Exhibit 13

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES  (Consolidated)

The following consolidated selected financial data is derived from the Corporation's audited financial statements as of and for the five years ended
December 31, 2007. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and related notes in this report.

SELECTED FINANCIAL DATA

|                       |                                                             | AS OF OR FOR THE YEARS ENDED DECEMBER 31,
|---------------------- | ----------------------------------------------------------- | -----------------------------------------
|
|
|STATEMENT OF CONDITION |                                                             |                                          
|                       | Assets                                                      |                                          
|                       | Net loans                                                   |                                          
|                       | Deposits                                                    |                                          
|                       | Other borrowed funds                                        |                                          
|                       | Junior subordinated deferrable interest debentures (Note 1) |                                          
|                       | Shareholders' equity                                        |                                          
|INCOME STATEMENT       |                                                             |                                          
|                       | Interest income                                             |                                          
|                       | Interest expense                                            |                                          
|                       |                                                             |                                          
|                       | Net interest income                                         |                                          
|                       | (Credit) provision for possible loan losses                 |                                          
|                       | Non-interest income                                         |                                          
|                       | Non-interest expense                                        |                                          
|                       |                                                             |                                          
|                       | Income before income taxes                                  |                                          
|                       | Minority interest in consolidated subsidiary                |                                          
|                       | Income taxes                                                |                                          
|                       |                                                             |                                          
|                       | Net income                                                  |                                          
|                       |                                                             |                                          
|                       | Per common share (Note 1):                                  |                                          
|                       |                                                             | Basic                                    
|                       |                                                             | Diluted                                  

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Note 1:
Per share information has been re-stated giving retroactive effect to stock dividends distributed.

1

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International
Bancshares Corporation and subsidiaries (the "Company" or the "Corporation") on a consolidated basis for the three-year period ended December 31, 2007. The following discussion
should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2007, and the Selected Financial Data and Consolidated Financial
Statements included elsewhere herein.

Special Cautionary Notice Regarding Forward Looking Information

Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although the Company
believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words "estimate," "expect," "intend," "believe" and
"project," as well as other words or expressions of a similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual
results and experience may differ materially from the forward-looking statements as a result of many factors.

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



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

Overview

The Company, which is headquartered in Laredo, Texas, with more than 255 facilities and more than 400 ATMs, provides banking services for commercial, consumer and
international customers of South, Central and Southeast Texas and the State of Oklahoma. The Company is one of the largest
independent commercial bank holding companies headquartered in Texas. The Company, through its bank subsidiaries, is in the business of gathering funds from various sources and investing those funds
in order to earn a return. The Company either directly or through a bank subsidiary owns two insurance agencies, a broker/dealer and a majority interest in an investment banking unit that owns a
broker/dealer. The Company's primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, the
Company generates income from fees on products offered to commercial, consumer and international customers.

A
primary goal of the Company is to grow net interest income and non-interest income while adequately managing credit risk, interest rate risk and expenses. Effective
management of capital is a critical objective of the Company. A key measure of the performance of a banking institution is the return on average common equity ("ROE"). The Company's ROE for the year
ended December 31, 2007 was 13.73% as compared to 14.02% for the year ended December 31, 2006.

The
Company is very active in facilitating trade along the United States border with Mexico. The Company does a large amount of business with customers domiciled in Mexico. Deposits from
persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of the Company's bank subsidiaries. The Company also serves the growing Hispanic population through the
Company's facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

Expense
control is an essential element in the Company's long-term profitability. As a result, one of the key ratios the Company monitors is the efficiency ratio, which is a
measure of non-interest expense to net-interest income plus non-interest income. The Company monitors this ratio over time to assess the Company's efficiency
relative to its peers and whether the Company is being productive with its long term goals of providing superior returns to the Company's shareholders. The efficiency ratio during 2007 was negatively
affected by an impairment charge of $13.1 million, after tax, arising from a charge on certain investment securities. This impairment charge negatively affected the efficiency ratio but does
not necessarily reflect a long-term negative trend. The efficiency ratio during 2006 was also negatively affected by the $8.9 million, net of tax, expense recognized in connection
with the tax litigation. Additionally, the

3

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Company's
efficiency ratio has been negatively impacted over the last few years because of the Company's aggressive branch expansion which has added 70 branches in 2006 and 2007. During rapid
expansion periods, the Company's efficiency ratio will suffer but the long term benefits of the expansion should be realized in future periods and benefits should positively impact the efficiency
ratio in future periods. The Company believes that the de novo branching will help in attracting new low cost deposits and loans and also help with the retention of current customers as more out of
market banks expand their branching activities in Texas; however, the Company realizes that there is a certain amount of time before each branch becomes profitable and thus negatively impacts earnings
in the short term. The Company has continued to foster the growth of loans to improve net interest income; however, this process of expanding quality loan balances takes a certain amount of time and
also increases the provision for loan losses in periods of expansion. The Company believes the de novo branch expansion is important to the future long term expansion of the Company.

Results of Operations

Summary

Consolidated Statements of Condition Information

December 31, 2007

December 31, 2006

Percent Increase
(Decrease)(Dollars in Thousands)Assets

$
11,167,161

$
10,911,454

2.3
%Net loans


5,474,902


4,970,273

10.2Deposits


7,157,606


6,989,918

2.4Other borrowed funds


1,456,936


2,095,576

(30.5
)Junior subordinated deferrable interest debentures


200,929


210,908

(4.7
)Shareholders' equity


935,905


842,056

11.1


Consolidated Statements of Income Information

|                                            |         | Year Ended
December 31,
2007 |         | Year Ended
December 31,
2006 |   | Percent
Increase
(Decrease)
2007 vs. 2006 |      | Year ended
December 31,
2005 |     | Percent
Increase
(Decrease)
2006 vs. 2005 |        
|------------------------------------------- | ------- | ---------------------------- | ------- | ---------------------------- | - | ----------------------------------------- | ---- | ---------------------------- | --- | ----------------------------------------- | -------
|
|Interest income                             |         | $                            | 643,573 |                              | $ | 609,073                                   |      | 5.7                          | %   | $                                         | 508,705
|Interest expense                            |         |                              | 333,340 |                              |   | 319,588                                   |      | 4.3                          |     |                                           | 206,830
|Net interest income                         |         |                              | 310,233 |                              |   | 289,485                                   |      | 7.2                          |     |                                           | 301,875
|(Credit) provision for possible loan losses |         |                              | (1,762  | )                            |   | 3,849                                     |      | (145.8                       | )   |                                           | 960    
|Non-interest income                         |         |                              | 165,363 |                              |   | 176,971                                   |      | (6.6                         | )   |                                           | 167,222
|Non-interest expense                        |         |                              | 300,282 |                              |   | 288,677                                   |      | 4.0                          |     |                                           | 255,988
|Net income                                  |         |                              | 121,312 |                              |   | 117,001                                   |      | 3.7                          |     |                                           | 140,779
|Per common share:                           |         |                              |         |                              |   |                                           |      |                              |     |                                           |        
|                                            | Basic   |                              | $       | 1.76                         |   | $                                         | 1.68 |                              | 4.8 | %                                         | $      
|                                            | Diluted |                              |         | 1.75                         |   |                                           | 1.67 |                              | 4.8 |                                           |        

Net Income

Net income for the year ended December 31, 2007 increased by 3.7% compared to the same period in 2006. Net income for the year ended December 31,
2007 was positively affected by the credit for possible

4

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loan
losses recorded in 2007. Net income for the year ended December 31, 2007 was negatively impacted by an impairment charge of $13.1 million, after tax, on certain investments. A
significant portion of the impairment charge was the result of the Company's strategic identification of certain investment securities that were sold in the second quarter of 2007 with the proceeds
from the sales used to reduce Federal Home Loan Bank ("FHLB") borrowings. Net income for the same period was positively affected by the sale of the securities, which generated gains of
$1.5 million, after tax. The investments sold were certain hybrid mortgage-backed securities with a coupon re-set date that exceeded 30 months and a weighted average yield to
coupon re-set that was approximately 100 basis points less than the FHLB certificate of indebtedness short-term rate. The sale of the securities facilitated a
re-positioning of the balance sheet to a more neutral position in terms of interest rate risk and also improved operating ratios.

Net
income decreased for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due in part, to a $8.9 million, net of tax, charge to
operations as a result of the loss of a tax lawsuit with the Internal Revenue Service that was litigated during the third quarter of 2005 in the Federal District Court in San Antonio, Texas and that
relates to certain leasing transactions previously discussed in Note 17 of the Notes to Consolidated Financial Statements. Because of the trial court judgment issued on March 31, 2006,
and the loss of the case at the appellate level, and the similarity between the litigated lawsuit and the other tax case that is pending, the Company took the $8.9 million charge, net of tax.
Additionally, net income for the year ended December 31, 2007 and 2006 was negatively impacted due to an inverted yield curve and increasing competition for deposits and loans. Additionally,
the year ended December 31, 2006 was affected by the Company's strategic decisions to reduce certain loan and deposit categories acquired from Local Financial Corporation ("LFIN"). As a result
of the inverted yield curve, the Company's interest revenue coming from its securities portfolio has been negatively affected. Because the Company faces the challenges of an inverted or flat yield
curve, the Company has placed greater emphasis on growing its loan portfolio and potentially improving the volume of interest income derived from loans. However, the greater emphasis on increasing
loan balances comes with more risk and takes time to produce quality loans and does not guarantee the Company will achieve its goal.

Net Interest Income

Net interest income is the spread between income on interest-earning assets, such as loans and securities, and the interest expense on liabilities used to fund
those assets, such as deposits, repurchase agreements and funds borrowed. Net interest income is the Company's largest source of revenue. Net

5

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

For the years ended December 31,2007
Average
Rate/Cost

2006
Average
Rate/Cost

2005
Average
Rate/CostAssetsInterest earning assets:Loan, net of unearned discounts:Domestic

8.58
%
8.42
%
7.12
%Foreign

7.43

7.16

5.44Investment securities:Taxable

4.69

4.58

3.98Tax-exempt

4.89

4.88

4.84Federal funds sold

4.96

4.79

2.77Other

5.81

6.82

6.12Total interest-earning assets

6.82
%
6.51
%
5.59
%LiabilitiesInterest bearing liabilities:Savings and interest bearing demand deposits

2.31
%
1.91
%
1.23
%Time deposits:Domestic

4.32

3.81

2.29Foreign

4.28

3.77

2.42Securities sold under repurchase agreements

4.46

4.50

3.65Other borrowings

5.15

5.07

3.21Junior subordinated deferrable interest debentures

8.06

9.72

7.88Total interest bearing liabilities

4.01
%
3.84
%
2.53
%


For
the three years ended December 31, 2007, as short term interest rates increased and stabilized, the Company accordingly increased interest rates on loans and deposits. The
level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net income and net interest margin. The yield on average interest-earning assets increased 4.8%
from 6.51% in 2006 to 6.82% in 2007, and the rates paid on average interest-bearing liabilities increased 4.4% from 3.84% in 2006 to 4.01% in 2007. The yield on average interest-earning assets
increased 16.5% from 5.59% in 2005 to
6.51% in 2006, and the rates paid on average interest-bearing liabilities increased 51.8% from 2.53% in 2005 to 3.84% in 2006. The majority of the Company's taxable investment securities are invested
in mortgage backed securities and during rapid increases or reduction in interest rates, the yield on these securities do not re-price as quickly as the loans.

The
Company has strategically reduced loans acquired in the LFIN acquisition. LFIN had a national real estate group that loaned funds throughout the United States and after extensive
review by the Company, the Company concluded the national real estate group goals were not consistent with the Company's loan origination goals that emphasize risk, pricing and the desire to lend
primarily in the markets that the Company occupies. This strategic reduction negatively impacted the interest recognized on loans. The decrease in interest income arising from this strategic reduction
was offset by continued growth in the Company's Texas branches. The Company has continued to grow deposits through its internal sales program. The Company strategically reduced certain deposit
categories of LFIN such as brokered deposits and certain public fund deposits. The Company decided not to continue the recruitment of brokered deposits and certain public funds because of the high
expense associated with those types of

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funding
sources and the lack of relationships those deposits carry. The strategic reduction in loans and deposits acquired from LFIN has negatively impacted net interest income.

The
following table analyzes the changes in net interest income during 2007 and 2006 and the relative effect of changes in interest rates and volumes for each major classification of
interest-earning assets and interest-bearing liabilities. Non-accrual loans have been included in assets for the purpose of this analysis, which reduces the resulting yields:

|                      |                                                    | 2007 compared to 2006 |        | 2006 compared to 2005 |        
|--------------------- | -------------------------------------------------- | --------------------- | ------ | --------------------- | -------
|
|
|
|Interest earned on:   |                                                    |                       |        |                       |        
|                      | Loans, net of unearned discounts:                  |                       |        |                       |        
|                      |                                                    | Domestic              |        | $                     | 34,772 
|                      |                                                    | Foreign               |        |                       | 55     
|                      | Investment securities:                             |                       |        |                       |        
|                      |                                                    | Taxable               |        |                       | (14,817
|                      |                                                    | Tax-exempt            |        |                       | (320   
|                      | Federal funds sold                                 |                       |        | (977                  | )      
|                      | Other                                              |                       |        | 2,482                 |        
|                      |                                                    |                       |        |                       |        
|                      | Total interest income                              |                       | $      | 21,195                |        
|                      |                                                    |                       |        |                       |        
|Interest incurred on: |                                                    |                       |        |                       |        
|                      | Savings and interest bearing demand deposits       |                       | $      | 3,921                 |        
|                      | Time deposits:                                     |                       |        |                       |        
|                      |                                                    | Domestic              |        |                       | (605   
|                      |                                                    | Foreign               |        |                       | 3,605  
|                      | Securities sold under repurchase agreements        |                       |        | 14,067                |        
|                      | Other borrowings                                   |                       |        | (29,285               | )      
|                      | Junior subordinated deferrable interest debentures |                       |        | (1,860                | )      
|                      | Other                                              |                       |        | 210                   |        
|                      |                                                    |                       |        |                       |        
|                      | Total interest expense                             |                       | $      | (9,947                | )      
|                      |                                                    |                       |        |                       |        
|Net interest income   |                                                    | $                     | 31,142 |                       | $      
|                      |                                                    |                       |        |                       |        

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(Note 1)
The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

As
part of the strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest
rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a
given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest
rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities.
Conversely, net interest income should contract somewhat in a period of falling interest rates. Management can quickly change the Company's interest rate position at any given point in time as market
conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same

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time.
Analytical techniques employed by the Company to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed
by the Investment Committee of the Company twice a year. The Investment Committee is comprised of certain senior managers of the various Company bank subsidiaries along with consultants. Management
currently believes that the Company is properly positioned for interest rate changes; however, if management determines at any time that the Company is not properly positioned, it will strive to
adjust the interest rate sensitive assets and liabilities in order to manage the effect of interest rate changes.

At
December 31, 2007, based on these simulations, a rate shift of 200 basis points in interest rates up or a rate shift of 200 basis points down will not vary net interest income
by more than 3.6% of projected
2008 net interest income. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market
developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

Allowance for Possible Loan Loss

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

|                                                                                               |  | December 31,
|---------------------------------------------------------------------------------------------- |  | ------------
|
|
|Loans accounted for on a non-accrual basis                                                     |  | $           
|Accruing loans contractually past due ninety days or more as to interest or principal payments |  |             
|Loans accounted for as "troubled debt restructuring"                                           |  |             

The
allowance for possible loan losses decreased 4.4% to $61,726,000 at December 31, 2007 from $64,537,000 at December 31, 2006. The (credit) provision for possible loan
losses charged to expense decreased $5,611,000 to $(1,762,000) for the year ended December 31, 2007 from $3,849,000 for the same period in 2006. The decrease in the allowance for possible loan
losses can be attributed to the charge off of loans acquired as part of the LFIN acquisition. Additionally, the reduction in the provision for possible loan losses can be attributed to the strength of
the loan portfolio during 2007; however, this does not necessarily indicate that the provision will trend downward. The allowance for possible loan losses was 1.1% of total loans, net of unearned
income at December 31, 2007 and 1.3% at December 31, 2006.

The
following table presents information concerning the aggregate amount of non-accrual and past due foreign loans extended to persons or entities in foreign countries.
Certain loans may be classified in one or more category:

|                                                                                               |  | December 31,
|---------------------------------------------------------------------------------------------- |  | ------------
|
|
|Loans accounted for on a non-accrual basis                                                     |  | $           
|Accruing loans contractually past due ninety days or more as to interest or principal payments |  |             

The
increase in non-accrual loans from 2003 to 2004 can be attributed to certain non-accrual loans acquired as a result of the LFIN acquisition. The gross income
that would have been recorded during 2007 and 2006 on non-accrual and restructured loans
in accordance with their original contract terms was $922,000 and $1,074,000 on domestic loans and $1,023,000 and $798,000 on foreign loans, respectively. The amount of interest income on such loans
that was recognized in 2007 and 2006 was $1,716,000 and $289,000 on domestic loans and $310,000 and $18,000 for foreign loans, respectively.

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The
non-accrual loan policy of the bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it is probable that future interest
accruals will be uncollectible. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the creditor's financial
condition warrants reestablishment of interest accruals. Under special circumstances, a loan may be more than 90 days delinquent as to interest or principal and not be placed on
non-accrual status. This situation generally results when a bank subsidiary has a borrower who is experiencing financial difficulties, but not to the extent that requires a restructuring
of indebtedness. The majority of this category is composed of loans that are considered to be adequately secured and/or for which there has been a recent history of payments. When a loan is placed on
non-accrual status, any interest accrued, not paid is reversed and charged to operations against interest income.

Loan
commitments, consisting of unused commitments to lend, letters of credit, credit card lines and other approved loans, that have not been funded, were $2,066,859,000 and
$2,043,213,000 at December 31, 2007 and 2006, respectively. See Note 19 to the Consolidated Financial Statements.

The
following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for possible loan losses arising from loans
charged-off and

9

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recoveries
on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:

|                                                                                                     |           | 2007                                   |           | 2006 |        | 2005      |   | 2004   |           | 2003 |       
|---------------------------------------------------------------------------------------------------- | --------- | -------------------------------------- | --------- | ---- | ------ | --------- | - | ------ | --------- | ---- | ------
|
|Loans, net of unearned discounts, outstanding at December 31                                         |           | $                                      | 5,536,628 |      | $      | 5,034,810 |   | $      | 4,625,692 |      | $     
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Average loans outstanding during the year (Note 1)                                                   |           | $                                      | 5,215,435 |      | $      | 4,796,489 |   | $      | 4,830,881 |      | $     
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Balance of allowance at January 1                                                                    |           | $                                      | 64,537    |      | $      | 77,796    |   | $      | 81,351    |      | $     
|(Credit) provision charged to expense                                                                |           |                                        | (1,762    | )    |        | 3,849     |   |        | 960       |      |       
|Loans charged off:                                                                                   |           |                                        |           |      |        |           |   |        |           |      |       
|                                                                                                     | Domestic: |                                        |           |      |        |           |   |        |           |      |       
|                                                                                                     |           | Commercial, financial and agricultural |           |      | (3,606 | )         |   | (7,302 | )         |      | (2,703
|                                                                                                     |           | Real estatemortgage                   |           |      | (800   | )         |   | (554   | )         |      | (806  
|                                                                                                     |           | Real estateconstruction               |           |      | (202   | )         |   | (99    | )         |      | (41   
|                                                                                                     |           | Consumer                               |           |      | (1,741 | )         |   | (2,056 | )         |      | (2,948
|                                                                                                     |           | Foreign                                |           |      | (102   | )         |   | (8,377 | )         |      | (73   
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Total loans charged off:                                                                             |           |                                        | (6,451    | )    |        | (18,388   | ) |        | (6,571    | )    |       
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Recoveries credited to allowance:                                                                    |           |                                        |           |      |        |           |   |        |           |      |       
|                                                                                                     | Domestic: |                                        |           |      |        |           |   |        |           |      |       
|                                                                                                     |           | Commercial, financial and agricultural |           |      | 810    |           |   | 625    |           |      | 1,436 
|                                                                                                     |           | Real estatemortgage                   |           |      | 58     |           |   | 130    |           |      | 69    
|                                                                                                     |           | Real estateconstruction               |           |      | 89     |           |   | 53     |           |      | 24    
|                                                                                                     |           | Consumer                               |           |      | 306    |           |   | 448    |           |      | 511   
|                                                                                                     |           | Foreign                                |           |      | 3,085  |           |   | 24     |           |      | 16    
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Total recoveries                                                                                     |           |                                        | 4,348     |      |        | 1,280     |   |        | 2,056     |      |       
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Net loans charged off                                                                                |           |                                        | (2,103    | )    |        | (17,108   | ) |        | (4,515    | )    |       
|Allowance acquired in purchase
    transactions                                                      |           |                                        | 1,054     |      |        |          |   |        |          |      |       
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Balance of allowance at December 31                                                                  |           | $                                      | 61,726    |      | $      | 64,537    |   | $      | 77,796    |      | $     
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1) |           |                                        | ..04      | %    |        | ..36      | % |        | ..09      | %    |       
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       
|Ratio of allowance to loans, net of unearned discounts, outstanding at December 31                   |           |                                        | 1.11      | %    |        | 1.28      | % |        | 1.68      | %    |       
|                                                                                                     |           |                                        |           |      |        |           |   |        |           |      |       

---

(Note 1)
The average balances for purposes of the above table are calculated on the basis of daily balances for 2006 and 2007 and month-end balances for the years ended 2005, 2004,
and 2003.

10

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The
loan balances increased despite the decline of loans as a result of the Company's strategy to reduce the exposure to certain loan categories that LFIN employed prior to the
acquisition by the Company. LFIN had a national real estate group that loaned funds throughout the United States and after extensive review by the Company, the Company concluded the national real
estate group goals were not consistent with the Company's loan origination goals that emphasize risk, pricing and the desire to lend primarily in the markets that the Company occupies.

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

|                                       |  | At December 31, |       
|-------------------------------------- |  | --------------- | ------
|
|
|
|Commercial, Financial and Agricultural |  | $               | 28,117
|Real estateMortgage                   |  |                 | 9,256 
|Real estateConstruction               |  |                 | 21,277
|Consumer                               |  |                 | 2,212 
|Foreign                                |  |                 | 864   
|                                       |  |                 |       
|                                       |  | $               | 61,726
|                                       |  |                 |       

The allowance for possible loan losses consists of the aggregate loan loss allowances of the bank subsidiaries. The allowances are established
through charges to operations in the form of provisions for possible loan losses. Loan losses or recoveries are charged or credited directly to the allowances.

The
bank subsidiaries charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a "loss" by bank
examiners. Commercial, financial and agricultural or real estate loans are generally considered by management to represent a loss, in whole or part, (i) when an exposure beyond any collateral
coverage is apparent, (ii) when no further collection of the portion of the loan so exposed is anticipated based on actual results, (iii) when the credit enhancements, if any, are not
adequate, and (iv) when the borrower's financial condition would indicate so. Generally, unsecured consumer loans are charged off when 90 days past due.

While
management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers
carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged off as a loss is an
exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's management that
the allowance for possible loan losses at December 31, 2007 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 26.

11

---



Non-Interest Income

|                                            |                           | Year Ended
December 31,
2007 |         | Year Ended
December 31,
2006 |   | Percent
Increase
(Decrease)
2007 vs. 2006 |         | Year Ended
December 31,
2005 |       | Percent
Increase
(Decrease)
2006 vs. 2005 |       
|------------------------------------------- | ------------------------- | ---------------------------- | ------- | ---------------------------- | - | ----------------------------------------- | ------- | ---------------------------- | ----- | ----------------------------------------- | ------
|
|Service charges on deposit accounts         |                           | $                            | 89,186  |                              | $ | 84,770                                    |         | 5.2                          | %     | $                                         | 83,917
|Other service charges, commissions and fees |                           |                              |         |                              |   |                                           |         |                              |       |                                           |       
|                                            | Banking                   |                              |         | 34,897                       |   |                                           | 29,523  |                              | 18.2  |                                           |       
|                                            | Non-banking               |                              |         | 18,675                       |   |                                           | 21,605  |                              | (13.6 | )                                         |       
|Investment securities transactions, net     |                           |                              | (15,938 | )                            |   | (930                                      | )       | 1,613.8                      |       |                                           | (181  
|Other investments, net                      |                           |                              | 19,821  |                              |   | 20,035                                    |         | (1.1                         | )     |                                           | 20,629
|Other income                                |                           |                              | 18,722  |                              |   | 21,968                                    |         | (14.8                        | )     |                                           | 25,397
|                                            |                           |                              |         |                              |   |                                           |         |                              |       |                                           |       
|                                            | Total non-interest income |                              | $       | 165,363                      |   | $                                         | 176,971 |                              | (6.6  | )%                                        | $     
|                                            |                           |                              |         |                              |   |                                           |         |                              |       |                                           |       

The
decrease in 2007 in investment securities transactions can be attributed to a $17.0 million impairment charge recorded in connection with certain investment securities
identified for sale in the first quarter 2007, offset by gains of $2.3 million in the second quarter 2007, when the securities were sold. Additionally, a loss of $1.0 million was
recorded on sales of securities in the third quarter of 2007. The impairment charge in the first quarter is a result of the Company's strategic identification of certain investment securities sold in
the second quarter 2007 with the proceeds from the sales used to reduce FHLB borrowings. The investments sold were certain hybrid mortgage-backed securities with a coupon re-set date that
exceeded 30 months and a weighted average yield to coupon re-set that was approximately 100 basis points less than the FHLB certificate of indebtedness short-term rate.
The sale of the securities facilitated a repositioning of the balance sheet to a more neutral position in terms of interest rate risk and improved the Company's operating ratios. As a result of this
decision, the Company marked the securities to market. Non-interest income increased in 2006 as compared to 2005 primarily because of income recognized by the Company's investment services
unit.

Non-Interest Expense

|                                             |                            | Year Ended
December 31,
2007 |         | Year Ended
December 31,
2006 |   | Percent
Increase
(Decrease)
2007 vs. 2006 |         | Year Ended
December 31,
2005 |     | Percent
Increase
(Decrease)
2006 vs. 2005 |        
|-------------------------------------------- | -------------------------- | ---------------------------- | ------- | ---------------------------- | - | ----------------------------------------- | ------- | ---------------------------- | --- | ----------------------------------------- | -------
|
|Employee compensation and benefits           |                            | $                            | 130,385 |                              | $ | 124,359                                   |         | 4.8                          | %   | $                                         | 113,620
|Occupancy                                    |                            |                              | 33,583  |                              |   | 27,886                                    |         | 20.4                         |     |                                           | 25,053 
|Depreciation of bank premises and equipment  |                            |                              | 32,069  |                              |   | 28,251                                    |         | 13.5                         |     |                                           | 25,538 
|Professional fees                            |                            |                              | 10,613  |                              |   | 11,050                                    |         | (4.0                         | )   |                                           | 12,497 
|Stationery and supplies                      |                            |                              | 6,414   |                              |   | 6,490                                     |         | (1.2                         | )   |                                           | 5,809  
|Amortization of identified intangible assets |                            |                              | 5,188   |                              |   | 4,866                                     |         | 6.6                          |     |                                           | 5,176  
|Advertising                                  |                            |                              | 11,973  |                              |   | 12,052                                    |         | (0.7                         | )   |                                           | 10,596 
|Other                                        |                            |                              | 70,057  |                              |   | 73,723                                    |         | (5.0                         | )   |                                           | 57,699 
|                                             |                            |                              |         |                              |   |                                           |         |                              |     |                                           |        
|                                             | Total non-interest expense |                              | $       | 300,282                      |   | $                                         | 288,677 |                              | 4.0 | %                                         | $      
|                                             |                            |                              |         |                              |   |                                           |         |                              |     |                                           |        

12

---



The
increase in non-interest expense for the three years ended December 31, 2007 can be attributed primarily to the expanded operations of the Company's bank
subsidiaries, which added 102 branches over three years, the amount expensed in connection with the tax lawsuits and increased employee compensation and benefits paid by the Company's investment
banking unit, the GulfStar Group. Expense control is an essential element in the Company's profitability. This is achieved through maintaining optimum staffing levels, an effective budgeting process,
and internal consolidation of bank functions. The increase in other expense in 2006 compared to 2005 can be attributed to the $13,640,000 in connection with the tax lawsuits (see Note 17 to the
consolidated financial statements) expensed in the first quarter 2006. The increase in employee compensation and benefits in 2006 compared to 2005 can be attributed to increased fees paid by the
Company's investment banking unit, the GulfStar Group and the growth experienced with the de novo branch activity.

Effects of Inflation

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

Financial Condition

Investment Securities

The following table sets forth the carrying value of investment securities as of December 31, 2007, 2006 and 2005:

December 31,2007

2006

2005(Dollars in Thousands)U.S. Treasury and Government SecuritiesAvailable for sale

$
1,308

$
1,268

$
1,283Mortgage-backed securitiesAvailable for sale


4,066,829


4,376,284


4,148,859Obligations of states and political subdivisionsAvailable for sale


84,633


95,897


99,557Equity securitiesAvailable for sale


13,500


14,629


14,654Other securitiesHeld to maturity


2,300


2,375


2,375Available for sale


1,618





Total

$
4,170,188

$
4,490,453

$
4,266,728


The
following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2007 and the average yields of such securities, except
for the totals, which reflect the

13

---



weighted
average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

|                                                              |       | Available for Sale
Maturing |      
|------------------------------------------------------------- | ----- | --------------------------- | -----
|
|
|
|
|U.S. Treasury and obligations of U.S.
    Government agencies |       | $                           | 1,308
|Mortgage-backed securities                                    |       |                             | 1,028
|Obligations of states and political
    subdivisions          |       |                             | 434  
|Equity securities                                             |       |                             | 325  
|Other securities                                              |       |                             | 985  
|                                                              |       |                             |      
|                                                              | Total |                             | $    
|                                                              |       |                             |      

|
|

|                 |  | Held to Maturity
Maturing
|---------------- |  | -------------------------
|
|
|
|
|Other securities |  | $                        
|                 |  |                          
|Total            |  | $                        
|                 |  |                          

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

Loans

The amounts of loans outstanding, by classification, at December 31, 2007, 2006, 2005, 2004 and 2003 are shown in the following table:

|                                           |                                 | December 31, |          
|------------------------------------------ | ------------------------------- | ------------ | ---------
|
|
|Commercial, financial and
    agricultural |                                 | $            | 2,426,064
|Real estatemortgage                       |                                 |              | 798,708  
|Real estateconstruction                   |                                 |              | 1,835,950
|Consumer                                   |                                 |              | 190,899  
|Foreign                                    |                                 |              | 285,008  
|                                           |                                 |              |          
|                                           | Total loans                     |              |          
|Unearned discount                          |                                 |              | (1       
|                                           |                                 |              |          
|                                           | Loans, net of unearned discount |              | $        
|                                           |                                 |              |          

14

---



The
following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2007, which based on remaining scheduled
repayments of principal are due in the years indicated. Also, the amounts due after one year are classified according to the sensitivity to changes in interest rates:

MaturingWithin
one year

After one
but within
five years

After
five years

Total(Dollars in Thousands)Commercial, financial and
    agricultural

$
770,152

$
1,391,065

$
264,847

$
2,426,064Real estateconstruction


1,096,699


699,809


39,442


1,835,950Foreign


186,316


90,596


8,096


285,008Total

$
2,053,167

$
2,181,470

$
312,385

$
4,547,022


|
|

Interest sensitivityFixed Rate

Variable Rate(Dollars in Thousands)Due after one but within five years

$
207,056

$
1,974,414Due after five years


78,663


233,722Total

$
285,719

$
2,208,136


Total
loan balances as of December 31, 2007 as compared to December 31, 2006 have increased because of the Company's desire to grow loans organically. This increase
occurred despite the Company's strategy to reduce the exposure to certain loan categories that LFIN employed prior to the acquisition by the Company. LFIN had a national real estate group that loaned
funds throughout the United States and after extensive review by the Company, the Company concluded the national real estate group goals were not consistent with the Company's loan origination goals
that emphasize risk, pricing and the desire to lend primarily in the markets that the Company occupies.

International Operations

On December 31, 2007, the Company had $285,008,000 (2.6% of total assets) in loans outstanding to borrowers domiciled in Mexico. The loan policies of the
Company's bank subsidiaries generally require that loans to borrowers domiciled in Mexico be primarily secured by assets located in the United States or have credit enhancements, in the form of
guarantees, from significant United States corporations. The

15

---



composition
of such loans and the related amounts of allocated allowance for possible loan losses as of December 31, 2007 is presented below.

Amount
of Loans

Related
Allowance for
Possible Losses(Dollars in Thousands)Secured by certificates of deposit in United States banks

$
175,604

$
88Secured by United States real estate


35,082


247Secured by other United States collateral (securities, gold, silver, etc.)


14,954


109Foreign real estate guaranteed under lease obligations primarily by U.S. companies


428


3Direct unsecured Mexican sovereign debt (principally former FICORCA debt)


1,783


12Other (principally Mexico real estate)


57,157


405$
285,008

$
864


The
transactions for the year ended December 31, 2007, in that portion of the allowance for possible loan losses related to foreign debt were as follows:

(Dollars in Thousands)Balance at December 31, 2006

$
7,612Charge-offs


(102
)Recoveries


3,082Net recoveries


2,983Credit to expense


(9,728
)Balance at December 31, 2007

$
864


The
increase of the credit expense exposure can be substantially attributed to a certain loan acquired as part of the LFIN acquisition. The Company charged off the loan and then
recovered a certain amount subsequent to the charge-off.

16

---



Deposits

2007

2006Average Balance

Average Balance(Dollars in Thousands)Deposits:Demandnon-interest bearingDomestic

$
1,291,513

$
1,240,419Foreign


126,238


124,192Total demand non-interest bearing


1,417,751


1,364,611Savings and interest bearing demandDomestic


1,964,411


1,810,759Foreign


363,667


311,543Total savings and interest bearing demand


2,328,078


2,122,302Time certificates of deposit$100,000 or more:Domestic


827,830


823,145Foreign


1,228,124


1,147,864Less than $100,000:Domestic


877,041


897,597Foreign


395,667


380,094Total time, certificates of deposit


3,328,662


3,248,700Total deposits

$
7,074,491

$
6,735,613


|
|

2007

2006

2005(Dollars in Thousands)Interest expense:Savings and interest bearing demandDomestic

$
46,878

$
36,606

$
24,583Foreign


6,900


3,838


2,353Total savings and interest bearing demand


53,778


40,444


26,936Time, certificates of deposit$100,000 or moreDomestic


37,133


32,851


18,705Foreign


54,494


44,143


26,710Less than $100,000Domestic


36,460


33,225


20,399Foreign


14,933


12,858


7,420Total time, certificates of deposit


143,020


123,077


73,234Total interest expense on deposits

$
196,798

$
163,521

$
100,170


17

---



Scheduled
maturities of time deposits in amounts of $100,000 or more at December 31, 2007, were as follows:

Due within 3 months or less

$
837,647Due after 3 months and within 6 months


541,752Due after 6 months and within 12 months


537,417Due after 12 months


187,135$
2,103,951


The
Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company relies primarily on its high quality customer service, sales programs,
customer referrals and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company's lending and investment activities, and the interest paid for
deposits must be managed carefully to control the level of interest expense. Deposits at December 31, 2007 were $7,157,606,000, an increase of 2.4% from $6,989,918,000 at December 31,
2006. The increase in deposits from 2006 to 2007 is primarily the result of the Company's internal sales programs to organically grow deposits.

Return on Equity and Assets

Certain key ratios for the Company for the years ended December 31, 2007, 2006 and 2005 follows (Note 1):

Years ended December 31,2007

2006

2005Percentage of net income to:Average shareholders' equity

13.73
%
14.02
%
17.97
%Average total assets

1.12

1.10

1.37Percentage of average shareholders' equity to average total assets

8.19

7.82

7.62Percentage of cash dividends per share to net income per share

38.45

37.64

32.58


---

(Note 1)
The average balances for purposes of the above table are calculated on the basis of daily balances for 2007 and 2006 and month-end balances for 2005.

Liquidity and Capital Resources

Liquidity

The maintenance of adequate liquidity provides the Company's bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer
credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets
and by holding appropriate amounts of liquid assets. The Company's bank subsidiaries derive their liquidity largely from deposits of individuals and business entities. Deposits from persons and
entities domiciled in Mexico comprise a stable portion of the deposit base of the Company's bank subsidiaries. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a
stable source of funding. Such deposits comprised approximately 30%, 30% and 28% of the Company's bank subsidiaries' total deposits as of December 31, 2007, 2006 and 2005, respectively. Other
important funding sources for the Company's bank subsidiaries have been borrowings from the Federal Home Loan Bank ("FHLB"), securities sold under repurchase agreements and large certificates of
deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. Primary liquidity of the Company and its subsidiaries has been

18

---



maintained
by means of increased investment in shorter-term securities, certificates of deposit and repurchase agreements. As in the past, the Company will continue to monitor the
volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipated fluctuations in interest rates over
reasonable periods of time.

Asset/Liability Management

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

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

The
gap report thus consists of an inventory of dollar amounts of assets and liabilities that have the potential to mature or re-price within a particular period. The flaw in
drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or re-pricings of
interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions
increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk exposure.

The
net interest rate sensitivity at December 31, 2007, is illustrated in the following table. This information reflects the balances of assets and liabilities whose rates are
subject to change. As indicated in the table on the following page, the Company is liability-sensitive during the early time periods and is asset-sensitive in the longer periods. The table shows the
sensitivity of the statement of condition at one point in time and is not necessarily indicative of the position at future dates.

19

---





INTEREST RATE SENSITIVITY(Dollars in Thousands)

|                                                               |  | Rate/Maturity
|-------------------------------------------------------------- |  | -------------
|
|
|Rate sensitive assets                                          |  |              
|Federal funds sold                                             |  | $            
|Time deposits with banks                                       |  |              
|Investment securities                                          |  |              
|Loans, net of non-accruals                                     |  |              
|                                                               |  |              
|Total earning assets                                           |  | $            
|                                                               |  |              
|Cumulative earning assets                                      |  | $            
|                                                               |  |              
|Rate sensitive liabilities                                     |  |              
|Time deposits                                                  |  | $            
|Other interest bearing deposits                                |  |              
|Securities sold under repurchase agreements                    |  |              
|Other borrowed funds                                           |  |              
|Junior subordinated deferrable interest debentures             |  |              
|                                                               |  |              
|Total interest bearing liabilities                             |  | $            
|                                                               |  |              
|Cumulative sensitive liabilities                               |  | $            
|                                                               |  |              
|Repricing gap                                                  |  | $            
|Cumulative repricing gap                                       |  |              
|Ratio of interest-sensitive assets to liabilities              |  |              
|Ratio of cumulative, interest- sensitive assets to liabilities |  |              

The
detailed inventory of statement of condition items contained in gap reports is the starting point of income simulation analysis. Income simulation analysis also focuses on the
variability of net interest income and net income, but without the limitations of gap analysis. In particular, the fundamental, but often unstated, assumption of the gap approach that every statement
of condition item that can re-price will do so to the full extent of any movement in market interest rates is taken into consideration in income simulation analysis.

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

20

---



At
December 31, 2007, based on these simulations, a rate shift of 200 basis points in interest rates up or a rate shift of 200 basis points down will not vary net interest income
by more than 3.6% of projected 2008 net interest income. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's
current view of future market developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

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

Principal
sources of liquidity and funding for the Company are dividends from subsidiaries and borrowed funds, with such funds being used to finance the Company's cash flow requirements.
The Company closely monitors the dividend restrictions and availability from the bank subsidiaries as disclosed in Note 20 to the Consolidated Financial Statements. At December 31, 2007,
the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $135,000,000, assuming that each bank subsidiary continues to be
classified as "well capitalized" under the applicable regulations. The restricted capital (capital and surplus) of the bank subsidiaries was approximately $952,119,000 as of December 31, 2007.
The undivided profits of the bank subsidiaries were approximately $545,145,000 as of December 31, 2007.

At
December 31, 2007, the Company has outstanding $1,456,936,000 in other borrowed funds and $200,929,000 in junior subordinated deferrable interest debentures. In addition to
borrowed funds and dividends, the Company has a number of other available alternatives to finance the growth of its existing banks as well as future growth and expansion.

Capital

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At December 31, 2007, shareholders' equity
was $935,905,000 compared to $842,056,000 at December 31, 2006, an increase of $93,849,000, or 11.1%. Shareholders' equity increased due to the retention of earnings offset by the payment of
cash dividends to shareholders. The accumulated other comprehensive income is not included in the calculation of regulatory capital ratios.

During
1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly rated bank holding companies and at least 4% to 5% for all other bank holding
companies. The Company's leverage ratio (defined as shareholders' equity plus eligible trust preferred securities issued and outstanding less goodwill and certain other intangibles divided by average
quarterly assets) was 7.76% at December 31, 2007 and 7.36% at December 31, 2006. The core deposit intangibles and goodwill of $314,705,000 as of December 31, 2007, recorded in
connection with financial institution acquisitions of the Company after February 1992, are deducted from the sum of core capital elements when determining the capital ratios of the Company.

The
FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum
capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have Tier 1 capital of at least 4.0% of risk-weighted assets and
total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity plus trust preferred securities issued and outstanding less goodwill and
certain other intangibles, while total capital consists of Tier 1 capital, certain debt instruments and a portion of the reserve for loan losses. In order to be deemed well capitalized pursuant
to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1

21

---



leverage
ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 11.98% and 12.49% and risk weighted total capital ratios of 12.99% and 13.61% as of December 31,
2007 and 2006, respectively, which are well above the minimum regulatory requirements and exceed the well capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements).

During
the past few years the Company has expanded its banking facilities. Among the activities and commitments the Company funded during 2007 and 2006 were certain capital expenditures
relating to the modernization and improvement of several existing bank facilities and the expansion of the bank branch network.

Junior Subordinated Deferrable Interest Debentures

The Company has formed twelve statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. As part of
the Local Financial Corporation ("LFIN") acquisition, the Company acquired three additional statutory business trusts previously formed by LFIN for the purpose of issuing trust preferred securities.
The twelve statutory business trusts formed by the Company and the three business trusts acquired in the LFIN transaction (the "Trusts") have each issued Capital and Common Securities and invested the
proceeds thereof in an equivalent amount of junior subordinated debentures (the "Debentures") issued by the Company or LFIN, as appropriate. As of December 31, 2007, the Debentures issued by
four of the trusts formed by the Company and the Debentures issued by all three of the trusts formed by LFIN have been redeemed by the Company. As of December 31, 2007, the principal amount of
debentures outstanding totaled $200,929,000.

The
Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passuwith one another.
The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment
terms of the respective issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the
Capital and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for
up to ten consecutive semi-annual periods on Trust I and for up to twenty consecutive quarterly periods on Trusts VI, VII, VIII, IX, X, XI and XII. If interest payments on any of the
Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require
the prior approval of the Federal Reserve and/or other regulatory bodies.

For
financial reporting purposes, the Trusts are treated as investments of the Company and not consolidated in the consolidated financial statements. Although the Capital Securities
issued by each of the Trusts are not included as a component of shareholders' equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes.
Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate
basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. For December 31, 2007, the total $200,929,000, of the Capital Securities outstanding qualified as
Tier 1 capital.

In
March 2005, the Federal Reserve Board issued a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter
quantitative limits. Under the final rule, after a transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements would be
limited to 25% of Tier 1 capital elements, net of goodwill, less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the
limit could be included in Tier 2 capital, subject to restrictions. Bank holding companies with significant international operations will be expected to limit trust preferred securities to 15%
of Tier 1 capital elements, net of goodwill; however, they may include qualifying mandatory convertible preferred

22

---



securities
up to the 25% limit. The Company believes that substantially all of the current trust preferred securities will be included in Tier 1 capital after the five-year
transition period ending March 31, 2009.

On
November 7, 2007, the Company, as successor issuer, redeemed all of its Floating Rate Junior Subordinated Debt Securities ("the Debt Securities") issued to Local Financial
Capital Trust III ("LFIN Trust III") at a redemption price equal to approximately $10,547,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the
redemption were used to simultaneously redeem an equal amount of LFIN Trust III Floating Rate Capital Securities and Floating Rate Common Securities issued by LFIN Trust III.

On
July 30, 2007, the Company, as successor issuer, redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to Local Financial
Capital Trust II ("LFIN Trust II") at a redemption price equal to approximately $10,764,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the
redemption of the Debt Securities were used to simultaneously redeem an equal amount of LFIN Trust II Floating Rate Capital Securities and Floating Rate Common Securities issued by LFIN Trust II.

On
July 7, 2007, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust V
("Trust V") at a redemption price equal to approximately $21,088,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust V Floating Rate Capital Securities and Floating Rate Common Securities issued by Trust V.

On
June 11, 2007, the Company formed International Bancshares Corporation Trust XII ("Trust XII"), for the purpose of issuing trust preferred securities. On June 26, 2007,
Trust XII issued $20,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.851% and subsequently at a floating rate of 1.45% over the
three month LIBOR, and interest is payable quarterly beginning September 1, 2007. The Trust XII Capital Securities will mature on September 1, 2037; however, the Capital Securities may
be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after September 1, 2012, or (b) in whole or in part within 90 days
upon the occurrence of certain legal, regulatory, or tax events.

On
April 22, 2007, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust IV
("Trust IV") at a redemption price equal to approximately $22,681,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust IV Floating Rate Capital Securities and Floating Rate Common Securities issued by Trust IV.

On
April 13, 2007, the Company formed International Bancshares Corporation Trust XI ("Trust XI"), for the purpose of issuing trust preferred securities. On April 19, 2007,
Trust XI issued $32,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.82% and subsequently at a floating rate of 1.62% over the three
month LIBOR, and interest is payable quarterly beginning July 1, 2007. The Trust XI Capital Securities will mature on July 1, 2037, however, the Capital Securities may be redeemed at
specified prepayment prices (a) in whole or in part on any interest payment date on or after July 1, 2012, or (b) in whole or in part within 90 days upon the occurrence of
certain legal, regulatory, or tax events.

On
December 8, 2006, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities") issued to International Bancshares Capital Trust III
("Trust III") at a redemption price equal to approximately $34,538,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem

23

---



an
equal amount of Trust III floating rate Capital Securities and the Trust III floating rate Common Securities issued by Trust III.

On
November 8, 2006, the Company formed International Bancshares Corporation Capital Trust X ("Trust X"), for the purpose of issuing trust preferred securities. On
November 15, 2006, Trust X issued $33,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.66% and subsequently at a floating rate
of 1.65% over the three month LIBOR, and interest is payable quarterly beginning February 1, 2007. The Trust X Capital Securities will mature on February 1, 2037; however, the Capital
Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after February 1, 2012, or (b) in whole or in part within
90 days upon the occurrence of certain legal, regulatory, or tax events.

On
September 30, 2006, the Company, as successor issuer, redeemed all of its Fixed Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to Local Financial
Capital Trust I ("LFIN Trust I") at a redemption price equal to approximately $41,155,625, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption
were used to simultaneously redeem an equal amount of LFIN Trust I Fixed Rate Capital Securities and the LFIN Trust I Fixed Rate Common Securities issued by LFIN Trust I.

On
July 25, 2006, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust II
("Trust II") at a redemption price equal to approximately $27,998,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust II Floating Capital Securities and the Trust II Floating Rate Common Securities issued by Trust II.

On
June 9, 2006, the Company formed International Bancshares Corporation Capital Trust IX ("Trust IX"), for the purpose of issuing trust preferred securities. On July 27,
2006, Trust IX issued $40,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 7.10%, and subsequently at a floating rate of 1.62% over the
London Interbank Offered Rate ("LIBOR"), and interest is payable quarterly beginning October 1, 2006. The Trust IX Capital Securities will mature on October 1, 2036; however, the Capital
Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after October 1, 2011, or (b) in whole or in part within
90 days upon the occurrence of certain legal, regulatory, or tax events.

24

---





The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2007:

|           |  | Junior
Subordinated
Deferrable
Interest
Debentures |         | Repricing
Frequency |           | Interest Rate |       | Interest Rate
Index(1) |              | Maturity Date |                | Optional
Redemption Date
|---------- |  | -------------------------------------------------- | ------- | ------------------- | --------- | ------------- | ----- | ---------------------- | ------------ | ------------- | -------------- | ------------------------
|
|Trust I    |  | $                                                  | 10,286  |                     | Fixed     |               | 10.18 | %                      | Fixed        |               | June 2031      |                         
|Trust VI   |  | $                                                  | 25,774  |                     | Quarterly |               | 8.32  | %                      | LIBOR + 3.45 |               | November 2032  |                         
|Trust VII  |  | $                                                  | 10,310  |                     | Quarterly |               | 8.16  | %                      | LIBOR + 3.25 |               | April 2033     |                         
|Trust VIII |  | $                                                  | 25,691  |                     | Quarterly |               | 8.29  | %                      | LIBOR + 3.05 |               | October 2033   |                         
|Trust IX   |  | $                                                  | 41,238  |                     | Fixed     |               | 7.10  | %                      | Fixed        |               | October 2036   |                         
|Trust X    |  | $                                                  | 34,021  |                     | Fixed     |               | 6.66  | %                      | Fixed        |               | February 2037  |                         
|Trust XI   |  | $                                                  | 32,990  |                     | Fixed     |               | 6.82  | %                      | Fixed        |               | July 2037      |                         
|Trust XII  |  | $                                                  | 20,619  |                     | Fixed     |               | 6.85  | %                      | Fixed        |               | September 2037 |                         
|           |  |                                                    |         |                     |           |               |       |                        |              |               |                |                         
|           |  | $                                                  | 200,929 |                     |           |               |       |                        |              |               |                |                         
|           |  |                                                    |         |                     |           |               |       |                        |              |               |                |                         

---

Contractual Obligations and Commercial Commitments

The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of December 31, 2007:

|                                                   |  | Payments due by Period
|-------------------------------------------------- |  | ----------------------
|
|
|Securities sold under repurchase agreements        |  | $                     
|Federal Home Loan Bank borrowings                  |  | $                     
|Junior subordinated deferrable interest debentures |  | $                     
|Operating leases                                   |  | $                     
|                                                   |  |                       
|Total Contractual Cash Obligations                 |  | $                     
|                                                   |  |                       

The
following table presents contractual commercial commitments of the Company (other than deposit liabilities) as of December 31, 2007:

|                                                    |                              | Amount of Commitment Expiration Per Period
|--------------------------------------------------- | ---------------------------- | ------------------------------------------
|
|
|Financial and Performance Standby Letters of Credit |                              | $                                         
|Commercial Letters of Credit                        |                              | $                                         
|Credit Card Lines                                   |                              | $                                         
|Other Commercial Commitments                        |                              | $                                         
|                                                    |                              |                                           
|                                                    | Total Commercial Commitments |                                           
|                                                    |                              |                                           

25

---



Due
to the nature of the Company's commercial commitments, including unfunded loan commitments and lines of credit, the amounts presented above do not necessarily reflect the amounts the
Company anticipates funding in the periods presented above.

Critical Accounting Policies

The Company has established various accounting policies which govern the application of accounting principles in the preparation of the Company's consolidated
financial statements. The significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments and
assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

The
Company considers its Allowance for Possible Loan Losses as a policy critical to the sound operations of the bank subsidiaries. The allowance for possible loan losses consists of the
aggregate loan loss allowances of the bank subsidiaries. The allowances are established through charges to operations in the form of provisions for possible loan losses. Loan losses or recoveries are
charged or credited directly to the allowances. The allowance for possible loan losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated
probable losses in the loan portfolio. The allowance is derived from the following elements: (i) allowances established on specific loans (ii) allowances based on quantitative historical
loss experience on the Company's loan portfolio and (iii) allowances based on qualitative data, which includes general economic conditions and other risk factors both internal and external to
the Company. See also discussion regarding the allowance for possible loan losses and provision for possible loan losses included in the results of operations and "Provision and Allowance for Possible
Loan Losses" included in Notes 1 and 5 of the Notes to Consolidated Financial Statements.

The
specific loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are reviewed by the servicing loan officer to determine if a loan has
any potential problem and if a loan should be placed on the Company's internal classified report. Additionally, the Company's credit department reviews the majority of the loans regardless of whether
they are past due and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any
relevant issues that were not discovered in the evaluation. Also, any analysis on loans that is provided through examinations by regulatory authorities is considered in the review process. After the
above analysis is completed, the Company will determine if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents,
collateral and/or payment history.

The
Company's internal classified report is segregated into the following categories: (i) "Special Review Credits," (ii) "Watch ListPass Credits," or
(iii) "Watch ListSubstandard Credits." The loans placed in the "Special Review Credits" category reflect the Company's opinion that the loans reflect potential weakness which
require monitoring on a more frequent basis. The "Special Review Credits" are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in
category is warranted. The loans placed in the "Watch ListPass Credits" category reflect the Company's opinion that the credit contains weaknesses which represent a greater degree of
risk, which warrant "extra attention." The "Watch ListPass Credits" are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change
in category is warranted. The loans placed in the "Watch ListSubstandard Credits" classification are considered to be potentially inadequately protected by the current sound worth and
debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse
financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that some future loss could be sustained
by the bank if such weaknesses are not corrected; provided however,

26

---



management
may evaluate these credits under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," criteria and, if deemed necessary, a
specific reserve is allocated to the credit, but management does not necessarily believe there is a loss present in this classified credit category. The specific reserve allocated under SFAS
No. 114, is based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or
(3) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company's loans evaluated under SFAS No. 114 are measured using the fair value of
collateral method. In limited cases, the Company may use other methods to determine the specific reserve of a loan under SFAS No. 114 if such loan is not collateral dependent.

The
allowance, based on historical loss experience on the Company's remaining loan portfolio, which includes the "Special Review Credits," "Watch ListPass Credits," and
"Watch ListSubstandard Credits" is determined by segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international loans, loan
concentrations and overdrafts. Installment loans are then further segregated by number of days past due. A historical loss percentage, adjusted for (i) management's evaluation of changes in
lending policies and procedures, (ii) current economic conditions in the market area served by the Company, (iii) other risk factors,
(iv) the effectiveness of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each
category. Each category is then added together to determine the allowance allocated under Statement of Financial Accounting Standards No. 5.

The
Company's management continually reviews the allowance for loan loss of the bank subsidiaries using the amounts determined from the allowances established on specific loans,
allowance established on quantitative historical percentages, allowance based on qualitative data, and the loans charged off and recoveries to establish an appropriate amount to maintain in the
Company's allowance for loan loss. If the basis of the Company's assumptions change, the allowance for loan loss would either decrease or increase and the Company would increase or decrease the
provision for loan loss charged to operations accordingly.

Recent Accounting Standards Issued

See Note 1Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for details of
recently issued and recently adopted accounting standards and their impact on the Company's consolidated financial statements.

Common Stock and Dividends

The Company had issued and outstanding 68,588,465 shares of $1.00 par value Common Stock held by approximately 2,597 holders of record at February 22,
2008. The book value of the stock at December 31, 2007 was $14.54 per share compared with $13.10 per share at December 31, 2006.

The
Common Stock is traded on the NASDAQ National Market under the symbol "IBOC." The following table sets forth the approximate high and low bid prices in the Company's Common Stock
during 2006 and 2007, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2007. Some of the quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing sales price of the Company's Common Stock was $21.44 per
share at February 22, 2008.

High

Low2007:

First quarter

$
29.05

$
25.85Second quarter


27.69


23.03Third quarter


26.18


19.45Fourth quarter


23.65


19.64


27

---



|
|

High

Low2006:

First quarter

$
26.99

$
25.90Second quarter


27.38


24.98Third quarter


27.48


25.02Fourth quarter


28.97


26.54


The
Company paid cash dividends to the shareholders in 2007 of $.35 ($.32 adjusted for the effect of the May 21, 2007 stock dividend) and $.35 per share on May 1, 2007 and
November 1, 2007, respectively to all holders of record on April 16, 2007 and October 15, 2007, respectively, or $44,765,000 in the aggregate during 2007. In 2006, the Company
paid cash dividends of $.32 and $.32 (adjusted for the effect of the May 21, 2007 stock dividend) on May 1, and November 1, 2006, respectively, or $44,166,000 in the aggregate
during 2006. The Company has no set schedule for paying cash or stock dividends and the amount paid in previous periods is not necessarily indicative of amounts that may be paid or available to be
paid in future periods. In addition, the Company has issued stock dividends during the last five-year period as follows:

Date

Stock DividendMay 19, 2003

25
%May 3, 2004

25
%May 2, 2005

25
%May 2006

0
%May 21, 2007

10
%


The
Company's principal source of funds to pay cash dividends on its Common Stock is cash dividends from its bank subsidiaries. There are certain statutory limitations on the payment of
dividends from the
subsidiary banks. For a discussion of the limitations, please see Note 20 of Notes to Consolidated Financial Statements.

Stock Repurchase Program

The Company expanded its formal stock repurchase program on May 3, 2007. Under the expanded stock repurchase program, the Company is authorized to
repurchase up to $225,000,000 of its common stock through December 2008. Stock repurchases may be made from time to time, on the open market or through private transactions. Shares repurchased in this
program will be held in treasury for reissue for various corporate purposes, including employee stock option plans. As of February 22, 2008, a total of 6,157,557 shares had been repurchased
under this program at a cost of $212,065,000. Stock repurchases are reviewed quarterly at the Company's Board of Directors meetings and the Board of Directors has stated that the aggregate investment
in treasury stock should not exceed $245,973,000. In the past, the Board of Directors has increased previous caps on treasury stock once they were met, but there are no assurances that an increase of
the $245,973,000 cap will occur in the future. As of February 22, 2008, the Company has approximately $233,038,000 invested in treasury shares, which amount has been accumulated since the
inception of the Company.

28

---



Share
repurchases are only conducted under publicly announced repurchase programs approved by the Board of Directors. The following table includes information about share repurchases for
the quarter ended December 31, 2007.

|                               |  | Total Number of
Shares Purchased |  | Average
Price Paid
Per Share |       | Total Number of
Shares Purchased
as Part of a
Publicly-Announced
Program |        | Approximate Dollar Value of Shares Available
for Repurchase(2)
|------------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | ------------------------------------------------------------------------ | ------ | --------------------------------------------------------------
|October 1  October 31, 2007   |  | 3                                |  |                              | 22.10 |                                                                          | 3      |                                                               
|November 1  November 30, 2007 |  | 58,694                           |  |                              | 20.79 |                                                                          | 58,694 |                                                               
|December 1  December 31, 2007 |  | 4,564                            |  |                              | 21.14 |                                                                          | 3,269  |                                                               
|                               |  |                                  |  |                              |       |                                                                          |        |                                                               
|                               |  | 63,261                           |  | $                            | 20.82 |                                                                          | 61,966 |                                                               
|                               |  |                                  |  |                              |       |                                                                          |        |                                                               

---

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2007, with respect to the Company's equity compensation plans:

|Plan Category                                              |       | (A)
Number of securities to be issued upon exercise of outstanding options, warrants and rights |         | (B)
Weighted average exercise price of outstanding options, warrants and rights |       | (C)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
|---------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------
|Equity Compensation plans approved by security holders     |       | 924,483                                                                                         |         | $                                                                               | 21.00 |                                                                                                                                              
|Equity Compensation plans not approved by security holders |       |                                                                                                |         | $                                                                               |      |                                                                                                                                              
|                                                           |       |                                                                                                 |         |                                                                                 |       |                                                                                                                                              
|                                                           | Total |                                                                                                 | 924,483 |                                                                                 | $     | 21.00                                                                                                                                        
|                                                           |       |                                                                                                 |         |                                                                                 |       |                                                                                                                                              

29

---



Stock Performance

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

GRAPHIC

Total Return to Shareholders  (includes reinvestment of dividends)

|                              |  |     |  | INDEXED RETURNS
December 31,
|----------------------------- |  | --- |  | ----------------------------
|
|
|INTERNATIONAL BANCSHARES CORP |  | 100 |  | 152.87                      
|S&P 500 INDEX                 |  | 100 |  | 128.68                      
|S&P 500 BANKS                 |  | 100 |  | 126.66                      

30

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders
International Bancshares Corporation:

We
have audited the accompanying consolidated statement of condition of International Bancshares Corporation and subsidiaries (the Company) as of December 31, 2006, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of
December 31, 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.

As
discussed in note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
to account for stock-based compensation.

/s/
KPMG, LLP

San
Antonio, Texas
February 28, 2007

31

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders
International Bancshares Corporation:

We
have audited the accompanying consolidated statement of condition of International Bancshares Corporation and subsidiaries (the "Company") as of December 31, 2007, and the
related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and
subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

We
also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), International Bancshares Corporation's internal control over
financial reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2008 expressed an unqualified opinion
on the effectiveness of International Bancshares Corporation and subsidiaries' internal control over financial reporting.

/s/
McGladrey & Pullen, LLP

Dallas,
Texas
February 28, 2008

32

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2007 and 2006

(Dollars in Thousands, Except Per Share Amounts)

|                                  |                                                                                                            | 2007                            |           | 2006      |           
|--------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------- | --------- | --------- | ----------
|Assets                            |                                                                                                           
|Cash and due from banks           |                                                                                                            | $                               | 329,052   |           | $         
|Federal funds sold                |                                                                                                            |                                 | 17,000    |           |           
|                                  |                                                                                                            |                                 |           |           |           
|                                  |                                                                                                            | Total cash and cash equivalents |           |           | 346,052   
|Time deposits with banks          |                                                                                                            |                                 | 4,852     |           |           
|Investment securities:            |                                                                                                            |                                 |           |           |           
|                                  | Held to maturity (Market value of $2,300 on December 31, 2007 and $2,375 on December 31, 2006)             |                                 |           | 2,300     |           
|                                  | Available for sale (Amortized cost of $4,167,624 on December 31, 2007 and $4,548,236 on December 31, 2006) |                                 |           | 4,167,888 |           
|                                  |                                                                                                            |                                 |           |           |           
|                                  |                                                                                                            | Total investment securities     |           |           | 4,170,188 
|Loans, net of unearned discounts  |                                                                                                            |                                 | 5,536,628 |           |           
|                                  | Less allowance for possible loan losses                                                                    |                                 |           | (61,726   | )         
|                                  |                                                                                                            |                                 |           |           |           
|                                  |                                                                                                            | Net loans                       |           |           | 5,474,902 
|Bank premises and equipment, net  |                                                                                                            |                                 | 435,654   |           |           
|Accrued interest receivable       |                                                                                                            |                                 | 54,301    |           |           
|Other investments                 |                                                                                                            |                                 | 323,885   |           |           
|Identified intangible assets, net |                                                                                                            |                                 | 31,507    |           |           
|Goodwill, net                     |                                                                                                            |                                 | 283,198   |           |           
|Other assets                      |                                                                                                            |                                 | 42,622    |           |           
|                                  |                                                                                                            |                                 |           |           |           
|                                  |                                                                                                            | Total assets                    |           | $         | 11,167,161
|                                  |                                                                                                            |                                 |           |           |           

See
accompanying notes to consolidated financial statements.

33

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued

December 31, 2007 and 2006

(Dollars in Thousands, Except Per Share Amounts)

|                                                                    |                                                                                                                                                           | 2007                                       |           | 2006      |           
|------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | ----------
|Liabilities and Shareholders' Equity                                |                                                                                                                                                          
|Liabilities:                                                        |                                                                                                                                                           |                                            |           |           |           
|Deposits:                                                           |                                                                                                                                                           |                                            |           |           |           
|                                                                    | Demandnon-interest bearing                                                                                                                               |                                            | $         | 1,512,627 |           
|                                                                    | Savings and interest bearing demand                                                                                                                       |                                            |           | 2,292,589 |           
|                                                                    | Time                                                                                                                                                      |                                            |           | 3,352,390 |           
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|                                                                    |                                                                                                                                                           | Total deposits                             |           |           | 7,157,606 
|Securities sold under repurchase agreements                         |                                                                                                                                                           |                                            | 1,328,983 |           |           
|Other borrowed funds                                                |                                                                                                                                                           |                                            | 1,456,936 |           |           
|Junior subordinated deferrable interest debentures                  |                                                                                                                                                           |                                            | 200,929   |           |           
|Other liabilities                                                   |                                                                                                                                                           |                                            | 86,802    |           |           
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|                                                                    |                                                                                                                                                           | Total liabilities                          |           |           | 10,231,256
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|Commitments, Contingent Liabilities and Other Tax Matters (Note 17) |                                                                                                                                                           |                                            |           |           |           
|Shareholders' equity:                                               |                                                                                                                                                           |                                            |           |           |           
|                                                                    | Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,440,983 shares on December 31, 2007 and 86,224,046 shares on December 31, 2006 |                                            |           | 95,441    |           
|                                                                    | Surplus                                                                                                                                                   |                                            |           | 144,140   |           
|                                                                    | Retained earnings                                                                                                                                         |                                            |           | 929,145   |           
|                                                                    | Accumulated other comprehensive income (loss)                                                                                                             |                                            |           | 165       |           
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|                                                                    |                                                                                                                                                           |                                            | 1,168,891 |           |           
|                                                                    | Less cost of shares in treasury, 26,848,880 shares on December 31, 2007 and 23,312,331 shares on December 31, 2006                                        |                                            |           | (232,986  | )         
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|                                                                    |                                                                                                                                                           | Total shareholders' equity                 |           |           | 935,905   
|                                                                    |                                                                                                                                                           |                                            |           |           |           
|                                                                    |                                                                                                                                                           | Total liabilities and shareholders' equity |           | $         | 11,167,161
|                                                                    |                                                                                                                                                           |                                            |           |           |           

See
accompanying notes to consolidated financial statements.

34

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2007, 2006 and 2005

(Dollars in Thousands, Except Per Share Amounts)

|                                            |                                                    | 2007                                                                  |        | 2006    |         | 2005  |        
|------------------------------------------- | -------------------------------------------------- | --------------------------------------------------------------------- | ------ | ------- | ------- | ----- | -------
|Interest income:                            |                                                    |                                                                       |        |         |         |       |        
|                                            | Loans, including fees                              |                                                                       | $      | 443,564 |         | $     | 400,020
|                                            | Federal funds sold                                 |                                                                       |        | 2,712   |         |       | 3,596  
|                                            | Investment securities:                             |                                                                       |        |         |         |       |        
|                                            |                                                    | Taxable                                                               |        |         | 190,371 |       |        
|                                            |                                                    | Tax-exempt                                                            |        |         | 4,270   |       |        
|                                            | Other interest income                              |                                                                       |        | 2,656   |         |       | 406    
|                                            |                                                    |                                                                       |        |         |         |       |        
|                                            |                                                    | Total interest income                                                 |        |         | 643,573 |       |        
|                                            |                                                    |                                                                       |        |         |         |       |        
|Interest expense:                           |                                                    |                                                                       |        |         |         |       |        
|                                            | Savings and interest bearing demand deposits       |                                                                       |        | 53,778  |         |       | 40,444 
|                                            | Time deposits                                      |                                                                       |        | 143,020 |         |       | 123,077
|                                            | Securities sold under repurchase agreements        |                                                                       |        | 43,837  |         |       | 30,137 
|                                            | Other borrowings                                   |                                                                       |        | 75,317  |         |       | 103,362
|                                            | Junior subordinated deferrable interest debentures |                                                                       |        | 17,178  |         |       | 22,568 
|                                            | Other interest expense                             |                                                                       |        | 210     |         |       |       
|                                            |                                                    |                                                                       |        |         |         |       |        
|                                            |                                                    | Total interest expense                                                |        |         | 333,340 |       |        
|                                            |                                                    |                                                                       |        |         |         |       |        
|                                            |                                                    | Net interest income                                                   |        |         | 310,233 |       |        
|(Credit) provision for possible loan losses |                                                    |                                                                       | (1,762 | )       |         | 3,849 |        
|                                            |                                                    |                                                                       |        |         |         |       |        
|                                            |                                                    | Net interest income after (credit) provision for possible loan losses |        |         | 311,995 |       |        
|                                            |                                                    |                                                                       |        |         |         |       |        
|Non-interest income:                        |                                                    |                                                                       |        |         |         |       |        
|                                            | Service charges on deposit accounts                |                                                                       |        | 89,186  |         |       | 84,770 
|                                            | Other service charges, commissions and fees        |                                                                       |        |         |         |       |        
|                                            |                                                    | Banking                                                               |        |         | 34,897  |       |        
|                                            |                                                    | Non-banking                                                           |        |         | 18,675  |       |        
|                                            | Investment securities transactions, net            |                                                                       |        | (15,938 | )       |       | (930   
|                                            | Other investments, net                             |                                                                       |        | 19,821  |         |       | 20,035 
|                                            | Other income                                       |                                                                       |        | 18,722  |         |       | 21,968 
|                                            |                                                    |                                                                       |        |         |         |       |        
|                                            |                                                    | Total non-interest income                                             |        |         | 165,363 |       |        
|                                            |                                                    |                                                                       |        |         |         |       |        

See
accompanying notes to consolidated financial statements.

35

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued

Years ended December 31, 2007, 2006 and 2005

(Dollars in Thousands, Except Per Share Amounts)

|                                               |                                               | 2007                       |        | 2006       |         | 2005  
|---------------------------------------------- | --------------------------------------------- | -------------------------- | ------ | ---------- | ------- | ------
|Non-interest expense:                          |                                               |                            |        |            |         |       
|                                               | Employee compensation and benefits            |                            | $      | 130,385    |         | $     
|                                               | Occupancy                                     |                            |        | 33,583     |         |       
|                                               | Depreciation of bank premises and equipment   |                            |        | 32,069     |         |       
|                                               | Professional fees                             |                            |        | 10,613     |         |       
|                                               | Stationery and supplies                       |                            |        | 6,414      |         |       
|                                               | Amortization of identified intangible assets  |                            |        | 5,188      |         |       
|                                               | Advertising                                   |                            |        | 11,973     |         |       
|                                               | Other                                         |                            |        | 70,057     |         |       
|                                               |                                               |                            |        |            |         |       
|                                               |                                               | Total non-interest expense |        |            | 300,282 |       
|                                               |                                               |                            |        |            |         |       
|                                               |                                               | Income before income taxes |        |            | 177,076 |       
|Minority interest in consolidated subsidiaries |                                               |                            |       |            |         | 40    
|Provision for income taxes                     |                                               |                            | 55,764 |            |         | 56,889
|                                               |                                               |                            |        |            |         |       
|                                               |                                               | Net income                 |        | $          | 121,312 |       
|                                               |                                               |                            |        |            |         |       
|Basic earnings per common share:               |                                               |                            |        |            |         |       
|                                               | Weighted average number of shares outstanding |                            |        | 69,036,274 |         |       
|                                               | Net income                                    |                            | $      | 1.76       |         | $     
|                                               |                                               |                            |        |            |         |       
|Fully diluted earnings per common share:       |                                               |                            |        |            |         |       
|                                               | Weighted average number of shares outstanding |                            |        | 69,370,111 |         |       
|                                               | Net income                                    |                            | $      | 1.75       |         | $     
|                                               |                                               |                            |        |            |         |       

See
accompanying notes to consolidated financial statements.

36

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Comprehensive Income        Years ended December 31, 2007, 2006, and 2005        (Dollars in
Thousands)

|                            |                                                                                                                                                     | 2007 |         | 2006    |   | 2005    |      
|--------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------- | ------- | - | ------- | -----
|Net income                  |                                                                                                                                                     | $    | 121,312 |         | $ | 117,001 |      
|Other comprehensive income: |                                                                                                                                                     |      |         |         |   |         |      
|                            | Net unrealized gains (losses) on securities available for sale arising during the year (tax effects of $27,416, $1,175, and $(30,617))              |      |         | 50,915  |   |         | 2,182
|                            | Reclassification adjustment for (losses) gains on securities available for sale included in net income (tax effects of $(5,578), $(326), and $(63)) |      |         | (10,360 | ) |         | (604 
|                            |                                                                                                                                                     |      |         |         |   |         |      
|Comprehensive income        |                                                                                                                                                     | $    | 161,867 |         | $ | 118,579 |      
|                            |                                                                                                                                                     |      |         |         |   |         |      

See
accompanying notes to consolidated financial statements.

37

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Shareholders' Equity        Years ended December 31, 2007, 2006 and 2005        (in Thousands)

|                             |                                                         | Number
of
Shares                                                                                               |     | Common
Stock |        | Surplus |        | Retained
Earnings |       | Accumulated
Other
Comprehensive
Income (Loss) |         | Treasury
Stock |         | Total   |  
|---------------------------- | ------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | --- | ------------ | ------ | ------- | ------ | ----------------- | ----- | --------------------------------------------- | ------- | -------------- | ------- | ------- | -
|Balance at December 31, 2004 |                                                         | 68,431                                                                                                         |     | $            | 68,431 |         | $      | 130,597           |       | $                                             | 705,642 |                | $       | 15,010  |  
|                             | Net income                                              |                                                                                                                |    |              |        |        |        |                   |      |                                               |         | 140,779        |         |         | 
|                             | Dividends:                                              |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Shares issued                                                                                                  |     | 17,172       |        |         | 17,172 |                   |       |                                              |         |                | (17,172 | )       |  
|                             |                                                         | Cash ($.72 per share)                                                                                          |     |             |        |         |       |                   |       |                                              |         |                | (40,833 | )       |  
|                             | Purchase of treasury stock (314,976 shares)             |                                                                                                                |    |              |        |        |        |                   |      |                                               |         |               |         |         | 
|                             | Exercise of stock options                               |                                                                                                                | 456 |              |        | 456     |        |                   | 4,785 |                                               |         |               |         |         | 
|                             | Tax benefit for exercise of stock options               |                                                                                                                |    |              |        |        |        |                   | 237   |                                               |         |               |         |         | 
|                             | Other comprehensive income, net of tax:                 |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Net change in unrealized gains and
losses on available for sale securities, net of reclassification adjustment |     |             |        |         |       |                   |       |                                              |         |                |        |         |  
|                             |                                                         |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|Balance at December 31, 2005 |                                                         | 86,059                                                                                                         |     |              | 86,059 |         |        | 135,619           |       |                                               | 788,416 |                |         | (41,968 | )
|                             | Net income                                              |                                                                                                                |    |              |        |        |        |                   |      |                                               |         | 117,001        |         |         | 
|                             | Dividends:                                              |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Cash ($.70 per share)                                                                                          |     |             |        |         |       |                   |       |                                              |         |                | (44,166 | )       |  
|                             | Purchase of treasury stock (981,977 shares)             |                                                                                                                |    |              |        |        |        |                   |      |                                               |         |               |         |         | 
|                             | Exercise of stock options                               |                                                                                                                | 165 |              |        | 165     |        |                   | 1,754 |                                               |         |               |         |         | 
|                             | Stock based compensation expense recognized in earnings |                                                                                                                |    |              |        |        |        |                   | 874   |                                               |         |               |         |         | 
|                             | Other comprehensive income, net of tax:                 |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |     |             |        |         |       |                   |       |                                              |         |                |        |         |  
|                             |                                                         |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|Balance at December 31, 2006 |                                                         | 86,224                                                                                                         |     |              | 86,224 |         |        | 138,247           |       |                                               | 861,251 |                |         | (40,390 | )
|                             | Net income                                              |                                                                                                                |    |              |        |        |        |                   |      |                                               |         | 121,312        |         |         | 
|                             | Dividends:                                              |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Shares issued                                                                                                  |     | 8,653        |        |         | 8,653  |                   |       |                                              |         |                | (8,653  | )       |  
|                             |                                                         | Cash ($.68 per share)                                                                                          |     |             |        |         |       |                   |       |                                              |         |                | (44,765 | )       |  
|                             | Purchase of treasury stock (1,196,688 Shares)           |                                                                                                                |    |              |        |        |        |                   |      |                                               |         |               |         |         | 
|                             | Exercise of stock options                               |                                                                                                                | 564 |              |        | 564     |        |                   | 5,122 |                                               |         |               |         |         | 
|                             | Stock based compensation expense recognized in earnings |                                                                                                                |    |              |        |        |        |                   | 771   |                                               |         |               |         |         | 
|                             | Other comprehensive income, net of tax:                 |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|                             |                                                         | Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |     |             |        |         |       |                   |       |                                              |         |                |        |         |  
|                             |                                                         |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  
|Balance at December 31, 2007 |                                                         | 95,441                                                                                                         |     | $            | 95,441 |         | $      | 144,140           |       | $                                             | 929,145 |                | $       | 165     |  
|                             |                                                         |                                                                                                                |     |              |        |         |        |                   |       |                                               |         |                |         |         |  

See accompanying notes to consolidated financial statements.

38

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Cash Flows        Years ended December 31, 2007, 2006 and 2005        (Dollars in Thousands)

|                      |                                                                                   | 2007                                                 |                                           | 2006    |            | 2005    |        
|--------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------- | ---------- | ------- | -------
|Operating activities: |                                                                                   |                                                      |                                           |         |            |         |        
|                      | Net income:                                                                       |                                                      | $                                         | 121,312 |            | $       | 117,001
|                      | Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                           |         |            |         |        
|                      |                                                                                   | (Credit) provision for possible loan losses          |                                           |         | (1,762     | )       |        
|                      |                                                                                   | Amortization of loan premiums                        |                                           |         | 191        |         |        
|                      |                                                                                   | Accretion of discounts on time deposits with banks   |                                           |         | (60        | )       |        
|                      |                                                                                   | Accretion of time deposit discounts                  |                                           |         | (19        | )       |        
|                      |                                                                                   | Decrease (increase) in loans held for sale           |                                           |         | 18,630     |         |        
|                      |                                                                                   | Depreciation of bank premises and equipment          |                                           |         | 32,069     |         |        
|                      |                                                                                   | (Gain) loss on sale of bank premises and equipment   |                                           |         | (3,434     | )       |        
|                      |                                                                                   | Depreciation and amortization of leased assets       |                                           |         | 2,167      |         |        
|                      |                                                                                   | Accretion of investment securities discounts         |                                           |         | (546       | )       |        
|                      |                                                                                   | Amortization of investment securities premiums       |                                           |         | 4,528      |         |        
|                      |                                                                                   | Investment securities transactions, net              |                                           |         | 15,938     |         |        
|                      |                                                                                   | Accretion of junior subordinated debenture discounts |                                           |         | 332        |         |        
|                      |                                                                                   | Amortization of identified intangible assets         |                                           |         | 5,188      |         |        
|                      |                                                                                   | Stock based compensation expense                     |                                           |         | 771        |         |        
|                      |                                                                                   | Earnings from affiliates and other investments       |                                           |         | (12,298    | )       |        
|                      |                                                                                   | Deferred tax (benefit) expense                       |                                           |         | (4,626     | )       |        
|                      |                                                                                   | Decrease (increase) in accrued interest receivable   |                                           |         | 3,505      |         |        
|                      |                                                                                   | (Increase) decrease in other assets                  |                                           |         | (1,976     | )       |        
|                      |                                                                                   | Net increase in other liabilities                    |                                           |         | 3,482      |         |        
|                      |                                                                                   |                                                      |                                           |         |            |         |        
|                      |                                                                                   |                                                      | Net cash provided by operating activities |         |            | 183,392 |        
|                      |                                                                                   |                                                      |                                           |         |            |         |        
|Investing activities: |                                                                                   |                                                      |                                           |         |            |         |        
|                      |                                                                                   | Proceeds from maturities of securities               |                                           |         | 25,903     |         |        
|                      |                                                                                   | Proceeds from sales of available for sale securities |                                           |         | 841,084    |         |        
|                      |                                                                                   | Purchases of available for sale securities           |                                           |         | (1,522,833 | )       |        
|                      |                                                                                   | Principal collected on mortgage backed securities    |                                           |         | 1,036,364  |         |        
|                      |                                                                                   | Proceeds from matured time deposits with banks       |                                           |         | 42,155     |         |        
|                      |                                                                                   | Net (increase) decrease in loans                     |                                           |         | (489,084   | )       |        
|                      |                                                                                   | Purchases of other investments                       |                                           |         | (56,460    | )       |        
|                      |                                                                                   | Distributions from other investments                 |                                           |         | 93,411     |         |        
|                      |                                                                                   | Purchases of bank premises and equipment             |                                           |         | (80,614    | )       |        
|                      |                                                                                   | Proceeds from sales of bank premises and equipment   |                                           |         | 7,973      |         |        
|                      |                                                                                   | Adjustment to goodwill related tax contingencies     |                                           |         | 5,885      |         |        
|                      |                                                                                   | Cash paid in purchase transaction                    |                                           |         | (23,470    | )       |        
|                      |                                                                                   | Cash acquired in purchase transaction                |                                           |         | 30,772     |         |        
|                      |                                                                                   |                                                      |                                           |         |            |         |        
|                      |                                                                                   |                                                      | Net cash used in investing activities     |         |            | (88,914 | )      
|                      |                                                                                   |                                                      |                                           |         |            |         |        

See
accompanying notes to consolidated financial statements.

39

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Cash Flows, continued        Years ended December 31, 2007, 2006 and 2005        (Dollars in
Thousands)

|                                                 |                                                                         | 2007                                                |         | 2006     |         | 2005      |         
|------------------------------------------------ | ----------------------------------------------------------------------- | --------------------------------------------------- | ------- | -------- | ------- | --------- | --------
|Financing activities:                            |                                                                         |                                                     |         |          |         |           |         
|                                                 | Net increase in non-interest bearing demand deposits                    |                                                     | $       | 29,813   |         | $         | 114,096 
|                                                 | Net increase (decrease) in savings and interest bearing demand deposits |                                                     |         | 31,517   |         |           | 48,217  
|                                                 | Net (decrease) increase in time deposits                                |                                                     |         | (11,624  | )       |           | 171,179 
|                                                 | Net increase (decrease) in securities sold under repurchase agreements  |                                                     |         | 622,648  |         |           | (54,427 
|                                                 | Other borrowed funds, net                                               |                                                     |         | (638,887 | )       |           | 225,501 
|                                                 | Principal payments of long-term debt                                    |                                                     |         | (63,920  | )       |           | (101,290
|                                                 | Proceeds from issuance of long-term debt                                |                                                     |         | 53,609   |         |           | 75,259  
|                                                 | Purchase of treasury stock                                              |                                                     |         | (29,710  | )       |           | (28,017 
|                                                 | Proceeds from stock transactions                                        |                                                     |         | 5,686    |         |           | 1,919   
|                                                 | Payments of cash dividends                                              |                                                     |         | (44,738  | )       |           | (44,166 
|                                                 | Payments of cash dividends in lieu of fractional shares                 |                                                     |         | (27      | )       |           |        
|                                                 |                                                                         |                                                     |         |          |         |           |         
|                                                 |                                                                         | Net cash (used in) provided by financing activities |         |          | (45,633 | )         |         
|                                                 |                                                                         |                                                     |         |          |         |           |         
|Increase (decrease) in cash and cash equivalents |                                                                         |                                                     | 48,845  |          |         | (160, 911 | )       
|Cash and cash equivalents at beginning of year   |                                                                         |                                                     | 297,207 |          |         | 458,118   |         
|                                                 |                                                                         |                                                     |         |          |         |           |         
|Cash and cash equivalents at end of year         |                                                                         | $                                                   | 346,052 |          | $       | 297,207   |         
|                                                 |                                                                         |                                                     |         |          |         |           |         
|Supplemental cash flow information:              |                                                                         |                                                     |         |          |         |           |         
|                                                 | Interest paid                                                           |                                                     | $       | 333,907  |         | $         | 312,018 
|                                                 | Income taxes paid                                                       |                                                     |         | 62,145   |         |           | 67,421  
|                                                 | Adjustment to goodwill arising from acquisition                         |                                                     |         | 7,960    |         |           | 7,016   

See
accompanying notes to consolidated financial statements.

40

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

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

Consolidation and Basis of Presentation

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

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

The
Company owns two insurance-related subsidiaries, IBC Life Insurance Company and IBC Insurance Agency, Inc., a wholly owned subsidiary of IBC, the bank subsidiary. Neither of
the insurance-related subsidiaries conducts underwriting activities. The IBC Life Insurance Company is in the business of reinsuring credit life and credit accident and health insurance. The business
is assumed from an unaffiliated insurer and the only business written is generated by the bank subsidiaries of the Company. The risk assumed on each of the policies is not significant to the
consolidated financial statements.

The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statement of condition and income and expenses for the periods. Actual results could differ
significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for possible
loan losses.

Per Share Data

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

41

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Investment Securities

The Company classifies debt and equity securities into one of these categories: held-to-maturity,
available-for-sale, or trading. Such classifications are reassessed for appropriate classification at each reporting date. Securities that are intended and expected to be held
until maturity are classified as "held-to-maturity" and are carried at amortized cost for financial statement reporting. Securities that are not positively expected to be held
until maturity, but are intended to be held for an indefinite period of time are classified as "available-for-sale" or "trading" and are carried at their fair value. Unrealized
holding gains and losses are included in net income for those securities classified as "trading", while unrealized holding gains and losses related to those securities classified as
"available-for-sale" are excluded from net income and reported net of tax as other comprehensive income and in shareholders' equity as accumulated other comprehensive income
until realized. The Company did not maintain any trading securities during the three year period ended December 31, 2007.

Mortgage-backed
securities held at December 31, 2007 and 2006 represent participating interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Mortgage-backed securities are either issued or guaranteed by the U.S. Government or its agencies including the Federal Home Loan Mortgage Corporation ("Freddie Mac"),
the Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae"). Investments in mortgage-backed securities issued by Ginnie Mae are fully
guaranteed by the U. S. Government. Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, but are rated AAA. Market interest
rate fluctuations can affect the prepayment speed of principal and the yield on the security.

Premiums
and discounts are amortized using the level yield or "interest method" over the terms of the securities. Declines in the fair value of held-to-maturity
and available-for sale-securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether
other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification
method.

Unearned Discounts

Consumer loans are frequently made on a discount basis. The amount of the discount is subsequently included in interest income ratably over the term of the
related loans to approximate the effective interest method.

Provision and Allowance for Possible Loan Losses

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

42

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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

Loans

Loans are reported at the principal balance outstanding, net of unearned discounts. Interest income on loans is reported on an accrual basis. Loan fees and costs
associated with originating the loans are amortized over the life of the loan using the interest method. The Company originates mortgage loans that may subsequently be sold to an unaffiliated third
party. The loans are not securitized and if sold, are sold without recourse. Loans held for sale are carried at cost and the principal amount outstanding is not significant to the consolidated
financial statements.

Non-Accrual Loans

The non-accrual loan policy of the Company's bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be un-collectible. As it relates to consumer loans, management charges off those loans when the loan is contractually 90 days past
due. Under special circumstances, a consumer or non-consumer loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. This situation
generally results when a bank subsidiary has a borrower who is experiencing financial difficulties, but not to the extent that requires a restructuring of indebtedness. The majority of this category
is composed of loans that are considered to be adequately secured and/or for which there has been a recent history of payments. When a loan is placed on non-accrual status, any interest accrued, not
paid is reversed and charged to operations against interest income. As it relates to non-consumer loans that are not 90 days past due, management will evaluate each of these loans to determine if
placing the loan on non-accrual status is warranted. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the
debtor's financial condition warrants reestablishment of interest accruals.

Other Real Estate Owned

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

43

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Bank Premises and Equipment

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

Other Investments

Other investments include equity investments in non-financial companies, bank owned life insurance, as well as equity securities with no readily
determinable fair market value. Equity investments are accounted for using the equity method of accounting. Equity securities with no readily determinable fair value are accounted for using the cost
method.

Income Taxes

Deferred income tax assets and liabilities are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws. The Company files a consolidated federal income tax return with its subsidiaries.

Recognition
of deferred tax assets is based on management's belief that the benefit related to certain temporary differences, tax operating loss carry forwards, and tax credits are more
likely than not to be realized. A valuation allowance is recorded for the amount of the deferred tax items for which it is more likely than not that the tax benefits will not be realized.

Stock Options

Through December 31, 2005, the Company accounted for stock-based employee compensation plans based on the intrinsic value method provided in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25"), and related interpretations. Because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the measurement date, which is generally the date of grant, no compensation expense was recognized on options granted. Compensation expense
for stock awards is based on the market price of the stock on the measurement date, which is generally the date of grant, and is recognized ratably over the service period of the award.

Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting Standards
No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123," requires pro forma disclosures
of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 16 in the
accompanying Notes to Consolidated Financial Statements included elsewhere in this report use the fair value method of SFAS No. 123 to measure compensation expense for stock-based employee
compensation plans. The fair value of stock options granted was estimated as the measurement date, which is generally the date of grant, using the Black-Sholes-Merton option-pricing model. This model
was developed for use in estimating the fair value of publicly traded

44

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

options
that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Sholes-Merton option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options.

In
December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R ("SFAS No. 123R"), "Share-Based Payment
(Revised 2004)." Among other things, SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the date of the grant. SFAS No. 123R was adopted by the Company on January 1, 2006.

Net Income Per Share

Basic Earnings Per Share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding. The computation of diluted EPS
assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options is considered in earnings per share
calculations, if dilutive, using the treasury stock method. Stock options for 460,861 and 360,958 shares of common stock were not considered in computing diluted earnings per common share for 2007 and
2006, respectively, because they were antidilutive.

Goodwill and Identified Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill is tested for impairment at least annually or on an interim
basis if an event triggering impairment may have occurred. As of December 31, 2007, after completing goodwill testing, the Company has determined that no goodwill impairment exists.

Identified
intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is
capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company's identified intangible assets relate to core deposits. Identified
intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. See Note 7Goodwill and Other Intangible Assets.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value
of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported
at the lower of the carrying value or fair value less costs to sell, and are no longer

45

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

depreciated.
The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the statement of condition.

Consolidated Statements of Cash Flows

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

Accounting for Transfers and Servicing of Financial Assets

The Company accounts for transfers and servicing of financial assets and extinguishments of liabilities based on the application of a financial-components
approach that focuses on control. After a transfer of financial assets, the Company recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when extinguished. The Company has retained mortgage servicing rights in connection with the sale of mortgage loans. Because the
Company may not initially identify loans as originated for resale, all loans are initially treated as held for investment. The value of the mortgage servicing rights are reviewed periodically for
impairment and are amortized in proportion to, and over the period of estimated net servicing income or net servicing losses. The value of the mortgage servicing rights is not significant to the
consolidated statements of condition.

Segments of an Enterprise and Related Information

The Company operates as one segment. The operating information used by the Company's chief executive officer for purposes of assessing performance and making
operating decisions about the Company is the consolidated financial statements presented in this report. The Company has four active operating subsidiaries, namely, the bank subsidiaries, otherwise
known as International Bank of Commerce, Laredo, Commerce Bank, International Bank of Commerce, Zapata and International Bank of Commerce, Brownsville. The Company applies the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information," in determining its reportable segments and related disclosures. None of the Company's other subsidiaries meets
the 10% threshold for disclosure under SFAS No. 131.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities
available for sale.

Advertising

Advertising costs are expensed as incurred.

Reclassifications

Certain amounts in the prior year's presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on
previously reported net income.

46

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Additionally,
subsequent to the filing of the Company's annual report on Form 10-K for the year ended December 31, 2006, the Company identified that cash flows arising from
the sales of loans held for sale
had been presented incorrectly. The cash flows from the sales of loans were included in the consolidated statements of cash flows as part of cash flows from investing activities instead of operating
activities. The change resulted in reclassifications of $3.9 million and $25.0 million for the years ended December 31, 2006 and 2005, respectively, from net cash used in
investing activities to net cash provided by operating activities. The impact of this reclassification is not considered material to the financial statements previously presented on the
Form 10K for the years ended December 31, 2006 or 2005.

New Accounting Standards

In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, ("SFAS No. 155"), "Accounting
for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140." SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 155 permits fair value measurements for
any hybrid financial instrument that contains an embedded derivative and that otherwise would require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial interest. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a re-measurement event occurring
after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this new standard at January 1, 2007 did not have an impact on the Company's
financial statements.

In
March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, ("SFAS No. 156"), "Accounting for Servicing of Financial
Assetsan amendment of FASB Statement No. 140." SFAS No. 156 amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilitiesa replacement of FASB Statement No. 125," by requiring, in certain situations, an entity to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract. All separately recognized servicing assets and servicing liabilities are required to be initially measured at fair value.
Subsequent measurement methods include the amortization method, whereby servicing assets or servicing liabilities are amortized in proportion to an over the period of estimated net servicing income or
net servicing loss or the fair value method, whereby servicing assets or servicing liabilities are measured at fair value at each reporting date and changes in fair value are reported in earnings in
the period in which they occur. If the amortization method is used, an entity must assess servicing assets or servicing liabilities for impairment or increased obligation based on the fair value at
each reporting date. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this new standard at
January 1, 2007 did not have a significant impact on the Company's consolidated financial statements.

47

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

In
September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate a significant impact to the financial statements upon the adoption of this new
standard.

In
February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 ("SFAS No. 159"), "The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure eligible items at fair value at certain
specified review dates. Changes in unrealized gains/losses for items elected to be measured using the fair value option are reported in earnings at each subsequent reporting date. The fair value
option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire
instruments and not to portions of instruments. SFAS No. 159 is effective for an entity's first fiscal year ending after November 15, 2007. The Company does not anticipate a significant
impact to the financial statements upon the adoption of this new standard.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141R ("SFAS No. 141R"), "Business Combinations (Revised
2007)." SFAS No. 141R, replaces SFAS No. 141, "Business Combinations," and applies to all transactions and other events in which one entity obtains control over one or more other
entities. SFAS No. 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities, and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the
amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS No. 141, whereby the
cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS No. 141R requires the acquiring entity to expense
acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS No. 141. Under SFAS
No. 141R, the requirements of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," would have to be met in order to accrue for a restructuring plan in
purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which
case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimateable criteria of SFAS No. 5, "Accounting for
Contingencies." SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not adopt this standard early. It is unknown what the impact of the adoption of this new standard will have on the Company's financial statements.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160 ("SFAS No. 160"), "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB Statement No. 51." SFAS No. 160 amends Accounting Research Bulleting (ARB) No. 51. "Consolidated Financial Statements," to
establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as minority

48

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

interest,
is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS No. 160
requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated financial statements, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS No. 160 is effective
for fiscal year, and interim periods within those fiscal years, beginning on or after December 15, 2008, or January 1, 2009 for entities with a calendar year end. An entity may not adopt
this standard early. The Company does not anticipate a significant impact to the financial statements upon the adoption of this new standard.

In
June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109." FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no change in
the liability for unrecognized tax benefits, thus, there was no change to the January 1, 2007 retained earnings balance.

The
Company recognizes interest accrued related to unrecognized tax benefits in operating expenses and penalties in income tax expense, which is consistent with the recognition of these
items in prior reporting periods. The Company files income tax returns in the US federal jurisdiction and the State of Oklahoma. The Company is not subject to examination by any taxing authority for
any tax years prior to 2004, with the exception of the tax year involved in the IRS lease litigation as discussed in Note 17Commitments, Contingent Liabilities and Other Tax
matters.

In
September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 ("SAB No. 108"), "Considering the Effects of a Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements." SAB No.108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper
amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income
statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of misstatement in
current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. The adoption of this new standard did not have an impact on the Company's financial statements.

49

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(2) Acquisitions

On March 16, 2007, the Company completed its acquisition of Southwest First Community, Inc. ("SWFC"), a bank holding company with approximately
$133 million in assets that owned State Bank & Trust in Beeville, Texas and Commercial State Bank in Sinton, Texas. The transaction was pursuant to the Agreement and Plan of Merger dated
December 1, 2006 (the "Merger Agreement"). The Company paid consideration totaling $23.5 million in cash.

(3) Investment Securities

The amortized cost and estimated fair value by type of investment security at December 31, 2007 are as follows:

|                            |  | Held to Maturity
|--------------------------- |  | ----------------
|
|
|Other securities            |  | $               
|                            |  |                 
|Total investment securities |  | $               
|                            |  |                 

|
|

|                                                 |  | Available for Sale
|------------------------------------------------ |  | ------------------
|
|
|U.S. Treasury securities                         |  | $                 
|Mortgage-backed securities                       |  |                   
|Obligations of states and political subdivisions |  |                   
|Other securities                                 |  |                   
|Equity securities                                |  |                   
|                                                 |  |                   
|Total investment securities                      |  | $                 
|                                                 |  |                   

---

50

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

The amortized cost and estimated fair value of investment securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

|                                       |  | Held to Maturity |       | Available for Sale
|-------------------------------------- |  | ---------------- | ----- | ------------------
|
|
|Due in one year or less                |  | $                | 325   |                   
|Due after one year through five years  |  |                  | 1,975 |                   
|Due after five years through ten years |  |                  |      |                   
|Due after ten years                    |  |                  |      |                   
|Mortgage-backed securities             |  |                  |      |                   
|Equity securities                      |  |                  |      |                   
|                                       |  |                  |       |                   
|Total investment securities            |  | $                | 2,300 |                   
|                                       |  |                  |       |                   

The
amortized cost and estimated fair value by type of investment security at December 31, 2006 are as follows:

|                            |  | Held to Maturity
|--------------------------- |  | ----------------
|
|
|Other securities            |  | $               
|                            |  |                 
|Total investment securities |  | $               
|                            |  |                 

|
|

|                                                 |  | Available for Sale
|------------------------------------------------ |  | ------------------
|
|
|U.S. Treasury securities                         |  | $                 
|Mortgage-backed securities                       |  |                   
|Obligations of states and political subdivisions |  |                   
|Other securities                                 |  |                   
|Equity securities                                |  |                   
|                                                 |  |                   
|Total investment securities                      |  | $                 
|                                                 |  |                   

---

Mortgage-backed
securities are primarily securities issued by the Freddie Mac, Fannie Mae and Ginnie Mae. Investments in mortgage-backed securities issued by Ginnie Mae are fully
guaranteed by the

51

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

U.S.
Government. Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, but are rated AAA.

The
amortized cost and fair value of available for sale investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements
and short-term fixed borrowings was $3,240,405,000 and $3,239,874,000, respectively, at December 31, 2007.

Proceeds
from the sale of securities available-for-sale were $841,084,000, $60,447,000 and $189,902,000 during 2007, 2006 and 2005, respectively, which amounts
included $838,561,000, $61,377,000 and $173,457,000 of mortgage-backed securities. In 2007, the Company sold approximately $833,160,000 of mortgage-backed securities that were in a loss position. The
securities identified for sale had unique attributes that distinguished them from the rest of the portfolio and caused them to not meet the interest rate risk profile of the Company at the time. The
first sale occurred in the first quarter. The securities sold were certain hybrid mortgage-backed securities with a coupon re-set date that exceeded 30 months and a weighted average
yield to coupon re-set that was approximately 100 basis points less than the FHLB certificate of indebtedness short-term rate. The second sale occurred in the third quarter.
The securities sold were certain hybrid mortgage-backed securities with a coupon re-set date that was 15 - 30 months and a weighted average yield coupon
re-set that was approximately 60 basis points below the FHLB short-term advance rate. In both quarters, the proceeds from the sales of the securities were used to pay down FHLB
borrowings. The sales of the securities facilitated a re-positioning of the balance sheet to a more neutral position in terms of interest rate risk and will improve operating ratios in the
short term. In 2006, the Company sold approximately $61,377,000 of mortgage-backed securities that were in a loss position in order to re-position a portion of the balance sheet of one of
its subsidiary banks in response to unexpected changes in the economic landscape of the subsidiary bank. In 2005, the Company sold approximately $173,457,000 of mortgage-backed securities, of which
$101,653,000 were in a loss position, in order to mitigate interest rate risk in the balance sheet, pay down borrowings and
improve operating ratios. The securities identified for sale consisted of both fixed and adjustable-rate mortgage-backed securities that had unique attributes that distinguished them from
the rest of the portfolio and caused them to not meet the interest rate risk profile of the Company at the time. The fixed rate securities had principal prepayment speeds that were 10% per period and
were the lowest coupon bonds in the Company's entire portfolio. The adjustable-rate mortgage-backed securities sold had coupon re-set dates of approximately 60 months, a
weighted average coupon below 4.40% and prepayment speeds that were below 10% for a one month period and below 15% for a six-month period. The Company intends to hold mortgage-backed
securities until a market price recovery or a maturity of the securities. Gross gains of $2,431,000, $412,000 and $1,402,000 and gross losses of $18,369,000, $1,342,000 and $1,583,000 were realized on
the sales in 2007, 2006 and 2005, respectively.

52

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

Gross
unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been
in a continuous unrealized loss position, at December 31, 2007 were as follows:

|                    |                                                  | Less than 12 months |         | 12 months or more |   | Total  |       
|------------------- | ------------------------------------------------ | ------------------- | ------- | ----------------- | - | ------ | ------
|
|
|Available for sale: |                                                  |                     |         |                   |   |        |       
|                    | U.S. Treasury securities                         |                     | $       |                  |   | $      |      
|                    | Mortgage-backed securities                       |                     |         | 678,596           |   |        | (1,551
|                    | Obligations of states and political subdivisions |                     |         | 2,520             |   |        | (25   
|                    |                                                  |                     |         |                   |   |        |       
|                    |                                                  | $                   | 681,116 |                   | $ | (1,576 | )     
|                    |                                                  |                     |         |                   |   |        |       

Gross
unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been
in a continuous loss position, at December 31, 2006 were as follows:

|                    |                                                  | Less than 12 months |         | 12 months or more |   | Total  |       
|------------------- | ------------------------------------------------ | ------------------- | ------- | ----------------- | - | ------ | ------
|
|
|Available for sale: |                                                  |                     |         |                   |   |        |       
|                    | U.S. Treasury securities                         |                     | $       |                  |   | $      |      
|                    | Mortgage-backed securities                       |                     |         | 812,870           |   |        | (4,511
|                    | Obligations of states and political subdivisions |                     |         |                  |   |        |      
|                    | Other securities                                 |                     |         |                  |   |        |      
|                    |                                                  |                     |         |                   |   |        |       
|                    |                                                  | $                   | 812,870 |                   | $ | (4,511 | )     
|                    |                                                  |                     |         |                   |   |        |       

The
unrealized losses on investments in mortgage-backed securities are caused by changes in market interest rates. Mortgage-backed securities are primarily securities issued by the
Freddie Mac, Fannie Mae and Ginnie Mae. The contractual cash obligations of the securities issued by Ginnie Mae are fully guaranteed by the U.S. Government. The contractual cash obligations of the
securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, the securities are rated AAA. The decrease in fair value is due to market interest rates and
not other factors, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity of the securities, it is the conclusion of the Company that
the investments are not considered other-than-temporarily impaired.

The
unrealized losses on investments in other securities are caused by fluctuations in market interest rates. The underlying cash obligations of the securities are guaranteed by the
entity underwriting the debt instrument. It is the belief of the Company that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity. The securities
are purchased by the Company for their economic value. The decrease in fair value is primarily due to market interest rates and not other factors,

53

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

and
because the Company has the ability and intent to hold these investments until a market price recovery or maturity of the securities, it is the conclusion of the Company that the investments are
not considered other-than-temporarily impaired.

(4) Loans

A summary of net loans, by loan type at December 31, 2007 and 2006 is as follows:

December 31,2007

2006(Dollars in thousands)Commercial, financial and agricultural

$
2,426,064

$
2,337,573Real estate-mortgage


798,708


785,401Real estateconstruction


1,835,950


1,404,186Consumer


190,899


198,580Foreign (Mexico)


285,008


309,144Total loans


5,536,629


5,034,884Unearned discount


(1
)

(74
)Loans, net of unearned discount

$
5,536,628

$
5,034,810


(5) Allowance for Possible Loan Losses

A summary of the transactions in the allowance for possible loan losses for the years ended December 31, 2007, 2006 and 2005 is as follows:

2007

2006

2005(Dollars in Thousands)Balance at January 1,

$
64,537

$
77,796

$
81,351Losses charged to allowance


(6,451
)

(18,388
)

(6,571
)Recoveries credited to allowance


4,348


1,280


2,056Net losses charged to allowance


(2,103
)

(17,108
)

(4,515
)(Credit) provision charged to operations


(1,762
)

3,849


960Acquired in purchase transactions


1,054





Balance at December 31,

$
61,726

$
64,537

$
77,796


Loans
accounted for on a non-accrual basis at December 31, 2007, 2006 and 2005 amounted to $33,622,000, $17,788,000 and $30,075,000, respectively. The effect of such
non-accrual loans reduced interest income by $1,378,000, $1,868,000 and $2,329,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Amounts received on
non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. Accruing loans contractually past due
90 days or more as to interest or principal payments at December 31, 2007, 2006, and 2005 amounted to $21,840,000, $9,400,000 and $6,086,000, respectively.

54

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Allowance for Possible Loan Losses (Continued)

The
decrease in non-accrual loans from 2005 to 2006 can be attributed to the charge-off of loans acquired as part of the Local Financial Corporation ("LFIN")
acquisition in 2004. In the third quarter of 2007, a loan acquired as part of the LFIN acquisition was settled for $6.8 million. The settlement resulted in the reversal of approximately
$3.7 million of specific reserves established in 2006 and the recovery of approximately $3.1 million. The combination of the settlement recovery and reduction in the impaired loans was a
contributing cause to the reduction in the allowance for loan loss at December 31, 2007.

Impaired
loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these
loans through its normal loan review procedures. Impaired loans are measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate;
(2) the loan's observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company's impaired loans are measured at the
fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

The
following table details key information regarding the Company's impaired loans:

2007

2006

2005(Dollars in Thousands)Balance of impaired loans where there is a related allowance for loan loss

$
39,618

$
22,909

$
34,796Balance of impaired loans where there is no related allowance for loan loss








Total impaired loans

$
39,618

$
22,909

$
34,796Allowance allocated to impaired loans

$
4,903

$
7,171

$
20,014


The
impaired loans included in the table above were primarily comprised of collateral dependent commercial loans, which have not been fully charged off. The average recorded investment
in impaired loans was $22,590,000, $25,684,000, and $29,909,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Interest income recorded on impaired loans was $1,989,000,
$404,000, and $185,000 for the years ended December 31, 2007, 2006 and 2005. The increase in the impaired loans from 2006 to 2007 is the result of certain loans being placed in this category,
and does not necessarily reflect the environment of the current sub-prime crisis. The increase of $16,709,000 reflects a slight increase in this category relative to the Company's
$5.5 billion total outstanding balance of loans. Although the Company has no direct exposure to sub-prime loans, due to the recent sub-prime crisis on a national level, the Company
might experience an increasing amount of impaired loans; however, management's decision to place loans in this category does not necessarily mean that losses will occur.

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

55

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Allowance for Possible Loan Losses (Continued)

While
management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers
carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be un-collectible and that it should be wholly or partially
charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the
judgment of the Company's management that the allowance for possible loan losses at December 31, 2007 was adequate to absorb probable losses from loans in the portfolio at that date.

(6) Bank Premises and Equipment

A summary of bank premises and equipment, by asset classification, at December 31, 2007 and 2006 were as follows:

Estimated
useful lives

2007

2006(Dollars in Thousands)Bank buildings and improvements

5  40 years

$
323,382

$
288,664Furniture, equipment and vehicles

1  20 years


229,495


204,163Land




97,713


82,191Real estate held for future expansion:Land, building, furniture, fixture and equipment

7  27 years


817


868Less: accumulated depreciation




(215,753
)

(185,563
)Bank premises and equipment, net



$
435,654

$
390,323


(7) Goodwill and Other Intangible Assets

The Company's identified intangibles are all in the form of amortizable core deposit premium. In 2007, the Company acquired $2,337,000 in identified intangibles
in the form of core deposit premium in the SWFC acquisition, which will be amortized over a ten year period. Information on the Company's identified intangible assets follows:

Carrying
Amount

Accumulated
Amortization

Net(Dollars in Thousands)December 31, 2007:Core deposit premium

$
58,675

$
27,168

$
31,507December 31, 2006:Core deposit premium

$
56,338

$
21,980

$
34,358


56

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(7) Goodwill and Other Intangible Assets (Continued)

Amortization
expense of intangible assets for the years ended December 31, 2007, 2006 and 2005, was $5,188,000, $4,866,000 and $5,176,000, respectively. Estimated amortization
expense for each of the five succeeding fiscal years, and thereafter, is as follows:

Fiscal
year ending:

Total(in thousands)2008

$
5,1952009


5,1332010


5,0872011


5,0482012


4,343Thereafter


6,701Total

$
31,507


Changes
in the carrying amount of goodwill for the years ended December 31, 2007 and 2006 were as illustrated in the table below.

2007

2006(Dollars in Thousands)Balance at January 1,

$
282,246

$
289,262Adjustment to goodwill related to prior acquisition (Note 17)


(7,960
)

(7,016
)Goodwill from purchase transaction (Note 2)


8,912


Balance as of December 31,

$
283,198

$
282,246


57

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Deposits

Deposits as of December 31, 2007 and 2006 and related interest expense for the years ended December 31, 2007, 2006 and 2005 were as follows:

2007

2006(Dollars in Thousands)Deposits:Demandnon-interest bearingDomestic

$
1,371,711

$
1,332,525Foreign


140,916


120,951Total demand non-interest bearing


1,512,627


1,453,476Savings and interest bearing demandDomestic


1,932,415


1,838,229Foreign


360,174


366,222Total savings and interest bearing demand


2,292,589


2,204,451Time, certificates of deposit$100,000 or moreDomestic


841,832


846,185Foreign


1,262,119


1,200,412Less than $100,000Domestic


851,438


892,656Foreign


397,001


392,738Total time, certificates of deposit


3,352,390


3,331,991Total deposits

$
7,157,606

$
6,989,918


58

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Deposits (Continued)

|
|

2007

2006

2005(Dollars in Thousands)Interest expense:Savings and interest bearing demandDomestic

$
46,878

$
36,606

$
24,583Foreign


6,900


3,838


2,353Total savings and interest bearing demand


53,778


40,444


26,936Time, certificates of deposit$100,000 or moreDomestic


37,133


32,851


18,705Foreign


54,494


44,143


26,710Less than $100,000Domestic


36,460


33,225


20,399Foreign


14,933


12,858


7,420Total time, certificates of deposit


143,020


123,077


73,234Total interest expense on deposits

$
196,798

$
163,521

$
100,170


Scheduled
maturities of time deposits as of December 31, 2007, were as follows:

Total(in thousands)2008

$
3,007,2432009


217,9512010


75,7942011


33,0762012


17,638Thereafter


688Total

$
3,352,390


Scheduled
maturities of time deposits in amounts of $100,000 or more at December 31, 2007, were as follows:

Due within 3 months or less

$
837,647Due after 3 months and within 6 months


541,752Due after 6 months and within 12 months


537,417Due after 12 months


187,135$
2,103,951


(9) Securities Sold Under Repurchase Agreements

The Company's bank subsidiaries have entered into repurchase agreements with an investment banking firm and individual customers of the bank subsidiaries. The
purchasers have agreed to resell to the bank subsidiaries identical securities upon the maturities of the agreements. Securities sold under

59

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(9) Securities Sold Under Repurchase Agreements (Continued)

repurchase
agreements were mortgage-backed book entry securities and averaged $982,747,000 and $670,063,000 during 2007 and 2006, respectively, and the maximum amount outstanding at any month end
during 2007 and 2006 was $1,334,147,000 and $794,617,000, respectively.

Further
information related to repurchase agreements at December 31, 2007 and 2006 is set forth in the following table:

|                        |                      | Collateral Securities |   | Repurchase Borrowing | 
|----------------------- | -------------------- | --------------------- | - | -------------------- | 
|
|
|December 31, 2007 term: |                      |                       |   |                      | 
|                        | Overnight agreements |                       | $ | 286,367              | 
|                        | 1 to 29 days         |                       |   | 50,684               | 
|                        | 30 to 90 days        |                       |   | 118,456              | 
|                        | Over 90 days         |                       |   | 1,207,423            | 
|                        |                      |                       |   |                      | 
|                        | Total                |                       | $ | 1,662,930            | 
|                        |                      |                       |   |                      | 
|December 31, 2006 term: |                      |                       |   |                      | 
|                        | Overnight agreements |                       | $ | 318,681              | 
|                        | 1 to 29 days         |                       |   | 39,274               | 
|                        | 30 to 90 days        |                       |   | 119,200              | 
|                        | Over 90 days         |                       |   | 558,993              | 
|                        |                      |                       |   |                      | 
|                        | Total                |                       | $ | 1,036,148            | 
|                        |                      |                       |   |                      | 

The
book value and fair value of securities sold includes the entire book value and fair value of securities partially or fully pledged under repurchase agreements.

(10) Other Borrowed Funds

Other borrowed funds include Federal Home Loan Bank borrowings, which are short and long-term fixed borrowings issued by the Federal Home Loan Bank of
Dallas at the market price offered at the time of funding. These borrowings are secured by mortgage-backed investment securities and a portion of the Company's loan portfolio.

60

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(10) Other Borrowed Funds (Continued)

Further information regarding the Company's other borrowed funds at December 31, 2007 and 2006 is set forth in the following table:

December 31,2007

2006(Dollars in Thousands)Federal Home Loan Bank advancesshort-termBalance at year end

$
1,456,870

$
2,095,505Rate on balance outstanding at year end


4.38
%

5.29
%Average daily balance

$
1,462,435

$
2,040,618Average rate


5.15
%

5.07
%Maximum amount outstanding at any month end

$
2,157,148

$
2,247,025Federal Home Loan Bank advanceslong-termBalance at year end

$
66

$
71Rate on balance outstanding at year end


5.15
%

5.15
%Average daily balance

$
69

$
73Average rate


5.15
%

5.15
%Maximum amount outstanding at any month end

$
71

$
75


(11) Junior Subordinated Deferrable Interest Debentures

The Company has formed twelve statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. As part of
the Local Financial Corporation ("LFIN") acquisition, the Company acquired three additional statutory business trusts previously formed by LFIN for the purpose of issuing trust preferred securities.
The twelve statutory business trusts formed by the Company and the three business trusts acquired in the LFIN transaction (the "Trusts") have each issued Capital and Common Securities and invested the
proceeds thereof in an equivalent amount of junior subordinated debentures (the "Debentures") issued by the Company or LFIN, as appropriate. As of December 31, 2007, the Debentures issued by
four of the trusts formed by the Company and the Debentures issued by all three of the trusts formed by LFIN have been redeemed by the Company. As of December 31, 2007, the principal amount of
debentures outstanding totaled $200,929,000.

The
Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passuwith one another.
The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment
terms of the respective issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the
Capital and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for
up to ten consecutive semi-annual periods on Trust I and for up to twenty consecutive quarterly periods on Trusts VI, VII, VIII, IX, X, XI and XII. If interest payments on any of the
Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require
the prior approval of the Federal Reserve and/or other regulatory bodies.

61

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(11) Junior Subordinated Deferrable Interest Debentures (Continued)

For
financial reporting purposes, the Trusts are treated as investments of the Company and not consolidated in the consolidated financial statements. Although the Capital Securities
issued by each of the Trusts are not included as a component of shareholders' equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes.
Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate
basis. Any amount that exceeds the 25%
threshold would qualify as Tier 2 capital. For December 31, 2007, the total $200,929,000, of the Capital Securities outstanding qualified as Tier 1 capital.

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

On
November 7, 2007, the Company, as successor issuer, redeemed all of its Floating Rate Junior Subordinated Debt Securities ("the Debt Securities") issued to Local Financial
Capital Trust III ("LFIN Trust III") at a redemption price equal to approximately $10,547,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the
redemption were used to simultaneously redeem an equal amount of LFIN Trust III Floating Rate Capital Securities and Floating Rate Common Securities issued by LFIN Trust III.

On
July 30, 2007, the Company, as successor issuer, redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to Local Financial
Capital Trust II ("LFIN Trust II") at a redemption price equal to approximately $10,764,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the
redemption of the Debt Securities were used to simultaneously redeem an equal amount of LFIN Trust II Floating Rate Capital Securities and Floating Rate Common Securities issued by LFIN Trust II.

On
July 7, 2007, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust V
("Trust V") at a redemption price equal to approximately $21,088,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust V Floating Rate Capital Securities and Floating Rate Common Securities issued by Trust V.

On
June 11, 2007, the Company formed International Bancshares Corporation Trust XII ("Trust XII"), for the purpose of issuing trust preferred securities. On June 26, 2007,
Trust XII issued $20,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.851% and subsequently at a floating rate of 1.45% over the
three month LIBOR, and interest is payable quarterly beginning September 1, 2007. The Trust XII Capital Securities will mature on September 1, 2037; however, the Capital Securities may
be redeemed at specified prepayment prices (a) in whole or in part on

62

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(11) Junior Subordinated Deferrable Interest Debentures (Continued)

any
interest payment date on or after September 1, 2012, or (b) in whole or in part within 90 days upon the occurrence of certain legal, regulatory, or tax events.

On
April 22, 2007, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust IV
("Trust IV") at a redemption price equal to approximately $23,723,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust IV Floating Rate Capital Securities and Floating Rate Common Securities issued by Trust IV.

On
April 13, 2007, the Company formed International Bancshares Corporation Trust XI ("Trust XI"), for the purpose of issuing trust preferred securities. On April 19, 2007,
Trust XI issued $32,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.82% and subsequently at a floating rate of 1.62% over the three
month LIBOR, and interest is payable quarterly beginning July 1, 2007. The Trust XI Capital Securities will mature on July 1, 2037, however, the Capital Securities may be redeemed at
specified prepayment prices (a) in whole or in part on any interest payment date on or after July 1, 2012, or (b) in whole or in part within 90 days upon the occurrence of
certain legal, regulatory, or tax events.

On
December 8, 2006, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities") issued to International Bancshares Capital Trust III
("Trust III") at a redemption price equal to approximately $34,538,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust III floating rate Capital Securities and the Trust III floating rate Common Securities issued by Trust III.

On
November 8, 2006, the Company formed International Bancshares Corporation Capital Trust X ("Trust X"), for the purpose of issuing trust preferred securities. On
November 15, 2006, Trust X issued $33,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 6.66% and subsequently at a floating rate
of 1.65% over the three month LIBOR, and interest is payable quarterly beginning February 1, 2007. The Trust X Capital Securities will mature on February 1, 2037; however, the Capital
Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after February 1, 2012, or (b) in whole or in part within
90 days upon the occurrence of certain legal, regulatory, or tax events.

On
September 30, 2006, the Company, as successor issuer, redeemed all of its Fixed Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to Local Financial
Capital Trust I ("LFIN Trust I") at a redemption price equal to approximately $41,155,625, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption
were used to simultaneously redeem an equal amount of LFIN Trust I Fixed Rate Capital Securities and the LFIN Trust I Fixed Rate Common Securities issued by LFIN Trust I.

On
July 25, 2006, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the "Debt Securities"), issued to International Bancshares Capital Trust II
("Trust II") at a redemption price equal to approximately $27,998,000, which includes accrued interest to, but not including, the redemption date. The proceeds from the redemption were used to
simultaneously redeem an equal amount of Trust II Floating Capital Securities and the Trust II Floating Rate Common Securities issued by Trust II.

63

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(11) Junior Subordinated Deferrable Interest Debentures (Continued)

On
June 9, 2006, the Company formed International Bancshares Corporation Capital Trust IX ("Trust IX"), for the purpose of issuing trust preferred securities. On July 27,
2006, Trust IX issued $40,000,000 of Capital Securities. The Capital Securities accrue interest for the first five years at a fixed rate of 7.10%, and subsequently at a floating rate of 1.62% over the
London Interbank Offered Rate ("LIBOR"), and interest is payable quarterly beginning October 1, 2006. The Trust IX Capital Securities will mature on October 1, 2036; however, the Capital
Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after October 1, 2011, or (b) in whole or in part within
90 days upon the occurrence of certain legal, regulatory, or tax events.

The
following table illustrates key information about each of the Debentures and their interest rates at December 31, 2007:

|           |  | Junior
Subordinated
Deferrable
Interest
Debentures |         | Repricing
Frequency |           | Interest
Rate |       | Interest Rate
Index(1) |              | Maturity
Date |                | Optional
Redemption Date
|---------- |  | -------------------------------------------------- | ------- | ------------------- | --------- | ------------- | ----- | ---------------------- | ------------ | ------------- | -------------- | ------------------------
|
|Trust I    |  | $                                                  | 10,286  |                     | Fixed     |               | 10.18 | %                      | Fixed        |               | June 2031      |                         
|Trust VI   |  | $                                                  | 25,774  |                     | Quarterly |               | 8.32  | %                      | LIBOR + 3.45 |               | November 2032  |                         
|Trust VII  |  | $                                                  | 10,310  |                     | Quarterly |               | 8.16  | %                      | LIBOR + 3.25 |               | April 2033     |                         
|Trust VIII |  | $                                                  | 25,691  |                     | Quarterly |               | 8.29  | %                      | LIBOR + 3.05 |               | October 2033   |                         
|Trust IX   |  | $                                                  | 41,238  |                     | Fixed     |               | 7.10  | %                      | Fixed        |               | October 2036   |                         
|Trust X    |  | $                                                  | 34,021  |                     | Fixed     |               | 6.66  | %                      | Fixed        |               | February 2037  |                         
|Trust XI   |  | $                                                  | 32,990  |                     | Fixed     |               | 6.82  | %                      | Fixed        |               | July 2037      |                         
|Trust XII  |  | $                                                  | 20,619  |                     | Fixed     |               | 6.85  | %                      | Fixed        |               | September 2037 |                         
|           |  |                                                    |         |                     |           |               |       |                        |              |               |                |                         
|           |  | $                                                  | 200,929 |                     |           |               |       |                        |              |               |                |                         
|           |  |                                                    |         |                     |           |               |       |                        |              |               |                |                         

---

(12) Earnings per Share ("EPS")

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive

64

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(12) Earnings per Share ("EPS") (Continued)

potential
common shares outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended December 31, 2007, 2006, and 2005 is set forth in the
following table:

Net Income
(Numerator)

Shares
(Denominator)

Per Share
Amount(Dollars in Thousands,
Except Per Share Amounts)December 31, 2007:Basic EPSNet income

$
121,312

69,036,274

$
1.76Potential dilutive common shares




333,837Diluted EPS

$
121,312

69,370,111

$
1.75December 31, 2006:Basic EPSNet income

$
117,001

69,446,874

$
1.68Potential dilutive common shares




707,703Diluted EPS

$
117,001

70,154,577

$
1.67December 31, 2005:Basic EPSNet income

$
140,779

70,064,519

$
2.01Potential dilutive common shares




869,165Diluted EPS

$
140,779

70,933,684

$
1.98


(13) Employees' Profit Sharing Plan

The Company has a deferred profit sharing plan for full-time employees with a minimum of one year of continuous employment. The Company's annual
contribution to the plan is based on a percentage, as determined by the Board of Directors, of income before income taxes, as defined, for the year. Allocation of the contribution among officers and
employees' accounts is based on length of service and amount of salary earned. Profit sharing costs of $4,628,000, $4,685,000 and $4,950,000 were charged to income for the years ended
December 31, 2007, 2006, and 2005, respectively.

(14) International Operations

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

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

65

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(14) International Operations (Continued)

A
summary of assets attributable to international operations at December 31, 2007 and 2006 are as follows:

2007

2006(Dollars in Thousands)Loans:Commercial

$
223,507

$
246,352Others


61,501


62,792285,008


309,144Less allowance for possible loan losses


(864
)

(7,612
)Net loans

$
284,144

$
301,532Accrued interest receivable

$
2,464

$
2,655


At
December 31, 2007, the Company had $171,139,000 in outstanding standby and commercial letters of credit to facilitate trade activities. The letters of credit are issued
primarily in conjunction with credit facilities, which are available to various Mexican banks doing business with the Company.

Revenues
directly attributable to international operations were $21,525,000, $20,344,000 and $14,003,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

(15) Income Taxes

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

2007

2006

2005(Dollars in Thousands)CurrentU.S.

$
60,462

$
70,701

$
48,151State


(127
)

1,838


452Foreign


55


36


15Total current taxes


60,390


72,575


48,618DeferredU.S.


582


(15,442
)

21,763State


(5,208
)

(244
)

989Total deferred taxes


(4,626
)

(15,686
)

22,752Total income taxes

$
55,764

$
56,889

$
71,370


66

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(15) Income Taxes (Continued)

Total
income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35% for 2007, 2006 and 2005 to income before income taxes. The reasons for the
differences for the years ended December 31 are as follows:

2007

2006

2005(Dollars in Thousands)Computed expected tax expense

$
61,977

$
60,876

$
74,252Change in taxes resulting from:Tax-exempt interest income


(1,625
)

(1,681
)

(1,800
)State tax, net of federal income taxes and tax credit


(2,272
)

1,037


1,267Other investment income


(3,079
)

(3,724
)

(2,965
)Other


763


381


616Actual tax expense

$
55,764

$
56,889

$
71,370


The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are reflected
below:

2007

2006(Dollars in Thousands)Deferred tax assets:Loans receivable, principally due to the allowance for possible loan losses

$
24,788

$
26,796Net unrealized losses on available for sale investment securities





22,320Other real estate owned


5


13Goodwill


3,132


3,132Accrued expenses


200


5,829State net operating loss carryforwards


6,620


1,275Other


6,079


1,893Total deferred tax assets


40,824


61,258Deferred tax liabilities:Lease financing receivable


(7,376
)

(8,328
)Bank premises and equipment, principally due to differences on depreciation


(18,277
)

(23,051
)Net unrealized gains on available for sale investment securities


(99
)

FHLB stock


(6,305
)

(5,975
)Identified intangible assets


(19,993
)

(19,157
)Other


(6,803
)

(4,536
)Total deferred tax liabilities


(58,853
)

(61,047
)Net deferred tax (liability) asset

$
(18,029
)
$
211


67

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(15) Income Taxes (Continued)

The
net deferred tax liability of $18,029,000 at December 31, 2007 is included in other liabilities in the consolidated statements of condition. The net deferred tax asset of
$211,000 at December 31, 2006 is included in other assets in the consolidated statements of condition.

State
net operating loss carryforwards expire beginning in June 2013 and ending in December 2024.

(16) Stock Options

On April 1, 2005, the Board of Directors adopted the 2005 International Bancshares Corporation Stock Option Plan (the "2005 Plan"). The 2005 Plan replaced
the 1996 International Bancshares Corporation
Key Contributor Stock Option Plan (the "1996 Plan"). Under the 2005 Plan both qualified incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") may be granted. Options granted may be
exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years. Through
December 31, 2007, the options granted under the 2005 Plan have a six-year vesting schedule (5%; 10%; 15%; 20%; 25% and 25%). As of December 31, 2007, 41,772 shares were
available for future grants under the 2005 Plan.

The
Company had previously granted nonqualified stock options exercisable for a total of 154,420 shares, adjusted for stock dividends, of Common Stock to certain employees of the
GulfStar Group. The grants were not made under either the 1996 Plan or the 2005 Plan. The options were exercisable for a period of seven years and vested in equal increments over a period of five
years. All options granted to the GulfStar Group employees had an option price of not less than the fair market value of the Common Stock on the date of grant. The remaining options were exercised in
July 2007.

On
January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R ("SFAS No. 123R"),"Share-Based Payment, (Revised
2004)." SFAS No. 123R sets accounting requirements for "share-based" compensation to employees and non-employee directors, including employee stock purchase plans, and requires
companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

The
Company chose the modified-prospective transition alternative in adopting SFAS No. 123R. Under the modified-prospective transition method, compensation cost is recognized in
financial statements issued subsequent to the date of adoption for all stock-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were
granted prior to the date of adoption.

The
fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected
volatility is based on the historical volatility of the price of the Company's stock. The Company uses historical data to estimate the expected dividend yield and employee termination rates within the
valuation model. The expected term of options is derived from the "simplified" method as prescribed by SEC Staff Accounting

68

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(16) Stock Options (Continued)

Bulletin
No. 107. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

2007

2006Expected Life (Years)

6.13

6.13Dividend yield

2.27
%
2.25
%Interest rate

4.63
%
4.94
%Volatility

20.15
%
21.05
%


A
summary of option activity under the stock option plans for the twelve months ended December 31, 2007 is as follows:

|                                                          |                   | Number of
options |         | Weighted
average
exercise price |       | Weighted
average
remaining contractual
term (years) |      | Aggregate
intrinsic
value ($)
|--------------------------------------------------------- | ----------------- | ----------------- | ------- | ------------------------------- | ----- | --------------------------------------------------- | ---- | -----------------------------
|Options outstanding at December 31, 2006                  |                   | 1,515,965         |         | $                               | 15.65 |                                                     |      |                              
|Plus: Options granted                                     |                   | 156,025           |         |                                 | 23.76 |                                                     |      |                              
|Less:                                                     |                   |                   |         |                                 |       |                                                     |      |                              
|                                                          | Options exercised |                   | 564,360 |                                 |       | 10.08                                               |      |                              
|                                                          | Options expired   |                   |        |                                 |       |                                                    |      |                              
|                                                          | Options forfeited |                   | 183,147 |                                 |       | 16.21                                               |      |                              
|                                                          |                   |                   |         |                                 |       |                                                     |      |                              
|Options outstanding at December 31, 2007                  |                   | 924,483           |         | $                               | 21.00 |                                                     | 4.52 |                              
|                                                          |                   |                   |         |                                 |       |                                                     |      |                              
|Options fully vested and exercisable at December 31, 2007 |                   | 434,280           |         | $                               | 15.88 |                                                     | 2.58 |                              

Stock-based
compensation expense included in the consolidated statements of income for the twelve months ended December 31, 2007 and December 31, 2006 was approximately
$771,000 and $874,000, respectively. As of December 31, 2007 there was approximately $1,769,000, of total unrecognized stock-based compensation cost related to non-vested options
granted under the Company plans that will be recognized over a weighted average period of 1.7 years.

A
summary of the status of the Company's non-vested options as of December 31, 2007, and changes during the twelve months ended December 31, 2007, is presented
below:

Non-vested Options

Options

Weighted average
grant-date
fair value ($)Non-vested options at December 31, 2006

437,019

$
6.70Granted

156,025


5.35Vested

58,044


6.76Forfeited

44,797


6.48Non-vested options at December 31, 2007

490,203

$
6.28


69

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(16) Stock Options (Continued)

Other
information pertaining to option activity during the twelve month period ending December 31, 2007 and December 31, 2006 is as follows:

Twelve Months Ended December 31,2007

2006Weighted average grant date fair value of stock options granted

$
5.35

$
7.08Total fair value of stock options vested

$
392,000

$
1,302,000Total intrinsic value of stock options exercised

$
10,542,000

$
2,907,000


Awards
granted prior to the Company's adoption of SFAS No. 123R were accounted for under the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, no stock-based employee compensation cost is
reflected in net income in the accompanying unaudited consolidated statements of income for the twelve months ended December 31, 2005 because all options granted under the Company's plans had
exercise prices equal to the market value of the underlying common stock on the date of grant.

Pro
forma net income and net income per share, as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for the period presented
prior to the Company's adoption of SFAS 123R is as follows:

Twelve Months Ended
December 31, 2005(Dollars in Thousands, except per share data)Net income, as reported

$
140,779Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects


(345
)Pro forma net income

$
140,434Earnings per share:Basic earningsAs reported

$
2.01Pro forma


2.00Diluted earningsAs reported

$
1.98Pro forma


1.98


70

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Commitments, Contingent Liabilities and Other Tax Matters

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

The
Company leases portions of its banking premises and equipment under operating leases. Total rental expense for the years ended December 31, 2007, 2006 and 2005 were
$10,100,000, $7,800,000 and $7,600,000, respectively. Future minimum lease payments due under non-cancellable operating leases at December 31, 2007 were as follows:

Fiscal
year ending:

Total(in thousands)2008

$
7,5022009


6,3712010


5,7962011


4,8102012


2,455Thereafter


6,572Total

$
33,506


It
is expected that certain leases will be renewed, as these leases expire. Aggregate future minimum rentals to be received under non-cancellable leases greater than one year
at December 31, 2007 were $25,600,000.

Cash
of approximately $65,931,000 and $57,272,000 at December 31, 2007 and 2006, respectively, was maintained to satisfy regulatory reserve requirements.

The
Company's lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions. The lease-financing transactions in two of the partnerships
have been examined by the Internal Revenue Service ("IRS"). In both partnerships, the lead bank subsidiary was the owner of a ninety-nine percent (99%) limited partnership interest. The
IRS has issued separate Notice of Final Partnership Administrative Adjustments ("FPAA") to the partnerships and on September 25, 2001, and January 10, 2003, the Company filed lawsuits
contesting the adjustments asserted in the FPAAs.

Prior
to filing the lawsuits the Company was required to deposit the estimated tax due of approximately $4,083,000 with respect to the first FPAA and $7,710,606 with respect to the
second FPAA with the IRS pursuant to the Internal Revenue Code. If it is determined that the amount of tax due, if any, related to the lease-financing transactions is less than the amount of the
deposits, the remaining amount of the deposits would be returned to the Company.

In
order to curtail the accrual of additional interest related to the disputed tax benefits and because interest rates were unfavorable, on March 7, 2003, the Company submitted to
the IRS a total of approximately $13.7 million, which constitutes the interest that would have accrued based on the

71

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Commitments, Contingent Liabilities and Other Tax Matters (Continued)

adjustments
proposed in the FPAAs related to both of the lease-financing transactions. If it is determined that the amount of interest due, if any, related to the lease-financing transactions is less
than the approximate $13.7 million, the remaining amount of the prepaid interest would be refunded to the Company, plus interest thereon.

Beginning
August 29, 2005, IBC proceeded to litigate one of the partnership tax cases in the Federal District Court in San Antonio, Texas. The case was tried over nine days
beginning August 29, 2005. On March 31, 2006, the trial court rendered a judgment against the Company on the first FPAA. IBC timely filed its notice of appeal to the Fifth Circuit Court
of Appeals. The appeal was argued on August 8, 2007 and the Trial Court decision was affirmed on August 23, 2007. The judgment became non-appealable on November 21,
2007. The other partnership tax case was stayed by the same Trial Court pending the appeal. Following the resolution of the first case, the trial court reopened the second case and set it for trial on
September 2, 2008.

The
Company, through December 31, 2005, had previously expensed approximately $12.0 million in connection with the lawsuits. Because of the above-referenced trial court
judgment against the Company on the first FPAA, the uncertainty of the outcome at the appellate level, and the similarity between the two FPAAs, the Company, as of December 31, 2007, has
expensed an additional $13.7 million, approximately. The resultant approximately $25.7 million expensed is the total of the tax adjustments due and the interest due on such adjustments
for both FPAAs. Management will continue to evaluate the merits of each lawsuit and make any appropriate revisions to the amounts, as deemed necessary.

As
part of the LFIN acquisition, two tax matters were transferred to the Company. The first relates to deductions taken on amended returns filed by LFIN during 2003 for the tax years
ended June 30, 1999 through December 31, 2001. The refunds requested on the amended returns amounted to approximately $7.0 million. At December 31, 2003, LFIN had received
approximately $2.0 million of the total refund requested. Because all the refunds are under review by the IRS, LFIN had established a reserve equal to the $2.0 million received and did
not recognize any benefit for the remaining $5.0 million. The second tax contingency reserve of $7.0 million was resolved with the IRS in September 2006 and as a result, the second tax
contingency reserve is no longer required. The reserve was applied to the goodwill acquired as part of the LFIN acquisition. During the first quarter of 2007, the Company favorably resolved the issues
with the IRS on the first tax contingency for approximately $7.0 million plus interest accrued thereon. The Company has applied the refund, including interest accrued prior to the LFIN
acquisition, to the goodwill that resulted from the LFIN acquisition. The Company has booked the remaining portion of the interest accrued on the tax matter subsequent to the LFIN acquisition to
earnings.

(18) Transactions with Related Parties

In the ordinary course of business, the subsidiaries of the Company make loans to directors and executive officers of the Corporation, including their affiliates,
families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectibility or present other unfavorable features. The aggregate amounts receivable
from such related parties amounted to approximately $75,129,000 and $48,731,000 at December 31, 2007 and 2006, respectively.

72

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(19) Financial Instruments with Off-Statement of Condition Risk and Concentrations of Credit Risk

In the normal course of business, the bank subsidiaries are party to financial instruments with off-statement of condition risk to meet the financing
needs of their customers. These financial instruments include commitments to their customers. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts
recognized in the consolidated statement of condition. The contract amounts of these instruments reflect the extent of involvement the bank subsidiaries have in particular classes of financial
instruments. At December 31, 2007, the following financial amounts of instruments, whose contract amounts represent credit risks, were outstanding:

Commitments to extend credit

$
1,855,293,000Credit card lines


40,427,000Standby letters of credit


157,525,000Commercial letters of credit


13,614,000


The
Company enters into a standby letter of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the standby letters of credit, the Company is required to make payments to the beneficiary
of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. At December 31, 2007, the maximum potential amount of future payments is
$157,525,000. At December 31, 2007, the fair value of these guarantees is not significant. Unsecured letters of credit totaled $54,461,000 and $45,243,000 at December 31, 2007 and 2006,
respectively.

The
Company enters into commercial letters of credit on behalf of its customers which authorize a third party to draw drafts on the Company up to a stipulated amount and with specific
terms and conditions. A commercial letter of credit is a conditional commitment on the part of the Company to provide payment on drafts drawn in accordance with the terms of the commercial letter of
credit.

The
bank subsidiaries' exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the
instruments. The bank subsidiaries use the same credit policies in making commitments and conditional obligations as they do for on-statement of condition instruments. The bank
subsidiaries control the credit risk of these transactions through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates normally less than one year or other termination clauses and may require the
payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank
subsidiaries evaluate each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension
of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include residential and commercial real estate, bank certificates of deposit, accounts receivable
and inventory.

The
bank subsidiaries make commercial, real estate and consumer loans to customers principally located in South, Central and Southeast Texas and the State of Oklahoma. Although the loan
portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in these areas, especially in the real estate and commercial
business sectors.

73

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Dividend Restrictions and Capital Requirements

Bank regulatory agencies limit the amount of dividends, which the bank subsidiaries can pay the Corporation, through IBC Subsidiary Corporation, without obtaining
prior approval from such agencies. At December 31, 2007, the subsidiary banks could pay dividends of up to $135,000,000 to the Company
without prior regulatory approval and without adversely affecting their "well capitalized" status. In addition to legal requirements, regulatory authorities also consider the adequacy of the bank
subsidiaries' total capital in relation to their deposits and other factors. These capital adequacy considerations also limit amounts available for payment of dividends. The Company historically has
not allowed any subsidiary bank to pay dividends in such a manner as to impair its capital adequacy.

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

Quantitative
measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on the following page) of
Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2007, that the Company and each of
the bank subsidiaries met all capital adequacy requirements to which it is subject.

As
of December 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized all the bank subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized" the bank subsidiaries must maintain minimum Total risk-based, Tier 1 risk based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of any of the bank subsidiaries as well
capitalized.

74

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Dividend Restrictions and Capital Requirements (Continued)

The
Company's and the bank subsidiaries' actual capital amounts and ratios for 2007 are presented in the following table:

|                                          |                                             | Actual |   | For Capital Adequacy
Purposes |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions |  
|----------------------------------------- | ------------------------------------------- | ------ | - | ----------------------------- |  | ---------------------------------------------------------------- | -
|
|
|
|As of December 31, 2007:                  |                                             |        |   |                               |  |                                                                  |  
|Total Capital (to Risk Weighted Assets):  |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 889,637                       |  | 12.99                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 686,411                       |  | 11.36                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 76,313                        |  | 18.51                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 35,102                        |  | 22.13                                                            |  
|                                          | Commerce Bank                               |        |   | 47,109                        |  | 24.56                                                            |  
|Tier 1 Capital (to Risk Weighted Assets): |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 820,319                       |  | 11.98                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 625,133                       |  | 10.34                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 71,594                        |  | 17.36                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 33,845                        |  | 21.33                                                            |  
|                                          | Commerce Bank                               |        |   | 45,045                        |  | 23.48                                                            |  
|Tier 1 Capital (to Average Assets):       |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 820,319                       |  | 7.76                                                             | %
|                                          | International Bank of Commerce, Laredo      |        |   | 625,133                       |  | 7.02                                                             |  
|                                          | International Bank of Commerce, Brownsville |        |   | 71,594                        |  | 8.79                                                             |  
|                                          | International Bank of Commerce, Zapata      |        |   | 33,845                        |  | 8.78                                                             |  
|                                          | Commerce Bank                               |        |   | 45,045                        |  | 9.92                                                             |  

75

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Dividend Restrictions and Capital Requirements (Continued)

The Company's and the bank subsidiaries' actual capital amounts and ratios for 2006 are also presented in the following table:

|                                          |                                             | Actual |   | For Capital Adequacy
Purposes |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions |  
|----------------------------------------- | ------------------------------------------- | ------ | - | ----------------------------- |  | ---------------------------------------------------------------- | -
|
|
|
|As of December 31, 2006:                  |                                             |        |   |                               |  |                                                                  |  
|Total Capital (to Risk Weighted Assets):  |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 845,827                       |  | 13.61                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 639,892                       |  | 11.74                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 80,168                        |  | 20.64                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 37,345                        |  | 27.24                                                            |  
|                                          | Commerce Bank                               |        |   | 46,198                        |  | 22.54                                                            |  
|Tier 1 Capital (to Risk Weighted Assets): |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 775,705                       |  | 12.49                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 578,414                       |  | 10.61                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 75,934                        |  | 19.55                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 35,847                        |  | 26.15                                                            |  
|                                          | Commerce Bank                               |        |   | 43,631                        |  | 21.29                                                            |  
|Tier 1 Capital (to Average Assets):       |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 775,705                       |  | 7.36                                                             | %
|                                          | International Bank of Commerce, Laredo      |        |   | 578,414                       |  | 6.56                                                             |  
|                                          | International Bank of Commerce, Brownsville |        |   | 75,934                        |  | 9.22                                                             |  
|                                          | International Bank of Commerce, Zapata      |        |   | 35,847                        |  | 9.50                                                             |  
|                                          | Commerce Bank                               |        |   | 43,631                        |  | 8.40                                                             |  

(21) Fair Value of Financial Instruments

The fair value estimates, methods, and assumptions for the Company's financial instruments at December 31, 2007 and 2006 are outlined below.

Cash and Due From Banks and Federal Funds Sold

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

Time Deposits with Banks

The carrying amounts of time deposits with banks approximate fair value.

76

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Fair Value of Financial Instruments (Continued)

Investment Securities

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

Loans

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

For
variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by
discounting
scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. At
December 31, 2007 and 2006, the carrying amount of fixed rate performing loans was $1,267,033 and $1,259,870,000 respectively, and the estimated fair value was $1,255,581 and $1,237,409,000,
respectively.

Fair
value for significant impaired loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the
risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and specific borrower information. As
of December 31, 2007 and 2006, the net carrying amount of impaired loans was a reasonable estimate of the fair value.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand
deposit accounts, was equal to the amount payable on demand as of December 31, 2007 and 2006. The fair value of time deposits is based on the discounted value of contractual cash flows. The
discount rate is based on currently offered rates. At December 31, 2007 and 2006, the carrying amount of time deposits was $3,352,390,000 and $3,331,991,000, respectively, and the estimated
fair value was $3,376,754,000 and $3,337,399,000, respectively.

Securities Sold Under Repurchase Agreements and Other Borrowed Funds

Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at December 31, 2007 and 2006.

77

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Fair Value of Financial Instruments (Continued)

Junior Subordinated Deferrable Interest Debentures

Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at December 31, 2007.

Commitments to Extend Credit and Letters of Credit

Commitments to extend credit and fund letters of credit are principally at current interest rates and therefore the carrying amount approximates fair value.

Limitations

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

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

78

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Condition  (Parent Company Only)    December 31, 2007 and 2006  (Dollars in Thousands)

|                                     |                                                    | 2007                                       |           | 2006    |          
|------------------------------------ | -------------------------------------------------- | ------------------------------------------ | --------- | ------- | ---------
|ASSETS                               |                                                    |                                            |           |         |          
|Cash                                 |                                                    | $                                          | 580       |         | $        
|Repurchase Agreements                |                                                    |                                            | 1,000     |         |          
|Other investments                    |                                                    |                                            | 31,449    |         |          
|Notes receivable                     |                                                    |                                            | 1,841     |         |          
|Investment in subsidiaries           |                                                    |                                            | 1,103,690 |         |          
|Other assets                         |                                                    |                                            | 2,667     |         |          
|                                     |                                                    |                                            |           |         |          
|                                     |                                                    | Total assets                               |           | $       | 1,141,227
|                                     |                                                    |                                            |           |         |          
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                    |                                            |           |         |          
|Liabilities:                         |                                                    |                                            |           |         |          
|                                     | Junior subordinated deferrable interest debentures |                                            | $         | 200,929 |          
|                                     | Due to IBC Trading                                 |                                            |           | 21      |          
|                                     | Other liabilities                                  |                                            |           | 4,372   |          
|                                     |                                                    |                                            |           |         |          
|                                     |                                                    | Total liabilities                          |           |         | 205,322  
|                                     |                                                    |                                            |           |         |          
|Shareholders' equity:                |                                                    |                                            |           |         |          
|                                     | Common shares                                      |                                            |           | 95,441  |          
|                                     | Surplus                                            |                                            |           | 144,140 |          
|                                     | Retained earnings                                  |                                            |           | 929,145 |          
|                                     | Accumulated other comprehensive income (loss)      |                                            |           | 165     |          
|                                     |                                                    |                                            |           |         |          
|                                     |                                                    |                                            | 1,168,891 |         |          
|Less cost of shares in treasury      |                                                    |                                            | (232,986  | )       |          
|                                     |                                                    |                                            |           |         |          
|                                     |                                                    | Total shareholders' equity                 |           |         | 935,905  
|                                     |                                                    |                                            |           |         |          
|                                     |                                                    | Total liabilities and shareholders' equity |           | $       | 1,141,227
|                                     |                                                    |                                            |           |         |          

79

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Income  (Parent Company Only)    Years ended December 31, 2007, 2006 and 2005  (Dollars in Thousands)

|                                                   |                                      | 2007                                                                                      |        | 2006    |         | 2005   |        
|-------------------------------------------------- | ------------------------------------ | ----------------------------------------------------------------------------------------- | ------ | ------- | ------- | ------ | -------
|Income:                                            |                                      |                                                                                           |        |         |         |        |        
|                                                   | Dividends from subsidiaries          |                                                                                           | $      | 114,520 |         | $      | 113,839
|                                                   | Interest income on notes receivable  |                                                                                           |        | 50      |         |        | 126    
|                                                   | Interest income on other investments |                                                                                           |        | 6,283   |         |        | 2,508  
|                                                   | Other interest income                |                                                                                           |        | 573     |         |        | 1,339  
|                                                   | Gain on sale of assets               |                                                                                           |        |        |         |        |       
|                                                   | Other                                |                                                                                           |        |        |         |        | 7      
|                                                   |                                      |                                                                                           |        |         |         |        |        
|                                                   |                                      | Total income                                                                              |        |         | 121,426 |        |        
|Expenses:                                          |                                      |                                                                                           |        |         |         |        |        
|                                                   | Interest expense (Debentures)        |                                                                                           |        | 17,178  |         |        | 22,568 
|                                                   | Other                                |                                                                                           |        | 4,789   |         |        | 3,220  
|                                                   |                                      |                                                                                           |        |         |         |        |        
|                                                   |                                      | Total expenses                                                                            |        |         | 21,967  |        |        
|                                                   |                                      |                                                                                           |        |         |         |        |        
|                                                   |                                      | Income before federal income taxes and equity in undistributed net income of subsidiaries |        |         | 99,459  |        |        
|Income tax benefit                                 |                                      |                                                                                           | (5,281 | )       |         | (7,918 | )      
|                                                   |                                      |                                                                                           |        |         |         |        |        
|                                                   |                                      | Income before equity in undistributed net income of subsidiaries                          |        |         | 104,740 |        |        
|Equity in undistributed net income of subsidiaries |                                      |                                                                                           | 16,572 |         |         | 17,052 |        
|                                                   |                                      |                                                                                           |        |         |         |        |        
|                                                   |                                      | Net income                                                                                |        | $       | 121,312 |        | $      
|                                                   |                                      |                                                                                           |        |         |         |        |        

80

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(23) International Bancshares Corporation (Parent Company Only) Financial Information (Continued)

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

Statements of Cash Flows  (Parent Company Only)    Years ended December 31, 2007, 2006 and 2005  (Dollars in Thousands)

|                          |                                                                                   | 2007                                                            |     | 2006    |         | 2005  |         
|------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------- | --- | ------- | ------- | ----- | --------
|Operating activities:     |                                                                                   |                                                                 |     |         |         |       |         
|                          | Net income                                                                        |                                                                 | $   | 121,312 |         | $     | 117,001 
|                          | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                 |     |         |         |       |         
|                          |                                                                                   | Gain on sale of assets                                          |     |         |        |       |         
|                          |                                                                                   | Accretion of junior subordinated interest deferrable debentures |     |         | 332     |       |         
|                          |                                                                                   | Depreciation of bank premises and equipment                     |     |         |        |       |         
|                          |                                                                                   | Stock compensation expense                                      |     |         | 771     |       |         
|                          |                                                                                   | (Decrease) increase in other liabilities                        |     |         | (1,732  | )     |         
|                          |                                                                                   | Equity in undistributed net income of subsidiaries              |     |         | (16,572 | )     |         
|                          |                                                                                   |                                                                 |     |         |         |       |         
|                          |                                                                                   | Net cash provided by operating activities                       |     |         | 104,111 |       |         
|                          |                                                                                   |                                                                 |     |         |         |       |         
|Investing activities:     |                                                                                   |                                                                 |     |         |         |       |         
|                          | Contributions to subsidiaries                                                     |                                                                 |     | (23,470 | )       |       | (424    
|                          | Proceeds (repurchase) of repurchase agreement with banks                          |                                                                 |     | 5,303   |         |       | (3,703  
|                          | Proceeds from sales of bank premises and equipment                                |                                                                 |     |        |         |       |        
|                          | Net (increase) decrease in notes receivable                                       |                                                                 |     | (205    | )       |       | 900     
|                          | (Increase) decrease in other assets                                               |                                                                 |     | (6,714  | )       |       | (4,215  
|                          |                                                                                   |                                                                 |     |         |         |       |         
|                          | Net cash (used in) provided by investing activities                               |                                                                 |     | (25,086 | )       |       | (7,442  
|                          |                                                                                   |                                                                 |     |         |         |       |         
|Financing activities:     |                                                                                   |                                                                 |     |         |         |       |         
|                          | Proceeds from issuance of subordinated debentures                                 |                                                                 |     | 53,609  |         |       | 75,259  
|                          | Payments of subordinated debentures                                               |                                                                 |     | (63,920 | )       |       | (101,290
|                          | Proceeds from stock transactions                                                  |                                                                 |     | 5,686   |         |       | 1,919   
|                          | Payments of cash dividends                                                        |                                                                 |     | (44,738 | )       |       | (44,166 
|                          | Payments of cash dividends in lieu of fractional shares                           |                                                                 |     | (27     | )       |       |        
|                          | Purchase of treasury stock                                                        |                                                                 |     | (29,710 | )       |       | (28,017 
|                          |                                                                                   |                                                                 |     |         |         |       |         
|                          | Net cash used in financing activities                                             |                                                                 |     | (79,100 | )       |       | (96,295 
|                          |                                                                                   |                                                                 |     |         |         |       |         
|                          | (Decrease) increase in cash                                                       |                                                                 |     | (75     | )       |       | (907    
|Cash at beginning of year |                                                                                   |                                                                 | 655 |         |         | 1,562 |         
|                          |                                                                                   |                                                                 |     |         |         |       |         
|Cash at end of year       |                                                                                   | $                                                               | 580 |         | $       | 655   |         
|                          |                                                                                   |                                                                 |     |         |         |       |         

81

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Condensed Quarterly Income Statements        (Dollars in Thousands, Except Per Share Amounts)        (Unaudited)

|     |                                                | Fourth
Quarter |   | Third
Quarter |      | Second
Quarter |         | First
Quarter
|---- | ---------------------------------------------- | -------------- | - | ------------- | ---- | -------------- | ------- | -------------
|2007 |                                                |                |   |               |      |                |         |              
|     | Interest income                                |                | $ | 159,152       |      | $              | 159,158 |              
|     | Interest expense                               |                |   | 81,064        |      |                | 81,350  |              
|     |                                                |                |   |               |      |                |         |              
|     | Net interest income                            |                |   | 78,088        |      |                | 77,808  |              
|     | (Credit) provision for possible loan losses    |                |   | (405          | )    |                | (3,916  | )            
|     | Non-interest income                            |                |   | 46,240        |      |                | 45,617  |              
|     | Non-interest expense                           |                |   | 76,433        |      |                | 78,352  |              
|     |                                                |                |   |               |      |                |         |              
|     | Income before income taxes                     |                |   | 48,300        |      |                | 48,989  |              
|     | Minority interest in consolidated subsidiaries |                |   |              |      |                |        |              
|     | Income taxes                                   |                |   | 12,884        |      |                | 16,327  |              
|     |                                                |                |   |               |      |                |         |              
|     | Net income                                     |                | $ | 35,416        |      | $              | 32,662  |              
|     |                                                |                |   |               |      |                |         |              
|     | Per common share:                              |                |   |               |      |                |         |              
|     |                                                | Basic          |   |               |      |                |         |              
|     |                                                | Net income     |   | $             | ..52 |                | $       | ..47         
|     |                                                |                |   |               |      |                |         |              
|     |                                                | Diluted        |   |               |      |                |         |              
|     |                                                | Net income     |   | $             | ..52 |                | $       | ..47         
|     |                                                |                |   |               |      |                |         |              

82

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Condensed Quarterly Income Statements (Continued)

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

|     |                                                | Fourth
Quarter(1) |   | Third
Quarter |      | Second
Quarter |         | First
Quarter
|---- | ---------------------------------------------- | ----------------- | - | ------------- | ---- | -------------- | ------- | -------------
|2006 |                                                |                   |   |               |      |                |         |              
|     | Interest income                                |                   | $ | 160,829       |      | $              | 156,552 |              
|     | Interest expense                               |                   |   | 87,658        |      |                | 86,600  |              
|     |                                                |                   |   |               |      |                |         |              
|     | Net interest income                            |                   |   | 73,171        |      |                | 69,952  |              
|     | Provision for possible loan losses             |                   |   | 1,216         |      |                | 1,954   |              
|     | Non-interest income                            |                   |   | 49,272        |      |                | 40,058  |              
|     | Non-interest expense                           |                   |   | 73,070        |      |                | 69,028  |              
|     |                                                |                   |   |               |      |                |         |              
|     | Income before income taxes                     |                   |   | 48,157        |      |                | 39,028  |              
|     | Minority interest in consolidated subsidiaries |                   |   | 40            |      |                |        |              
|     | Income taxes                                   |                   |   | 16,342        |      |                | 12,435  |              
|     |                                                |                   |   |               |      |                |         |              
|     | Net income                                     |                   | $ | 31,775        |      | $              | 26,593  |              
|     |                                                |                   |   |               |      |                |         |              
|     | Per common share:                              |                   |   |               |      |                |         |              
|     |                                                | Basic             |   |               |      |                |         |              
|     |                                                | Net income        |   | $             | ..45 |                | $       | ..38         
|     |                                                |                   |   |               |      |                |         |              
|     |                                                | Diluted           |   |               |      |                |         |              
|     |                                                | Net income        |   | $             | ..45 |                | $       | ..38         
|     |                                                |                   |   |               |      |                |         |              

---

83

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Condensed Average Statements of Condition

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

Distribution of Assets, Liabilities and Shareholders' Equity

The following table sets forth a comparative summary of average interest earning assets and average interest bearing liabilities and related interest yields for
the years ended December 31, 2007, 2006, and 2005:

|                                     |                                                    | 2007                               |                               | 2006                                 |                     | 2005       |       
|------------------------------------ | -------------------------------------------------- | ---------------------------------- | ----------------------------- | ------------------------------------ | ------------------- | ---------- | ------
|
|
|Assets                               |                                                    |                                    |                               |                                      |                     |            |       
|Interest earning assets:             |                                                    |                                    |                               |                                      |                     |            |       
|                                     | Loan, net of unearned discounts:                   |                                    |                               |                                      |                     |            |       
|                                     |                                                    | Domestic                           |                               | $                                    | 4,920,774           |            | $     
|                                     |                                                    | Foreign                            |                               |                                      | 289,678             |            |       
|                                     | Investment securities:                             |                                    |                               |                                      |                     |            |       
|                                     |                                                    | Taxable                            |                               |                                      | 4,055,546           |            |       
|                                     |                                                    | Tax-exempt                         |                               |                                      | 87,234              |            |       
|                                     | Federal funds sold                                 |                                    |                               | 54,634                               |                     |            | 2,712 
|                                     | Other                                              |                                    |                               | 22,448                               |                     |            | 2,656 
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    |                                    | Total interest-earning assets |                                      |                     | 9,430,314  |       
|Non-interest earning assets:         |                                                    |                                    |                               |                                      |                     |            |       
|                                     | Cash and due from banks                            |                                    |                               | 222,116                              |                     |            |       
|                                     | Bank premises and equipment, net                   |                                    |                               | 405,536                              |                     |            |       
|                                     | Other assets                                       |                                    |                               | 750,454                              |                     |            |       
|                                     | Less allowance for possible loan losses            |                                    |                               | (65,688                              | )                   |            |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    |                                    | Total                         |                                      | $                   | 10,742,732 |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|Liabilities and Shareholders' Equity |                                                    |                                    |                               |                                      |                     |            |       
|Interest bearing liabilities:        |                                                    |                                    |                               |                                      |                     |            |       
|                                     | Savings and interest bearing demand deposits       |                                    | $                             | 2,328,078                            |                     | $          | 53,778
|                                     | Time deposits:                                     |                                    |                               |                                      |                     |            |       
|                                     |                                                    | Domestic                           |                               |                                      | 1,704,871           |            |       
|                                     |                                                    | Foreign                            |                               |                                      | 1,623,791           |            |       
|                                     | Securities sold under repurchase agreements        |                                    |                               | 982,884                              |                     |            | 43,837
|                                     | Other borrowings                                   |                                    |                               | 1,462,504                            |                     |            | 75,317
|                                     | Junior subordinated interest deferrable debentures |                                    |                               | 213,119                              |                     |            | 17,178
|                                     | Senior notes                                       |                                    |                               |                                     |                     |            | 210   
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    | Total interest bearing liabilities |                               |                                      | 8,315,247           |            |       
|Non-interest bearing liabilities:    |                                                    |                                    |                               |                                      |                     |            |       
|                                     | Demand Deposits                                    |                                    |                               | 1,417,751                            |                     |            |       
|                                     | Other liabilities                                  |                                    |                               | 125,952                              |                     |            |       
|Shareholders' equity                 |                                                    |                                    | 883,782                       |                                      |                     |            |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    | Total                              |                               | $                                    | 10,742,732          |            |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    |                                    |                               |                                      | Net interest income |            |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       
|                                     |                                                    |                                    |                               | Net yield on interest earning assets |                     |            |       
|                                     |                                                    |                                    |                               |                                      |                     |            |       

---

(Note 1) The average balances for purposes of the above table are calculated on the basis of daily balances for
2007 and 2006 and month-end balances for 2005.

84

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INTERNATIONAL BANCSHARES CORPORATION  OFFICERS AND DIRECTORS

|OFFICERSDENNIS E. NIXON
Chairman of the Board and President
R. DAVID GUERRA
Vice President
EDWARD J. FARIAS
Vice President
RICHARD CAPPS
Vice President
IMELDA NAVARRO
Treasurer
WILLIAM CUELLAR
Auditor
MARISA V. SANTOS
Secretary
HILDA V. TORRES
Assistant Secretary |  | DIRECTORSDENNIS E. NIXON
President, International Bank of Commerce
IRVING GREENBLUM
International Investments/Real Estate
R. DAVID GUERRA
President
International Bank of Commerce
Branch in McAllen, TX
DANIEL B. HASTINGS, JR.
Licensed U. S. Custom Broker
President
Daniel B. Hastings, Inc.
RICHARD E. HAYNES
Attorney at Law
Real Estate Investments
IMELDA NAVARRO
Senior Executive Vice President
International Bank of Commerce
SIOMA NEIMAN
International Entrepreneur
PEGGY J. NEWMAN
Investments
LEONARDO SALINAS
Investments
ANTONIO R. SANCHEZ, JR.
Chairman of the Board
Sanchez Oil & Gas Corporation
Investments
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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