EXHIBIT 13


             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                                 (CONSOLIDATED)
                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                      AT OR FOR THE YEARS ENDED DECEMBER 31,
                                       --------------------------------------------------------------------
                                           1999          1998          1997          1996          1995
                                       ------------  ------------  ------------  ------------  ------------
<S>                                    <C>           <C>           <C>           <C>           <C>
                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
     Assets..........................  $  5,421,804  $  4,987,877  $  4,517,846  $  3,351,231  $  2,935,606
     Net loans.......................     1,876,754     1,589,788     1,420,180     1,214,959     1,186,456
     Deposits........................     3,527,212     3,369,637     3,175,560     2,662,153     2,143,346
     Other borrowed funds............     1,380,000     1,074,000       490,000       239,000        66,500
     Shareholders' equity............       353,436       370,283       341,244       283,767       245,761

INCOME STATEMENT
     Interest income.................  $    340,736  $    326,174  $    275,732  $    221,779  $    218,867
     Interest expense................       185,205       181,909       145,371       107,372       112,361
                                       ------------  ------------  ------------  ------------  ------------
     Net interest income.............       155,531       144,265       130,361       114,407       106,506
     Provision for possible loan
       losses........................         6,379         8,571         7,740         6,630         5,150
     Non-interest income.............        60,966        41,698        36,776        30,194        26,009
     Non-interest expense............       106,983        99,047        85,745        73,457        68,989
                                       ------------  ------------  ------------  ------------  ------------
     Income before income taxes......       103,135        78,345        73,652        64,514        58,376
     Income taxes....................        36,887        24,620        24,771        20,164        18,315
                                       ------------  ------------  ------------  ------------  ------------
     Net income......................  $     66,248  $     53,725  $     48,881  $     44,350  $     40,061
                                       ============  ============  ============  ============  ============

     Per common share:
          Basic......................  $       4.11  $       3.30  $       3.07  $       2.81  $       2.57
          Diluted....................  $       4.03  $       3.22  $       2.96  $       2.72  $       2.46
     Cash dividends per share........  $       1.10  $        .90  $        .50  $       0.50  $        .50
</TABLE>

------------

     Note 1:  See note 2 of notes to the consolidated financial statements
regarding the acquisitions made by International Bancshares Corporation and its
subsidiaries in 1999 and 1997.

     Note 2:  See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds of the Company and its subsidiaries.

                                       1

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

     Management's discussion and analysis represents an explanation of
significant changes in the financial position and results of operations of
International Bancshares Corporation (the "Company") on a consolidated basis
for the three year period ended December 31, 1999. The Company is a bank holding
company with four bank subsidiaries operating in 93 main banking and branch
facilities in South and Southeast Texas, and four non-bank subsidiaries. The
following discussion should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, and the Selected
Financial Data and Consolidated Financial Statements included elsewhere herein.

RESULTS OF OPERATIONS

     Net income for 1999 was $66,248,000 or $4.11 per share -- basic ($4.03 per
share -- diluted) compared with $53,725,000 or $3.30 per share -- basic ($3.22
per share -- diluted) in 1998 and $48,881,000 or $3.07 per share -- basic ($2.96
per share -- diluted) in 1997.

     Historically, the Company's acquisitions have been accounted for using the
purchase method of accounting which results in the creation of goodwill. The
Company's goodwill is being amortized as a non-cash reduction of net income over
time periods from ten to twenty years. "Income before goodwill charges"
reflects the net income of the Company excluding goodwill amortization. In
computing the income tax adjustment, management has considered tax deductible
goodwill separately from non-tax deductible goodwill in making this calculation.
The income tax on tax deductible goodwill has been computed using the standard
corporate tax rate of 35%, and the non-tax deductible goodwill has been
grossed-up using the same 35% tax rate to reflect the earnings result. These two
calculations have been combined to reflect the net income tax adjustment
displayed in the income before goodwill charges table below. The table
reconciles reported earnings to net income excluding intangible amortization
("income before goodwill charges") to help facilitate peer group comparisons.


                                          YEARS ENDED DECEMBER 31,
                                       -------------------------------
                                         1999       1998       1997
                                       ---------  ---------  ---------
                                        (DOLLARS IN THOUSANDS, EXCEPT
                                               PER SHARE DATA)
Reported net income..................  $  66,248  $  53,725  $  48,881
Amortization of intangible assets....      3,898      3,936      2,949
Income tax adjustment................       (309)      (322)      (645)
                                       ---------  ---------  ---------
Income before goodwill charges.......  $  69,837  $  57,339  $  51,185
                                       =========  =========  =========
Income before goodwill charges per
  common share:
     Basic...........................  $    4.33  $    3.52  $    3.21
     Diluted.........................       4.25       3.43       3.10

     Total assets at December 31, 1999 grew 9% to $5,421,804,000 from
$4,987,877,000 at December 31, 1998 while net loans increased 18% to
$1,876,754,000 at December 31, 1999 from $1,589,788,000 at December 31, 1998.
Deposits at December 31, 1999 were $3,527,212,000, an increase of 5% over the
$3,369,637,000 at December 31, 1998, an increase of 6% over the $3,175,560,000
at December 31, 1997. Total assets at December 31, 1998 grew 10% to
$4,987,877,000 from $4,517,846,000 at December 31, 1997 while net loans
increased 12% to $1,589,788,000 at December 31, 1998 from $1,420,180,000 at
December 31, 1997. The increase in assets and deposits during 1999 reflects
growth opportunities in the Company's market through its branch system. The
aggregate amount of certificates of indebtedness with the Federal Home Loan Bank
of Dallas ("FHLB") increased to $1,380,000,000 at December 31, 1999 from the
$1,074,000,000 at December 31, 1998. Such funds were used to fund the earning
asset base of the Company.

     Net interest income in 1999 increased by $11,266,000, or 8%, over that in
1998. The net yield on average interest earning assets increased by .02% from
3.36% in 1998 to 3.38% in 1999. The net yield on average interest earning assets
decreased by .45% in 1998 to 3.36% from 3.81% in 1997 while net interest

                                       2
<PAGE>
income increased by $13,904,000 or 11% over 1997. A 7.1% increase in average
interest earning assets from $4,296,845,000 in 1998 to $4,600,812,000 in 1999
and a 25.5% increase from $3,422,639,000 in 1997 to $4,296,845,000 in 1998
contributed to the continued increase in net interest income for 1999 and 1998,
respectively. The Company experienced a .18% decrease in the yield on average
interest earning assets to 7.41% in 1999 from 7.59% in 1998 and a .28% decrease
was reflected on the rates paid on average interest bearing liabilities to 4.44%
in 1999 from 4.72% in 1998. In 1998 a .47% decrease was reflected in the yield
on average interest earning assets to 7.59% from 8.06% in 1997 and there was no
change reflected on the rates paid on average interest bearing liabilities of
4.72% in 1998 and 1997.

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

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

     Non-interest income increased 46% in 1999 to $60,966,000 over $41,698,000
in 1998 and increased 13% over $36,776,000 in 1997. The 1999 and 1998 increases
in non-interest income were due to the increases in service charge income and
the $6,530,000 gain recognition on the 1999 sale of $62,400,000 of credit card
receivables and the premium paid on the related transfer of $87,454,000 of
deposits in the third quarter. The increase in service charges was attributable
to the amount of account transaction fees received as a result of the deposit
growth, new deposit products and increased collection efforts.

     Expense control is an essential element in the Company's profitability.
This is achieved through maintaining optimum staffing levels, an effective
budgeting process, and internal consolidation of bank functions. Non-interest
expense includes such items as salaries and wages and employee benefits, net
occupancy expenses, equipment expenses and other operating expenses such as FDIC
insurance. Non-interest expense increased 8% in 1999 to $106,983,000 from
$99,047,000 in 1998 and increased 16% from $85,745,000 in 1997. The 1999 and
1998 increases in non-interest expense were primarily due to the increased
operations at certain of the bank subsidiaries as a result of acquisitions, and
expanded branch operations.

     The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 49% for the year ended December 31, 1999,
compared to the year ago ratio of 53%. The Company's efficiency ratio has been
under 53% for each of the last five years, which the Company believes is below
national peer group ratios.

     Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 1999, the Company's
efforts to increase its loan volume resulted in an increase of 14% in average
domestic loans and an increase of 35% in average foreign loans for an increase
in total average loans of 16% over 1998. The average yield for these loans
decreased .46% for domestic

                                       3
<PAGE>
loans and decreased by .30% for foreign loans in 1999 as compared to 1998. The
Company experienced an increase of 17% in average domestic loans and a 10%
increase in average foreign loans in 1998 as compared to 1997. The yield for
these loans decreased .16% for domestic loans and decreased by .86% for foreign
loans in 1998 as compared to 1997.

     The Company experienced a decrease of .33% in average balances of taxable
investment securities from $2,771,927,000 for 1998 to $2,762,895,000 for 1999
and an increase of 31% from $2,121,927,000 for 1997 to $2,771,927,000 for 1998.
The slight decrease reflected in 1999 is primarily from the impact of carrying
the available for sale securities at fair value.

     The allowance for possible loan losses increased 5% from $25,551,000 at
December 31, 1998 to $26,770,000 at December 31, 1999 and increased 4% from
$24,516,000 at December 31, 1997 to $25,551,000 at December 31, 1998. The
provision for possible loan losses charged to expense decreased 26% from
$8,571,000 in 1998 to $6,379,000 in 1999 and increased 11% from $7,740,000 in
1997 to $8,571,000 in 1998. The decrease in the provision for possible loan
losses was largely due to the sale of the credit card receivables in the third
quarter. The allowance for possible loan losses was 1.40% of total loans at
December 31, 1999 compared to 1.57% at 1998 and 1.69% at 1997. Non-performing
assets as a percentage of total loans and total assets were 1.17% and .41%,
respectively, at December 31, 1999, and .92% and .30% at December 31, 1998,
respectively. Loans accounted for on a non-accrual basis increased 38% from
$5,538,000 at December 31, 1998 to $7,662,000 at December 31, 1999. As loans are
placed on non-accrual status, interest previously accrued and recorded is
reversed unless the loan is well secured and in the process of collection. The
increase in non-performing loans was primarily due to consumer credit problems
and other credit problems that a financial institution faces in the normal
course of business. Foreclosed assets decreased 27% from $3,129,000 at December
31, 1998 to $2,285,000 at December 31, 1999. The decrease in foreclosed assets
were primarily due to the sale of foreclosed assets. In 1998, non-accruals
decreased 4% from $5,742,000 at December 31, 1997 to $5,538,000 at December 31,
1998 and foreclosed assets decreased 43% from $5,510,000 at December 31, 1997 to
$3,129,000 at December 31, 1998.

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

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

     While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged off as a loss is
an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses can be made only on a subjective

                                       4
<PAGE>
basis. It is the judgment of the Company's management that the allowance for
possible loan losses at December 31, 1999 was adequate to absorb possible losses
from loans in the portfolio at that date.

     On December 31, 1999, the Company had $5,421,804,000 of consolidated assets
of which approximately $216,632,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico. The loan policies of the Company's bank
subsidiaries generally require that loans to borrowers domiciled in Mexico be
primarily secured by assets located in the United States or have credit
enhancements, in the form of guarantees, from significant United States
corporations. The composition of such loans and the related amounts of allocated
allowance for possible loan losses as of December 31, 1999 is presented below.

                                                          RELATED
                                        AMOUNT OF      ALLOWANCE FOR
                                          LOANS       POSSIBLE LOSSES
                                        ---------     ---------------
                                           (DOLLARS IN THOUSANDS)
Secured by certificates of deposit in
  United States banks................   $  85,415         $    43
Secured by United States real
  estate.............................      33,073             321
Secured by other United States
  collateral (securities, gold,
  silver, etc.)......................      10,755             142
Direct unsecured Mexican sovereign
  debt (principally former FICORCA
  debt)..............................       1,346              42
Other................................      86,043             774
                                        ---------     ---------------
                                        $ 216,632         $ 1,322
                                        =========     ===============

     The transactions for the year ended December 31, 1999 in that portion of
the allowance for possible loan losses related to Mexican debt were as follows:

                                        (DOLLARS IN THOUSANDS)
Balance at January 1, 1999...........           $1,124
Recoveries...........................                1
Provision charged to operations......              197
                                              --------
Balance at December 31, 1999.........           $1,322
                                              ========

LIQUIDITY AND CAPITAL RESOURCES

     The maintenance of adequate liquidity provides the Company's bank
subsidiaries with the ability to meet potential depositor withdrawals, provide
for customer credit needs, maintain adequate statutory reserve levels and take
full advantage of high-yield investment opportunities as they arise. Liquidity
is afforded by access to financial markets and by holding appropriate amounts of
liquid assets. The bank subsidiaries of the Company derive their liquidity
largely from deposits of individuals and business entities. Historically, the
Mexico based deposits of the Company's bank subsidiaries have been a stable
source of funding. Deposits from persons and entities domiciled in Mexico
comprise a significant and stable portion of the deposit base of the Company's
bank subsidiaries. Such deposits comprised approximately 41%, 38% and 35% of the
Company's bank subsidiaries' total deposits as of December 31, 1999, 1998 and
1997, respectively. Other important funding sources for the Company's bank
subsidiaries during 1999 and 1998 have been wholesale liabilities with FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.

     The Company's funds management policy has as its primary focus the
measurement and management of the banks' earnings at risk in the face of rising
and 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

                                       5
<PAGE>
estimate of the vulnerability of net interest income to changes in market rates
as implied by the relative repricings of assets and liabilities. The gap report
calculates the difference between the amounts of assets and liabilities
repricing across a series of intervals in time, with emphasis typically placed
on the one-year period. This difference, or gap, is usually expressed as a
percentage of total assets.

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

     The gap report thus consists of an inventory of dollar amounts of assets
and liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 18 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 1999.

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

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

     At December 31, 1999, based on these simulations, a rate shift of 200 basis
points in earnings either up or down will not vary earnings by more than 8
percent of projected 2000 after-tax net income. A 200 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.

     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 affect on net income, such as changes in credit quality or the size
and composition of the balance sheet.

     Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company closely monitors the dividend
restrictions and availability from the bank subsidiaries as disclosed in Note 17
to the Consolidated Financial Statements. At December 31, 1999, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries
as dividends was approximately $58,641,000, assuming that each bank subsidiary
continues to be classified as "well capitalized" under the applicable
regulations. The restricted capital of the bank subsidiaries was approximately
$306,263,000 as

                                       6
<PAGE>
of December 31, 1999. The undivided profits of the bank subsidiaries were
approximately $152,078,000 as of December 31, 1999.

     As of December 31, 1999, the Company has outstanding $1,380,000,000 in
short-term and long-term borrowed funds. In addition to borrowed funds and
dividends, the Company has a number of other available alternatives to finance
the growth of its existing banks as well as future growth and expansion.

     The Company maintains an adequate level of capital as a margin of safety
for its depositors and shareholders. At December 31, 1999, shareholders' equity
was $353,436,000 compared to $370,283,000 at December 31, 1998, a decrease of
$16,847,000 or 5%. The decrease in shareholders' equity resulted from the stock
repurchase program and the negative impact of comprehensive income. An
accounting standard relating to comprehensive income requires that unrealized
losses on securities held available for sale, net of tax, be deducted from
shareholders' equity.

     During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage
ratio of 3% for the most highly-rated bank holding companies and at least 4% to
5% for all other bank holding companies. The Company's leverage ratio (defined
as stockholders' equity less goodwill and certain other intangibles divided by
average quarterly assets) was 6.58% at December 31, 1999 and 6.50% at December
31, 1998. The core deposit intangibles and goodwill of $42,568,000 as of
December 31, 1999, recorded in connection with financial institution
acquisitions of the Company, are deducted from the sum of core capital elements
when determining the capital ratios of the Company.

     The FRB has adopted risk-based capital guidelines which assign risk
weightings to assets and off-balance sheet items. The guidelines also define and
set minimum capital requirements (risk-based capital ratios). Under the final
1992 rules, all banks are required to have core capital (Tier 1) of at least
4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists principally of shareholders' equity less goodwill and
certain other intangibles, while total capital consists of core capital, certain
debt instruments and a portion of the reserve for credit losses. In order to be
deemed well capitalized pursuant to the regulations, an institution must have a
total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and
a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital
ratios of 13.41% and 13.36% and risk weighted total capital ratios of 14.46% and
14.45% for December 31, 1999 and 1998, respectively, which are well above the
minimum regulatory requirements and exceed the well capitalized ratios (see note
17 to notes to Consolidated Financial Statements).

     The Company announced a new formal stock repurchase program on June 22,
1999 and announced it expanded the stock repurchase program on July 16, 1999 and
on January 11, 2000. Under the stock repurchase program, the Company is
authorized to repurchase up to $35,000,000 of its common stock through June
2000. Stock repurchases may be made from time to time, on the open market or
through private transactions. Shares repurchased in this program will be held in
treasury for reissue for various corporate purposes, including employee stock
option plans. As of March 20, 2000 a total of 487,865 shares had been
repurchased under this program at a cost of $21,224,000. Stock repurchases are
presented quarterly at the Company's Board of Directors meetings and the Board
of Directors has stated that the aggregate investment in treasury stock should
not exceed $60,000,000. In the past, the board has increased previous caps on
treasury stock once they were met, but there are no assurances that an increase
of the $60,000,000 cap will occur in the future. As of March 20, 2000 the
Company has approximately $42,197,000 invested in treasury shares, which amount
has been accumulated since the inception of the Company.

     During the past few years the Company has expanded its banking facilities.
Among the activities and commitments the Company funded during 1999 and 1998
were certain capital expenditures relating to the modernization and improvement
of several existing bank facilities and the expansion of the bank branch
network.

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

                                       7
<PAGE>
impact of inflation on net interest income because it is not possible to
accurately differentiate between increases in net interest income resulting from
inflation and increases resulting from increased business activity. Inflation
also raises costs of operation, primarily those of employment and services.

FORWARD LOOKING INFORMATION

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

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

ADOPTION OF NEW ACCOUNTING STANDARDS

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

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

     In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure." SFAS No. 129 lists
required disclosures about capital structure that

                                       8
<PAGE>
had been included in a number of previously existing separate statements and
opinions. It applies to all entities, public and nonpublic. SFAS No. 129 is
effective for financial statements issued for periods ending after December 15,
1997. The adoption of this Statement did not have a material impact on the
Company's consolidated financial statements.

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

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management of the Company believes that
it does not have separate reportable operating segments under the provision of
SFAS No. 131. The provisions of SFAS No. 131 are effective for financial
statements for periods beginning after December 15, 1997.

     In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 further amends Statement 65, "Accounting for Certain
Mortgage Banking Activities, as amended by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," requires that after securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No. 134 is effective for the
first fiscal quarter beginning after December 15, 1998. The adoption of this
Statement did not have a material impact on the Company's consolidated financial
position, results of operation, or liquidity.

ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net
investment in a foreign operation. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management of the
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on the Company's consolidated financial position, results of operation,
or liquidity.

COMMON STOCK AND DIVIDENDS

     The Company had issued and outstanding 17,226,715 shares of $1.00 par value
Common Stock held by approximately 1,918 holders of record at March 20, 2000.
The book value of the stock at December 31, 1999 was $22.05 per share compared
with $22.42 per share, adjusted for stock dividends, one year ago.

                                       9
<PAGE>
The decrease in the book value of the stock resulted primarily from the negative
impact of the comprehensive income reporting requirements.

     On August 28, 1995, the Common Stock began to trade on the OTC Bulletin
Board under the trading symbol IBNC; however, trading in the Common Stock of the
Company was not extensive and such trades could not be characterized as
amounting to an active trading market. As of March 4, 1998, the Common Stock was
listed on the Nasdaq National Market under the trading symbol IBOC.

     The following table sets forth the approximate high and low bid prices in
the Company's Common Stock, adjusted for stock dividends during 1998 and 1999,
as quoted on the OTC Bulletin Board and as recorded by local brokerage firms or
from information in the Company's records for the periods prior to March 4, 1998
and as quoted on the Nasdaq National Market for the periods after March 4, 1998
for each of the quarters in the two year period ended December 31, 1999 and
1998. 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 $39.88
per share at March 20, 2000.

                                         HIGH        LOW
                                       ---------  ---------
1999:
     First quarter...................  $   41.80  $   34.20
     Second quarter..................      42.50      35.40
     Third quarter...................      47.50      41.19
     Fourth quarter..................      48.00      41.59


                                         HIGH        LOW
                                       ---------  ---------
1998:
     First quarter...................  $   51.20  $   49.60
     Second quarter..................      54.24      50.88
     Third quarter...................      50.15      45.20
     Fourth quarter..................      43.90      40.50


     The Company in 1999 paid a $8,499,000 and $8,628,000 or $0.60 and $0.50 per
share respectively, and in 1998 paid a $5,683,000 and $5,655,000 or $0.50 and
$.40 per share respectively, special cash dividends to the shareholders. In
addition, the Company has issued stock dividends during the last five year
period as follows:

                                         STOCK
                DATE                    DIVIDEND
-------------------------------------   --------
May 19, 1995.........................       25%
May 17, 1996.........................       25
May 16, 1997.........................       25
May 22, 1998.........................       25
May 20, 1999.........................       25


     The Company's principal source of funds to pay cash dividends on its Common
Stock is cash dividends from the bank subsidiaries. There are certain statutory
limitations on the payment of dividends from the subsidiary banks. For a
discussion of the limitations, please see Note 17 of notes to consolidated
financial statements.

RECENT SALES OF UNREGISTERED SECURITIES

     No securities were sold by the Company during the fiscal year ended
December 31, 1999 that were not registered under the Securities Act of 1933.

     On December 19, 1997, the Company issued 65,772 shares of Common Stock to
Federal National Mortgage Association for $76.02 per share for a total of
$5,000,000 in cash. The transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Act.

                                       10

<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
International Bancshares Corporation:

     We have audited the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit 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, 1999
and 1998, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.

                                                         /s/ KPMG LLP

San Antonio, Texas
March 15, 2000

                                       11
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
                           DECEMBER 31, 1999 AND 1998
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                          1999         1998
                                       -----------  -----------
               ASSETS
Cash and due from banks..............  $   121,695  $    94,594
Federal funds sold...................       13,300       26,000
                                       -----------  -----------
         Total cash and cash
       equivalents...................      134,995      120,594
Time deposits with banks.............        1,877        1,373
Investment securities:
  Held to maturity (Market value of
  $2,405 on December 31, 1999 and
  $2,505 on December 31, 1998).......        2,406        2,508
  Available for sale (Amortized cost
  of $3,050,099 on December 31, 1999
  and $2,991,836 on December 31,
  1998)..............................    2,993,311    3,005,369
                                       -----------  -----------
         Total investment
       securities....................    2,995,717    3,007,877
Loans:
  Commercial, financial and
    agricultural.....................    1,115,511      896,060
  Real estate -- mortgage............      278,819      215,689
  Real estate -- construction........      129,813       94,374
  Consumer...........................      171,104      250,917
  Foreign............................      216,632      166,324
                                       -----------  -----------
         Total loans.................    1,911,879    1,623,364
  Less unearned discounts............       (8,355)      (8,025)
                                       -----------  -----------
         Loans, net of unearned
           discounts.................    1,903,524    1,615,339
  Less allowance for possible loan
    losses...........................      (26,770)     (25,551)
                                       -----------  -----------
         Net loans...................    1,876,754    1,589,788
                                       -----------  -----------
Bank premises and equipment, net.....      145,342      137,568
Accrued interest receivable..........       34,827       31,542
Other investments....................      130,089       16,026
Intangible assets....................       43,598       44,971
Other assets.........................       58,605       38,138
                                       -----------  -----------
         Total assets................  $ 5,421,804  $ 4,987,877
                                       ===========  ===========


LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Deposits:
    Demand -- non-interest bearing...  $   499,369  $   414,412
    Savings and interest bearing
     demand..........................      928,455      947,408
    Time.............................    2,099,388    2,007,817
                                       -----------  -----------
         Total deposits..............    3,527,212    3,369,637
    Securities sold under repurchase
     agreements......................      123,752      135,700
    Other borrowed funds.............    1,380,000    1,074,000
    Other liabilities................       37,404       38,257
                                       -----------  -----------
         Total liabilities...........    5,068,368    4,617,594
                                       -----------  -----------
Shareholders' equity:
    Common stock of $1.00 par value.
     Authorized 40,000,000 shares;
      issued 21,091,754 shares in
     1999 and 16,790,999 shares in
     1998............................       21,092       16,791
    Surplus..........................       24,050       22,250
    Retained earnings................      385,942      341,025
    Accumulated other comprehensive
     income (loss)...................      (36,912)       8,797
                                       -----------  -----------
                                           394,172      388,863
Less cost of shares in treasury,
  3,851,844 shares in 1999 and
  2,670,927 shares in 1998...........      (40,736)     (18,580)
                                       -----------  -----------
         Total shareholders'
       equity........................      353,436      370,283
                                       -----------  -----------
         Total liabilities and
       shareholders' equity..........  $ 5,421,804  $ 4,987,877
                                       ===========  ===========

          See accompanying notes to consolidated financial statements.

                                       12
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                            1999            1998            1997
                                       --------------  --------------  --------------
<S>                                    <C>             <C>             <C>
Interest income:
     Loans, including fees...........  $      160,105  $      145,016  $      127,348
     Time deposits with banks........             104              89              47
     Federal funds sold..............             710           1,462           1,120
     Investment securities:
          Taxable....................         175,042         179,030         146,820
          Tax-exempt.................           4,432             241              90
     Other...........................             343             336             307
                                       --------------  --------------  --------------
               Total interest
                  income.............         340,736         326,174         275,732
                                       --------------  --------------  --------------
Interest expense:
     Savings and interest bearing
       demand deposits...............          27,182          26,419          22,152
     Time deposits...................          97,626         101,823          89,413
     Federal funds purchased and
       securities sold under
       repurchase agreements.........           6,047          13,396          15,754
     Other borrowings................          54,340          39,969          18,052
     Other...........................              10             302        --
                                       --------------  --------------  --------------
               Total interest
                  expense............         185,205         181,909         145,371
                                       --------------  --------------  --------------
               Net interest income...         155,531         144,265         130,361
Provision for possible loan losses...           6,379           8,571           7,740
                                       --------------  --------------  --------------
               Net interest income
                  after provision for
                  possible loan
                  losses.............         149,152         135,694         122,621
                                       --------------  --------------  --------------
Non-interest income:
     Service charges on deposit
       accounts......................          30,629          21,679          18,511
     Other service charges,
       commissions and fees..........           9,129           9,352           8,295
     Investment securities
       transactions, net.............              13           3,893             484
     Other investments...............           6,441          (1,391)          4,474
     Gain on sale of loans...........           6,449             178             157
     Other income....................           8,305           7,987           4,855
                                       --------------  --------------  --------------
               Total non-interest
                  income.............          60,966          41,698          36,776
                                       --------------  --------------  --------------
Non-interest expense:
     Employee compensation and
       benefits......................          42,857          39,733          33,431
     Occupancy.......................           7,537           7,675           6,258
     Depreciation of bank premises
       and equipment.................          11,700          10,388           8,256
     Professional fees...............           4,953           3,461           3,839
     Stationery and supplies.........           3,157           3,186           3,026
     Amortization of intangible
       assets........................           3,898           3,936           2,949
     Other...........................          32,881          30,668          27,986
                                       --------------  --------------  --------------
               Total non-interest
                  expense............         106,983          99,047          85,745
                                       --------------  --------------  --------------
               Income before income
                  taxes..............         103,135          78,345          73,652
Income taxes.........................          36,887          24,620          24,771
                                       --------------  --------------  --------------
               Net income............  $       66,248  $       53,725  $       48,881
                                       ==============  ==============  ==============
Basic earnings per common share:
     Net Income......................  $         4.11  $         3.30  $         3.07
                                       ==============  ==============  ==============
     Weighted average number of
       shares outstanding............      16,118,661      16,286,161      15,929,548
Diluted earnings per common share:
     Net Income......................  $         4.03  $         3.22  $         2.96
                                       ==============  ==============  ==============
     Weighted average number of
       shares outstanding............      16,422,774      16,706,522      16,515,611
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       13
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

                                         1999       1998       1997
                                       ---------  ---------  ---------
Net Income...........................  $  66,248  $  53,725  $  48,881
                                       ---------  ---------  ---------
Other comprehensive income, net of
  tax:
     Unrealized holding gains
       (losses) on securities
       available for sale arising
       during the year...............    (48,751)    (9,021)    10,346
     Reclassification adjustment for
       (gains) losses on securities
       available for sale included in
       net income....................      3,042     (3,764)      (152)
                                       ---------  ---------  ---------
Comprehensive income.................  $  20,539  $  40,940  $  59,075
                                       =========  =========  =========


                                       14
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                         NUMBER      COMMON                RETAINED      COMPREHENSIVE      TREASURY
                                        OF SHARES     STOCK     SURPLUS    EARNINGS          INCOME          STOCK       TOTAL
                                        ---------    -------    -------    ---------    ----------------    --------    --------
<S>                                     <C>          <C>        <C>        <C>          <C>                 <C>         <C>
Balances at January 1, 1997..........     10,353     $10,353    $11,935    $ 260,134        $ 11,388        $(10,043)   $283,767
    Net income.......................      --          --         --          48,881         --                --         48,881
    Stock dividends:
         Shares issued...............      2,601      2,601       --          (2,601)        --                --          --
         Cash dividends..............      --          --         --          (4,426)        --                --         (4,426)
    Purchase of treasury stock.......      --          --         --          --             --               (4,491)     (4,491)
    Exercise of stock options........        176        176       1,602       --             --                --          1,778
    Sale of stock....................         66         66       4,934       --             --                --          5,000
    Tax effect of non-qualified stock
      options exercised..............      --          --           541       --             --                --            541
    Other comprehensive income, net
      of tax:
      Net change in unrealized gains
         (losses) on available for
         sale securities, net of
         reclassification
         adjustment..................      --          --         --          --              10,194           --         10,194
                                        ---------    -------    -------    ---------    ----------------    --------    --------
Balances at December 31, 1997........     13,196     $13,196    $19,012    $ 301,988        $ 21,582        $(14,534)   $341,244
                                        =========    =======    =======    =========    ================    ========    ========
    Net income.......................      --          --         --          53,725         --                --         53,725
    Stock dividends:
         Shares issued...............      3,350      3,350       --          (3,350)        --                --          --
         Cash dividends..............      --          --         --         (11,338)        --                --        (11,338)
    Purchase of treasury stock.......      --          --         --          --             --               (4,046)     (4,046)
    Exercise of stock options........        245        245       2,520       --             --                --          2,765
    Tax effect of non-qualified stock
      options exercised..............      --          --           718       --             --                --            718
    Other comprehensive income, net
      of tax:
      Net change in unrealized gains
         (losses) on available for
         sale securities, net of
         reclassification
         adjustment..................      --          --         --          --             (12,785)          --        (12,785)
                                        ---------    -------    -------    ---------    ----------------    --------    --------
Balances at December 31, 1998........     16,791     $16,791    $22,250    $ 341,025        $  8,797        $(18,580)   $370,283
                                        =========    =======    =======    =========    ================    ========    ========
    Net income.......................      --          --         --          66,248         --                --         66,248
    Stock dividends:
         Shares issued...............      4,204      4,204       --          (4,204)        --                --          --
         Cash dividends..............      --          --         --         (17,127)        --                --        (17,127)
    Purchase of treasury stock.......      --          --         --          --             --              (22,156)    (22,156)
    Exercise of stock options........         97         97       1,800       --             --                --          1,897
    Other comprehensive income, net
      of tax:
      Net change in unrealized gains
         (losses) on available for
         sale securities, net of
         reclassification
         adjustment..................      --          --         --          --             (45,709)          --        (45,709)
                                        ---------    -------    -------    ---------    ----------------    --------    --------
Balances at December 31, 1999........     21,092     $21,092    $24,050    $ 385,942        $(36,912)       $(40,736)   $353,436
                                        =========    =======    =======    =========    ================    ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       15
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                              1999          1998          1997
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Operating activities:
    Net income..........................  $     66,248  $     53,725  $     48,881
    Adjustments to reconcile net income
      to net cash provided by operating
      activities:
         Provision for possible loan
           losses.......................         6,379         8,571         7,740
         Recoveries on charged-off
           loans........................         1,389         1,349           997
         Net cost of operations of other
           real estate owned............           509           106           161
         Write down of credit card
           receivables to net realizable
           value........................         2,766       --            --
         Gain on sale of loans..........        (6,449)         (178)         (157)
         Depreciation of bank premises
           and equipment................        11,700        10,388         8,256
         Depreciation and amortization
           of leasing assets............         1,796           948           931
         Accretion of investment
           securities discounts.........       (15,460)      (10,708)       (1,445)
         Amortization of investment
           securities premiums..........        12,611        14,260        10,017
         Realized gain on investment
           securities transactions,
           net..........................           (13)       (3,893)         (484)
         Gain on sale of bank premises
           and equipment................           (45)       (1,715)          (51)
         Deferred tax expense...........         4,372         2,122         1,139
         Increase in accrued interest
           receivable...................        (3,261)         (271)       (7,145)
         (Decrease) increase other
           liabilities..................        (5,287)       11,831        11,537
                                          ------------  ------------  ------------
             Net cash provided by
               operating activities.....        77,255        86,535        80,377
                                          ------------  ------------  ------------
Investing activities:
    Cash acquired in purchase
      transactions......................        20,320       --            102,664
    Proceeds from maturities of
      securities........................         2,350           975         2,660
    Proceeds from sales of available for
      sale securities...................       616,080       541,362       229,287
    Purchases of available for sale
      securities........................    (1,325,652)   (1,967,527)   (1,366,791)
    Principal collected on
      mortgage-backed securities........       676,535       976,706       355,675
    Proceeds from matured time deposits
      with banks........................           684         1,290           198
    Purchases of time deposits with
      banks.............................        (1,188)       (1,076)         (603)
    Net increase in loans...............      (286,548)     (179,350)      (74,620)
    Net (increase) decrease in other
      assets............................      (132,896)       17,787         2,743
    Purchases of bank premises and
      equipment.........................       (18,983)      (19,193)      (24,626)
    Proceeds from sale of bank premises
      and equipment.....................            76         2,573           101
                                          ------------  ------------  ------------
             Net cash used in investing
               activities...............      (449,222)     (626,453)     (773,312)
                                          ------------  ------------  ------------
Financing activities:
    Net increase (decrease) in
      non-interest bearing demand
      deposits..........................  $     84,031  $    (36,125) $     57,137
    Net (decrease) increase in savings
      and interest bearing demand
      deposits..........................       (27,177)      127,649        23,996
    Net increase in time deposits.......        72,848       102,553       141,511
    Net (decrease) increase in federal
      funds purchased and securities
      sold under repurchase
      agreements........................       (11,948)     (342,709)      287,201
    Proceeds from issuance of other
      borrowed funds....................     2,045,000     2,440,000       997,347
    Principal payments on other borrowed
      funds.............................    (1,739,000)   (1,856,000)     (746,347)
    Purchase of treasury stock..........       (22,156)       (4,046)       (4,491)
    Proceeds from stock transactions....         1,897         2,765         6,778
    Payments of cash dividends..........       (17,101)      (11,297)       (4,400)
    Payments of cash dividends in lieu
      of fractional shares..............           (26)          (41)          (26)
                                          ------------  ------------  ------------
             Net cash provided by
               financing activities.....       386,368       422,749       758,706
                                          ------------  ------------  ------------
             Increase (decrease) in cash
               and cash equivalents.....        14,401      (117,169)       65,771
Cash and cash equivalents at beginning
  of year...............................       120,594       237,763       171,992
                                          ------------  ------------  ------------
Cash and cash equivalents at end of
  year..................................  $    134,995  $    120,594  $    237,763
                                          ============  ============  ============
Supplemental cash flow information:
    Interest paid.......................  $    189,137  $    185,402  $    148,825
    Income taxes paid...................        26,753        21,691        23,815
Supplemental schedule of noncash
  investing and financing activities
  relating to various purchase
  transactions:
    Loans acquired......................         4,503  $    --       $    140,112
    Investment securities and other
      assets acquired...................         3,112       --             93,382
    Deposit and other liabilities
      assumed...........................        27,935       --            336,158
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       16

<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

  CONSOLIDATION AND BASIS OF PRESENTATION

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

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

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

  PER SHARE DATA

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

  INVESTMENT SECURITIES

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

     Mortgage-backed securities held at December 31, 1999 and 1998 represent
participating interests in pools of long-term first mortgage loans originated
and serviced by the issuers of the securities. Premiums and discounts are
amortized using the straight-line method over the contractual maturity of the
loans

                                       17
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


adjusted for anticipated prepayments. Income recognized under the straight line
method is not materially different from income that would be recognized under
the level yield or "interest method". Mortgage-backed securities are either
issued or guaranteed by the U.S. Government or its agencies. Market interest
rate fluctuations can affect the prepayment speed of principal and the yield on
the security.

  UNEARNED DISCOUNTS

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

  PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

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

  NON-ACCRUAL LOANS

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

  OTHER REAL ESTATE OWNED

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

  BANK PREMISES AND EQUIPMENT

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

  INCOME TAXES

     The Company recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. The provision for
deferred income taxes is based on the asset and liability method

                                       18
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


and represents the change in the deferred income tax accounts during the year,
including the effect of enacted tax rate changes.

  STOCK OPTIONS

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

  NET INCOME PER SHARE

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

  CAPITAL STRUCTURE

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

  ACQUISITIONS AND AMORTIZATION OF INTANGIBLES

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

  IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     Long-lived assets and certain identifiable intangibles to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell,
except for assets that are covered by APB Opinion No. 30.

                                       19
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  CONSOLIDATED STATEMENT OF CASH FLOWS

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

  ENVIRONMENTAL REMEDIATION

     Environmental remediation liabilities are accrued when the criteria of SFAS
No. 5, "Accounting for Contingencies," have been met.

  ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS

     The Company accounts for transfers and servicing of financial assets and
extinguishments of liabilities based on the application of a
financial-components approach that focuses on control. After a transfer of
financial assets, the Company recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.

  COMPREHENSIVE INCOME

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

  SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
131 establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management of the Company believes that it does not have
separate reportable operating segments under the provision of SFAS No. 131. The
provisions of SFAS No. 131 are effective for financial statements for periods
beginning after December 15, 1997.

(2)  ACQUISITIONS

     Effective February 19, 1999, IBC purchased certain assets and assumed
certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus
Christi, Texas. IBC purchased loans of approximately $4,503,000 and assumed
deposits of approximately $27,873,000 and received cash and other assets in the
amount of approximately $23,432,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $2,525,000 which are being amortized on a straight line basis
over a fifteen year period.

     Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded

                                       20
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


intangible assets, goodwill and core deposit premium totaling $17,613,000 which
are being amortized on a straight line basis over a fifteen year period.

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

(3)  INVESTMENT SECURITIES

     The amortized cost and estimated market value by type of investment
security at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                                 HELD TO MATURITY
                                        -------------------------------------------------------------------
                                                         GROSS          GROSS       ESTIMATED
                                        AMORTIZED     UNREALIZED     UNREALIZED       MARKET      CARRYING
                                           COST          GAINS         LOSSES         VALUE         VALUE
                                        ----------    -----------    -----------    ----------    ---------
<S>                                     <C>           <C>            <C>            <C>           <C>
                                                              (DOLLARS IN THOUSANDS)
Obligations of states and political
  subdivisions.......................     $  321        $--            $    (1)       $  320       $   321
Other securities.....................      2,085         --             --             2,085         2,085
                                        ----------    -----------    -----------    ----------    ---------
     Total investment securities.....     $2,406        $--            $    (1)       $2,405       $ 2,406
                                        ==========    ===========    ===========    ==========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                 AVAILABLE FOR SALE
                                        --------------------------------------------------------------------
                                                         GROSS          GROSS       ESTIMATED
                                        AMORTIZED     UNREALIZED     UNREALIZED       MARKET       CARRYING
                                           COST          GAINS         LOSSES         VALUE         VALUE
                                        ----------    -----------    -----------    ----------    ----------
<S>                                     <C>           <C>            <C>            <C>           <C>
                                                               (DOLLARS IN THOUSANDS)
U.S. Treasury securities.............   $  261,980     $  --          $   (1,000)   $  260,980    $  260,980
Mortgage-backed securities...........    2,534,461          4,695        (47,193)    2,491,963     2,491,963
Obligations of states and political
  subdivisions.......................      102,210              2        (11,796)       90,416        90,416
Other securities.....................       76,212             45         (2,103)       74,154        74,154
Equity securities....................       75,236            603            (41)       75,798        75,798
                                        ----------    -----------    -----------    ----------    ----------
     Total investment securities.....   $3,050,099     $    5,345     $  (62,133)   $2,993,311    $2,993,311
                                        ==========    ===========    ===========    ==========    ==========
</TABLE>

                                       21
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The amortized cost and estimated market value of investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.

<TABLE>
<CAPTION>
                                             HELD TO MATURITY               AVAILABLE FOR SALE
                                        --------------------------      --------------------------
                                                        ESTIMATED                       ESTIMATED
                                        AMORTIZED         MARKET        AMORTIZED         MARKET
                                           COST           VALUE            COST           VALUE
                                        ----------      ----------      ----------      ----------
<S>                                     <C>             <C>             <C>             <C>
                                                          (DOLLARS IN THOUSANDS)
Due in one year or less..............     $  260          $  260        $      807      $      808
Due after one year through five
  years..............................      1,886           1,885               792             794
Due after five years through ten
years................................        260             260            10,000           9,600
Due after ten years..................      --              --              428,803         414,348
Mortgage-backed securities...........      --              --            2,534,461       2,491,963
Equity securities....................      --              --               75,236          75,798
                                        ----------      ----------      ----------      ----------
     Total investment securities.....     $2,406          $2,405        $3,050,099      $2,993,311
                                        ==========      ==========      ==========      ==========
</TABLE>

     The amortized cost and estimated market value by type of investment
security at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                               HELD TO MATURITY
                                        --------------------------------------------------------------
                                                       GROSS         GROSS       ESTIMATED
                                        AMORTIZED    UNREALIZED    UNREALIZED     MARKET      CARRYING
                                          COST         GAINS         LOSSES        VALUE       VALUE
                                        ---------    ----------    ----------    ---------    --------
<S>                                     <C>          <C>           <C>           <C>          <C>
                                                            (DOLLARS IN THOUSANDS)
Obligations of states and political
  subdivisions.......................    $   518       $--           $   (3)      $   515      $  518
Other securities.....................      1,990        --            --            1,990       1,990
                                        ---------    ----------    ----------    ---------    --------
     Total investment securities.....    $ 2,508       $--           $   (3)      $ 2,505      $2,508
                                        =========    ==========    ==========    =========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                 AVAILABLE FOR SALE
                                        --------------------------------------------------------------------
                                                         GROSS          GROSS       ESTIMATED
                                        AMORTIZED     UNREALIZED     UNREALIZED       MARKET       CARRYING
                                           COST          GAINS         LOSSES         VALUE         VALUE
                                        ----------    -----------    -----------    ----------    ----------
<S>                                     <C>           <C>            <C>            <C>           <C>
                                                               (DOLLARS IN THOUSANDS)
U.S. Treasury securities.............   $  207,543      $   145        $--          $  207,688    $  207,688
Mortgage-backed securities...........    2,534,867       19,747         (3,219)      2,551,395     2,551,395
Obligations of states and political
  subdivisions.......................       28,234       --                (34)         28,200        28,200
Other securities.....................      158,916          628         (4,453)        155,091       155,091
Equity securities....................       62,276          719         --              62,995        62,995
                                        ----------    -----------    -----------    ----------    ----------
     Total investment securities.....   $2,991,836      $21,239        $(7,706)     $3,005,369    $3,005,369
                                        ==========    ===========    ===========    ==========    ==========
</TABLE>

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

     The amortized cost and fair market value of investment securities pledged
to qualify for fiduciary powers, to secure public monies as required by law,
repurchase agreements and short-term fixed borrowings was $2,450,133,000 and
$2,405,878,000, respectively, at December 31, 1999.

     Proceeds from the sale of securities available-for-sale were $616,080,000,
$541,362,000 and $229,287,000 during 1999, 1998 and 1997, respectively. Gross
gains of $2,639,000 and gross losses of $2,626,000 were realized in 1999
primarily from the sale of available-for-sale mortgage-backed securities.

                                       22
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


Gross gains and losses of $4,374,000 and $481,000 and $619,000 and $135,000 were
realized in 1998 and 1997, respectively.

     The Company maintains the required level of stock at the Federal Home Loan
Bank of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity
securities and is recorded at cost and totaled $73,808,000 at December 31, 1999.

(4)  ALLOWANCE FOR POSSIBLE LOAN LOSSES

     A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 1999, 1998 and 1997 is as follows:

                                         1999       1998       1997
                                       ---------  ---------  ---------
                                           (DOLLARS IN THOUSANDS)
Balance at January 1, 1999...........  $  25,551  $  24,516  $  21,036
                                       ---------  ---------  ---------
     Losses charged to allowance.....     (6,549)    (8,885)    (6,336)
     Recoveries credited to
       allowance.....................      1,389      1,349        997
                                       ---------  ---------  ---------
     Net losses charged to
       allowance.....................     (5,160)    (7,536)    (5,339)
     Provision charged to
       operations....................      6,379      8,571      7,740
                                       ---------  ---------  ---------
     Allowances acquired in purchase
       transactions..................     --         --          1,079
                                       ---------  ---------  ---------
Balance at December 31, 1999.........  $  26,770  $  25,551  $  24,516
                                       =========  =========  =========

     Loans accounted for on a non-accrual basis at December 31, 1999, 1998 and
1997 amounted to $7,662,000, $5,538,000 and $5,742,000, respectively. The effect
of such non-accrual loans reduced interest income by $874,000, $708,000 and
$602,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Amounts received on non-accruals are applied, for financial accounting purposes,
first to principal and then to interest after all principal has been collected.

     Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review procedures.
Impaired loans include (1) all non-accrual loans, (2) loans which are 90 days or
more past due, unless they are well secured (i.e. the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and (3) other loans which management believes are impaired. 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.

     Impaired loans were $7,738,000 at December 31, 1999, $8,440,000 at December
31, 1998 and $12,854,000 at December 31, 1997. The average recorded investment
in impaired loans during 1999, 1998, and 1997 was $8,028,000, $8,962,000 and
$12,507,000, respectively. The total allowance for possible loan losses related
to these loans was $882,000, $1,384,000 and $1,144,000 at December 31, 1999,
1998 and 1997, respectively. Interest income on impaired loans of $371,000,
$443,000 and $777,000 was recognized for cash payments received in 1999, 1998
and 1997, respectively.

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

     The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further

                                       23
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


collection of the loss portion is anticipated based on the borrower's financial
condition and general economic conditions in the borrower's industry. Generally,
unsecured consumer loans are charged-off when 90 days past due.

     While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged-off as a loss,
is an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses can be made only on a subjective basis. It is
the judgment of the Company's management that the allowance for possible loan
losses at December 31, 1999 was adequate to absorb possible losses from loans in
the portfolio at that date.

(5)  BANK PREMISES AND EQUIPMENT

     A summary of bank premises and equipment, by asset classification, at
December 31, 1999 and 1998 were as follows:


                                         ESTIMATED
                                        USEFUL LIVES      1999        1998
                                        ------------   ----------  ----------
                                                       (DOLLARS IN THOUSANDS)
Bank buildings and improvements......   5 - 40 years   $  108,165  $   98,986
Furniture, equipment and vehicles....   1 - 20 years       76,199      67,691
Land.................................                      27,270      25,908
Real estate held for future
  expansion:
Land, building, furniture, fixture
  and equipment......................   7 - 27 years        2,215       2,215
Less: accumulated depreciation.......                     (68,507)    (57,232)
                                                       ----------  ----------
          Bank premises and equipment, net..........   $  145,342  $  137,568
                                                       ==========  ==========


                                       24
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6)  DEPOSITS

     Deposits as of December 31, 1999 and 1998 and related interest expense for
the years ended December 31, 1999, 1998 and 1997 were as follows:


                                           1999          1998
                                       ------------  ------------
                                         (DOLLARS IN THOUSANDS)
Deposits:
  Demand -- non-interest bearing
     Domestic........................  $    438,028  $    364,954
     Foreign.........................        61,341        49,458
                                       ------------  ------------
  Total demand non-interest
     bearing.........................       499,369       414,412
                                       ------------  ------------
  Savings and interest bearing demand
     Domestic........................       709,104       729,275
     Foreign.........................       219,351       218,133
                                       ------------  ------------
  Total savings and interest bearing
     demand..........................       928,455       947,408
                                       ------------  ------------
  Time, certificates of deposit
     $100,000 or more
     Domestic........................       469,607       460,946
     Foreign.........................       859,164       746,994
  Less than $100,000
     Domestic........................       472,217       530,732
     Foreign.........................       298,400       269,145
                                       ------------  ------------
  Total time, certificates of
     deposit.........................     2,099,388     2,007,817
                                       ============  ============
  Total deposits.....................  $  3,527,212  $  3,369,637
                                       ============  ============


                                          1999         1998        1997
                                       -----------  ----------  ----------
                                             (DOLLARS IN THOUSANDS)
Interest Expense:
  Savings and interest bearing demand
     Domestic........................  $    21,678  $   21,580  $   17,559
     Foreign.........................        5,504       4,839       4,593
                                       -----------  ----------  ----------
  Total savings and interest bearing
     demand..........................  $    27,182  $   26,419  $   22,152
                                       ===========  ==========  ==========
  Time, certificates of deposit
     $100,000 or more
     Domestic........................  $    22,790  $   24,484  $   19,256
     Foreign.........................       38,497      36,865      32,532
  Less than $100,000
     Domestic........................       24,158      28,746      27,200
     Foreign.........................       12,181      11,728      10,425
                                       -----------  ----------  ----------
  Total time, certificates of
     deposit.........................  $    97,626  $  101,823  $   89,413
                                       ===========  ==========  ==========
  Total interest expense on
     deposits........................  $   124,808  $  128,242  $  111,565
                                       ===========  ==========  ==========


                                       25
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7)  SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

     The Company's bank subsidiaries have entered into repurchase agreements
with the FHLB 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 $124,276,000, $257,589,000
and $301,511,000 during 1999, 1998 and 1997, respectively, and the maximum
amount outstanding at any month end during 1999, 1998 and 1997 was $136,066,000,
$518,450,000 and $540,370,000, respectively.

     Further information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1999 and 1998 is set forth in the
following table:

<TABLE>
<CAPTION>
                                               COLLATERAL SECURITIES              REPURCHASE BORROWING
                                         ---------------------------------    -----------------------------
                                          BOOK VALUE OF    MARKET VALUE OF    BALANCE OF   WEIGHTED AVERAGE
                                         SECURITIES SOLD   SECURITIES SOLD    LIABILITY     INTEREST RATE
                                         ---------------   ---------------    ----------   ----------------
<S>                                      <C>               <C>                <C>          <C>
                                                               (DOLLARS IN THOUSANDS)
December 31, 1999 Term:
     Overnight agreements...............    $  37,091         $  36,040        $  21,799         4.65%
     1 to 29 days.......................        8,776             8,173            6,249         4.77%
     30 to 90 days......................       37,370            35,439           34,469         5.03%
     Over 90 days.......................       62,178            57,219           61,235         5.30%
                                         ---------------   ---------------    ----------        -----
          Total.........................    $ 145,415         $ 136,871        $ 123,752         5.09%
                                         ===============   ===============    ==========        =====
December 31, 1998 Term:
     Overnight agreements...............    $  56,172         $  58,802        $  41,130         4.60%
     1 to 29 days.......................       15,416            15,634            6,128         5.11%
     30 to 90 days......................       37,867            38,330           28,211         5.22%
     Over 90 days.......................       89,162            90,412           60,231         4.61%
                                         ---------------   ---------------    ----------        -----
          Total.........................    $ 198,617         $ 203,178        $ 135,700         4.76%
                                         ===============   ===============    ==========        =====
</TABLE>

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

(8)  OTHER BORROWED FUNDS

     Other borrowed funds at December 31, 1999 and 1998 are $1,330,000,000 and
$974,000,000, respectively, of short-term fixed borrowings with the Federal Home
Loan Bank of Dallas at the market price offered at the time of funding. These
borrowings are secured by mortgage-backed investment securities. The weighted
average interest rate on the short-term fixed borrowings outstanding at December
31, 1999 and 1998 was 5.86% and 5.03%, respectively, and the weighted average
interest rate for the year 1999 and 1998 was 5.27% and 5.48%, respectively. The
average daily balance on short-term fixed borrowings was $948,446,000 and
$633,167,000 during 1999 and 1998, respectively, and the maximum amount
outstanding at any month end during 1999 and 1998 was $1,335,000,000 and
$1,004,000,000, respectively.

     At December 31, 1999, the Company had a $50,000,000 long-term fixed rate
certificate of indebtedness outstanding payable to the FHLB at a ten year
Treasury rate minus forty-five basis points, maturing December 8, 2009. At
December 31, 1998, the Company had two long-term certificates of indebtedness
outstanding, each in the amounts of $50,000,000 payable to the FHLB at a ten
year Treasury rate minus forty-five basis points, maturing June 9, 2008 and July
7, 2008. Both certificates were called by the FHLB in 1999. These borrowings are
secured by a blanket lien of 1-4 family first lien mortgage loans.

                                       26
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9)  EARNINGS PER SHARE

     Basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding. The
computation of diluted EPS assumes the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
calculation of the basic EPS and the diluted EPS at December 31, 1999, 1998, and
1997 is set forth in the following table:

<TABLE>
<CAPTION>
                                          INCOME           SHARES         PER-SHARE
                                        (NUMERATOR)     (DENOMINATOR)      AMOUNT
                                        -----------     -------------     ---------
<S>                                     <C>             <C>               <C>
                                               (DOLLARS IN THOUSANDS, EXCEPT
                                                    PER SHARE AMOUNTS)
December 31, 1999:
Basic EPS
     Income available to common
       stockholders..................     $66,248         16,118,661        $4.11
     Potential dilutive common
       shares........................                        304,113
                                        -----------     -------------
Diluted EPS..........................     $66,248         16,422,774        $4.03
                                        ===========     =============
December 31, 1998:
Basic EPS
     Income available to common
       stockholders..................     $53,725         16,286,161        $3.30
     Potential dilutive common
       shares........................                        420,361
                                        -----------     -------------
Diluted EPS                               $53,725         16,706,522        $3.22
                                        ===========     =============
December 31, 1997:
Basic EPS
     Income available to common
       stockholders..................     $48,881         15,929,548        $3.07
     Potential dilutive common
       shares........................                        586,063
                                        -----------     -------------
Diluted EPS..........................     $48,881         16,515,611        $2.96
                                        ===========     =============
</TABLE>

(10)  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 $1,722,600,
$1,546,700 and $1,161,000 were charged to income for the years ended December
31, 1999, 1998, and 1997, respectively.

(11)  INTERNATIONAL OPERATIONS

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

                                       27
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of assets attributable to international operations at December
31, 1999 and 1998 are as follows:


                                          1999        1998
                                       ----------  ----------
                                       (DOLLARS IN THOUSANDS)
Loans:
     Commercial......................  $  184,129  $  135,328
     Others..........................      32,503      30,996
                                       ----------  ----------
                                          216,632     166,324
     Less allowance for possible loan
       losses........................      (1,322)     (1,124)
                                       ----------  ----------
          Net loans..................  $  215,310  $  165,200
                                       ==========  ==========
Accrued interest receivable..........  $    1,725  $    1,327
                                       ==========  ==========


     At December 31, 1999, the Company had $6,865,000 in outstanding
international commercial letters of credit to facilitate trade activities. The
letters of credit are issued primarily in conjunction with credit facilities
which are available to various Mexican banks doing business with the Company.

     Income directly attributable to international operations was $15,317,000,
$11,795,000 and $11,821,000 for the years ended December 31, 1999, 1998 and
1997, respectively.

(12)  INCOME TAXES

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

                                         1999       1998       1997
                                       ---------  ---------  ---------
                                           (DOLLARS IN THOUSANDS)
Current
     U.S.                              $  32,413  $  22,443  $  23,565
     Foreign.........................        102         55         67
                                       ---------  ---------  ---------
          Total current taxes........     32,515     22,498     23,632
Deferred.............................      4,372      2,122      1,139
                                       ---------  ---------  ---------
          Total income taxes.........  $  36,887  $  24,620  $  24,771
                                       =========  =========  =========

     Total income tax expense differs from the amount computed by applying the
U.S. Federal income tax rate of 35% for 1999, 1998 and 1997 to income before
income taxes. The reasons for the differences for the years ended December 31
are as follows:


                                         1999       1998       1997
                                       ---------  ---------  ---------
                                           (DOLLARS IN THOUSANDS)
Computed expected tax expense........  $  36,097  $  27,416  $  25,846
Change in taxes resulting from:
     Tax-exempt interest income......     (1,397)      (151)      (111)
     Lease financing.................      3,193     (2,309)    (1,397)
     Employee benefits...............     (1,609)    --         --
     Other...........................        603       (336)       433
                                       ---------  ---------  ---------
          Actual tax expense.........  $  36,887  $  24,620  $  24,771
                                       =========  =========  =========


                                       28
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are reflected below:


                                           1999         1998
                                       ------------  ----------
                                        (DOLLARS IN THOUSANDS)
Deferred tax assets:
     Loans receivable, principally
       due to the allowance for
       possible loan losses..........  $      8,561  $    8,042
     Other real estate owned.........           766         516
     Accrued expenses................         1,466       1,286
     Net unrealized losses on
       available for sale investment
       securities....................        19,876      --
     Other...........................           284       1,701
                                       ------------  ----------
     Total deferred tax assets.......        30,953      11,545
Deferred tax liabilities:
     Lease financing receivable......        (8,772)     (4,964)
     Bank premises and equipment,
       principally due to differences
       in depreciation...............        (1,684)     (2,175)
     Net unrealized gains on
       available for sale investment
       securities....................       --           (4,733)
     FHLB stock......................        (2,842)     (2,046)
     Other...........................          (267)       (479)
                                       ------------  ----------
     Total deferred tax
       liabilities...................       (13,565)    (14,397)
                                       ------------  ----------
          Net deferred tax asset
             (liability)               $     17,388  $   (2,852)
                                       ============  ==========


     The Company did not record a valuation allowance against deferred tax
assets at December 31, 1999 and 1998 because management has concluded it is more
likely than not the Company will have future taxable earnings in excess of
future tax deductions.

                                       29
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13)  STOCK OPTIONS

     On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan
replaced the 1987 International Bancshares Corporation Key Contributor Stock
Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both
qualified incentive stock options ("ISOs") and nonqualified stock options
("NQSOs") may be granted. Options granted may be exercisable for a period of
up to 10 years from the date of grant, excluding ISOs granted to 10%
shareholders, which may be exercisable for a period of up to only five years.
The following schedule summarizes the pertinent information (adjusted for stock
distributions) with regard to stock options from January 1, 1997 through
December 31, 1999 which were granted by the Company under the 1987 Plan or the
1996 Plan.


                                            OPTION PRICE       OPTIONS
                                              PER SHARE      OUTSTANDING
                                           ---------------   -----------
Balance at January 1, 1997..............                         837,386
     Terminated.........................    $6.01 - 24.60        (13,897)
     Granted............................    29.70 - 41.60        440,833
     Exercised..........................    6.01 - 24.60        (176,424)
                                                             -----------
Balance at December 31, 1997............                       1,087,898
     Terminated.........................    $6.83 - 37.82        (40,445)
     Granted............................    38.40 - 39.80         17,813
     Exercised..........................    6.83 - 37.82        (244,753)
                                                             -----------
Balance at December 31, 1998............                         820,513
     Terminated.........................   $15.00 - 43.00        (50,610)
     Granted............................    36.80 - 43.00        193,900
     Exercised..........................    15.74 - 30.23        (96,504)
                                                             -----------
Balance at December 31, 1999............                         867,299
                                                             ===========


     At December 31, 1999 and 1998, 316,698 and 201,419 options were
exercisable, respectively, and as of December 31, 1999, 39,622 shares were
available for future grants under the 1996 Plan. All options granted under the
1987 Plan and the 1996 Plan had an option price of not less than the fair market
value of the Company's common stock at the date of grant and a vesting period of
five years.

     The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING
                       ---------------------------------------       OPTIONS EXERCISABLE
                                       WEIGHTED-                  -------------------------
                                        AVERAGE      WEIGHTED-                    WEIGHTED-
                         NUMBER        REMAINING      AVERAGE        NUMBER        AVERAGE
      RANGE OF         OUTSTANDING    CONTRACTUAL    EXERCISE     EXERCISABLE     EXERCISE
  EXERCISE PRICES      AT 12/31/99       LIFE          PRICE      AT 12/31/99       PRICE
--------------------   -----------    -----------    ---------    ------------    ---------
<S>                    <C>            <C>            <C>          <C>             <C>
$16.72..............       5,492        .11 years     $ 16.72          5,492       $ 16.72
15.74...............     212,102        3.5 years       15.74        145,400         15.74
19.44...............         784        4.8 years       19.44         --             19.44
30.23 - 41.60.......     440,833        5.4 years       30.54        162,182         30.54
38.40 - 39.80.......      17,813        7.1 years       38.60          3,624         38.60
36.80 - 43.00.......     190,275        8.3 years       38.13         --             38.13
                       -----------                                ------------
$15.74 - 43.00......     867,299                                     316,698
                       ===========                                ============
</TABLE>

     Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to

                                       30
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


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

     The fair values of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
                                         1999       1998       1997
                                       ---------  ---------  ---------
Expected life (years)................          6          6          6
Interest rate........................       5.54%      4.46%      6.62%
Volatility...........................      33.68%     36.40%     30.08%


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

<TABLE>
<CAPTION>
                                                         1999       1998       1997
                                                       ---------  ---------  ---------
<S>                                     <C>            <C>        <C>        <C>
Net income...........................     As reported  $  66,248  $  53,725  $  48,881
                                        Pro forma....     64,478     52,123     47,667
Basic earnings.......................     As reported  $    4.11  $    3.30  $    3.07
                                            Pro forma       4.00       3.20       2.99
Diluted earnings.....................     As reported  $    4.03  $    3.22  $    2.96
                                            Pro forma       3.93       3.12       2.89
</TABLE>

     The Company has a formal stock repurchase program and as part of the
program, the Company occasionally repurchases shares of Common Stock related to
the exercise of stock options through the surrender of other shares of Common
Stock of the Company owned by the option holders.

(14)  COMMITMENTS AND CONTINGENT LIABILITIES

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

     The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for the years ended December 31, 1999,
1998 and 1997 and noncancellable lease commitments at December 31, 1999 were not
significant.

     Cash of approximately $29,171,000 and $25,434,000 at December 31, 1999 and
1998, respectively, was maintained to satisfy regulatory reserve requirements.

     The Company's lead bank subsidiary has invested in several lease financing
transactions. Two of the lease financing transactions have been examined by the
Internal Revenue Service ("IRS"). In both transactions, a subsidiary of the
lead bank is the owner of a ninety-nine percent (99%) limited partnership
interest. The IRS has issued a Notice of Proposed Adjustments to Affected Items
of a partnership for one of the transactions and the affected partnership has
submitted a Protest contesting the adjustments. The IRS has issued a Notice of
Proposed Adjustments to Affected Items of a Partnership for the other
transaction and

                                       31
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


the partnership intends to file a Protest contesting the proposed adjustments.
No reliable prediction can be made at this time as to the likely outcome of the
Protests; however, if the Protests are decided adversely to the partnerships,
all or a portion of the $12 million in tax benefits previously recognized by the
Company in connection with these lease financing transactions would be in
question.Management currently estimates its exposure to be approximately
$4,800,000, which amount has been accrued for and included in income tax
expense. Management intends to continue to evaluate the merits of this matter
and make appropriate revisions if warranted.

(15)  TRANSACTIONS WITH RELATED PARTIES

     In the ordinary course of business, the Corporation and its subsidiaries
make loans to directors and executive officers of the Corporation, including
their affiliates, families and companies in which they are principal owners. In
the opinion of management, these loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than normal
risk of collectibility or present other unfavorable features. The aggregate
amounts receivable from such related parties amounted to approximately
$39,938,000 and $48,712,000 at December 31, 1999 and 1998, respectively. During
1999, $16,397,000 of new loans were made and repayments totaled $25,171,000.

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

     In the normal course of business, the bank subsidiaries are party to
financial instruments with off-balance sheet risk to meet the financing needs of
their customers. These financial instruments include commitments to their
customers. These financial instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the balance sheet. The
contract amounts of these instruments reflect the extent of involvement the bank
subsidiaries have in particular classes of financial instruments. At December
31, 1999, the following financial instruments, whose contract amounts represent
credit risks, were outstanding:

<TABLE>
<S>                                    <C>
Commitments to extend credit.........  $   577,480,000
Credit card lines....................       50,981,000
Letters of credit....................       50,011,000
</TABLE>

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

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

     The bank subsidiaries make commercial, real estate and consumer loans to
customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata
counties in South Texas as well as Matagorda,

                                       32
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


Brazoria, Galveston, Fort Bend, Calhoun, and Harris counties in Southeast Texas.
Although the loan portfolio is diversified, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economic
conditions in these areas, especially in the real estate and commercial business
sectors.

(17)  DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS

     Bank regulatory agencies limit the amount of dividends which the bank
subsidiaries can pay the Corporation, through IBC Subsidiary Corporation,
without obtaining prior approval from such agencies. At December 31, 1999, the
aggregate amount legally available to be distributed to the Corporation from
bank subsidiaries as dividends was approximately $58,641,000, assuming that each
subsidiary bank continues to be classified as "well capitalized" pursuant to
the applicable regulations. The restricted capital of the bank subsidiaries was
approximately $306,263,000. The undivided profits of the bank subsidiaries was
$152,078,000. In addition to legal requirements, regulatory authorities also
consider the adequacy of the bank subsidiaries' total capital in relation to
their deposits and other factors. These capital adequacy considerations also
limit amounts available for payment of dividends. The Corporation historically
has not allowed any subsidiary bank to pay dividends in such a manner as to
impair its capital adequacy.

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

     Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table on the following page) of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
1999, that the Corporation and the bank subsidiaries met all capital adequacy
requirements to which it is subject.

     As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized all the bank subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Corporation and the bank subsidiaries
must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the categorization of the
Corporation or any of the bank subsidiaries as well capitalized.

                                       33
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Corporation's and the bank subsidiaries' actual capital amounts and
ratios for 1999 are also presented in the following table:
<TABLE>
<CAPTION>
                                                                                                   TO BE WELL
                                                                                               CAPITALIZED UNDER
                                                                        FOR CAPITAL            PROMPT CORRECTIVE
                                                 ACTUAL              ADEQUACY PURPOSES         ACTION PROVISIONS
                                          ---------------------    ----------------------    ----------------------
                                            AMOUNT      RATIO       AMOUNT        RATIO       AMOUNT        RATIO
                                          ----------  ---------    ---------    ---------    ---------    ---------
<S>                                       <C>         <C>          <C>          <C>          <C>          <C>
                                                                   (GREATER     (GREATER     (GREATER     (GREATER
                                                                    THAN OR      THAN OR      THAN OR      THAN OR
                                                                   EQUAL TO)    EQUAL TO)    EQUAL TO)    EQUAL TO)

                                                                   (DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total Capital (to Risk Weighted Assets):
     Consolidated.......................  $  374,803      14.46%   $ 207,412       8.00%     $ 259,266      10.00%
     International Bank of Commerce,
       Laredo...........................     274,551      12.29      178,752       8.00        223,441      10.00
     International Bank of Commerce,
       Brownsville......................      36,833      19.37       15,211       8.00         19,014      10.00
     International Bank of Commerce,
       Zapata...........................      16,835      27.20        4,951       8.00          6,189      10.00
     Commerce Bank......................      19,705      21.47        7,343       8.00          9,178      10.00
Tier 1 Capital (to Risk Weighted Assets):
     Consolidated.......................  $  347,780      13.41%   $ 103,706       4.00%     $ 155,559       6.00%
     International Bank of Commerce,
       Laredo...........................     251,450      11.25       89,376       4.00        134,064       6.00
     International Bank of Commerce,
       Brownsville......................      34,982      18.40        7,605       4.00         11,408       6.00
     International Bank of Commerce,
       Zapata...........................      16,315      26.36        2,476       4.00          3,713       6.00
     Commerce Bank......................      18,556      20.22        3,671       4.00          5,507       6.00
Tier 1 Capital (to Average Assets):
     Consolidated.......................  $  347,780       6.58%   $ 211,527       4.00%     $ 264,409       5.00%
     International Bank of Commerce,
       Laredo...........................     251,450       5.70      176,321       4.00        220,401       5.00
     International Bank of Commerce,
       Brownsville......................      34,982       8.18       17,110       4.00         21,387       5.00
     International Bank of Commerce,
       Zapata...........................      16,315       8.18        7,983       4.00          9,978       5.00
     Commerce Bank......................      18,556       8.52        8,715       4.00         10,894       5.00
</TABLE>

                                       34
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Corporation's and the bank subsidiaries' actual capital amounts and
ratios for 1998 are also presented in the following table:
<TABLE>
<CAPTION>
                                                                                                   TO BE WELL
                                                                                               CAPITALIZED UNDER
                                                                        FOR CAPITAL            PROMPT CORRECTIVE
                                                 ACTUAL              ADEQUACY PURPOSES         ACTION PROVISIONS
                                          ---------------------    ----------------------    ----------------------
                                            AMOUNT      RATIO       AMOUNT        RATIO       AMOUNT        RATIO
                                          ----------  ---------    ---------    ---------    ---------    ---------
<S>                                       <C>         <C>          <C>          <C>          <C>          <C>
                                                                   (GREATER     (GREATER     (GREATER     (GREATER
                                                                    THAN OR      THAN OR      THAN OR      THAN OR
                                                                   EQUAL TO)    EQUAL TO)    EQUAL TO)    EQUAL TO)

                                                                   (DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
     Consolidated.......................  $  343,669      14.45%   $ 190,239       8.00%     $ 237,798      10.00%
     International Bank of Commerce,
       Laredo...........................     248,814      12.03      165,426       8.00        206,783      10.00
     International Bank of Commerce,
       Brownsville......................      30,436      18.20       13,375       8.00         16,719      10.00
     International Bank of Commerce,
       Zapata...........................      14,404      28.18        4,089       8.00          5,112      10.00
     Commerce Bank......................      18,768      24.18        6,208       8.00          7,760      10.00
Tier 1 Capital (to Risk Weighted Assets):
     Consolidated.......................  $  317,794      13.36%   $  95,119       4.00%     $ 142,679       6.00%
     International Bank of Commerce,
       Laredo...........................     226,595      10.96       82,713       4.00        124,070       6.00
     International Bank of Commerce,
       Brownsville......................      28,806      17.23        6,688       4.00         10,031       6.00
     International Bank of Commerce,
       Zapata...........................      13,893      27.18        2,045       4.00          3,067       6.00
     Commerce Bank......................      17,795      22.93        3,104       4.00          4,656       6.00
Tier 1 Capital (to Average Assets):
     Consolidated.......................  $  317,794       6.50%   $ 195,546       4.00%     $ 244,433       5.00%
     International Bank of Commerce,
       Laredo...........................     226,595       5.46      166,115       4.00        207,644       5.00
     International Bank of Commerce,
       Brownsville......................      28,806       6.98       16,508       4.00         20,634       5.00
     International Bank of Commerce,
       Zapata...........................      13,893       9.38        5,924       4.00          7,404       5.00
     Commerce Bank......................      17,795      10.12        7,037       4.00          8,796       5.00
</TABLE>

                                       35
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(18)  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value estimates, methods, and assumptions for the Company's
financial instruments at December 31, 1999 and 1998 are outlined below.

  CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD

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

  TIME DEPOSITS WITH BANKS

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

  INVESTMENT SECURITIES

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

  LOANS

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

     For variable rate performing loans, the carrying amount approximates the
fair value. For fixed rate performing loans, except residential mortgage loans,
the fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market. At December 31, 1999 and 1998, the carrying
amount of fixed rate performing loans was $677,616,000 and $558,386,000,
respectively, and the estimated fair value was $673,973,000 and $559,128,000,
respectively.

     Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgementally determined using available market and specific borrower
information. As of December 31, 1999 and 1998, the net carrying amount of
non-performing loans was a reasonable estimate of the 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,
1999 and 1998. 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, 1999 and 1998, the carrying amount of time deposits was
$2,099,388,000 and $2,007,817,000, respectively, and the estimated fair value
was $2,109,599,000 and $1,996,975,000, respectively.

                                       36
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, OTHER
    BORROWED FUNDS AND SUBORDINATED DEBT

     Due to the contractual terms of these financial instruments, the carrying
amounts approximated fair value at December 31, 1999 and 1998.

  COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT

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

  LIMITATIONS

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

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

                                       37
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19)  INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION

                            STATEMENTS OF CONDITION
                             (PARENT COMPANY ONLY)
                           DECEMBER 31, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)


                                          1999        1998
                                       ----------  ----------
               ASSETS
Cash.................................  $      227  $       97
Repurchase agreements................      --           1,600
Other investments....................       8,390      10,708
Notes receivable.....................      42,374      49,925
Investment in subsidiaries...........     292,284     296,422
Other assets.........................      10,196      12,244
                                       ----------  ----------
          Total assets...............     353,471     370,996
                                       ==========  ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
     Other liabilities...............          35         713
                                       ----------  ----------
          Total liabilities..........          35         713
                                       ----------  ----------
Shareholders' equity:
     Common stock....................      21,092      16,791
     Surplus.........................      24,050      22,250
     Retained earnings...............     385,942     341,025
     Accumulated other comprehensive
      income (loss)..................     (36,912)      8,797
                                       ----------  ----------
                                          394,172     388,863
     Less cost of shares in
      treasury.......................     (40,736)    (18,580)
                                       ----------  ----------
          Total shareholders'
             equity..................     353,436     370,283
                                       ----------  ----------
          Total liabilities and
             shareholders' equity....  $  353,471  $  370,996
                                       ==========  ==========


                                       38
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                              STATEMENTS OF INCOME
                             (PARENT COMPANY ONLY)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)


                                         1999       1998       1997
                                       ---------  ---------  ---------
Income:
     Dividends from subsidiaries.....  $  30,500  $   3,455  $  17,035
     Interest income on notes
       receivable....................      4,463      5,202      6,134
     Interest income on
       investments...................        506        745         36
     Other interest income...........        343        289        307
     Other...........................      1,316     (1,377)     4,517
                                       ---------  ---------  ---------
          Total income...............     37,128      8,314     28,029
                                       ---------  ---------  ---------
Expenses:
     Interest expense on notes
       payable.......................     --         --            142
     Other...........................        382        695        380
                                       ---------  ---------  ---------
          Total expenses.............        382        695        522
                                       ---------  ---------  ---------
          Income before federal
             income taxes and equity
             in undistributed net
             income of
             subsidiaries............     36,746      7,619     27,507
Federal income tax expense...........        873       (277)     1,785
                                       ---------  ---------  ---------
          Income before equity in
             undistributed net income
             of subsidiaries.........     35,873      7,896     25,722
Equity in undistributed net income of
  subsidiaries.......................     30,375     45,829     23,159
                                       ---------  ---------  ---------
          Net income.................  $  66,248  $  53,725  $  48,881
                                       =========  =========  =========


                                       39
<PAGE>
             INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                            STATEMENTS OF CASH FLOWS
                             (PARENT COMPANY ONLY)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 1999        1998        1997
                                              ----------  ----------  ----------
<S>                                           <C>         <C>         <C>
Operating activities:
  Net income................................  $   66,248  $   53,725  $   48,881
  Adjustments to reconcile net income to net
     cash provided by operating activities:
       Gain on sale of other real estate....      --          --            (113)
       (Decrease) increase in other
          liabilities.......................        (678)        482         197
       Equity in undistributed net income of
          subsidiaries......................     (30,375)    (45,829)    (23,159)
                                              ----------  ----------  ----------
             Net cash provided by operating
               activities...................      35,195       8,378      25,806
                                              ----------  ----------  ----------
Investing activities:
  Contributions to subsidiaries.............     (10,965)    (11,648)    (18,656)
  Repayment from subsidiaries...............      --          --             166
  Purchase of time deposits with banks......      --          --          (2,900)
  Proceeds from time deposits with banks....      --          --           2,900
  Purchase of repurchase agreement with
     banks..................................      (2,500)     (3,550)     (7,500)
  Proceeds from repurchase agreement with
     banks..................................       4,100       9,450      --
  Purchase of available for sale other
     securities.............................      --         (10,036)     (1,156)
  Principal collected on mortgage-backed
     securities.............................       2,087       1,339      --
  Net decrease in notes receivable..........       7,551       7,284      10,192
  Decrease (increase) in other assets.......       2,048      11,149      (5,364)
  Proceeds from sale of other real estate...      --          --             665
                                              ----------  ----------  ----------
             Net cash provided (used) in
               investing activities.........       2,321       3,988     (21,653)
                                              ----------  ----------  ----------
Financing activities:
  Proceeds from issuance of other borrowed
     funds..................................      --          --           6,333
  Principal payments on notes payable.......      --          --          (8,333)
  Proceeds from stock transactions..........       1,898       2,765       6,778
  Payments of cash dividends................     (17,102)    (11,297)     (4,400)
  Payments of cash dividends in lieu of
     fractional shares......................         (26)        (41)        (26)
  Purchase of treasury stock................     (22,156)     (4,046)     (4,491)
                                              ----------  ----------  ----------
             Net cash used in financing
               activities...................     (37,386)    (12,619)     (4,139)
                                              ----------  ----------  ----------
             Increase (decrease) in cash and
               cash equivalents.............         130        (253)         14
Cash at beginning of year...................          97         350         336
                                              ----------  ----------  ----------
Cash at end of year.........................  $      227  $       97  $      350
                                              ==========  ==========  ==========
Supplemental cash flow information:
  Interest paid.............................  $   --      $   --      $      131
</TABLE>

                                       40
<PAGE>
                      INTERNATIONAL BANCSHARES CORPORATION
                             OFFICERS AND DIRECTORS

OFFICERS                                    DIRECTORS

DENNIS E. NIXON                             DENNIS E. NIXON
Chairman of the Board and President         President
                                            International Bank of Commerce
R. DAVID GUERRA
Vice President                              R. DAVID GUERRA
                                            President
LEONARDO SALINAS                            International Bank of Commerce
Vice President                              Branch in McAllen, Texas

EDUARDO J. FARIAS                           LEONARDO SALINAS
Vice President                              Senior Executive Vice President
                                            International Bank of Commerce
RICHARD CAPPS
Vice President                              LESTER AVIGAEL
                                            Retail Merchant
IMELDA NAVARRO                              Chairman of the Board
Treasurer                                   International Bank of Commerce

WILLIAM CUELLAR                             IRVING GREENBLUM
Auditor                                     Retail Merchant

LUISA D. BENAVIDES                          RICHARD E. HAYNES
Secretary                                   Attorney at Law; Real
                                            Estate Investments
MARISA V. SANTOS
Assistant Secretary                         SIOMA NEIMAN
                                            An International Entrepreneur

                                            ANTONIO R. SANCHEZ, JR.
                                            Chairman of the Board of Sanchez
                                            Oil & Gas Corporation;
                                            Investments

                                            PEGGY J. NEWMAN
                                            Investments