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, 2009. 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 31,2009

2008

2007

2006

2005(Dollars in Thousands, Except Per Share Data)STATEMENT OF CONDITIONAssets

$
11,762,543

$
12,439,341

$
11,167,161

$
10,911,454

$
10,391,853Net loans


5,571,869


5,799,372


5,474,902


4,970,273


4,547,896Deposits


7,178,007


6,858,784


7,157,606


6,989,918


6,656,426Other borrowed funds


1,347,625


2,522,986


1,456,936


2,095,576


1,870,075Junior subordinated deferrable interest debentures


201,082


201,048


200,929


210,908


236,391Shareholders' equity


1,407,470


1,257,297


935,905


842,056


792,867INCOME STATEMENTInterest income

$
527,377

$
564,603

$
643,573

$
609,073

$
508,705Interest expense


139,796


231,731


333,340


319,588


206,830Net interest income


387,581


332,872


310,233


289,485


301,875Provision (credit) for probable loan losses


58,833


19,813


(1,762
)

3,849


960Non-interest income


201,013


189,809


165,363


176,971


167,222Non-interest expense


309,031


301,226


300,282


288,717


255,988Income before income taxes


220,730


201,642


177,076


173,890


212,149Income taxes


77,988


69,530


55,764


56,889


71,370Net income


142,742


132,112


121,312


117,001


140,779Preferred stock dividends


12,984











Net income available to common shareholders

$
129,758

$
132,112

$
121,312

$
117,001

$
140,779Per common share (Note 1):Basic

$
1.90

$
1.93

$
1.76

$
1.68

$
2.01Diluted

$
1.90

$
1.92

$
1.75

$
1.67

$
1.98


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


1

---





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, 2009. The following
discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2009, 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.

Risk
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:



2

---





Forward-looking
statements speak only as of the date on which such statements are made. 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.

Recent Developments

On December 23, 2008, as part of the TARP Capital Purchase Program, the Company entered into a Letter Agreement incorporating an
attached Securities Purchase Agreement Standard Terms (collectively the "Securities Purchase Agreement") with the Treasury. The closing of the transactions contemplated in the Securities Purchase
Agreement occurred on December 23, 2008.

Under
the Securities Purchase Agreement, the Company sold 216,000 shares of the Company's fixed-rate cumulative perpetual preferred stock, Series A, par value $.01 per share (the
"Senior Preferred Stock"), having a liquidation preference of $1,000 per share, for a total price of $216,000,000. The Senior Preferred Stock will pay dividends at the rate of 5% per year for the
first five years and 9% per year

3

---



thereafter.
The Senior Preferred Stock has no maturity date and ranks senior to the Company's common stock with respect to the payment of dividends and distributions and amounts payable upon
liquidation, dissolution and winding up of the Company. The Senior Preferred Stock generally is non-voting except for class voting rights on matters that would adversely affect the rights of the
holders of the Senior Preferred Stock. To date, the Company has not redeemed any of the Senior Preferred Stock.

Overview

The Company, which is headquartered in Laredo, Texas, with 280 facilities and more than 435 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 liquidating subsidiary, a broker/dealer and a fifty percent 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, 2009 was 11.10% as compared to 13.34% for the year ended December 31, 2008.

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, the Company monitors the efficiency ratio, which is a measure of non-interest expense to
net interest income plus non-interest income closely. The Company's efficiency ratio has been negatively impacted over the last few years because of the Company's aggressive branch expansion
which has added a total of 34 branches during 2008 and 2009. 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 the benefits should positively impact the efficiency ratio in future periods. The Company monitors this ratio over time to assess the Company's efficiency relative to its peers
taking into account the Company's branch expansion. The Company uses this measure as one factor in determining if the Company is accomplishing its long-term goals of providing superior returns to the
Company's shareholders.

4

---



Results of Operations

Summary

Consolidated Statements of Condition Information

December 31, 2009

December 31, 2008

Percent Increase
(Decrease)(Dollars in Thousands)Assets

$
11,762,543

$
12,439,341


(5.4
)%Net loans


5,571,869


5,799,372


(3.9
)Deposits


7,178,007


6,858,784


4.7Other borrowed funds


1,347,625


2,522,986


(46.6
)Junior subordinated deferrable interest debentures


201,082


201,048


Shareholders' equity


1,407,470


1,257,297


11.9


Consolidated Statements of Income Information

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Percent
Increase
(Decrease)
2009 vs. 2008

Year Ended
December 31,
2007

Percent
Increase
(Decrease)
2008 vs. 2007(Dollars in Thousands)Interest income

$
527,377

$
564,603


(6.6
)%
$
643,573


(12.3
)%Interest expense


139,796


231,731


(39.7
)

333,340


(30.5
)Net interest income


387,581


332,872


16.4


310,233


7.3Provision (credit) for probable loan losses


58,833


19,813


196.9


(1,762
)

(1,224.5
)Non-interest income


201,013


189,809


5.9


165,363


14.8Non-interest expense


309,031


301,226


2.6


300,282


.3Net income


142,742


132,112


8.0


121,312


8.9Net income available to common shareholders


129,758


132,112


(1.8
)

121,312


8.9Per common share:Basic

$
1.90

$
1.93


(1.6
)%
$
1.76


9.7
%Diluted


1.90


1.92


(1.0
)

1.75


9.7


Net Income

Net income for the year ended December 31, 2009 increased by 8.0% compared to the same period in 2008 despite the
$25.4 million, after tax, increase in the provision for probable loan losses charged to expense during 2009. Additionally, an industry-wide FDIC special assessment negatively impacted the
Company's earnings by $3.3 million, after tax in the second quarter. The increase in the provision was prompted by management's analysis of the general weakness in the economy and the impact of
that weakness on the Company's loan portfolio and the related allowance for probable loan losses. Additionally, net income for 2009 was positively affected by the increasing net interest margin of the
Company. While the Texas and Oklahoma economies are performing better than other parts of the country, Texas and Oklahoma are not immune to the problems associated with the U.S. economy. The
substantial increase in the provision for probable loan losses is not necessarily an indicator that more credits will worsen to the point that the Company will have to continue to record provisions
for probable loan losses at these levels in future periods.

Net
income for the year ended December 31, 2008 was also negatively impacted by increases in the provision for probable loan losses charged to expense. Net income for the year
ended December 31, 2007

5

---



was
positively affected by the credit for probable 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 sale of certain investment securities 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 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 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 31,2009
Average
Rate/Cost

2008
Average
Rate/Cost

2007
Average
Rate/CostAssetsInterest earning assets:Loan, net of unearned discounts:Domestic


5.88
%

6.60
%

8.58
%Foreign


4.96


6.03


7.43Investment securities:Taxable


4.34


4.59


4.69Tax-exempt


4.87


4.87


4.89Federal funds sold





1.75


4.96Other


.87


4.99


5.81Total interest-earning assets


5.17
%

5.70
%

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


.51
%

1.17
%

2.31
%Time deposits:Domestic


1.96


3.25


4.32Foreign


1.78


3.11


4.28Securities sold under repurchase agreements


3.06


3.51


4.46Other borrowings


.57


2.44


5.15Junior subordinated deferrable interest debentures


6.23


7.03


8.06Total interest bearing liabilities


1.59
%

2.67
%

4.01
%


6

---



For the three years ended December 31, 2009, as short term interest rates have fluctuated, the Company has monitored and adjusted interest rates on loans and deposits
accordingly. 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 decreased 9.3% from 5.70% in 2008 to 5.17% in 2009, and the rates paid on average interest-bearing liabilities decreased 40.4% from 2.67% in 2008 to 1.59% in 2009. The yield on average
interest-earning assets decreased 16.4% from 6.82% in 2007 to 5.70% in 2008, and the rates paid on average interest-bearing liabilities decreased 33.4% from 4.01% in 2007 to 2.67% in 2008. 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
following table analyzes the changes in net interest income during 2009 and 2008 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:

2009 compared to 2008
Net increase (decrease) due to

2008 compared to 2007
Net increase (decrease) due toVolume(1)

Rate(1)

Total

Volume(1)

Rate(1)

Total(Dollars in Thousands)

(Dollars in Thousands)Interest earned on:Loans, net of unearned discounts:Domestic

$
7,524

$
(39,016
)
$
(31,492
)
$
37,681

$
(106,085
)
$
(68,404
)Foreign


(531
)

(2,926
)

(3,457
)

(463
)

(3,979
)

(4,442
)Investment securities:Taxable


7,389


(10,386
)

(2,997
)

3,026


(4,469
)

(1,443
)Tax-exempt


1,560


(4
)

1,556


(740
)

(16
)

(756
)Federal funds sold


(927
)




(927
)

(80
)

(1,705
)

(1,785
)Other


3,132


(3,041
)

91


(2,075
)

(65
)

(2,140
)Total interest income

$
18,147

$
(55,373
)
$
(37,226
)
$
37,349

$
(116,319
)
$
(78,970
)Interest incurred on:Savings and interest bearing demand deposits

$
(1,759
)
$
(14,060
)
$
(15,819
)
$
(972
)
$
(26,155
)
$
(27,127
)Time deposits:Domestic


526


(22,122
)

(21,596
)

(100
)

(18,206
)

(18,306
)Foreign


(1,169
)

(21,459
)

(22,628
)

907


(19,142
)

(18,235
)Securities sold under repurchase agreements


900


(6,577
)

(5,677
)

20,226


(13,663
)

6,563Other borrowings


6,508


(31,033
)

(24,525
)

(3,465
)

(37,876
)

(41,341
)Junior subordinated deferrable interest debentures


2


(1,604
)

(1,602
)

(973
)

(2,068
)

(3,041
)Other


(88
)




(88
)

(122
)




(122
)Total interest expense

$
4,920

$
(96,855
)
$
(91,935
)
$
15,501

$
(117,110
)
$
(101,609
)Net interest income

$
13,227

$
41,482

$
54,709

$
21,848

$
791

$
22,639


(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

7

---



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 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, 2009, based on these simulations, a rate shift of 300 basis points in interest rates up will vary net interest income by 1.89%, while a rate shift of 100 basis
points down will not vary net interest income by more than .18% of projected 2010 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 Probable 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 31,2009

2008

2007

2006

2005(Dollars in Thousands)Loans accounted for on a non-accrual basis

$
68,314

$
163,700

$
32,900

$
13,490

$
17,129Accruing loans contractually past due ninety days or more as to interest or principal payments


11,986


6,208


21,330


9,201


5,478Loans accounted for as "troubled debt restructuring"

















The
allowance for probable loan losses increased 29.9% to $95,393,000 at December 31, 2009 from $73,461,000 at December 31, 2008. The provision for probable loan losses
charged to expense increased $39,020,000 to $58,833,000 for the year ended December 31, 2009 from $19,813,000 for the same period in 2008. The Company's provision for probable loan losses
increased for the years ended December 31, 2009 and 2008, prompted by the analysis of management regarding the weakness in the overall economy and the impact of that weakness on the Company's
loan portfolio and the related allowance for probable loan losses. While the Texas and Oklahoma economies are performing better than other
parts of the country, Texas and Oklahoma are not immune to the problems associated with the U.S. economy. The decrease in the allowance for probable loan losses for the year ended December 31,
2007, can be partially attributed to the charge off of loans acquired as part of the LFIN acquisition. The allowance for probable loan losses was 1.68% of total loans, net of unearned income at
December 31, 2009 and 1.25% at December 31, 2008.

8

---



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 31,2009

2008

2007

2006

2005(Dollars in Thousands)Loans accounted for on a non-accrual basis

$
24

$
530

$
722

$
4,298

$
12,946Accruing loans contractually past due ninety days or more as to interest or principal payments


103


66


510


199


608


The
gross income that would have been recorded during 2009 and 2008 on non-accrual and restructured loans in accordance with their original contract terms was $4,008,000 and $6,148,000
on domestic loans and $3,000 and $94,000 on foreign loans, respectively. The amount of interest income on such loans that was recognized in 2009 and 2008 was $547,000 and $193,000 on domestic loans
and $0 and $0 for foreign loans, respectively.

Generally,
loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deem the collectability of the principal and/or
interest to be in question, as well as when required by applicable regulatory guidelines. 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 $1,349,516,000 and
$1,914,733,000 at December 31, 2009 and 2008, respectively. See Note 20 to the Consolidated Financial Statements.

9

---



The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for probable loan losses arising from loans
charged-off and recoveries on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:

2009

2008

2007

2006

2005(Dollars in Thousands)Loans, net of unearned discounts, outstanding at December 31

$
5,667,262

$
5,872,833

$
5,536,628

$
5,034,810

$
4,625,692Average loans outstanding during the year (Note 1)

$
5,748,789

$
5,683,130

$
5,215,435

$
4,796,489

$
4,830,881Balance of allowance at January 1

$
73,461

$
61,726

$
64,537

$
77,796

$
81,351Provision (credit) charged to expense


58,833


19,813


(1,762
)

3,849


960Loans charged off:Domestic:Commercial, financial and agricultural


(14,565
)

(5,754
)

(3,606
)

(7,302
)

(2,703
)Real estatemortgage


(2,500
)

(1,400
)

(800
)

(554
)

(806
)Real estateconstruction


(17,953
)

(202
)

(202
)

(99
)

(41
)Consumer


(2,690
)

(1,770
)

(1,741
)

(2,056
)

(2,948
)Foreign


(831
)

(8
)

(102
)

(8,377
)

(73
)Total loans charged off:


(38,539
)

(9,134
)

(6,451
)

(18,388
)

(6,571
)Recoveries credited to allowance:Domestic:Commercial, financial and agricultural


519


576


810


625


1,436Real estatemortgage


128


94


58


130


69Real estateconstruction


19


21


89


53


24Consumer


937


361


306


448


511Foreign


35


4


3,085


24


16Total recoveries


1,638


1,056


4,348


1,280


2,056Net loans charged off


(36,901
)

(8,078
)

(2,103
)

(17,108
)

(4,515
)Allowance acquired in purchase transactions








1,054





Balance of allowance at December 31

$
95,393

$
73,461

$
61,726

$
64,537

$
77,796Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1)


.64
%

.14
%

.04
%

.36
%

.09
%Ratio of allowance to loans, net of unearned discounts, outstanding at December 31


1.68
%

1.25
%

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 2009, 2008, 2007 and 2006 and month-end balances for the year ended
2005.


10

---






The
allowance for probable 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 31,2009

2008

2007

2006

2005Allowance

Percent
of total

Allowance

Percent
of total

Allowance

Percent
of total

Allowance

Percent
of total

Allowance

Percent
of total(Dollars in Thousands)Commercial, Financial and Agricultural

$
47,676


47.8
%
$
33,737


43.8
%
$
28,117


43.9
%
$
28,158


46.5
%
$
34,283


51.4
%Real estateMortgage


16,825


16.8


11,639


15.1


9,256


14.4


9,461


15.6


12,228


18.3Real estateConstruction


27,918


27.9


25,058


32.6


21,277


33.2


16,914


27.9


13,007


19.5Consumer


2,581


2.6


2,223


2.9


2,212


3.4


2,392


3.9


3,154


4.7Foreign


393


4.9


804


5.6


864


5.1


7,612


6.1


15,124


6.1$
95,393


100.0
%
$
73,461


100.0
%
$
61,726


100.0
%
$
64,537


100.0
%
$
77,796


100.0
%


The allowance for probable 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 probable loan losses.

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.

The
allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management's best estimate of probable
loan losses within the existing portfolio of loans. The Company's allowance for probable loan loss methodology is based on guidance provided in Securities and Exchange Commission Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues" and includes allowance allocations calculated in accordance with ASC 310, "Receivables" and ASC 450,
"Contingencies." The reserve allocated to all categories of loans increased approximately $21.9 million from 2008 to 2009 and $11.7 million from 2007 to 2008. The increase in the reserve
occurred as the result of the deterioration of economic conditions in 2008 that continue in to occur in 2009. The reserve allocated to Commercial and Real EstateConstruction loans
increased from 2007 to 2008 primarily due to increases in impaired loans in which a specified valuation allowance was determined in accordance with ASC 310-10. Please refer to
Note 5Allowance for Probable Loan Losses in the accompanying Notes to the consolidated Financial Statements.

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 probable loan losses can be made only on a subjective basis. It is the judgment of the Company's management that
the allowance for probable loan losses at December 31, 2009 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 24.
Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, the Company's estimate of probable loan losses could also change, which
could affect the level of future provisions for probable loan losses.

11

---



Non-Interest Income

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Percent
Increase
(Decrease)
2009 vs. 2008

Year Ended
December 31,
2007

Percent
Increase
(Decrease)
2008 vs. 2007(Dollars in Thousands)Service charges on deposit accounts

$
99,642

$
98,466


1.2
%
$
89,186


10.4
%Other service charges, commissions and feesBanking


42,861


40,543


5.7


34,897


16.2Non-banking


12,697


7,592


67.2


18,675


(59.3
)Investment securities transactions, net


11,956


6,427


86.0


(15,938
)

140.3Other investments, net


19,773


15,183


30.2


19,821


(23.4
)Other income


14,084


21,598


(34.8
)

18,722


15.4Total non-interest income

$
201,013

$
189,809


5.9
%
$
165,363


14.8
%


The
increase in investment securities transactions for the year ended December 31, 2009 can be attributed to the sale of investment securities resulting in a gain of
$12.0 million, before taxes. Non-banking service charges, commissions and fees 2009 was positively impacted by the results of a wholly owned insurance subsidiary of the Company's lead bank.
During 2008, the Company sold certain equity securities resulting in a gain of $6.2 million, before taxes. The loss in the investment securities transactions for the year ended December 31,
2007 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 and the sale of certain
equity investments. The impairment charge in 2007 was the result of the Company's strategic sale of certain investment securities with the proceeds from the sales used to reduce Federal Home Loan Bank
("FHLB") borrowings. The investments identified 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 was done to improve the Company's operating ratios. As a result of this decision, the Company marked the securities to market. The increase in banking
service charges, commissions and fees for the year ended December 31, 2009 and 2008 can be attributed to increased surcharge and interchange income from customers using the IBC
debit card and automated teller machines (ATM). The increase in service charges on deposit accounts can be attributed partially to the Company's sales programs and the additional accounts created as a
result of those programs.

12

---



Non-Interest Expense

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Percent
Increase
(Decrease)
2009 vs. 2008

Year Ended
December 31,
2007

Percent
Increase
(Decrease)
2008 vs. 2007(Dollars in Thousands)Employee compensation and benefits

$
130,849

$
129,084


1.4
%
$
130,385


(1.0
)%Occupancy


35,374


38,315


(7.7
)

33,583


14.1Depreciation of bank premises and equipment


35,879


36,700


(2.2
)

32,069


14.4Professional fees


12,640


10,051


25.8


9,741


3.2Deposit insurance assessments


10,249


1,027


898.0


872


17.8Stationery and supplies


4,496


6,129


(26.6
)

6,414


(4.4
)Amortization of identified intangible assets


5,286


5,195


1.8


5,188


0.1Advertising


9,149


13,189


(30.6
)

11,973


10.2Other


65,109


61,536


5.8


70,057


(12.2
)Total non-interest expense

$
309,031

$
301,226


2.6
%
$
300,282


0.3
%


Non-interest
expense was affected by the aggressive de novo branching activity that has added 16 new branches in 2009 and 18 branches in 2008. As a result of the branch expansion,
employee compensation increased due to staffing of these branches. Deposit insurance assessment expense for the twelve months ended December 31, 2009 was negatively impacted by the FDIC
special assessment. In May 2009, the FDIC issued a final rule which levied a special assessment on all insured depository institutions totaling five basis points of each institution's total
assets less Tier 1 capital as of June 30, 2009 that was collected on September 30, 2009. The special assessment is part of the FDIC's efforts to re-build the Deposit Insurance Fund
("DIF"). The Company accrued $5.1 million related to the special assessment. In October 2009, the FDIC issued a final rule that financial institutions prepay their quarterly assessments for the
next three years in an effort to shore up the DIF. The rule required banks to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and all of 2010, 2011 and 2012 on
December 30, 2009. The Company also paid additional fees related to its participation in the FDIC Temporary Liquidity Guaranty Program, which provides full FDIC deposit insurance coverage for
non-interest bearing accounts through June 30, 2010 (extended from December 31, 2009). The fee assessment for such accounts was ten basis points per quarter in 2009 and increased to
fifteen basis points per quarter in 2010 on amounts in covered accounts exceeding $250,000.

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.

13

---



Financial Condition

Investment Securities

The following table sets forth the carrying value of investment securities as of December 31, 2009, 2008 and 2007:

December 31,2009

2008

2007(Dollars in Thousands)U.S. Treasury SecuritiesAvailable for sale

$
1,327

$
1,319

$
1,308Residential mortgage-backed securitiesAvailable for sale


4,491,764


4,974,317


4,066,829Obligations of states and political subdivisionsAvailable for sale


136,866


82,214


84,633Equity securitiesAvailable for sale


14,126


14,030


13,500Other securitiesHeld to maturity


2,450


2,300


2,300Available for sale








1,618Total

$
4,646,533

$
5,074,180

$
4,170,188


The
following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2009 and the average yields of such securities, except
for the totals, which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without
prepayment penalties.

Available for Sale MaturingWithin one year

After one but
within five years

After five but
within ten years

After ten yearsAdjusted

Adjusted

Adjusted

AdjustedCost

Yield

Cost

Yield

Cost

Yield

Cost

Yield(Dollars in Thousands)U.S. Treasury and obligations of U.S. Government agencies

$
1,327


.21
%
$




%
$




%
$




%Residential mortgage-backed securities


33,773


4.60


5,973


4.87


372,322


4.85


3,981,663


4.06Obligations of states and political subdivisions














10,224


4.80


122,744


5.21Equity securities


325

















13,500


3.83Other securities























Total

$
35,425


4.39
%
$
5,973


4.87
%
$
382,546


4.85
%
$
4,117,907


4.10
%


14

---





Held to Maturity MaturingWithin one year

After one but
within five years

After five but
within ten years

After ten yearsAdjusted

Adjusted

Adjusted

AdjustedCost

Yield

Cost

Yield

Cost

Yield

Cost

Yield(Dollars in Thousands)Other securities

$
1,825


1.45
%
$
625


1.41
%
$




%
$




%Total

$
1,825


1.45
%
$
625


1.41
%
$




%
$




%


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"). 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 carry an implied AAA rating with limited credit risk, particularly given the placement of Fannie
Mae and Freddie Mac into conservatorship by the federal government in early September 2008.

Loans

The amounts of loans outstanding, by classification, at December 31, 2009, 2008, 2007, 2006 and 2005 are shown in the following
table:

December 31,2009

2008

2007

2006

2005(Dollars in Thousands)Commercial, financial and agricultural

$
2,703,379

$
2,574,247

$
2,426,064

$
2,337,573

$
2,376,276Real estatemortgage


954,010


888,095


798,708


785,401


847,512Real estateconstruction


1,583,057


1,911,954


1,835,950


1,404,186


901,518Consumer


146,331


169,589


190,899


198,580


218,607Foreign


280,485


328,948


285,008


309,144


281,947Total loans


5,667,262


5,872,833


5,536,629


5,034,884


4,625,860Unearned discount








(1
)

(74
)

(168
)Loans, net of unearned discount

$
5,667,262

$
5,872,833

$
5,536,628

$
5,034,810

$
4,625,692


The
following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2009, 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

$
699,848

$
1,833,943

$
169,588

$
2,703,379Real estateconstruction


524,266


873,499


185,292


1,583,057Foreign


186,975


88,450


5,060


280,485Total

$
1,411,089

$
2,795,892

$
359,940

$
4,566,921


15

---





Interest sensitivityFixed Rate

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

$
224,953

$
2,570,939Due after five years


29,079


330,861Total

$
254,032

$
2,901,800


International Operations

On December 31, 2009, the Company had $280,485,000 (2.4% of total assets) in loans outstanding to borrowers domiciled in foreign
countries, which included primarily borrowers domiciled in Mexico. The loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in foreign countries be
primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The composition of such loans and the
related amounts of allocated allowance for probable loan losses as of December 31, 2009 is presented below.

Amount of Loans

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

$
178,336

$
89Secured by United States real estate


31,481


70Secured by other United States collateral (securities, gold, silver, etc.)


17,955


56Direct unsecured Mexican sovereign debt (principally former FICORCA debt)


1,507


4Other (principally Mexico real estate)


51,206


174$
280,485

$
393


The
transactions for the year ended December 31, 2009, in that portion of the allowance for probable loan losses related to foreign debt were as follows:

(Dollars in Thousands)Balance at December 31, 2008

$
604Charge-offs


(691
)Recoveries


7Net recoveries


(684
)Provision charged to expense


473Balance at December 31, 2009

$
393


16

---



Deposits

2009
Average Balance

2008
Average Balance(Dollars in Thousands)Deposits:Demandnon-interest bearingDomestic

$
1,325,682

$
1,324,178Foreign


155,312


130,879Total demand non-interest bearing


1,480,994


1,455,057Savings and interest bearing demandDomestic


1,781,663


1,924,622Foreign


353,484


361,378Total savings and interest bearing demand


2,135,147


2,286,000Time certificates of deposit$100,000 or more:Domestic


947,382


874,040Foreign


1,218,579


1,249,290Less than $100,000:Domestic


771,362


828,510Foreign


388,852


395,706Total time, certificates of deposit


3,326,175


3,347,546Total deposits

$
6,942,316

$
7,088,603




2009

2008

2007(Dollars in Thousands)Interest expense:Savings and interest bearing demandDomestic

$
9,267

$
23,197

$
46,878Foreign


1,565


3,454


6,900Total savings and interest bearing demand


10,832


26,651


53,778Time, certificates of deposit$100,000 or moreDomestic


18,091


28,990


37,133Foreign


23,315


41,383


54,494Less than $100,000Domestic


15,600


26,297


36,460Foreign


5,249


9,809


14,933Total time, certificates of deposit


62,255


106,479


143,020Total interest expense on deposits

$
73,087

$
133,130

$
196,798


17

---





Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2009, were as follows:

Due within 3 months or less

$
931,885Due after 3 months and within 6 months


547,820Due after 6 months and within 12 months


590,219Due after 12 months


171,808$
2,241,732


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, 2009 were $7,178,007,000, an increase of 4.7% from $6,858,784,000 at December 31,
2008.

Return on Equity and Assets

Certain key ratios for the Company for the years ended December 31, 2009, 2008 and 2007 follows (Note 1):

Years ended
December 31,2009

2008

2007Percentage of net income to:Average shareholders' equity


11.10
%

13.34
%

13.73
%Average total assets


1.23


1.17


1.12Percentage of average shareholders' equity to average total assets


11.07


8.81


8.19Percentage of cash dividends per share to net income per share


17.89


34.27


38.45


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


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 31%, 30%, and 30% of the Company's bank subsidiaries' total deposits at each of the years ended
December 31, 2009, 2008 and 2007, 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 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

18

---



and
cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipate 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, 2009, 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/MaturityDecember 31, 2009

3 Months
or Less

Over 3
Months to
1 Year

Over 1
Year to 5
Years

Over 5
Years

Total(Dollars in Thousands)Rate sensitive assetsInvestment securities

$
499,891

$
1,747,483

$
2,399,159

$


$
4,646,533Loans, net of non-accruals


4,278,624


233,192


386,276


709,402


5,607,494Total earning assets

$
4,778,515

$
1,980,675

$
2,785,435

$
709,402

$
10,254,027Cumulative earning assets

$
4,778,515

$
6,759,190

$
9,544,625

$
10,254,027Rate sensitive liabilitiesTime deposits

$
1,474,301

$
1,616,955

$
307,092

$
308

$
3,398,656Other interest bearing deposits


2,262,552











2,262,552Securities sold under repurchase agreements


331,388


109,095


1,334


1,000,000


1,441,817Other borrowed funds


1,347,625











1,347,625Junior subordinated deferrable interest debentures


61,858





128,868


10,356


201,082Total interest bearing liabilities

$
5,477,724

$
1,726,050

$
437,294

$
1,010,664

$
8,651,732Cumulative sensitive liabilities

$
5,477,724

$
7,203,774

$
7,641,068

$
8,651,732Repricing gap

$
(699,209
)
$
254,625

$
2,348,141

$
(301,262
)
$
1,602,295Cumulative repricing gap


(699,209
)

(444,584
)

1,903,557


1,602,295Ratio of interest-sensitive assets to liabilities


.872


1.148


6.370


.702


1.185Ratio of cumulative, interest- sensitive assets to liabilities


.872


.938


1.249


1.185


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.

At
December 31, 2009, based on these simulations, a rate shift of 300 basis points in interest rates up will vary projected 2010 net interest income by 1.89%, while a rate shift
of 100 basis points down will not vary net interest income by more than .18% of projected 2010 net interest income. The basis point shift in interest rates is a hypothetical rate scenario used to
calibrate risk, and does not necessarily represent

20

---



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 21 to the Consolidated Financial Statements. At December 31, 2009,
the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $390,000,000, 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 $928,945,000 as of December 31, 2009.
The undivided profits of the bank subsidiaries were approximately $727,972,000 as of December 31, 2009. Additionally, as a result of the
Company's participation in the TARP Capital Purchase Program, the Company is restricted in the payment of dividends and may not without the Treasury Department's consent, declare or pay any dividend
on the Company Common Stock other than a regular semi-annual cash dividend of not more than $.33 per share, as adjusted for any stock dividend or stock split. The restriction ceases to exist only on
the earlier to occur of December 23, 2011 or the date on which the Company has redeemed all of the Series A Preferred Stock issued as part of the Capital Purchase Program or the date on
which the Treasury has transferred all of the Preferred Stock to third parties affiliated with the Treasury.

At
December 31, 2009, the Company has outstanding $1,347,625,000 in other borrowed funds and $201,082,000 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,
2009, shareholders' equity was $1,407,470,000 compared to $1,257,297,000 at December 31, 2008, an increase of $150,173,000, or 11.9%. Shareholders' equity increased primarily due to the
retention of earnings offset by the payment of cash dividends to shareholders and the repurchase of common stock under the Company's publicly announced stock purchase program. 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 10.95% at December 31, 2009 and 9.97% at December 31, 2008. The large increase in the Company's leverage ratio is primarily due to the Company's participation in
the Treasury's CPP program. The core deposit intangibles and goodwill of $304,890,000 as of December 31, 2009, are deducted from the sum of core capital elements when determining the capital
ratios of the Company.

21

---



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 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 17.74% and 15.30% and risk weighted total capital
ratios of 18.99% and 16.35% as of December 31, 2009 and 2008, respectively, which are well above the minimum regulatory requirements and exceed the well capitalized ratios (see Note 21
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 2009 and 2008 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, 2009, 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, 2009, the principal amount of debentures
outstanding totaled $201,082,000. As a result of participation in the TARP Capital Purchase Program, the Company may not without the consent of the Treasury Department redeem any of the Debentures
until the earlier to occur of December 23, 2011, or the date on which the Company has redeemed all of the Series A Preferred Stock issued under the Capital Purchase Program or the date
on which the Treasury has transferred all of the Series A Preferred Stock to third parties not affiliated with the Treasury.

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

22

---



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. As of December 31, 2009, the total $201,082,000, of the Capital Securities outstanding qualified as Tier 1 capital.

In
March 2005, the Federal Reserve Board issued a final rule that allowed the inclusion of trust preferred securities in Tier 1 capital, but placed 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, 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. On March 16, 2009, the Federal Reserve Board extended for two years the transition period. The Company believes that all of the current trust preferred
securities will be included in Tier 1 capital after the transition period ending on March 31, 2011.

The
following table illustrates key information about each of the Debentures and their interest rates at December 31, 2009:

Junior
Subordinated
Deferrable
Interest
Debentures

Repricing
Frequency

Interest Rate

Interest Rate
Index

Maturity Date

Optional
Redemption Date(in thousands)Trust I

$
10,356

Fixed


10.18
%
Fixed

June 2031

June 2011Trust VI

$
25,774

Quarterly


3.72
%
LIBOR + 3.45

November 2032

May 2010Trust VII

$
10,310

Quarterly


3.53
%
LIBOR + 3.25

April 2033

April 2010Trust VIII

$
25,774

Quarterly


3.33
%
LIBOR + 3.05

October 2033

April 2010Trust IX

$
41,238

Fixed


7.10
%
Fixed

October 2036

October 2011Trust X

$
34,021

Fixed


6.66
%
Fixed

February 2037

February 2012Trust XI

$
32,990

Fixed


6.82
%
Fixed

July 2037

July 2012Trust XII

$
20,619

Fixed


6.85
%
Fixed

September 2037

September 2012$
201,082


(1)Trust
IX, X, XI and XII accrue interest at a fixed rate for the first five years, then floating at LIBOR + 1.62%, 1.65%, 1.62% and 1.45% thereafter,
respectively.


Contractual Obligations and Commercial Commitments

The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of December 31,
2009:

Payments due by Period(Dollars in Thousands)Contractual Cash Obligations

Total

Less than
One Year

One to Three
Years

Three to
Five Years

After Five
YearsSecurities sold under repurchase agreements

$
1,441,817

$
440,483

$
1,334

$


$
1,000,000Federal Home Loan Bank borrowings

$
1,347,625


1,347,625








Junior subordinated deferrable interest debentures

$
201,082











201,082Operating leases

$
38,022


10,043


13,930


6,385


7,664Total Contractual Cash Obligations

$
3,028,546

$
1,798,151

$
15,264

$
6,385

$
1,208,746


23

---



The
following table presents contractual commercial commitments of the Company (other than deposit liabilities) as of December 31, 2009:

Amount of Commitment Expiration Per Period(Dollars in Thousands)Commercial Commitments

Total

Less than
One Year

One to Three
Years

Three to
Five Years

After Five
YearsFinancial and Performance Standby Letters of Credit

$
132,151

$
127,941

$
4,210

$


$
Commercial Letters of Credit

$
1,356


1,356








Credit Card Lines

$
48,016


48,016








Other Commercial Commitments

$
1,167,993


705,699


328,749


62,351


71,194Total Commercial Commitments

$
1,349,516

$
883,012

$
332,959

$
62,351

$
71,194


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 Probable Loan Losses as a policy critical to the sound operations of the bank subsidiaries. The allowance for probable 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 probable loan losses. Loan losses or recoveries are
charged or credited directly to the allowances. The allowance for probable 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 probable loan losses and provision for probable loan losses included in the results of operations and "Provision and Allowance for Probable
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 Company's 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.

24

---



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, management may evaluate these credits under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan," now included as part of ASC 310-10, "Receivables," 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 ASC 310-10, 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 ASC 310-10 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 ASC 310-10
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 ASC 450-20.

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.

Preferred Stock, Common Stock and Dividends

The Company had issued and outstanding 68,103,940 shares of $1.00 par value Common Stock held by approximately 2,485 holders of record
at February 24, 2010. The book value of the Common Stock at

25

---



December 31,
2009 was $18.90 per share compared with $16.25 per share at December 31, 2008. The Company has issued and outstanding 216,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, par value $0.01 per share, having a liquidation preference of $1,000 per share, as of February 25, 2009. The book value of the Series A Preferred at
December 31, 2008 was $1,000 per share.

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 2009 and 2008, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2009. 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 $21.88 per share at February 24, 2010.

High

Low2009:

First quarter

$
21.68

$
7.36Second quarter


14.92


7.82Third quarter


16.91


9.18Fourth quarter


19.06


14.85




High

Low2008:

First quarter

$
24.61

$
18.25Second quarter


26.05


21.36Third quarter


35.80


19.28Fourth quarter


27.40


19.08


The
Company paid cash dividends to the common shareholders of $.17 per share on May 11, 2009 and November 2, 2009, to all holders of record on April 27, 2009 and
October 19, 2009, respectively, or $23,262,000 in the aggregate during 2009. The Company paid cash dividends to the shareholders in 2008 of $.33 per share on April 18 and
October 15, 2008, to all holders of record on March 31, 2008 and September 30, 2008, respectively, or $45,253,000 in the aggregate during 2008.

Additionally,
as a result of the Company's participation in the TARP Capital Purchase Program, the Company is restricted in the payment of dividends and may not without the Treasury
Department's consent, declare or pay any dividend on the Company Common Stock other than a regular semi-annual cash dividend of not more than $.33 per share, as adjusted for any stock dividend or
stock split. The restriction ceases to exist only on the earlier to occur of December 23, 2011 or the date on which the Company has redeemed all of the Series A Preferred Stock issued as
part of the Capital Purchase Program or the date on which the Treasury has transferred all of the Preferred Stock to third parties not affiliated with the Treasury. On April 7, 2009, the
Company gained consent from the Treasury Department (the "Treasury Consent") to use the regular semi-annual cash dividend funds of not more than $.33 per share, as adjusted for any stock dividend or
stock split, to pay quarterly dividends and to repurchase common stock. While the IBC Board is inclined to continue to declare regular semi-annual cash dividends, the Board may decide to pay quarterly
cash dividends in the future and the amount of any cash dividends, combined with amounts spent in conjunction with the Company's stock repurchase program, will be limited by the restrictions set forth
in the Treasury Consent. There can be no assurance as to future dividends because they are dependent upon the Company's future earnings, capital requirements, financial condition, acquisition
opportunities and general business conditions at the time.

26

---





In addition, the Company has issued common stock dividends during the last five-year period as follows:

Date

Stock DividendMay 2, 2005


25
%May 2006



%May 21, 2007


10
%May 2008



%May 2009



%


The
Company's principal source of funds to pay cash dividends on its Common Stock and Series A Preferred Stock is cash dividends from its bank subsidiaries. For a discussion of
the limitations, please see Note 21 of Notes to Consolidated Financial Statements.

Stock Repurchase Program

The Company terminated its stock repurchase program on December 19, 2008, in connection with participating in the TARP Capital
Purchase Program, which program prohibited stock repurchases, except for repurchases made in connection with the administration of an employee benefit plan in the ordinary course of business and
consistent with past practices. Pursuant to the Treasury Consent received on April 7, 2009, the Company obtained consent from the Treasury to repurchase shares of the Company's common stock;
provided, however, that in no event will the aggregate amount of cash dividends and common stock repurchases for a given semi-annual period exceed the aggregate amount that would be used to pay the
originally permitted semi-annual cash dividend of $.33 per share. Under the new stock repurchase program, the Company is authorized to repurchase up to $40,000,000 of its common stock within
twelve months from the adoption of the repurchase program on April 9, 2009. Stock repurchases may be made from time to time, on the open market or through private transactions. As part
of the stock repurchase program, during the third quarter of 2009 and the first quarter of 2010, the Company's Board of Directors adopted a rule 10b5-1 trading plan and intends to adopt additional
Rule 10b5-1 trading plans that will allow the Company to purchase its shares of common stock during certain trading blackout periods when the Company would ordinarily not be in the market due
to trading restrictions set forth in its internal trading policy. Shares repurchased in the stock repurchase program will be held in treasury for reissue for various corporate
purposes, including employee stock option plans. The Company is not obligated to repurchase shares under its stock purchase program or to enter into additional Rule 10b5-1 trading plans. The
timing, actual number and value of shares purchased will depend on many factors, including the Company's cash flow and the liquidity and price performance of its shares of common stock. As of
February 24, 2010, a total of 6,913,284 shares had been repurchased under all programs at a cost of $222,435,000.

Except
for repurchases in connection with the administration of an employee benefit plan in the ordinary course of business and consistent with past practices, common stock repurchases
are only conducted under publicly announced repurchase programs approved by the Board of Directors. The

27

---



following
table includes information about common stock share repurchases for the quarter ended December 31, 2009.

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(1)October 1October 31, 2009










$
33,346,000November 1November 30, 2009


68,877


16.08


68,877


32,239,000December 1December 31, 2009


90,309


16.79


90,309


30,722,000Total


159,186

$
16.48


159,186


(1)The
formal stock repurchase program was initiated in 1999 and before it was terminated on December 19, 2008, it had been expanded periodically. The
new repurchase program that was adopted on April 9, 2009 allows for the repurchase of up to $40,000,000 of treasury stock through April 9, 2010.


Equity Compensation Plan Information

The following table sets forth information as of December 31, 2009, 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


823,592

$
20.54


142,922Total


823,592

$
20.54


142,922


28

---



Stock Performance

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

Performance Graph

Total Return To Shareholders  (Includes reinvestment of dividends)

INDEXED RETURNS
December 31,Base
Period
2004Company/Index

2005

2006

2007

2008

2009International Bancshares Corporation


100


95.24


102.65


78.60


84.15


74.66S&P 500 Index


100


104.91


121.48


128.16


80.74


102.11S&P 500 Banks


100


98.54


114.41


80.33


42.18


39.40


29

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders
International Bancshares Corporation:

We
have audited the accompanying consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.

As
discussed in Note 22 to the consolidated financial statements, effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements".

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), International Bancshares Corporation and subsidiaries' internal
control over financial reporting as of December 31, 2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2010 expressed an unqualified opinion on the effectiveness of International
Bancshares Corporation and subsidiaries' internal control over financial reporting.

/s/
McGladrey & Pullen, LLP

Dallas,
Texas
March 1, 2010

30

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Condition        December 31, 2009 and 2008        (Dollars in
Thousands, Except Per Share Amounts)

2009

2008AssetsCash and due from banks

$
224,638

$
298,720Total cash and cash equivalents


224,638


298,720Time deposits with banks





396Investment securities:Held to maturity (Market value of $2,450 on December 31, 2009 and $2,300 on December 31, 2008)


2,450


2,300Available for sale (Amortized cost of $4,541,851 on December 31, 2009 and $5,043,703 on December 31, 2008)


4,644,083


5,071,880Total investment securities


4,646,533


5,074,180Loans


5,667,262


5,872,833Less allowance for probable loan losses


(95,393
)

(73,461
)Net loans


5,571,869


5,799,372Bank premises and equipment, net


490,375


466,371Accrued interest receivable


41,731


48,712Other investments


359,404


388,071Identified intangible assets, net


22,358


27,385Goodwill, net


282,532


282,532Other assets


123,103


53,602Total assets

$
11,762,543

$
12,439,341


See accompanying notes to consolidated financial statements.

31

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Continued)

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Amounts)

2009

2008Liabilities and Shareholders' EquityLiabilities:Deposits:Demandnon-interest bearing

$
1,516,799

$
1,459,670Savings and interest bearing demand


2,262,552


2,081,602Time


3,398,656


3,317,512Total deposits


7,178,007


6,858,784Securities sold under repurchase agreements


1,441,817


1,441,131Other borrowed funds


1,347,625


2,522,986Junior subordinated deferrable interest debentures


201,082


201,048Other liabilities


186,542


158,095Total liabilities


10,355,073


11,182,044Commitments, Contingent Liabilities and Other Tax Matters (Note 18)Shareholders' equity:Series A cumulative perpetual preferred shares, $.01 par value, $1,000 per share liquidation value. Authorized 25,000,000 shares; issued
216,000 shares on December 31, 2009, net of discount of $10,258 and 216,000 shares on December 31, 2008 net of discount of $12,442


205,742


203,558Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,711,111 shares on December 31, 2009 and 95,499,399 shares on December 31,
2008


95,711


95,499Surplus


161,258


158,110Retained earnings


1,122,290


1,016,004Accumulated other comprehensive income


65,878


18,1891,650,879


1,491,360Less cost of shares in treasury, 27,607,171 shares on December 31, 2009 and 26,898,219 shares on December 31, 2008


(243,409
)

(234,063
)Total shareholders' equity


1,407,470


1,257,297Total liabilities and shareholders' equity

$
11,762,543

$
12,439,341


See accompanying notes to consolidated financial statements.

32

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Income        Years ended December 31, 2009, 2008 and 2007    
   (Dollars in Thousands, Except Per Share Amounts)

2009

2008

2007Interest income:Loans, including fees

$
335,769

$
370,718

$
443,564Federal funds sold





927


2,712Investment securities:Taxable


185,931


188,928


190,371Tax-exempt


5,070


3,514


4,270Other interest income


607


516


2,656Total interest income


527,377


564,603


643,573Interest expense:Savings and interest bearing demand deposits


10,832


26,651


53,778Time deposits


62,255


106,479


143,020Securities sold under repurchase agreements


44,723


50,400


43,837Other borrowings


9,451


33,976


75,317Junior subordinated deferrable interest debentures


12,535


14,137


17,178Other interest expense





88


210Total interest expense


139,796


231,731


333,340Net interest income


387,581


332,872


310,233Provision (credit) for probable loan losses


58,833


19,813


(1,762
)Net interest income after provision (credit) for probable loan losses


328,748


313,059


311,995Non-interest income:Service charges on deposit accounts


99,642


98,466


89,186Other service charges, commissions and feesBanking


42,861


40,543


34,897Non-banking


12,697


7,592


18,675Investment securities transactions, net


11,956


6,427


(15,938
)Other investments, net


19,773


15,183


19,821Other income


14,084


21,598


18,722Total non-interest income


201,013


189,809


165,363


See accompanying notes to consolidated financial statements.

33

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Continued)

Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands, Except Per Share Amounts)

2009

2008

2007Non-interest expense:Employee compensation and benefits

$
130,849

$
129,084

$
130,385Occupancy


35,374


38,315


33,583Depreciation of bank premises and equipment


35,879


36,700


32,069Professional fees


12,640


10,051


9,741Deposit insurance assessments


10,249


1,027


872Stationery and supplies


4,496


6,129


6,414Amortization of identified intangible assets


5,286


5,195


5,188Advertising


9,149


13,189


11,973Other


65,109


61,536


70,057Total non-interest expense


309,031


301,226


300,282Income before income taxes


220,730


201,642


177,076Provision for income taxes


77,988


69,530


55,764Net income

$
142,742

$
132,112

$
121,312Preferred stock dividends and discount accretion


12,984





Net income available to common shareholders

$
129,758

$
132,112

$
121,312Basic earnings per common share:Weighted average number of shares outstanding


68,373,732


68,576,654


69,036,274Net income

$
1.90

$
1.93

$
1.76Fully diluted earnings per common share:Weighted average number of shares outstanding


68,394,624


68,714,390


69,370,111Net income

$
1.90

$
1.92

$
1.75


See accompanying notes to consolidated financial statements.

34

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Comprehensive Income        Years ended December 31, 2009, 2008, and 2007
      (Dollars in Thousands)

2009

2008

2007Net income

$
142,742

$
132,112

$
121,312Other comprehensive income, net of tax:Net unrealized gains on securities available for sale arising during the year (tax effects of $29,863, $11,955, and $16,259)


55,460


22,202


30,195Reclassification adjustment for (gains) losses on securities available for sale included in net income (tax effects of $(4,185), $(2,249) and
$5,578)


(7,771
)

(4,178
)

10,360Comprehensive income

$
190,431

$
150,136

$
161,867


See accompanying notes to consolidated financial statements.

35

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Shareholders' Equity        Years ended December 31, 2009, 2008 and 2007
     (in Thousands)

Number
of
Shares

Preferred
Stock

Common
Stock

Surplus

Retained
Earnings

Other
Comprehensive
Income (Loss)

Treasury
Stock

TotalBalance at December 31, 2006


86,224

$


$
86,224

$
138,247

$
861,251

$
(40,390
)
$
(203,276
)
$
842,056Net Income














121,312








121,312Dividends:Shares issued


8,653





8,653





(8,653
)







Cash ($.68 per share)














(44,765
)







(44,765
)Purchase of treasury (1,196,688 shares)




















(29,710
)

(29,710
)Exercise of stock options


564





564


5,122











5,686Stock compensation expense recognized in earnings











771











771Other comprehensive income, net of tax:Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment

















40,555





40,555Balance at December 31, 2007


95,441





95,441


144,140


929,145


165


(232,986
)

935,905Net Income














132,112








132,112Dividends:Cash ($.66 per share)














(45,253
)







(45,253
)Issuance of preferred stock(1)





203,558





12,442











216,000Purchase of treasury stock (48,339 shares)




















(1,077
)

(1,077
)Exercise of stock options


58





58


836











894Stock compensation expense recognized in earnings











692











692Other comprehensive income, net of tax:Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment

















18,024





18,024Balance at December 31, 2008


95,499


203,558


95,499


158,110


1,016,004


18,189


(234,063
)

1,257,297Net Income














142,742








142,742Dividends:Cash ($.34 per share)














(23,262
)







(23,262
)Preferred stock (5%), including discount accretion





2,184








(13,194
)







(11,010
)Purchase of treasury stock (708,952 shares)




















(9,346
)

(9,346
)Exercise of stock options


212





212


2,493











2,705Stock compensation expense recognized in earnings











655











655Other comprehensive income, net of tax:Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment

















47,689





47,689Balance at December 31, 2009


95,711

$
205,742

$
95,711

$
161,258

$
1,122,290

$
65,878

$
(243,409
)
$
1,407,470


See accompanying notes to consolidated financial statements.

36

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Cash Flows        Years ended December 31, 2009, 2008 and 2007        (Dollars in Thousands)

2009

2008

2007Operating activities:Net income:

$
142,742

$
132,112

$
121,312Adjustments to reconcile net income to net cash provided by operating activities:Provision (credit) for probable loan losses


58,833


19,813


(1,762
)Amortization of loan premiums





134


191Accretion of discounts on time deposits with banks





1


(60
)Accretion of time deposit discounts


(14
)

(36
)

(19
)Depreciation of bank premises and equipment


35,879


36,700


32,069Loss (gain) on sale of bank premises and equipment


80


282


(3,434
)Depreciation and amortization of leased assets


300


880


2,167Accretion of investment securities discounts


(1,940
)

(1,405
)

(546
)Amortization of investment securities premiums


6,911


6,017


4,528Investment securities transactions, net


(11,956
)

(6,427
)

15,938Accretion of junior subordinated debenture discounts


34


119


332Amortization of identified intangible assets


5,286


5,195


5,188Stock based compensation expense


655


692


771Earnings from affiliates and other investments


(16,891
)

(11,324
)

(12,298
)Deferred tax benefit


(3,035
)

(4,683
)

(4,626
)Decrease in accrued interest receivable


6,981


5,589


3,505Increase in other assets


(69,845
)

(10,677
)

(1,976
)(Decrease) increase in other liabilities


(97,022
)

(18,878
)

3,482Net cash provided by operating activities


56,998


154,104


164,762Investing activities:Proceeds from maturities of securities


1,637


18,124


25,903Proceeds from sales and calls of available for sale securities


579,099


8,376


841,084Purchases of available for sale securities


(1,196,157
)

(2,002,446
)

(1,522,833
)Principal collected on mortgage backed securities


1,224,938


1,186,450


1,036,364Proceeds from matured time deposits with banks


396


4,457


42,155Net decrease (increase) in loans


168,671


(344,418
)

(470,454
)Purchases of other investments


(11,430
)

(60,567
)

(56,460
)Distributions from other investments


56,988


7,385


93,411Purchases of bank premises and equipment


(61,015
)

(68,537
)

(80,614
)Proceeds from sales of bank premises and equipment


1,052


838


7,973Adjustment to goodwill related tax contingencies








5,885Purchase, adjustment of identified intangible asset (Note 2)


(259
)

(1,074
)

Cash paid in purchase transaction








(23,470
)Cash acquired in purchase transaction








30,772Net cash provided by (used in) investing activities


763,920


(1,251,412
)

(70,284
)


See accompanying notes to consolidated financial statements.

37

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands)

2009

2008

2007Financing activities:Net increase (decrease) in non-interest bearing demand deposits

$
57,129

$
(52,957
)
$
29,813Net increase (decrease) in savings and interest bearing demand deposits


180,950


(210,987
)

31,517Net increase (decrease) in time deposits


81,158


(34,842
)

(11,624
)Net increase in securities sold under repurchase agreements


686


112,148


622,648Other borrowed funds, net


(1,175,361
)

1,066,050


(638,887
)Principal payments of long-term debt








(63,920
)Proceeds from issuance of long-term debt








53,609Purchase of treasury stock


(9,346
)

(1,077
)

(29,710
)Proceeds from stock transactions


2,705


216,894


5,686Payments of cash dividendscommon


(23,261
)

(45,253
)

(44,738
)Payments of cash dividendspreferred


(9,660
)




Payments of cash dividends in lieu of fractional shares








(27
)Net cash (used in) provided by financing activities


(895,000
)

1,049,976


(45,633
)(Decrease) increase in cash and cash equivalents


(74,082
)

(47,332
)

48,845Cash and cash equivalents at beginning of year


298,720


346,052


297,207Cash and cash equivalents at end of year

$
224,638

$
298,720

$
346,052Supplemental cash flow information:Interest paid

$
146,778

$
245,509

$
333,907Income taxes paid


83,830


69,646


62,145Purchases of available-for-sale securities not yet settled


100,829


84,768


Accrued dividends, preferred shares


1,350





Adjustment to goodwill arising from acquisition








7,960


See accompanying notes to consolidated financial statements.

38

---





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, Premier Tierra Holdings, Inc. 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 probable loan losses.

On
July 1, 2009, the Financial Accounting Standards Board officially launched the "FASB Accounting Standards Codification," ("Codification"), which is now the single official
source of authoritative, non-governmental U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission ("SEC"). The Codification supersedes all prior accounting literature. With
the launch of the Codification, U.S. GAAP now consists of two levelsauthoritative (Codification) and non-authoritative (anything not in the Codification). The Codification is effective
for interim and annual periods ending after September 15, 2009, and is organized into approximately 90 accounting topics. The FASB will no longer be issuing

39

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

accounting
standards in the form of Statements, Staff Positions or Emerging Issues Task Force Abstracts. The FASB will instead amend the Codification by issuing "Accounting Standards Updates." The
adoption of the Codification did not have a significant impact to the Company's consolidated financial statements.

Subsequent Events

Effective June 30, 2009, the Company adopted Statement of Financial Accounting Standards No. 165 ("SFAS No. 165"),
"Subsequent Events." SFAS No. 165 is currently included in the Codification under ASC Topic 855, "Subsequent Events" ("ASC 855"). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance
sheet date but before financial statements are issued or available to be issued. ASC 855 defines (i) the period after the balance sheet date during which a reporting entity's management should
evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures an entity should make about events or transactions that occurred after the balance
sheet date. The adoption of the accounting standard did not have an impact on the Company's consolidated financial statements. The Company has evaluated all events or transactions that occurred after
December 31, 2009 through March 1, 2010, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable or
non-recognizable subsequent events.

Per Share Data

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

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, 2009.

Mortgage-backed
securities held at December 31, 2009 and 2008 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"), the Government National Mortgage Association ("Ginnie Mae") or other non-government entities. 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

40

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Mae
are not fully guaranteed by the U.S. Government, but carry an implied AAA rating with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by
the federal government in early September 2008. 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 of the Company to hold and the determination of whether the Company will more likely than not be required to sell the
investment prior to a 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.

Provision and Allowance for Probable Loan Losses

The allowance for probable 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 probable 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.

Management
believes that the allowance for probable 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 probable 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.

Impaired Loans

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. 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

41

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Company
may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

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 probable 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. Other real estate owned totaled
$35,326,000 and $27,733,000 at December 31, 2009 and 2008, respectively. Other real estate owned is included in other assets.

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.

42

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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.

The
Company evaluates uncertain tax positions at the end of each reporting period. 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 benefit recognized in the financial statements from any
such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2009 and 2008,
respectively, after evaluating all uncertain tax positions, the Company has recorded no liability for unrecognized tax benefits at the end of the reporting period. The Company would recognize any
interest accrued on unrecognized tax benefits as other interest expense and penalties as other non-interest expense. During the years ended December 31, 2009, 2008 and 2007, the
Company recognized no interest expense or penalties related to uncertain tax positions.

The
Company files consolidated tax returns in the U.S. Federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal or state income tax
examinations by tax authorities for years before 2006.

Stock Options

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.

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 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-Scholes-Merton option-pricing model does not necessarily provide a reliable single measure of the fair value of the
Company's stock options.

43

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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.

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 September 30, 2009, 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 and contract
rights. As of December 31, 2009, the Company has determined that no impairment of identified intangibles exists. 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 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

44

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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.

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 or total assets.

New Accounting Standards

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157
("SFAS No. 157"), "Fair Value Measurements," now included in ASC 820-10. ASC 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The Company adopted ASC 820-10 on January 1, 2008. The impact of the adoption of the new accounting standard was not
significant.

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," now included in ASC 825-10. ASC 825-10 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. The Company adopted

45

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

ASC
825-10 on January 1, 2008. The adoption of the new accounting standard did not have an impact on the Company's financial statements.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141R ("SFAS No. 141R"), "Business Combinations
(Revised 2007)," now included in ASC 805-10 through ASC 805-50. The accounting standard, 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. The accounting standard 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. It 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
ASC 805-10 through ASC 805-50, the requirements of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," or ASC420-10, 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," or ASC 450. The new accounting standard 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. The new accounting standard will affect the accounting for any future business combinations the Company
enters into.

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," now included in ASC 810-10. ASC 810-10 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 ASC 810-10 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as minority 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, ASC 810-10 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. ASC 810-10 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. The Company adopted ASC 810-10 on January 1, 2009. The adoption of the new accounting standard did not have an impact on
the Company's financial statements.

In
March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161 ("SFAS No. 161"), "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133," now included in ASC 815-10. ASC 815-10 amends and expands the disclosure requirements of SFAS No. 133 to
provide greater transparency about how and why

46

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

and
entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments
and related hedged items affect an entity's financial position, results of operations and cash flows. ASC 815-10 requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815-10 is
effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of the new standard did not have a significant impact on the Company's consolidated
financial statements.

On
April 9, 2009, the Financial Accounting Standards Board issued FASB Staff Position No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP No. 157-4"), included in ASC 820-10. ASC 820-10 provides additional guidance for estimating
fair value in accordance with FASB ASC 820-10, "Fair Value Measurements," when the volume and level of activity for the asset or liability have significantly decreased. Additionally, the staff
position also provides guidance on identifying circumstances that indicate a transaction is not orderly. The staff position stresses that even though there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of the valuation techniques used to measure the fair value of the asset or liability, the main objective of fair value accounting
measurements remains the same. As defined by the FSP, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date under current market conditions. Additionally, the staff position amends the fair value disclosures as originally required by ASC 820-10. The staff position is
effective for interim and annual reporting periods ending after June 15, 2009, although early adoption is permitted for periods ending after March 15, 2009. The adoption of the staff
position did not have a significant impact on the Company's consolidated financial statements.

On
April 9, 2009, the Financial Accounting Standards Board issued FASB Staff Position No. 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments" ("FSP No. 107-1 and APB 28-1"), included in ASC 825-10. The staff position amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," also in
ASC 825-10, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP also amends Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting" to require those disclosures in summarized financial information at interim reporting periods. The new standard is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the staff accounting position did not have a significant impact on the Company's
consolidated financial statements.

On
April 9, 2009, the Financial Accounting Standards Board issued FASB Staff Position No. 115-2 and 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments" (FSP No. 115-2 and 124-2"), included in ASC 320-10 and amends the other-than-temporary guidance in U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments in debt and equity securities in the financial statements. The staff position does not amend existing recognition and
measurement guidance related to other-than-temporary impairment. The staff position requires that unless there is an intent or requirement to sell a debt security, only the amount of the estimated
credit loss is recorded through earnings, while the remaining mark-to-market loss is recognized as a component of equity through other comprehensive income. Additionally, it enhances required
disclosures of existing guidelines. The staff position is effective for interim and annual

47

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1) Summary of Significant Accounting Policies (Continued)

reporting
periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and will be applied to all existing and new investments in debt
securities. The adoption of the accounting standard did not have a significant impact on the Company's consolidated financial statements.

In
August 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-05, to ASC 820, "Fair Value Measurements and Disclosures." The Update
provides amendments for the fair value measurement of liabilities. The Update clarifies which techniques should be used to measure fair value in the event that there are no quoted prices in active
markets for an identical liability. The amendment also clarifies that when estimating the fair value of a liability, entities are not required to factor in any existing requirements that would affect
the transferability of the asset. The Update is effective for the first interim and annual reporting period ending after issuance. The adoption of the update to existing accounting standards did not
have a significant impact on the Company's consolidated financial statements.

In
September 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-06, to update ASC 740, "Income Taxes." The Update addresses the need
for additional implementation guidance in accounting for uncertainty in income taxes. The key provisions of the Update illustrate by example what should be done in the case where a decision needs to
be made regarding whether the income tax is paid by the entity is attributable to the entity or its owners, what constitutes a tax position for a pass-through or tax exempt not-for-profit entity, and
how the accounting for uncertainty in income taxes is impacted when a combined group include both taxable and non-taxable entities. The Update is effective for interim and annual reporting periods
ending after September 15, 2009 for entities that are currently applying the standards for accounting for uncertainty
in income taxes. The adoption of the update to existing accounting standards did not have a significant impact on the Company's consolidated financial statements.

In
December 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-16, to ASC 860, "Transfers and Servicing." The Update amends prior
accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continued exposure to the risks related to the transferred financial
assets. The Update eliminates the concept of a "qualifying special-purpose entity" and changes the requirements for derecognizing financial assets. The Update also requires additional disclosures
about all continuing involvement by the entity in transferred financial assets including information about gains and losses resulting from transfers during the reporting period. The Update is
effective for fiscal periods ending after January 1, 2010. The adoption of the update to existing accounting standards is not expected to have a significant impact on the Company's consolidated
financial statements.

(2) Acquisitions

On December 4, 2008, the Company completed its acquisition of certain rights to InsCorp, Inc. insurance contracts for $1,074,000. InsCorp, Inc. is a multiline
independently owned insurance agency, which insures oil operators, merchants and industrial businesses.

48

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities

The amortized cost and estimated fair value by type of investment security at December 31, 2009 are as follows:

Held to MaturityAmortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

Carrying
value(Dollars in Thousands)Other securities

$
2,450

$


$


$
2,450

$
2,450Total investment securities

$
2,450

$


$


$
2,450

$
2,450




Available for SaleAmortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

Carrying
value(1)(Dollars in Thousands)U.S. Treasury securities

$
1,327

$


$


$
1,327

$
1,327Residential mortgage-backed securities


4,393,731


113,138


(15,105
)

4,491,764


4,491,764Obligations of states and political subdivisions


132,968


4,102


(204
)

136,866


136,866Equity securities


13,825


343


(42
)

14,126


14,126Total investment securities

$
4,541,851

$
117,583

$
(15,351
)
$
4,644,083

$
4,644,083


(1)Included
in the carrying value of residential mortgage-backed securities are $1,898,905 of mortgage-backed securities issued by Ginnie Mae, $2,533,290 of
mortgage-backed securities issued by Fannie Mae and Freddie Mac and $59,569 issued by non-government entities.


The
amortized cost and estimated fair value of investment securities at December 31, 2009, 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 SaleAmortized
Cost

Estimated
fair value

Amortized
Cost

Estimated
fair value(Dollars in Thousands)Due in one year or less

$
1,825

$
1,825

$
1,327

$
1,327Due after one year through five years


625


625





Due after five years through ten years








10,224


10,326Due after ten years








122,744


126,540Residential mortgage-backed securities








4,393,731


4,491,764Equity securities








13,825


14,126Total investment securities

$
2,450

$
2,450

$
4,541,851

$
4,644,083


49

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

The
amortized cost and estimated fair value by type of investment security at December 31, 2008 are as follows:

Held to MaturityAmortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

Carrying
value(Dollars in Thousands)Other securities

$
2,300

$


$


$
2,300

$
2,300Total investment securities

$
2,300

$


$


$
2,300

$
2,300




Available for SaleAmortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

Carrying
value(1)(Dollars in Thousands)U.S. Treasury securities

$
1,319

$


$


$
1,319

$
1,319Residential mortgage-backed securities


4,947,351


59,915


(32,949
)

4,974,317


4,974,317Obligations of states and political subdivisions


81,208


1,346


(340
)

82,214


82,214Equity securities


13,825


205





14,030


14,030Total investment securities

$
5,043,703

$
61,466

$
(33,289
)
$
5,071,880

$
5,071,880


(1)Included
in the carrying value of residential mortgage-backed securities are $1,820,988 of mortgage-backed securities issued by Ginnie Mae, $3,087,038 of
mortgage-backed securities issued by Fannie Mae and Freddie Mac and $66,291 issued by non-government entities.


Mortgage-backed
securities are securities issued by the Freddie Mac, Fannie Mae, Ginnie Mae or non-government entities. 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 carry an implied AAA rating
with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008.

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 $2,747,873,000 and $2,829,519,000, respectively, at December 31, 2009.

Proceeds
from the sale and call of securities available-for-sale were $579,099,000, $8,376,000 and $841,084,000 during 2009, 2008 and 2007, respectively, which amounts included
$544,305,000, $0 and $838,561,000 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

50

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

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 are expected to improve operating ratios in the short term. Gross gains of $11,980,000, $6,427,000 and $2,431,000 and
gross losses of $24,000, $0 and $18,369,000 were realized on the sales in 2009, 2008 and 2007, respectively.

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, 2009 were as follows:

Less than 12 months

12 months or more

TotalFair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses(Dollars in Thousands)Available for sale:Residential mortgage-backed securities

$
16,581

$
(37
)
$
59,879

$
(15,068
)
$
76,460

$
(15,105
)Obligations of states and political subdivisions


14,910


(201
)

275


(3
)

15,185


(204
)Equity securities








33


(42
)

33


(42
)$
31,491

$
(238
)
$
60,187

$
(15,113
)
$
91,678

$
(15,351
)


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, 2008 were as follows:

Less than 12 months

12 months or more

TotalFair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses(Dollars in Thousands)Available for sale:Residential mortgage-backed securities

$
893,067

$
(32,335
)
$
96,734

$
(614
)
$
989,801

$
(32,949
)Obligations of states and political subdivisions


8,262


(274
)

1,299


(66
)

9,561


(340
)$
901,329

$
(32,609
)
$
98,033

$
(680
)
$
999,362

$
(33,289
)


The
unrealized losses on investments in mortgage-backed securities are primarily 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 carry an implied AAA rating with limited credit risk, particularly given the
placement of Fannie Mae and

51

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities (Continued)

Freddie
Mac into conservatorship by the federal government in early September 2008. The decrease in fair value on mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae is
due to market interest rates. The Company has no intent to sell and will not more than likely than not be required to sell before a market price recovery or maturity of the securities; therefore, it
is the conclusion of the Company that the investments in mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae are not considered other-than-temporarily impaired. In addition,
the Company has a small investment in non-agency mortgage-backed securities that have strong credit backgrounds and include additional credit enhancements to protect the Company from losses arising
from high foreclosure rates. These securities have additional market volatility beyond economically induced interest rate events. The Company has received principal and interest payments in line with
expected cash flows at the time of purchase. The Company has no intent to sell and will not more likely than not be required to sell before recovery of amortized cost, the non-agency mortgage-backed
securities until a market price recovery or maturity and has continued to receive cash as expected. It is the conclusion of the Company that the investments in non-agency mortgage-backed securities
are other-than-temporarily impaired, but primarily due to other than credit issues.

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, and because the Company has no intent to sell and
will not more likely than not be required to sell before 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, 2009 and 2008 is as follows:

December 31,2009

2008(Dollars in thousands)Commercial, financial and agricultural

$
2,703,379

$
2,574,247Real estatemortgage


954,010


888,095Real estateconstruction


1,583,057


1,911,954Consumer


146,331


169,589Foreign


280,485


328,948Total loans

$
5,667,262

$
5,872,833


52

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Allowance for Probable Loan Losses

A summary of the transactions in the allowance for probable loan losses for the years ended December 31, 2009, 2008 and 2007 is as follows:

2009

2008

2007(Dollars in Thousands)Balance at January 1,

$
73,461

$
61,726

$
64,537Losses charged to allowance


(38,539
)

(9,134
)

(6,451
)Recoveries credited to allowance


1,638


1,056


4,348Net losses charged to allowance


(36,901
)

(8,078
)

(2,103
)Provision (credit) charged to operations


58,833


19,813


(1,762
)Acquired in purchase transactions








1,054Balance at December 31,

$
95,393

$
73,461

$
61,726


Loans
accounted for on a non-accrual basis at December 31, 2009, 2008 and 2007 amounted to $68,338,000, $164,230,000 and $33,622,000, respectively. The effect of such non-accrual
loans reduced interest income by $4,011,000, $6,242,000 and $1,378,000 for the years ended December 31, 2009, 2008 and 2007, 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 principal or
interest payments at December 31, 2009, 2008 and 2007 amounted to $12,089,000, $6,274,000 and $21,840,000, respectively.

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:

2009

2008

2007(Dollars in Thousands)Balance of impaired loans where there is a related allowance for loan loss

$
106,780

$
137,153

$
39,618Balance of impaired loans where there is no related allowance for loan loss


11,494


27,786


Total impaired loans

$
118,274

$
164,939

$
39,618Allowance allocated to impaired loans

$
30,555

$
20,671

$
4,903


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 $149,528,000, $93,654,000, and $22,590,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Interest income recorded on impaired loans was
$547,000, $236,000 and $1,989,000 for the years ended December 31, 2009, 2008 and 2007. The increase in the balance of impaired loans over

53

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(5) Allowance for Probable Loan Losses (Continued)

historical
levels can be partially attributed to certain loans that filed for bankruptcy protection and a few loan relationships that deteriorated during 2009 and 2008. A portion of the impaired loans
have adequate collateral and credit enhancements not requiring a related allowance for loan loss. The level of impaired loans is reflective of the economic weakness that has been created by the
financial crisis
and the subsequent economic downturn. While impaired loans have increased compared to historical levels, they have decreased for the period ended December 31, 2009, compared to the period
ending December 31, 2008. The decrease in impaired loans from 2008 to 2009 can be attributed to improving economic conditions in certain industry sectors and market areas and collateral
enhancements or other factors that improve the quality of the credits. Management is confident the Company's loss exposure regarding these credits will be significantly reduced due to the Company's
long-standing practices that emphasize secured lending with strong collateral positions and guarantor support. Management is likewise confident the reserve for probable loan losses is adequate. The
Company has no direct exposure to sub-prime loans in its loan portfolio, but the sub-prime crisis has affected the credit markets on a national level, and as a result, the Company has experienced an
increasing amount of impaired loans; however, management's decision to place loans in this category does not necessarily mean that the Company will experience significant losses from these loans or
significant increases in impaired loans from these levels.

Management
of the Company recognizes the risks associated with these impaired loans. However, management's decision to place loans in this category does not necessarily mean that losses
will occur. In the current environment, troubled loan management can be protracted because of the legal and process problems that delay the collection of an otherwise collectable loan. Additionally,
management believes that the collateral related to these impaired loans and/or the secondary support from guarantors mitigates the potential for losses from impaired loans. It is also important to
note that even though the economic conditions in Texas and Oklahoma are weakened, we believe these markets are improving and better positioned to recover than many other areas of the country.

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.

54

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(6) Bank Premises and Equipment

A summary of bank premises and equipment, by asset classification, at December 31, 2009 and 2008 were as follows:

Estimated useful lives

2009

2008(Dollars in Thousands)Bank buildings and improvements

5  40 years

$
384,760

$
351,766Furniture, equipment and vehicles

1  20 years


265,425


252,290Land




124,012


109,214Real estate held for future expansion:Land, building, furniture, fixture and equipment

7  27 years


715


766Less: accumulated depreciation




(284,537
)

(247,665
)Bank premises and equipment, net



$
490,375

$
466,371


(7) Goodwill and Other Intangible Assets

The majority of the Company's identified intangibles are in the form of amortizable core deposit premium. In 2008, the Company purchased $1,074,000 in identified intangibles in the
acquisition of the rights to InsCorp, Inc. insurance agency insurance contracts, which will be amortized over a 7 year period. Information on the Company's identified intangible assets follows:

Carrying
Amount

Accumulated
Amortization

Net(Dollars in Thousands)December 31, 2009:Core deposit premium

$
58,675

$
37,496

$
21,179Identified intangible (contract rights)


1,333


154


1,179Total identified intangibles

$
60,008

$
37,650

$
22,358December 31, 2008:Core deposit premium

$
58,675

$
32,364

$
26,311Identified intangible (contract rights)


1,074





1,074Total identified intangibles

$
59,749

$
32,364

$
27,385


55

---



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, 2009, 2008 and 2007, was $5,286,000, $5,195,000 and $5,188,000, respectively. Estimated
amortization expense for each of the five succeeding fiscal years, and thereafter, is as follows:

Fiscal year ending:

Total(in thousands)2010

$
5,2842011


5,2452012


4,5392013


4,5202014


2,277Thereafter


493Total

$
22,358


Changes
in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 were as illustrated in the table below.

2009

2008(Dollars in Thousands)Balance at January 1,

$
282,532

$
283,198Decrease in goodwill due to sale of partnership interest





(841
)Goodwill from purchase transaction (Note 2)





175Balance as of December 31,

$
282,532

$
282,532


56

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Deposits

Deposits as of December 31, 2009 and 2008 and related interest expense for the years ended December 31, 2009, 2008 and 2007 were as follows:

2009

2008(Dollars in Thousands)Deposits:Demandnon-interest bearingDomestic

$
1,352,745

$
1,325,272Foreign


164,054


134,398Total demand non-interest bearing


1,516,799


1,459,670Savings and interest bearing demandDomestic


1,835,430


1,750,317Foreign


427,122


331,285Total savings and interest bearing demand


2,262,552


2,081,602Time, certificates of deposit$100,000 or moreDomestic


984,171


945,348Foreign


1,257,561


1,191,444Less than $100,000Domestic


759,902


793,953Foreign


397,022


386,767Total time, certificates of deposit


3,398,656


3,317,512Total deposits

$
7,178,007

$
6,858,784




2009

2008

2007(Dollars in Thousands)Interest expense:Savings and interest bearing demandDomestic

$
9,267

$
23,197

$
46,878Foreign


1,565


3,454


6,900Total savings and interest bearing demand


10,832


26,651


53,778Time, certificates of deposit$100,000 or moreDomestic


18,091


28,990


37,133Foreign


23,315


41,383


54,494Less than $100,000Domestic


15,600


26,297


36,460Foreign


5,249


9,809


14,933Total time, certificates of deposit


62,255


106,479


143,020Total interest expense on deposits

$
73,087

$
133,130

$
196,798


57

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Deposits (Continued)

Scheduled maturities of time deposits as of December 31, 2009 were as follows:

Total(in thousands)2010

$
3,094,1522011


199,8632012


59,9372013


40,9222014


3,481Thereafter


301Total

$
3,398,656


Scheduled
maturities of time deposits in amounts of $100,000 or more at December 31, 2009, were as follows:

Due within 3 months or less

$
931,885Due after 3 months and within 6 months


547,820Due after 6 months and within 12 months


590,219Due after 12 months


171,808$
2,241,732


(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 repurchase agreements were mortgage-backed book entry securities and averaged
$1,461,839,000 and $1,436,224,000 during 2009 and 2008, respectively, and the maximum amount outstanding at any month end during 2009 and 2008 was $1,500,223,000 and $1,556,734,000, respectively.

58

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(9) Securities Sold Under Repurchase Agreements (Continued)

Further
information related to repurchase agreements at December 31, 2009 and 2008 is set forth in the following table:

Collateral Securities

Repurchase BorrowingBook Value of
Securities Sold

Fair Value of
Securities Sold

Balance of
Liability

Weighted Average
Interest Rate(Dollars in Thousands)December 31, 2009 term:Overnight agreements

$
428,543

$
440,262

$
277,153


1.00
%1 to 29 days


36,576


37,773


14,420


1.7830 to 90 days


61,197


62,918


39,814


1.89Over 90 days


1,313,560


1,350,490


1,110,430


3.52Total

$
1,839,876

$
1,891,443

$
1,441,817


2.97
%December 31, 2008 term:Overnight agreements

$
344,161

$
348,784

$
250,268


1.30
%1 to 29 days


66,002


66,341


26,942


2.4030 to 90 days


105,195


105,917


53,972


2.42Over 90 days


1,341,304


1,350,612


1,109,949


3.65Total

$
1,856,662

$
1,871,654

$
1,441,131


3.17
%


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.

Further
information regarding the Company's other borrowed funds at December 31, 2009 and 2008 is set forth in the following table:

December 31,2009

2008(Dollars in Thousands)Federal Home Loan Bank advancesshort-termBalance at year end

$
1,347,625

$
2,522,986Rate on balance outstanding at year end


.14
%

1.07
%Average daily balance

$
1,662,457

$
1,395,220Average rate


.57
%

2.44
%Maximum amount outstanding at any month end

$
2,620,761

$
2,522,986


59

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(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, 2008, 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, 2009, the principal amount of debentures
outstanding totaled $201,082,000. As a result of participation in the TARP Capital Purchase Program, the Company may not, without the consent of the Treasury Department, redeem any of the Debentures
until the earlier to occur of December 23, 2011, or the date on which the Company has redeemed all of the Series A Preferred Stock issued under the Capital Purchase Program or the date
on which the Treasury has transferred all of the Series A Preferred Stock to third parties not affiliated with the Treasury.

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. As of December 31, 2009, the total
$201,082,000, of the Capital Securities outstanding qualified as Tier 1 capital.

In
March 2005, the Federal Reserve Board issued a final rule that allowed the inclusion of trust preferred securities in Tier 1 capital, but placed 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, 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. On March 16, 2009, the Federal Reserve Board extended for two years the transition period. The Company believes that substantially all of the current trust
preferred securities will be included in Tier 1 capital after the transition period ending on March 31, 2011.

60

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(11) Junior Subordinated Deferrable Interest Debentures (Continued)

The
following table illustrates key information about each of the Debentures and their interest rates at December 31, 2009:

Junior
Subordinated
Deferrable
Interest
Debentures

Repricing
Frequency

Interest Rate

Interest Rate
Index(1)

Maturity Date

Optional
Redemption Date(in thousands)Trust I

$
10,356

Fixed


10.18
%
Fixed

June 2031

June 2011Trust VI

$
25,774

Quarterly


3.72
%
LIBOR + 3.45

November 2032

May 2010Trust VII

$
10,310

Quarterly


3.53
%
LIBOR + 3.25

April 2033

April 2010Trust VIII

$
25,774

Quarterly


3.33
%
LIBOR + 3.05

October 2033

April 2010Trust IX

$
41,238

Fixed


7.10
%
Fixed

October 2036

October 2011Trust X

$
34,021

Fixed


6.66
%
Fixed

February 2037

February 2012Trust XI

$
32,990

Fixed


6.82
%
Fixed

July 2037

July 2012Trust XII

$
20,619

Fixed


6.85
%
Fixed

September 2037

September 2012$
201,082


(1)Trust
IX, X, XI and XII accrue interest at a fixed rate for the first five years, then floating at LIBOR + 1.62%, 1.65%, 1.62% and 1.45% thereafter,
respectively.


61

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(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 potential common shares outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended December 31, 2009, 2008, and 2007 is set forth
in the following table:

Net Income
(Numerator)

Shares
(Denominator)

Per Share
Amount(Dollars in Thousands,
Except Per Share Amounts)December 31, 2009:Basic EPSNet income available to common shareholders

$
129,758


68,373,732

$
1.90Potential dilutive common shares





20,892Diluted EPS

$
129,758


68,394,624

$
1.90December 31, 2008:Basic EPSNet income

$
132,112


68,576,654

$
1.93Potential dilutive common shares





137,736Diluted EPS

$
132,112


68,714,390

$
1.92December 31, 2007:Basic EPSNet income

$
121,312


69,036,274

$
1.76Potential dilutive common shares





333,837Diluted EPS

$
121,312


69,370,111

$
1.75


(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 $4,366,000, $4,683,000 and $4,628,000 were charged to income for the years ended December 31, 2009, 2008, and 2007, 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.

62

---



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, 2009 and 2008 are as follows:

2009

2008(Dollars in Thousands)Loans:Commercial

$
230,464

$
270,298Others


50,021


58,650280,485


328,948Less allowance for probable loan losses


(393
)

(604
)Net loans

$
280,092

$
328,344Accrued interest receivable

$
1,373

$
1,896


At
December 31, 2009, the Company had $133,507,000 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 $13,681,000, $17,084,000 and $21,525,000 for the years ended December 31, 2009, 2008 and 2007, 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:

2009

2008

2007(Dollars in Thousands)CurrentU.S.

$
77,653

$
71,280

$
60,462State


3,340


2,882


(127
)Foreign


30


51


55Total current taxes


81,023


74,213


60,390DeferredU.S.


(8,513
)

(6,030
)

582State


5,478


1,347


(5,208
)Total deferred taxes


(3,035
)

(4,683
)

(4,626
)Total income taxes

$
77,988

$
69,530

$
55,764


63

---



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 2009, 2008 and 2007 to income before income taxes. The reasons for the
differences for the years ended December 31 are as follows:

2009

2008

2007(Dollars in Thousands)Computed expected tax expense

$
77,293

$
70,720

$
61,977Change in taxes resulting from:Tax-exempt interest income


(1,937
)

(1,552
)

(1,625
)State tax, net of federal income taxes and tax credit


5,722


2,834


(2,272
)Other investment income


(3,526
)

(3,321
)

(3,079
)Other


436


849


763Actual tax expense

$
77,988

$
69,530

$
55,764


The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are reflected
below:

2009

2008(Dollars in Thousands)Deferred tax assets:Loans receivable, principally due to the allowance for probable loan losses

$
35,979

$
27,237Other real estate owned


76


42Goodwill


3,132


3,132Accrued expenses


170


200State net operating loss carryforwards





5,069Other


4,826


6,710Total deferred tax assets


44,183


42,390Deferred tax liabilities:Lease financing receivable


(59
)

(4,503
)Bank premises and equipment, principally due to differences on depreciation


(24,786
)

(21,514
)Net unrealized gains on available for sale investment securities


(36,355
)

(9,988
)FHLB stock


(1,489
)

(1,398
)Identified intangible assets


(20,951
)

(20,202
)Other


(7,111
)

(8,021
)Total deferred tax liabilities


(90,751
)

(65,626
)Net deferred tax liability

$
(46,568
)
$
(23,236
)


The
net deferred tax liability of $46,568,000 at December 31, 2009 is included in other liabilities in the consolidated statements of condition. The net deferred tax liability of
$23,236,000 at December 31, 2008 is included in other liabilities in the consolidated statements of condition.

64

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(15) Income Taxes (Continued)

State
net operating loss carryforwards were fully utilized in 2009. They originally expired 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"). Effective May 19, 2008, the 2005 Plan
was amended to increase the number of shares available for stock option grants under the 2005 Plan by 300,000 shares. 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 non-qualified 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. As of
December 31, 2009, 142,922 shares were available for future grants under the 2005 Plan.

The
fair value of each option award granted under the plan 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 historical exercise behavior. 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.

2009

2008Expected Life (Years)


6.13


6.13Dividend yield


2.99
%

2.75
%Interest rate


2.12
%

1.44
%Volatility


41.81
%

31.08
%


A
summary of option activity under the stock option plans for the twelve months ended December 31, 2009 is as follows:

Number of
options

Weighted
average
exercise
price

Weighted
average
remaining
contractual
term (years)

Aggregate
intrinsic
value ($)Options outstanding at December 31, 2008


833,597

$
21.43Plus: Options granted


249,250


10.46Less:Options exercised


211,772


12.77Options expired


15,052


12.66Options forfeited


32,431


18.09Options outstanding at December 31, 2009


823,592

$
20.54


4.83

$
2,066,000Options fully vested and exercisable at December 31, 2009


304,415

$
24.02


3.02

$
20,000


65

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(16) Stock Options (Continued)

Stock-based
compensation expense included in the consolidated statements of income for the twelve months ended December 31, 2009 and December 31, 2008 was
approximately $655,000 and $692,000, respectively. As of December 31, 2009 there was approximately $1,199,000, 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 1.6 years.

A
summary of the status of the Company's non-vested options as of December 31, 2009, and changes during the twelve months ended December 31, 2009, is presented below:

Non-vested Options

Options

Weighted average
grant-date
fair value ($)Non-vested options at December 31, 2008


367,208

$
6.19Granted


249,250


3.31Vested


80,546


6.48Forfeited


16,735


5.03Non-vested options at December 31, 2009


519,177

$
4.80


Other
information pertaining to option activity during the twelve month period ending December 31, 2009 and December 31, 2008 is as follows:

Twelve Months Ended December 31,2009

2008Weighted average grant date fair value of stock options granted

$
3.31

$
4.90Total fair value of stock options vested

$
522,000

$
624,000Total intrinsic value of stock options exercised

$
581,000

$
591,000


(17) Long Term Restricted Stock Units

As a participant in the Troubled Asset Relief Program Capital Purchase Program (the "CPP"), the Company must comply with the Interim Final Rule on TARP Standards for Compensation
and Corporate Governance issued in June 2009 by the Treasury, which implements the provisions of Section 111 of the Emergency Economic Stabilization Act of 2008, as amended by the
American Recovery and Reinvestment Act of 2009. Pursuant to these provisions, the Company is subject to
certain compensation restrictions, which include a prohibition on the payment or accrual of any bonuses (including equity-based incentive compensation) to certain officers and employees except for
awards of CPP-compliant long-term restricted stock and stock units.

On
December 18, 2009, the Company's board of directors (the "Board") adopted the 2009 International Bancshares Corporation Long-Term Restricted Stock Unit Plan (the "Plan") to
give the Company additional flexibility in the compensation of its officers, employees, consultants and advisors in compliance with all applicable laws and restrictions. The Plan authorizes the
Company to issue Restricted Stock Units ("RSUs") to officers, employees, consultants and advisors of the Company and its subsidiaries. The Plan provides that RSUs shall be issued by a committee of the
Board appointed by the Board from

66

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Long Term Restricted Stock Units (Continued)

time
to time consisting of at least two (2) members of the Board, each of whom is both a non-employee director and an outside director. On December 18, 2009, the Board adopted resolutions
creating the Long-Term Restricted Stock Unit Plan Committee to administer the Plan. RSUs issued under the Plan are not equity and are payable only in cash. The Plan provides for both the issuance of
CPP-compliant long-term RSUs as well as RSUs that are not CPP-compliant.

Dennis
E. Nixon, the Company's President, Chairman of the Board and a director of the Company, received an award of CPP-compliant RSUs, granted as of December 18, 2009, in the
amount of $250,000 for his performance during 2009. In order to meet the requirements of a CPP-compliant RSU, Mr. Nixon's RSUs do not exceed one-third of his total annual compensation.

(18) Commitments, Contingent Liabilities and Other Tax Matters

The Company leases portions of its banking premises and equipment under operating leases. Total rental expense for the years ended December 31, 2009, 2008 and 2007 were
$12,600,000, $11,700,000 and
$10,100,000, respectively. Future minimum lease payments due under non-cancellable operating leases at December 31, 2009 were as follows:

Fiscal year ending:

Total(in thousands)2010

$
10,0432011


8,2822012


5,6482013


3,9002014


2,485Thereafter


7,664Total

$
38,022


It
is expected that certain leases will be renewed, as these leases expire. Aggregate future minimum rentals to be received under non-cancellable sub-leases greater than one year at
December 31, 2009 were $13,300,000.

Cash
of approximately $60,154,000 and $60,405,000 at December 31, 2009 and 2008, respectively, was maintained to satisfy regulatory reserve requirements.

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's lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions. The Internal Revenue Service issued a Notice of Final
Partnership Administrative Adjustments ("FPAA") on two of the partnerships. In both partnerships, the lead bank subsidiary was the owner of a ninety-nine percent (99%) limited partnership interest. In
connection with

67

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

the
two partnerships through the first quarter of 2006, the Company expensed approximately $25.7 million, which amount represents the total of the tax adjustments due and the interest due on
such adjustments for both FPAAs. Management will continue to evaluate the correspondence with the IRS on the FPAAs and make any appropriate revisions to the amounts as deemed necessary.

The
Company is involved in a dispute related to certain tax matters that were transferred to the Company in its 2004 acquisition of LFIN. The dispute involves claims by the former
controlling shareholders of LFIN related to certain tax benefits enjoyed by LFIN in connection with losses on loans acquired from a failed thrift and a dispute LFIN had with the FDIC regarding tax
benefits related to the failed thrift acquisition. A jury trial related to this dispute commenced in the U.S. District Court for the Western District of Oklahoma on February 8, 2010. While the
outcome of any jury trial is very difficult to predict, the Company has determined, based on discussions with its legal counsel, that any material loss related to this dispute is remote. Management
intends to continue to evaluate the merits of this matter and make appropriate revisions to the amount reserved in connection with this dispute as deemed necessary.

(19) 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 collectability or present other unfavorable features. The aggregate amounts receivable from such related parties
amounted to approximately $67,681,000 and $79,438,000 at December 31, 2009 and 2008, respectively.

(20) 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, 2009, the following financial amounts of instruments, whose contract amounts represent credit risks, were
outstanding:

Commitments to extend credit

$
1,167,993,000Credit card lines


48,016,000Standby letters of credit


132,151,000Commercial letters of credit


1,356,000


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, 2009, the maximum potential amount of future payments is
$132,151,000. At December 31, 2009, the fair value of

68

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

these
guarantees is not significant. Unsecured letters of credit totaled $29,384,000 and $28,771,000 at December 31, 2009 and 2008, 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.

(21) Capital Requirements

On December 23, 2008, as part of the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program") of the United States Department of the Treasury
("Treasury"), the Company entered into a Letter Agreement incorporating an attached Securities Purchase Agreement-Standard Terms (collectively, the "Securities Purchase Agreement") with the Treasury.
The closing of the transactions contemplated in the Securities Purchase Agreement occurred on December 23, 2008.

Under
the Securities Purchase Agreement, the Company agreed to sell 216,000 shares of the Company's fixed-rate cumulative perpetual preferred stock, Series A, par value $.01 per share
(the "Senior Preferred Stock"), having a liquidation preference of $1,000 per share, for a total price of $216,000,000. The Senior Preferred Stock will pay dividends at the rate of 5% per year for the
first five years and 9% per year thereafter. The Senior Preferred Stock has no maturity date and ranks senior to the Company's common stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Senior Preferred Stock generally is non-voting except for class voting rights on matters that would
adversely affect the
rights of the holders of the Senior Preferred Stock. The Senior Preferred Stock qualifies for inclusion in Tier 1 capital for regulatory capital purposes and the issuance of the Senior Preferred Stock
increased the capital ratios of the Company.

69

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Capital Requirements (Continued)

In
conjunction with the purchase of the Senior Preferred Stock, the Treasury received a warrant (the "Warrant") to purchase 1,326,238 shares of the Company's common stock (the "Warrant
Shares") at $24.43 per share, which would represent an aggregate common stock investment in the Company on exercise of the warrant in full equal to 15% of the Senior Preferred Stock investment. The
term of the Warrant is ten years. The per share exercise price and the number of shares issuable upon exercise of the Warrant is subject to adjustment pursuant to customary anti-dilutive
provisions in certain events, such as stock splits, certain distributions of securities or other assets to holders of the Company's common stock, and upon certain issuances of the Company's common
stock at or below specified prices relative to the initial per share exercise price of the Warrant. The Warrant is immediately exercisable. The number of shares issuable upon exercise of the Warrant
is also subject to reduction in certain limited events that involve the Company conducting Qualified Equity Offerings on or prior to December 31, 2009. Both the Senior Preferred Stock and
Warrant will be accounted for as components of Tier 1 capital.

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, 2009, the subsidiary banks could pay dividends of up to $390,000,000 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.

Additionally,
as a result of the Company's participation in the TARP Capital Purchase Program, the Company is restricted in the payment of dividends and may not, without Treasury
Department's
consent, declare or pay any dividend on the Company Common Stock other than a regular semi-annual dividend of not more than $.33 per share, as adjusted for any stock dividend or stock split. The
restriction ceases to exist only on the earlier to occur of December 23, 2011 or the date on which the Company has redeemed all of the Series A Preferred Stock issued as part of the
Capital Purchase Program or the date on which the Treasury has transferred all of the Preferred Stock to third parties not affiliated with the Treasury. Also, all accrued and unpaid dividends on the
Senior Preferred Stock would have to be fully paid before the Company paid any dividends on its Common Stock. On April 7, 2009, the Company gained consent from the Treasury Department (the
"Treasury Consent") to use the regular semi-annual cash dividend funds of not more than $.33 per share, as adjusted for any stock dividend or stock split, to pay quarterly dividends and to repurchase
common stock. Any cash dividends combined with amounts spent in conjunction with the Company's stock repurchase program will be limited by the restrictions set forth in the Treasury Consent.

70

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Capital Requirements (Continued)

A
company that participates in the TARP Capital Purchase Program must adopt certain standards for executive compensation under the Emergency Economic Stabilization Act of 2008 (EESA) and
the American Recovery and Reinvestment Act of 2009 (the "ARRA") which was signed into law on February 17, 2009. While the U.S. Treasury must promulgate regulations to implement the executive
compensation restrictions and standards set forth in the ARRA, the new law significantly expands the executive compensation restrictions previously imposed by the EESA. Such restrictions apply to any
entity that has received or will receive funds under the TARP Capital Purchase Program, and shall generally continue to apply for as long as any obligation arising from securities issued under TARP,
including preferred stock issued under the Capital Purchase Program, remain outstanding. These ARRA restrictions shall not apply to any TARP Capital Purchase Program recipient during such time when
the federal government (i) only holds any warrants to purchase common stock of such recipient or (ii) holds no preferred stock or warrants to purchase common stock of such recipient. As
a result of the Company's participation in the TARP Capital Purchase Program, the restrictions and standards set forth in the ARRA shall be applicable to the Company, subject to regulations
promulgated by the U.S. Treasury.

Pursuant
to the provisions of the ARRA, the Company may be permitted to repay the $216 million it received under the TARP Capital Purchase Program, without regard to certain
repayment restrictions in the Securities Purchase Agreement, which restricted the Company's ability to redeem the Senior Preferred Stock during the first three years following the date of
investment. The redemption of the Senior Preferred Stock is subject to the consent of the Federal Reserve Bank of Dallas, which is the Company's primary Federal banking regulator. To date, the Company
has not redeemed any of the Senior Preferred Stock.

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, 2009, that the Company and each of the bank subsidiaries met all capital adequacy requirements to which it is subject.

As
of December 31, 2009, 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 Company and the bank subsidiaries must maintain minimum Total risk-based, Tier 1 risk based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of the Company or any of the bank subsidiaries as
well capitalized.

71

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Capital Requirements (Continued)

The Company's and the bank subsidiaries' actual capital amounts and ratios for 2009 are presented in the following table:

Actual

For Capital Adequacy
Purposes

To Be Well Capitalized
Under Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

Ratio(greater than
or equal to)

(greater than
or equal to)

(greater than
or equal to)

(greater than
or equal to)(Dollars in Thousands)As of December 31, 2009:Total Capital (to Risk Weighted Assets):Consolidated

$
1,321,656


18.99
%
$
556,763


8.00
%

N/A


N/AInternational Bank of Commerce, Laredo


881,679


14.80


476,708


8.00

$
595,885


10.00
%International Bank of Commerce, Brownsville


104,964


22.70


36,984


8.00


46,230


10.00International Bank of Commerce, Zapata


50,648


29.00


13,973


8.00


17,466


10.00Commerce Bank


61,157


30.12


16,244


8.00


20,305


10.00Tier 1 Capital (to Risk Weighted Assets):Consolidated

$
1,234,929


17.74
%
$
278,381


4.00
%

N/A


N/AInternational Bank of Commerce, Laredo


810,417


13.60


238,354


4.00

$
357,531


6.00
%International Bank of Commerce, Brownsville


99,179


21.45


18,492


4.00


27,738


6.00International Bank of Commerce, Zapata


49,120


28.12


6,987


4.00


10,480


6.00Commerce Bank


58,703


28.91


8,122


4.00


12,183


6.00Tier 1 Capital (to Average Assets):Consolidated

$
1,234,929


10.95
%
$
451,133


4.00
%

N/A


N/AInternational Bank of Commerce, Laredo


810,417


8.59


377,496


4.00

$
471,870


5.00
%International Bank of Commerce, Brownsville


99,179


12.32


32,189


4.00


40,237


5.00International Bank of Commerce, Zapata


49,120


11.13


17,651


4.00


22,063


5.00Commerce Bank


58,703


13.17


17,835


4.00


22,293


5.00


72

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Capital Requirements (Continued)

The
Company's and the bank subsidiaries' actual capital amounts and ratios for 2008 are also presented in the following table:

Actual

For Capital Adequacy
Purposes

To Be Well Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

Ratio(greater than
or equal to)

(greater than
or equal to)

(greater than
or equal to)

(greater than
or equal to)(Dollars in Thousands)As of December 31, 2008:Total Capital (to Risk Weighted Assets):Consolidated

$
1,205,014


16.35
%
$
589,741


8.00
%

N/A


N/AInternational Bank of Commerce, Laredo


804,621


12.39


519,556


8.00

$
649,445


10.00
%International Bank of Commerce, Brownsville


89,087


18.96


37,589


8.00


46,987


10.00International Bank of Commerce, Zapata


42,120


25.51


13,207


8.00


16,509


10.00Commerce Bank


53,451


28.43


15,042


8.00


18,803


10.00Tier 1 Capital (to Risk Weighted Assets):Consolidated

$
1,128,057


15.30
%
$
294,870


4.00
%

N/A


N/AInternational Bank of Commerce, Laredo


736,263


11.34


259,778


4.00

$
389,667


6.00
%International Bank of Commerce, Brownsville


83,998


17.88


18,795


4.00


28,192


6.00International Bank of Commerce, Zapata


40,634


24.61


6,604


4.00


9,905


6.00Commerce Bank


51,427


27.35


7,521


4.00


11,282


6.00Tier 1 Capital (to Average Assets):Consolidated

$
1,128,057


9.97
%
$
452,574


4.00
%

N/A


N/AInternational Bank of Commerce, Laredo


736,263


7.54


390,531


4.00

$
488,164


5.00
%International Bank of Commerce, Brownsville


83,998


10.00


33,589


4.00


41,987


5.00International Bank of Commerce, Zapata


40,634


9.32


17,433


4.00


21,791


5.00Commerce Bank


51,427


11.83


17,387


4.00


21,734


5.00


73

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements" for financial assets
and liabilities. Additionally, in accordance with Financial Accounting Standards Board Staff Position No. 157-2, ("FSP No 157-2"), "Effective date of FASB Statement No. 157," the Company
delayed application of SFAS No. 157 for non-financial assets and non-financial liabilities until January 1, 2009, except for those that are recognized or disclosed at fair value on a
recurring basis. SFAS No. 157 and FSP No. 157-2 are now included in the Accounting Standards Codification ("ASC") in Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"). ASC
820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies to all
financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date; it also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three
levels:



A
description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is
set forth below.

74

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value (Continued)

The
following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of December 31, 2009 by level within the fair value
measurement hierarchy.

Fair Value Measurements at
Reporting Date Using(in thousands)Assets/Liabilities
Measured at
Fair Value
December 31, 2009

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Measured on a recurring basis:Assets:U.S. Treasury securitiesAvailable-for-sale

$
1,327

$


$
1,327

$
Residential mortgage-backed securitiesAvailable-for-sale


4,491,764





4,432,195


59,569States and political subdivisionsAvailable-for-sale


136,866





136,866


OtherAvailable-for-sale


14,126


626


13,500


Measured on a non-recurring basis:Assets:Impaired Loans


76,225








76,225


75

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value (Continued)

The
following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of December 31, 2008 by level within the fair value
measurement hierarchy.

Fair Value Measurements at
Reporting Date Using(in thousands)Assets/Liabilities
Measured at
Fair Value
December 31, 2008

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Measured on a recurring basis:Assets:U.S. Treasury securitiesAvailable-for-sale

$
1,319

$


$
1,319

$
Residential mortgage-backed securitiesAvailable-for-sale


4,974,317





4,974,317


States and political subdivisionsAvailable-for-sale


82,214





82,214


OtherAvailable-for-sale


14,030


530


13,500


Measured on a non-recurring basis:Assets:Impaired Loans


116,482








116,482


Investment
securities available-for-sale are classified within level 2 and level 3 of the valuation hierarchy, with the exception of certain equity investments that are classified within
level 1. For investments classified as level 2 in the fair value hierarchy, the Company obtains fair value measurements for investment securities from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond's terms and conditions, among other things. Investment securities classified as level 3 are non-agency mortgage-backed securities. The non-agency
mortgage-backed securities held by the Company are traded in in-active markets and markets that have experienced significant decreases in volume and level of activity, as exhibited by few recent
transactions, a significant decline or absence of new issuances, price quotations that are not based on comparable securities transactions and wide bid-ask spreads among other factors. As a result of
the inability to use quoted market prices to determine fair value for these securities, the Company determined that fair value, as determined by level 3 inputs in the fair value hierarchy, is more
appropriate for financial reporting and more consistent with the expected performance of the investments. For the investments classified within level 3 of the fair value hierarchy, the Company used a
discounted cash flow model to determine the fair value. Inputs in the model included both historical performance and expected future performance based on information currently available. Assumptions
used in the discounted cash flow model included estimates on future principal prepayment rates, default and loss severity rates.

76

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value (Continued)

The
following table presents a reconciliation of activity for such mortgage-backed securities on a net basis (Dollars in thousands):

Balance at December 31, 2008

$
Principal paydowns, net of discount amortization


(8,023
)Total unrealized losses included in:Other comprehensive income


(14,979
)Transfers into level 3


82,571Balance at December 31, 2009

$
59,569


Certain
financial assets and financial liabilities are measured at fair value on a nonrecurring basis. The instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

As
of December 31, 2009, the Company's financial instruments measured at fair value on a non-recurring basis are limited to impaired loans. Impaired loans are classified within
level 3 of the valuation hierarchy. The fair value of impaired loans is derived in accordance with FASB ASC 310, "Receivables". The fair value of impaired loans is based on the fair value of the
collateral, as determined through an external appraisal process, discounted based on internal criteria. Impaired loans are primarily comprised of collateral-dependent commercial loans.

The
fair value estimates, methods, and assumptions for the Company's financial instruments at December 31, 2009 and December 31, 2008 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.

Investment securities held-to-maturity

The carrying amounts of investments held-to-maturity approximate fair value.

Investment Securities

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

77

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value (Continued)

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, 2009, and December 31, 2008, the carrying amount of fixed rate performing loans was $1,303,049,000 and $1,272,370,000 respectively, and the estimated fair value was
$1,200,343,000 and $1,253,496,000, respectively.

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, 2009 and 2008. 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, 2009 and 2008, the carrying amount of time deposits was $3,398,656,000 and $3,317,512,000, respectively, and the
estimated fair value was $3,412,538,000 and $3,343,150,000, respectively.

Securities Sold Under Repurchase Agreements and Other Borrowed Funds

Securities sold under repurchase agreements include both short and long-term maturities. Due to the contractual terms of the short-term
instruments, the carrying amounts approximated fair value at December 31, 2009 and December 31, 2008. The fair value of the long-term instruments is based on established market spreads.
At December 31, 2009 and December 31, 2008, the carrying amount of long-term repurchase agreements was $1,000,000,000 and the estimated fair value was $1,099,064,000 and $1,158,873,000,
respectively. Other borrowed funds are short-term Federal Home Loan Bank borrowings. Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at
December 31, 2009 and December 31, 2008.



The Company currently has fixed and floating junior subordinated deferrable interest debentures outstanding. Due to the contractual
terms of the floating rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at December 31, 2009 and December 31, 2008. The fair value of
the fixed junior subordinated deferrable interest debentures is based on established market spreads to the debentures. At December 31, 2009 and 2008, the carrying amount of fixed junior

78

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Fair Value (Continued)

subordinated
deferrable interest debentures was $139,224,000 and $139,190,000, respectively, and the estimated fair value was $65,762,000 and $44,704,000, respectively.

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.



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.

79

---





INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Condition  (Parent Company Only)

December 31, 2009 and 2008  (Dollars in Thousands)

2009

2008ASSETSCash

$
16,712

$
160,754Other investments


61,270


38,079Notes receivable


100


350Investment in subsidiaries


1,533,062


1,264,021Other assets


3,260


1,037Total assets

$
1,614,404

$
1,464,241LIABILITIES AND SHAREHOLDERS' EQUITYLiabilities:Junior subordinated deferrable interest debentures

$
201,082

$
201,048Due to IBC Trading


21


21Other liabilities


5,730


5,876Total liabilities


206,833


206,945Shareholders' equity:Preferred shares


205,742


203,558Common shares


95,711


95,499Surplus


161,258


158,110Retained earnings


1,122,392


1,016,003Accumulated other comprehensive income


65,877


18,1891,650,980


1,491,359Less cost of shares in treasury


(243,409
)

(234,063
)Total shareholders' equity


1,407,571


1,257,296Total liabilities and shareholders' equity

$
1,614,404

$
1,464,241


80

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Income  (Parent Company Only)

Years ended December 31, 2009, 2008 and 2007  (Dollars in Thousands)

2009

2008

2007Income:Dividends from subsidiaries

$
45,122

$
53,460

$
114,520Interest income on notes receivable


6


80


50Interest income on other investments


8,191


5,313


6,283Other interest income


914


486


573Other


7,225


65


Total income


61,458


59,404


121,426Expenses:Interest expense (Debentures)


12,535


14,137


17,178Other interest expense





88


Other


1,751


1,793


4,789Total expenses


14,286


16,018


21,967Income before federal income taxes and equity in undistributed net income of subsidiaries


47,172


43,386


99,459Income tax benefit


743


(3,593
)

(5,281
)Income before equity in undistributed net income of subsidiaries


46,429


46,979


104,740Equity in undistributed net income of subsidiaries


96,414


85,133


16,572Net income


142,843


132,112


121,312Preferred stock dividends and discount accretion


12,984





Net income available to common shareholders

$
129,758

$
132,112

$
121,312


81

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Cash Flows  (Parent Company Only)

Years ended December 31, 2009, 2008 and 2007  (Dollars in Thousands)

2009

2008

2007Operating activities:Net income

$
142,742

$
132,112

$
121,312Adjustments to reconcile net income to net cash provided by operating activities:Accretion of junior subordinated interest deferrable debentures


35


119


332Investment securities transactions, net


(6,586
)




Accretion of investment securities discounts


(325
)




Stock compensation expense


655


692


771(Decrease) increase in other liabilities


(310
)

1,443


(1,732
)Equity in undistributed net income of subsidiaries


(96,414
)

(85,133
)

(16,572
)Net cash provided by operating activities


39,737


49,233


104,111Investing activities:Contributions to subsidiaries


(138,103
)

(57,114
)

(23,470
)Proceeds of repurchase agreement with banks





1,000


5,303Principal collected on mortgage-backed securities


2,791





Net decrease (increase) in notes receivable


250


1,491


(205
)Increase in other assets


(9,215
)

(5,000
)

(6,714
)Net cash used in investing activities


(144,277
)

(59,623
)

(25,086
)Financing activities:Proceeds from issuance of subordinated debentures








53,609Payments on subordinated debentures








(63,920
)Proceeds from issuance of preferred stock





216,000


Proceeds from stock transactions


2,705


894


5,686Payments of cash dividends


(32,921
)

(45,253
)

(44,738
)Payments of cash dividends in lieu of fractional shares








(27
)Purchase of treasury stock


(9,346
)

(1,077
)

(29,710
)Net cash (used in) provided by financing activities


(39,562
)

170,564


(79,100
)(Decrease) increase in cash


(144,042
)

160,174


(75
)Cash at beginning of year


160,754


580


655Cash at end of year

$
16,712

$
160,754

$
580


82

---





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

Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter2009Interest income

$
126,279

$
126,704

$
134,178

$
140,216Interest expense


30,818


32,257


34,651


42,070Net interest income


95,461


94,447


99,527


98,146Provision for probable loan losses


13,404


10,346


22,858


12,225Non-interest income


51,934


50,875


56,192


42,012Non-interest expense


74,878


78,746


85,181


70,226Income before income taxes


59,113


56,230


47,680


57,707Income taxes


22,005


19,257


16,547


20,179Net income

$
37,108

$
36,973

$
31,133

$
37,528Preferred Stock Dividends


3,259


3,250


3,242


3,233Net income available to common shareholders

$
33,849

$
33,723

$
27,891

$
34,295Per common share:BasicNet income

$
..50

$
..49

$
..41

$
..50DilutedNet income

$
..50

$
..49

$
..41

$
..50


83

---



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

Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter2008Interest income

$
140,817

$
138,194

$
136,931

$
148,661Interest expense


49,835


54,076


56,790


71,030Net interest income


90,982


84,118


80,141


77,631Provision for probable loan losses


7,123


7,037


4,101


1,552Non-interest income


41,675


50,823


51,017


46,294Non-interest expense


77,254


76,591


76,384


70,997Income before income taxes


48,280


51,313


50,673


51,376Income taxes


16,577


17,433


17,624


17,896Net income

$
31,703

$
33,880

$
33,049

$
33,480Per common share:BasicNet income

$
..47

$
..49

$
..48

$
..49DilutedNet income

$
..46

$
..49

$
..48

$
..49


84

---



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, 2009, 2008, and 2007:

2009

2008

2007Average
Balance

Interest

Average
Rate/Cost

Average
Balance

Interest

Average
Rate/Cost

Average
Balance

Interest

Average
Rate/Cost(Dollars in Thousands)AssetsInterest earning assets:Loan, net of unearned discounts:Domestic

$
5,474,162

$
322,143


5.88
%
$
5,360,116

$
353,635


6.60
%
$
4,920,774

$
422,039


8.58
%Foreign


274,627


13,626


4.96


283,444


17,083


6.03


289,678


21,525


7.43Investment securities:Taxable


4,281,148


185,931


4.34


4,120,008


188,928


4.59


4,055,546


190,371


4.69Tax-exempt


104,140


5,070


4.87


72,117


3,514


4.87


87,234


4,270


4.89Federal funds sold











53,019


927


1.75


54,634


2,712


4.96Other


69,813


607


.87


9,874


516


5.23


22,448


2,656


5.81Total interest-earning assets


10,203,890


527,377


5.17
%

9,898,578


564,603


5.70
%

9,430,314


643,573


6.82
%Non-interest earning assets:Cash and due from banks


285,811








236,656








222,116Bank premises and equipment, net


479,281








445,487








405,536Other assets


738,568








728,038








750,454Less allowance for probable loan losses


(82,194
)







(64,917
)







(65,688
)Total

$
11,625,356







$
11,243,842







$
10,742,732Liabilities and Shareholders' EquityInterest bearing liabilities:Savings and interest bearing demand deposits

$
2,135,147

$
10,832


.51
%
$
2,286,000

$
26,651


1.17
%
$
2,328,078

$
53,778


2.31
%Time deposits:Domestic


1,718,744


33,691


1.96


1,702,549


55,287


3.25


1,704,871


73,593


4.32Foreign


1,607,431


28,564


1.78


1,644,997


51,192


3.11


1,623,791


69,427


4.28Securities sold under repurchase agreements


1,462,017


44,723


3.06


1,436,374


50,400


3.51


982,884


43,837


4.46Other borrowings


1,662,489


9,451


.57


1,395,220


33,976


2.44


1,462,504


75,317


5.15Junior subordinated interest deferrable debentures


201,064


12,535


6.23


201,042


14,137


7.03


213,119


17,178


8.06Senior notes














88








210


Total interest bearing liabilities


8,786,892


139,796


1.59
%

8,666,182


231,731


2.67
%

8,315,247


333,340


4.01
%Non-interest bearing liabilities:Demand Deposits


1,480,994








1,455,036








1,417,751Other liabilities


70,060








132,306








125,952Shareholders' equity


1,287,410








990,318








883,782Total

$
11,625,356







$
11,243,842







$
10,742,732Net interest income




$
387,581







$
332,872







$
310,233Net yield on interest earning assets








3.80
%







3.36
%







3.29
%


85

---





INTERNATIONAL BANCSHARES CORPORATION  OFFICERS AND DIRECTORS

OFFICERS

DIRECTORSDENNIS E. NIXON

DENNIS E. NIXONChairman of the Board and President

President, International Bank of CommerceR. DAVID GUERRA

IRVING GREENBLUMVice President

International Investments/Real EstateEDWARD J. FARIAS

R. DAVID GUERRAVice President

PresidentInternational Bank of CommerceRICHARD CAPPS

Branch in McAllen, TXVice PresidentDANIEL B. HASTINGS, JR.IMELDA NAVARRO

Licensed U. S. Custom BrokerTreasurer

PresidentDaniel B. Hastings, Inc.WILLIAM CUELLARAuditor

IMELDA NAVARROSenior Executive Vice PresidentMARISA V. SANTOS

International Bank of CommerceSecretarySIOMA NEIMANHILDA V. TORRES

International EntrepreneurAssistant SecretaryPEGGY J. NEWMANInvestmentsLEONARDO SALINASInvestmentsANTONIO R. SANCHEZ, JR.Chairman of the BoardSanchez Oil & Gas CorporationInvestments


86

---



QuickLinks