AnnualReport on Form 10-K, an evaluation was carried out by the management ofInternational Bancshares Corporation, (the “Corporation”) with theparticipation of its Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the Corporation’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the disclosurecontrols and procedures were effective as of the end of the period covered bythis report. Additionally, there were no changes in the Corporation’s internalcontrol over financial reporting that occurred during the quarter endedDecember 31, 2006 that have materially affected, or are reasonably likely tomaterially affect, the Corporation’s internal control over financial reporting.

**Management’sReport on Internal Control Over Financial Reporting**

The management of the Corporation is responsible forestablishing and maintaining adequate internal controls over financialreporting, as defined under Rules 13a-15(f) and 15d-15(f ) of the SecuritiesExchange Act of 1934.   The Corporation’s internal control overfinancial reporting is a process designed under the supervision of theCorporation’s Chief Executive Officer and Chief Financial Officer to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Corporation’s financial statements for external purposes inaccordance with generally accepted accounting principles.

As of December 31, 2006, management assessed theeffectiveness of the design and operation of the Corporation’s internalcontrols over financial reporting based on the criteria for effective internalcontrol over financial reporting established in “Internal Control —Integrated Framework,” issued by the Committee of Sponsoring Organizations(COSO) of the Treadway Commission. Based on the assessment, managementdetermined that the Corporation maintained effective internal control overfinancial reporting as of December 31, 2006, based on those criteria.

KPMG LLP, the independent registered public accountingfirm that audited the consolidated financial statements of the Corporationincluded in this Annual Report on Form 10-K, has issued an attestationreport on management’s assessment of the effectiveness of the Corporation’s internalcontrol over financial reporting as of December 31, 2006. The report,which expresses unqualified opinions on management’s assessment and on theeffectiveness of the Corporation’s internal control over financial reporting asof December 31, 2006, is included in this Item under the heading “Reportof Independent Registered Public Accounting Firm.”

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Report of IndependentRegistered Public Accounting Firm

The Board of Directorsand ShareholdersInternational Bancshares Corporation:

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that International Bancshares Corporation andsubsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO)*.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company;  (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and the receipts and expenditures of the company are beingmade only in accordance with authorization of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

In our opinion,management’s assessment that International Bancshares Corporation andsubsidiaries maintained effective internal control over financial reporting asof December 31, 2006, is fairly stated, in all material respects, based oncriteria established in *InternalControl-Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO)*. Also, in our opinion, International Bancshares Corporation andsubsidiaries, maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2006, based on criteria establishedin *Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO)*.

25

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We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated statements of condition of InternationalBancshares Corporation and subsidiaries as of December 31, 2006 and 2005, andthe related consolidated statements of income, comprehensive income,shareholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2006, and our report dated February 28, 2007expressed an unqualified opinion on those consolidated financial statements.
| /s/ KPMG LLP       |   |
|--------------------|--------|
|               |   |
|               |   |
| San Antonio, TX    |   |
| February 28,  2007 |   |

 

** **

26

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**Item 9B.  Other Information**

None.

# **PART III**

**Item 10.  Directors, Executive Officers and CorporateGovernance**

There is incorporated in this Item 10 by reference (i)that portion of the Company’s definitive proxy statement relating to theCompany’s 2007 Annual Meeting of Shareholders entitled “Election of Directors,”(ii) the first and second paragraphs of the portion entitled “Meetings andCommittees of the Board of Directors,” (iii) the portion entitled “Code ofEthics,” (iv) that portion entitled “Section 16(a) Beneficial OwnershipReporting Compliance” and (v) Item 4A of this report entitled “ExecutiveOfficers of the Registrant.”

**Item 11.  Executive Compensation**

There is incorporated in this Item 11 by referencethat portion of the Company’s definitive proxy statement relating to theCompany’s 2007 Annual Meeting of Shareholders entitled “Executive Compensation.”

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related**Stockholder Matters

There are incorporated in this Item 12 by referencethose portions of the Company’s definitive proxy statement relating to theCompany’s 2007 Annual Meeting of Shareholders entitled “Principal Shareholders,”“Security Ownership of Management,” and “Equity Compensation Plan Information.”

**Item 13.  Certain Relationships and RelatedTransactions, and Director Independence**

There is incorporated in this Item 13 by referencethat portion of the Company’s definitive proxy statement relating to theCompany’s 2007 Annual Meeting of Shareholders entitled “Interest of Managementin Certain Transactions.”

**Item 14.  Principal Accounting Fees and Services**

There is incorporated in this Item 14 by referencethat portion of the Company’s definitive proxy statement relating to theCompany’s 2007 Annual Meeting of Shareholders entitled “Principal AccountantFees and Services.”

27

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# **PART IV**

**Item 15.  Exhibits, Financial Statement Schedules**

(a)  Documents

1.                                               Theconsolidated financial statements of the Company and subsidiaries areincorporated into Item 8 of this report by reference from the 2006 AnnualReport to Shareholders filed as an exhibit hereto and they include:

Report of Independent Registered Public Accounting Firm

Consolidated:

Statements of Conditionas of December 31, 2006 and 2005

Statements of Income forthe years ended December 31, 2006, 2005 and 2004

Statements of ComprehensiveIncome for the years ended December 31, 2006, 2005 and 2004

Statements ofShareholders’ Equity for the years ended December 31, 2006, 2005 and 2004

Statements of Cash Flowsfor the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

2.                                               AllFinancial Statement Schedules are omitted as the required information isinapplicable or the information is presented in the consolidated financialstatements or related notes.

3.                                               Thefollowing exhibits have previously been filed by the Registrant or are includedin this report following the Index to Exhibits:

(3)(a)*-Articles of Incorporation of International BancsharesCorporation incorporated herein as an exhibit by reference to the CurrentReport, Exhibit 3.1 therein, under the Securities Exchange Act of 1934, filedby Registrant on Form 8-K with the Securities and Exchange Commission on June20, 1995, SEC File No. 09439.

(3)(b)*-Articles of Amendment to the Articles of Incorporation ofInternational Bancshares Corporation dated May 22, 1998 incorporated herein byreference to Exhibit 3(c) of the Registrant’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 31, 1999, SEC file No.09439.

(3)(c)* -Articles of Amendment to the Articles of Incorporation ofInternational Bancshares Corporation dated May 21, 2002 incorporated herein byreference to Exhibit 3(d) of the Registrant’s Annual Report on form 10-K filedwith the Securities and Exchange Commission on March 12, 2004, SEC File No.09439.

(3)(d)* - Articles of Amendment to the Articles of Incorporation ofInternational Bancshares Corporation filed with the Secretary of State of theState of Texas on May 17, 2005, incorporated herein as an exhibit by referenceto the Current Report, Exhibit 3.1 therein, under the Securities Exchange Actof 1934, filed by Registrant on Form 8-K with the Securities and ExchangeCommission on May 20, 2005, SEC File No. 09439.

(3)(e)* - Restated By-Laws of International Bancshares Corporationincorporated herein by reference to Exhibit 3(b) of the Registrant’s AnnualReport on Form 10-K filed with the Securities and Exchange Commission on March12, 2004, SEC File No. 09439.

28

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(10a)*+-The 1987 International Bancshares Corporation Key ContributorStock Option Plan as amended and restated (formerly the InternationalBancshares Corporation 1981 Incentive Stock Option Plan) incorporated herein asan exhibit by reference to Exhibit 28 to the Registration Statement on Form S-8filed with the Securities and Exchange Commission on July 13, 1987, SEC FileNo. 33-15655.

(10b)*+-The 1996 International Bancshares Corporation Stock Option Planincorporated herein by reference to Exhibit 99.1 to the Post EffectiveAmendment No. 1 to Form S-8 filed with the Securities and Exchange Commissionon March 21, 1997, SEC File No. 33-15655.

(10c)*+-2005 International Bancshares Corporation Stock Option Planincorporated herein as an exhibit by reference to the Current Report, Exhibit10.1 therein, under the Securities Exchange Act of 1934, filed by the Companyon Form 8-K with the Securities and Exchange Commission on April 1, 2005, SECFile No. 09439.

(10d)* - Agreement and Plan of Merger dated as of January 22, 2004,among International Bancshares Corporation, LFC Acquisitions Corp. and LocalFinancial Corporation incorporated herein as an exhibit by reference to theCurrent Report, under the Securities Exchange Act of 1934, filed by Registranton Form 8-K with the Securities and Exchange Commission on January 22, 2004,SEC File No. 09439.

(13)**  —International BancsharesCorporation 2006 Annual Report

(21)   —List of Subsidiaries ofInternational Bancshares Corporation as of February x, 2007

(23)   —Consent of IndependentRegistered Public Accounting Firm

(31a)   —Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(31b)  —Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32a)++  —Certification of ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

(32b)++  —Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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* Previously filed

+ ExecutiveCompensation Plans and Arrangements

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

++ This exhibitshall not be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to liability of that section, andshall not be deemed to be incorporated by reference into any filing under theSecurities Act of 1933 or the Securities Exchange Act of 1934.

29

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto 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 1, 2007       |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the Registrant and in the capacities and on the date indicated.
| Signatures |                           | Title  |   | Date                              |   |          |
|------------|--------------------------------|--------|--------|-----------------------------------|--------|---------------|
|       |                           |   |   |                              |   |          |   |   |
|       |  /s/ Dennis E.  Nixon     |   |   | President and  Director           |   | March 1, 2007 |   |   |
|       |  Dennis E.  Nixon         |   |   | (Principal  Executive Officer)    |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       |  /s/ Imelda  Navarro      |   |   | Treasurer                         |   | March 1, 2007 |   |   |
|       |  Imelda  Navarro          |   |   | (Principal  Financial Officer and |   |          |   |   |
|       |                           |   |   | Principal  Accounting Officer)    |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       |  /s/ Lester  Avigael      |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Lester  Avigael          |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       |  /s/ Irving  Greenblum    |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Irving  Greenblum        |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ R. David Guerra            |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  R. David  Guerra         |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ Daniel B. Hastings, Jr.    |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Daniel B.  Hastings, Jr. |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ Richard E. Haynes          |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Richard E.  Haynes       |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ Sioma Neiman               |   |   | Director                          |   | March 1, 2007 |   |   |
|       | Sioma Neiman                   |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       |  /s/ Peggy J.  Newman     |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Peggy J.  Newman         |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ Leonardo Salinas           |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Leonardo  Salinas        |   |   |                              |   |          |   |   |
|       |                           |   |   |                              |   |          |   |   |
|       | /s/ Antonio R. Sanchez, Jr.    |   |   | Director                          |   | March 1, 2007 |   |   |
|       |  Antonio R.  Sanchez, Jr. |   |   |                              |   |          |   |   |

 

30

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**Exhibit Index**
| Exhibit 13 -    |   | International Bancshares Corporation 2006 Annual  Report, Exhibit 13, page 1                        |
|-----------------|--------|-----------------------------------------------------------------------------------------------------|
|            |   |                                                                                                |
| Exhibit 21 -    |   | List of Subsidiaries of International Bancshares  Corporation as of February 22, 2007               |
|            |   |                                                                                                |
| Exhibit 23 -    |   | Consent of Independent Registered Public Accounting  Firm                                           |
|            |   |                                                                                                |
| Exhibit 31(a) - |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |   |                                                                                                |
| Exhibit 31(b) - |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|            |   |                                                                                                |
| Exhibit 32(a) - |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section                             |
|            |   | 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                         |
|            |   |                                                                                                |
| Exhibit 32(b) - |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section                             |
|            |   | 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                         |

 

31

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