INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES  (Consolidated)        SELECTED FINANCIAL DATA

|                 |                                                                          | AT OR FOR THE YEARS ENDED DECEMBER 31,
|---------------- | ------------------------------------------------------------------------ | --------------------------------------
|
|
|BALANCE SHEET    |                                                                          |                                       
|                 | Assets                                                                   |                                       
|                 | Net loans                                                                |                                       
|                 | Deposits                                                                 |                                       
|                 | Other borrowed funds                                                     |                                       
|                 | Shareholders' equity                                                     |                                       
|INCOME STATEMENT |                                                                          |                                       
|                 | Interest income                                                          |                                       
|                 | Interest expense                                                         |                                       
|                 |                                                                          |                                       
|                 | Net interest income                                                      |                                       
|                 | Provision for possible loan losses                                       |                                       
|                 | Non-interest income                                                      |                                       
|                 | Non-interest expense                                                     |                                       
|                 |                                                                          |                                       
|                 | Income before income taxes and cumulative change in accounting principle |                                       
|                 | Income taxes                                                             |                                       
|                 | Cumulative effect of a change in accounting principle, net of taxes      |                                       
|                 |                                                                          |                                       
|                 | Net income                                                               |                                       
|                 |                                                                          |                                       
|                 | Adjusted net income                                                      |                                       
|                 |                                                                          |                                       
|                 | Per common share:                                                        |                                       
|                 |                                                                          | Basic                                 
|                 |                                                                          | Diluted                               
|                 | Adjusted per common share:                                               |                                       
|                 |                                                                          | Basic                                 
|                 |                                                                          | Diluted                               

Note 1:
See note 2 of notes to the consolidated financial statements regarding the acquisitions made by International Bancshares Corporation and its subsidiaries in 2002
and 2001.

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

Note 3:
See note 15 of notes to the consolidated financial statements regarding the discontinuation of goodwill amortization. On January 1, 2002, the Company adopted
the remaining provisions of SFAS No. 142, which discontinued amortization of goodwill. Accordingly, there is no adjusted net income or per common share data for the year ended
December 31, 2002.

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

Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International
Bancshares Corporation and subsidiaries (the "Company") on a consolidated basis for the three-year period ended December 31, 2002. The Company is a financial holding company with
four bank subsidiaries operating in over 95 main banking and branch facilities in South and Southeast Texas, and ten 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, 2002, and the Selected Financial Data and Consolidated Financial Statements included
elsewhere herein.

Special Cautionary Notice Regarding Forward Looking Information

Certain
matters discussed in this report, excluding historical information, include forward-looking statements. 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 a similar
meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Such
statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the
forward-looking statements as a result of many factors.

Risk
factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements
include, among others the following possibilities: (I) changes in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense
expectations, (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, (IV) the loss of
senior management or operating personnel, (V) increased competition from both within and outside the banking industry, (VI) changes in local, national and international economic business
conditions which adversely affect the Company's customers and their ability to transact profitable business with the Company, including the ability of its borrowers to repay their loans according to
their terms or a change in the value of the related collateral, (VII) the timing, impact and other uncertainties of the Company's potential future acquisitions including the Company's ability
to identify suitable potential future acquisition candidates, the success or failure in the integration of their operations, and the Company's ability to maintain its current branch network and to
enter new markets successfully and capitalize on growth opportunities, (VIII) changes in the Company's ability to pay dividends on its Common Stock, (IX) the effects of the litigation
and proceedings pending with the Internal Revenue Service regarding the Company's lease financing transactions, and (X) additions to the Company's loan loss reserves as the result of changes in
local, national, or international conditions which adversely affect the Company's customers. It is not possible to foresee or identify all such factors. The Company makes no commitment to update any
forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

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Results of Operations



Net income for 2002 was $100,631,000, or $3.15 per sharebasic ($3.08 per sharediluted), compared with $83,342,000, or $2.52 per
sharebasic ($2.47 per sharediluted), in 2002 and $75,174,000, or $2.25 per sharebasic ($2.22 per sharediluted), in 2001.

During
the year-ended December 31, 1999, IBC Aircraft Services, Inc., a wholly owned subsidiary of the Company's lead bank, International Bank of Commerce,
Laredo, Texas, acquired for approximately $15 million, a 20% ownership interest in the Aircraft Finance Trust ("AFT"), a special purpose business trust formed to acquire, finance, refinance,
own, lease, sublease, sell and maintain aircraft. During 1999, AFT issued approximately $1.209 billion in aggregate principal amount of notes in five debt classes. AFT used the proceeds from
the debt offering to initially purchase 36 leased aircraft located in at least thirteen different countries from General Electric Capital Corporation and certain of its affiliates. The expected final
payment date of the AFT notes is August 15, 2016 and the final maturity date of the AFT notes is May 15, 2024. GE Capital Aviation Services Limited acts as servicer of the AFT aircraft
portfolio.

The
Company accounts for its investment in AFT under the equity method of accounting. AFT utilizes derivative instruments to manage the interest rate on bonds that it has issued. The
derivatives qualify as cash flow hedges and are reported at fair value. The Company records its proportionate share of the fair value of the derivatives as an increase or decrease in the investment in
AFT and accumulated other comprehensive income, net of tax. The Company's proportionate share of earnings or losses of AFT were losses of $6,799,000 and $1,766,000 for the years ended
December 31, 2002 and 2001, respectively, and earnings of $1,069,000 for the year ended December 31, 2000. Because of the losses from operations that AFT has reported as a result of the
events of September 11 and the impact on the airline industry including continued declines in air travel and continued reduced demand for commercial aircraft, the Company evaluated its
investment, which resulted in the Company recording an impairment charge of $6,081,000 in 2002. At December 31, 2002 and 2001, the Company's investment in AFT, excluding its proportionate share
of the fair value of the AFT derivatives, was $948,000 and $13,828,000, respectively. The Company's investment including the proportionate share of the fair value of the AFT derivatives at
December 31, 2002 and 2001, was $0 and $6,281,000, respectively.

On
March 13, 2002, Albertson's, Inc. announced its intention to exit substantially all of the Company's markets. The Company began its relationship with Albertson's in
1995. 39 Albertson's supermarkets and the related in-store branches of the Company located in Houston, San Antonio, Brownsville, Corpus Christi, Laredo, Endinburg, San Juan, Pharr,
Mission, Weslaco and Harlingen have been closed. On June 7, 2002, H-E-B agreed to purchase certain former Albertson's locations in San Antonio and the Rio Grande Valley.
The Company subsequently agreed with H-E-B to open in 5 of the Company's previous in-store locations and the Company also agreed to open an in-store
branch in another former Albertson's store that was not occupied by the Company. On May 10, 2002, Kroger Co. agreed to purchase certain former Albertson's locations in Houston. The Company
subsequently agreed with Kroger to open in 3 of the Company's previous in-store locations. During the third quarter 2002, the Company concluded that the remaining in-store
locations would not be re-opened and wrote off $1,159,000 of its investment in the related in-store branches. The Company will continue to maintain 1 Albertson's
in-store branch in the New Braunfels market that was not closed by Albertson's. As a result of the new branch arrangements in Houston and San Antonio and the Company's extensive branch
network, the Company does not expect any further significant loss of its deposit base or a significant impact from the branch closings on its consolidated financial condition or results of operations.

On
August 1, 2002, the Company completed its sale of three non-strategic bank branches in Rockdale, Taylor and Giddings, Texas to Citizens National Bank located in
Cameron, Texas. The branches were previously acquired by the Company as part of its acquisition of National Bancshares Corporation in the

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fourth quarter of 2001 and represented approximately $36.3 million in loans and $93.1 million in deposits. As a result of the sale, the Company recorded a gain of $3.1 million.

Total
assets at December 31, 2002 grew 1.8% to $6,495,635,000 from $6,381,401,000 at December 31, 2001, and grew 8.9% in 2001 from $5,860,714,000 at December 31,
2000. Net loans increased 4.5% to $2,725,349,000 at December 31, 2002 from $2,608,467,000 at December 31, 2001 and grew 17.9% in 2001 from $2,212,467,000 at December 31, 2000.
Deposits at December 31, 2002 were $4,239,899,000, a decrease of 2.1% from $4,332,834,000 at December 31, 2001, which represented an increase of 15.7% over $3,744,598,000 at
December 31, 2000. The decrease in deposits and slight increase in assets from
2002 to 2001 is primarily attributed to the sale of the bank branches. The aggregate amount of certificates of indebtedness with the Federal Home Loan Bank of Dallas ("FHLB") increased to
$1,050,857,000 at December 31, 2002 from the $709,296,000 at December 31, 2001. Long term debt of $135,000,000 in the form of trust preferred securities was issued in 2002 and 2001.
Trust preferred securities, certificates of indebtedness and the deposits are used to fund the earning asset base of the Company.



Net interest income in 2002 increased by $47,966,000, or 25.3%, over that in 2001, while net interest income in
2001 increased by $25,971,000, or 15.9%, over that in 2000. The net yield on average interest earning assets increased by 0.61% from 3.53% in 2001 to 4.14% in 2002. The net yield on average interest
earning assets increased by 0.3% in 2001 to 3.53% from 3.23% in 2000. Average interest earning assets increased 6.8% from $5,376,790,000 in 2001, to $5,741,369,000 in 2002 and increased 4.5% from
$5,147,489,000 in 2000 to $5,376,790,000 in 2001, which contributed to the growth in net interest income for 2002 and 2001, respectively. Due to decreasing market rates in 2002 and 2001, the Company
consequently lowered interest rates on loans and deposits, which in turn affected the yield on interest earning assets and interest bearing liabilities. The yield on average interest earning assets
decreased 1.1% from 7.26% in 2001 to 6.16% in 2002, and the rates paid on average interest bearing liabilities decreased 1.86% from 4.13% in 2001 to 2.27% in 2002. The yield on average interest
earning assets decreased .93% from 8.19% in 2000 to 7.26% in 2001 and the rates paid on average interest bearing liabilities decreased 1.2% from 5.33% in 2000 to 4.13% in 2001.

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

4

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Non-interest income increased 7.6% in 2002 to $85,645,000 from $79,588,000 in 2001, and increased 24.8% in 2001 from $63,796,000 in 2000. Service
charges and fees on deposit accounts and other banking services provided increased $3,007,000 from 2001 to 2002 as a result of the acquisition of NBC Bank and new products offerred by the Company.
Investment securities gains of $2,303,000 were recorded in 2002 compared to losses of $1,010,000 for 2001. These gains in 2002 and losses in 2001 occurred due to a bond program to reposition a portion
of the Company's bond portfolio and take advantage of higher bond yields. Non-interest income includes income on other investments. Income on other investments decreased by 124.4% in 2002
to $(2,598,000) from $10,536,000 in 2001, which represented a 23.7% decrease from $13,941,000 in 2000. The decrease in 2002 can be attributed to losses taken by the Company on its investment in AFT.
Other non-interest income increased $3,383,000 primarily from the gain recorded on the sale of the branches.



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 wages and employee benefits, net occupancy expenses, equipment expenses and other
operating expenses such as Federal Deposit Insurance Corporation ("FDIC") insurance. Non-interest expense increased 14.3%in 2002 to
$154,843,000 from $135,441,000 in 2001, which increased 21.0% from $111,957,000 in 2000. The increases in non-interest expense for the three years ended 2002 were due to the expanded
operations of the Company's bank subsidiaries.

The
efficiency ratio, a measure of non-interest expense to net interest income plus non-interest income, was 47.92% for the year ended December 31, 2002,
compared to 50.32% for the year ended December 31, 2001. The Company's efficiency ratio has been under 53% for each of the last five years, which the Company believes is better than national
peer group ratios.



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

Financial Condition



Most of the Company's lending activities involve commercial (domestic and foreign), consumer and real estate mortgage financing. In 2002, the Company's efforts to
increase its loan volume resulted in an increase of 14.5% in average domestic loans from $2,111,103,000 for 2001 to $2,416,259,000 in 2002 and an increase of 0.3% in average foreign loans from
$247,784,000 for 2001 to $248,597,000 in 2002 for an increase of 13.0% in total average loans from $2,358,887,000 for 2001 to $2,664,856,000 in 2002. The average yield for these loans decreased 1.4%
for domestic loans and decreased by 3.4% for foreign loans in 2002 as compared to 2001. The Company experienced an increase of 14% in average domestic loans from 2000 to 2001 and a .26% increase in
average foreign loans from 2000 to 2001. The yield for these loans decreased 1.9% for domestic loans and decreased by 0.2% for foreign loans in 2001 as compared to 2000.

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Loan
commitments, consisting of unused commitments to lend, letters of credit, credit card lines and other approved loans, which have not been funded, were $722,453,000 at
December 31, 2002. See Note 18 to the Consolidated Financial Statements.

The
allowance for possible loan losses increased 10.4% from $40,065,000 at December 31, 2001 to $44,213,000 at December 31, 2002 and increased 30.0% from $30,812,000 at
December 31, 2000 to $40,065,000 at December 31, 2001. The provision for possible loan losses charged to expense decreased 1.0% from $8,631,000 in 2001 to $8,541,000 in 2002 and
increased 26.5% from $6,824,000 in 2000 to $8,631,000 in 2001. The 2001 increase in the allowance for possible loan losses was largely due to the increase in the size of the loan portfolio and the
addition of $3,995,000 in existing allowance for loan losses as part of the loan portfolio acquired in the NBC acquisition. The allowance for possible loan
losses was 1.6% of total loans, net of unearned income, at December 31, 2002 compared to 1.5% at 2001 and 1.4% at 2000. Non-performing assets as a percentage of total loans and
total assets were .34% and .14%, respectively, at December 31, 2002, and .43% and .18%, respectively, at December 31, 2001. Loans accounted for on a non-accrual basis
decreased 52.3% from $8,252,000 at December 31, 2001 to $3,903,000 at December 31, 2002. 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. Foreclosed assets increased 20.2% from $5,308,000 at December 31, 2001 to $6,381,000 at December 31, 2002.
In 2001, non-accruals increased 31.5% from $6,273,000 at December 31, 2000 to $8,252,000 at December 31, 2001 and foreclosed assets increased 186.3% from $1,854,000 at
December 31, 2000 to $5,308,000 at December 31, 2001.

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. Management of each of the bank subsidiaries, along with management of the Company,
continually reviews 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, financial and agricultural 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 un-collectible and that it should be wholly or partially charged off as a
loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's
management that the allowance for possible loan losses at December 31, 2002 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on
page 13.



The average balances of taxable investment securities increased 2.6% from $2,854,225,000 for 2001 to $2,927,420,000 for 2002 and decreased 2.7% for 2001 from
$2,932,778,000 for 2000.



On December 31, 2002, the Company had $6,495,635,000 of consolidated assets of which approximately $233,277,000 or 3.6% were related to loans outstanding
to borrowers domiciled in Mexico. The loan

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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,
2002 is presented below.

|                                                                                   |  | Amount of
Loans |         | Related
Allowance for
Possible Losses
|---------------------------------------------------------------------------------- |  | --------------- | ------- | -------------------------------------
|
|Secured by certificates of deposit in United States banks                          |  | $               | 132,224 |                                      
|Secured by United States real estate                                               |  |                 | 35,235  |                                      
|Secured by other United States collateral (securities, gold, silver, etc.)         |  |                 | 8,275   |                                      
|Foreign real estate guaranteed under lease obligations primarily by U.S. companies |  |                 | 5,755   |                                      
|Direct unsecured Mexican sovereign debt (principally former FICORCA debt)          |  |                 | 3,293   |                                      
|Other (principally Mexico real estate)                                             |  |                 | 48,495  |                                      
|                                                                                   |  |                 |         |                                      
|                                                                                   |  | $               | 233,277 |                                      
|                                                                                   |  |                 |         |                                      

The
transactions for the year ended December 31, 2002 in that portion of the allowance for possible loan losses related to Mexican debt were as follows:

|                             |                                 | (Dollars in Thousands) |      
|---------------------------- | ------------------------------- | ---------------------- | -----
|Balance at December 31, 2001 |                                 | $                      | 1,502
|                             | Charge-offs                     |                        |      
|                             | Recoveries                      |                        |      
|                             |                                 |                        |      
|                             | Net charge-offs                 |                        |      
|                             | Provision charged to operations |                        |      
|                             |                                 |                        |      
|Balance at December 31, 2002 |                                 | $                      | 1,179
|                             |                                 |                        |      



The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company relies primarily on its high quality customer
service and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company's lending and investment activities, and the interest paid for deposits
must be managed carefully to control the level of interest expense. Deposits at December 31, 2002 were $4,239,899,000, a decrease of 2.1% over $4,332,834,000 at December 31, 2001, which
represented an increase of 15.7% from $3,744,598,000 at December 31, 2000. The decrease in deposits from 2002 to 2001 is primarily attributable to the sale of the bank branches.

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%, 40%

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and 42% of the Company's bank subsidiaries' total deposits as of December 31, 2002, 2001 and 2000, respectively. Other important funding sources for the Company's bank subsidiaries during 2002
and 2001 have been wholesale liabilities with the Federal Home Loan Bank ("FHLB") 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 estimate of the vulnerability of net interest income to changes in market
rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities re-pricing across
a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets.

If
an excess of liabilities over assets matures or re-prices within the one-year period, the 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 re-price within a particular period. The flaw in
drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or re-pricings of
interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions
increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk
exposure. See page 15 of the Company's Form 10-K for a tabular summary of the Company's interest rate sensitive assets and liabilities by their re-pricing dates at
December 31, 2002.

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, the fundamental, but often unstated, assumption of the gap approach that every balance sheet item that
can re-price will do so to the full extent of any movement in market interest rates is taken into consideration in income simulation analysis.

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

At
December 31, 2002, based on these simulations, a rate shift of 200 basis points in interest rates either up or down will not vary earnings by more than 3 percent of
projected 2003 net interest 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.

8

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All
the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposure changes continuously
as a result of the Company's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate
sensitivity, they do not necessarily take into account all business developments that have an effect on net income, such as changes in credit quality or the size and composition of the 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 19 to the Consolidated Financial Statements. At December 31, 2002,
the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $188,000,000, assuming that each bank subsidiary continues to be
classified as "well capitalized" under the applicable regulations. The restricted capital (capital, surplus and certified surplus) of the bank subsidiaries was approximately $399,042,000 as of
December 31, 2002. The undivided profits of the bank subsidiaries were approximately $251,625,000 as of December 31, 2002.

As
of December 31, 2002, the Company has outstanding $1,185,857,000 in other borrowed funds and long-term debt. 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, 2002, shareholders' equity was $547,264,000 compared
to $497,028,000 at December 31, 2001, an increase of $50,236,000, or 10%. The increase in shareholders' equity resulted from the retention of earnings and comprehensive income. Comprehensive
income includes unrealized gains or losses on securities held available for sale and changes in the fair value of derivative instruments of an equity method investee, net of tax. The accumulated other
comprehensive income is not included in the calculation of regulatory capital ratios.

During
1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly rated bank holding companies and at least 4% to 5% for all other bank holding
companies. The Company's leverage ratio (defined as shareholders' equity plus eligible trust preferred securities issued and outstanding less goodwill and certain other intangibles divided by average
quarterly assets) was 8.71% at December 31, 2002 and 6.67% at December 31, 2001. The core deposit intangibles and goodwill of $74,611,000 as of December 31, 2002, recorded in
connection with financial institution acquisitions of the Company after February 1992, are deducted from the sum of core capital elements when determining the capital ratios of the Company.

The
FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum
capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have Tier 1 capital of at least 4.0% of risk-weighted assets and total
capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity plus trust preferred securities issued and outstanding less goodwill and certain other
intangibles, while total capital consists of Tier 1 capital, certain debt instruments and a portion of the reserve for loan losses. In order to be deemed well capitalized pursuant to the regulations,
an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1 leverage ratio of 5%. The Company had
risk-weighted Tier 1 capital ratios of 15.95% and 13.83% and risk weighted total capital ratios of 17.21% and 15.06% as of December 31, 2002 and 2001, respectively, which are well
above the minimum regulatory requirements and exceed the well capitalized ratios (see note 19 to notes to Consolidated Financial Statements).

During
the past few years the Company has expanded its banking facilities. Among the activities and commitments the Company funded during 2002 and 2001 were certain capital expenditures
relating to the

9

---

modernization and improvement of several existing bank facilities and the expansion of the bank branch network.



The Company has formed six statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities (the
"Trusts"). The Trusts have issued Capital and Common Securities and invested the proceeds in an equivalent amount thereof in Junior Subordinated Deferrable Interest Debentures (the "Debentures")
issued by the Company. The Debentures will mature on various dates; however the Debentures may be redeemed at specified prepayment prices, in whole or in part after the specified dates, or in whole
within 90 days upon the occurrence of any one of certain legal, regulatory or tax events specified in the Indenture. Through December 31, 2002, the amount of Capital Securities
outstanding totaled $135,000,000.

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

For
financial reporting purposes, the Trusts are treated as non-banking subsidiaries of the Company and consolidated in the consolidated financial statements. Although the
Capital Securities issued by each of the Trusts are included as long-term debt and not as a component of shareholders' equity on the statement of condition, the Capital Securities are
treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1
capital on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. To date, all of the Capital Securities qualify as Tier 1 capital. Management of the Company
believes that the treatment of the trust preferred securities as Tier 1 capital, in addition to the ability to deduct the expense of the related Debentures for federal income tax purposes, provided
the Company with a cost-effective method of raising capital.

The
following table illustrates key information about each of the Capital Securities and their interest rate at December 31, 2002:

|          |  | Capital
Securities
Issued |         | Repricing
Frequency |               | Interest
Rate |       | Interest Rate
Index |              | Maturity
Date |               | Optional
Redemption
Date
|--------- |  | ------------------------- | ------- | ------------------- | ------------- | ------------- | ----- | ------------------- | ------------ | ------------- | ------------- | ------------------------
|
|Trust I   |  | $                         | 10,000  |                     | Fixed         |               | 10.18 | %                   | Fixed        |               | June 2031     |                         
|Trust II  |  | $                         | 25,000  |                     | Semi-Annually |               | 5.61  | %                   | LIBOR + 3.75 |               | July 2031     |                         
|Trust III |  | $                         | 33,000  |                     | Semi-Annually |               | 5.17  | %                   | LIBOR + 3.75 |               | December 2031 |                         
|Trust IV  |  | $                         | 22,000  |                     | Semi-Annually |               | 5.32  | %                   | LIBOR + 3.70 |               | April 2032    |                         
|Trust V   |  | $                         | 20,000  |                     | Quarterly     |               | 5.51  | %                   | LIBOR + 3.65 |               | July 2032     |                         
|Trust VI  |  | $                         | 25,000  |                     | Quarterly     |               | 5.27  | %                   | LIBOR + 3.45 |               | November 2032 |                         
|          |  |                           |         |                     |               |               |       |                     |              |               |               |                         
|          |  | $                         | 135,000 |                     |               |               |       |                     |              |               |               |                         
|          |  |                           |         |                     |               |               |       |                     |              |               |               |                         

10

---





The Company expanded its formal stock repurchase program on January 28, 2002, June 6, 2002, September 19, 2002 and November 6, 2002.
Under the expanded stock repurchase program, the Company is authorized to repurchase up to $140,000,000 of its common stock through December 2003. 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 24, 2003, a total of 3,208,112 shares had been repurchased under this program at a cost of $127,674,000, which shares are now reflected as 4,145,394 shares of treasury stock as
adjusted for stock dividends. Stock repurchases are reviewed quarterly at the Company's Board of Directors meetings and the Board of Directors has stated that the aggregate investment in treasury
stock should not exceed $160,973,000. In the past, the Board of Directors has increased previous caps on treasury stock once they were met, but there are no assurances that an increase of the
$160,973,000 cap will occur in the future. As of March 24, 2003, the Company has approximately $148,737,000 invested in treasury shares, adjusted for stock dividends, which amount has been
accumulated since the inception of the Company.



The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of December 31, 2002 (dollars in thousands):

|                                            |                                    | Payments due by Period
|------------------------------------------- | ---------------------------------- | ----------------------
|
|Securities sold under repurchase Agreements |                                    | $                     
|Federal Home Loan Bank borrowings           |                                    | $                     
|Trust Preferred Securities                  |                                    | $                     
|                                            |                                    |                       
|                                            | Total Contractual Cash Obligations |                       
|                                            |                                    |                       

The
following table presents contractual commercial commitments of the Company (other than deposit liabilities) as of December 31, 2002 (dollars in thousands):

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

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

11

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Critical Accounting Policies

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

The
Company considers its Allowance for Possible Loan Losses policy as a policy critical to the sound operations of the Banks. See also discussion regarding the allowance for possible
loan losses and provision for possible loan losses included in the results of operations and "Provision and Allowance for Possible Loan Losses" included in Notes 1 and 4 of the Notes to Consolidated
Financial Statements for further information regarding the Company's provision and allowance for possible loan losses policy.

The
allowance for possible loan losses consists of the aggregate loan loss allowances of the bank subsidiaries. The allowances are established through charges to operations in the form
of provisions for possible loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for possible loan losses of each bank subsidiary is maintained at a
level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance is derived from the following elements: (i) allowances established on
specific loans, and (ii) allowances based on historical loss experience on the Company's remaining loan portfolio.

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

The
Company's internal classified report is segregated into the following categories: (i) "Pass Credits," (ii) "Special Review Credits," or (iii) "Watch List
Credits." The loans placed in the "Pass Credits" category reflect the Company's opinion that the loan conforms to the bank's lending policies, which includes the borrower's ability to repay, the value
of the underlying collateral, if any, as it relates to the outstanding indebtedness of the loan, and the economic environment and industry in which the borrower operates. The loans placed in the
"Special Review Credits" category reflect the Company's opinion that the loans reflect potential weakness which required monitoring on a more frequent basis; however, the "Special Review Credits" are
not considered to need a specific reserve at the time, but are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is
warranted. The loans placed in the "Watchlist Credits" category
reflect the Company's opinion that the loans contain clearly pronounced credit weaknesses and/or inherent financial weaknesses of the borrower. Credits classified as "Watch List Credits" are evaluated
under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," criteria and, if deemed necessary a specific reserve is allocated to the credit.
The specific reserve allocated under SFAS No. 114, is based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

The
allowances based on historical loss experience on the Company's remaining loan portfolio is determined by segregating the remaining loan portfolio into similar categories such as
commercial loans, installment loans, international loans and overdrafts. Installment loans are then further segregated by

12

---

number of days past due. A historical loss percentage, adjusted for management's evaluation of changes in lending policies and procedures and current economic conditions in the market area served by
the Company is applied to each category.

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

Recent Accounting Standards Issued

In
June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed
after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with
the provisions in SFAS No. 142. SFAS No. 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

On
July 1, 2001, the Company adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as required for goodwill and intangible assets resulting from
business combinations consummated after June 30, 2001. The Company acquired approximately 71% of outstanding common shares of National Bancshares Corporation of Texas on November 20,
2001 and the remaining 29% outstanding common shares on December 31, 2001. The Company recorded an identified intangible asset and goodwill of $35,126,000 related to the acquisition. Under the
provisions of SFAS No. 142, the amount of goodwill acquired in the acquisition that was not amortized during 2001 was not significant.

SFAS
No. 141 requires upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business
combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS
No. 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the
intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first interim period.

The
Company adopted the remaining provisions of SFAS No. 142 as of January 1, 2002 and no longer amortizes goodwill relating to business combinations consummated before
July 1, 2001. As of the date of the adoption, the Company had unamortized goodwill in the amount of $69,639,000 and unamortized identifiable intangible assets in the amount of $21,978,000, all
of which are subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill that will no longer be amortized was $2,846,000 and $2,092,000 for
the years ended December 31, 2001 and 2000, respectively. In addition, the Company has evaluated its existing intangible assets and determined that no reclassifications were necessary to
conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. The Company performed a transitional assessment of whether there is an indication that goodwill is impaired.

13

---

The Company concluded that it is probable that its investment services reporting unit is impaired. The amount of the impairment is $5,130,000, net of tax, which is reported as a cumulative effect of
a change in accounting principle, net of tax, in 2002.

In
August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses
financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," it retains many of the fundamental provisions of SFAS No. 121, establishes a single accounting model for
long-lived assets to be disposed of by sale, and resolves certain implementation issues not previously addressed by SFAS No. 121. SFAS No. 144 also supercedes the accounting
and reporting provisions of Financial Accounting Standards Board Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of a Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends the reporting to a component of an entity, rather than a segment of a business, that either has been disposed of
or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002. The
adoption of SFAS No. 144 did not have an impact on the Company's consolidated financial statements.

In
October 2002, the Financial Accounting Standards Board issued SFAS No. 147 "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9". SFAS No. 72 required that in acquisitions of financial institutions, any excess of the fair value of liabilities assumed over the fair value of
tangible and intangible assets acquired be accounted for as an unidentifiable intangible asset and subsequently amortized. SFAS No. 72 unidentified intangible assets were excluded from the
scope of SFAS No. 141 and SFAS No. 142. Except for transactions between two or more mutual companies, SFAS No. 147 removes acquisitions of financial institutions from the scope of
SFAS No. 72 and FASB Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. SFAS No. 147 is
effective October 1, 2002 and requires that if the transaction that gave rise to the unidentified intangible asset was a business combination, the carrying amount of that asset shall be
reclassified to goodwill as of the later of the date of acquisition or the date of the full application of SFAS No. 142. SFAS No. 147 also requires that any interim or annual financial
statements that reflect the amortization of the unidentified intangible asset subsequent to the full application of SFAS 142 shall be restated to remove that amortization expense. The Company
adopted SFAS No. 147 on October 1, 2002. Upon the adoption of SFAS No. 147, the Company reclassified $10,487,000 from intangible assets to goodwill and reversed $792,000 of
amortization expense recognized during 2002 related to the SFAS 72 unidentified intangible asset.

In
December 2002, the Financial Accounting Standards Board issue SFAS No. 148, "Accounting for Stock-Based CompensationTransition Disclosure, an amendment of
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation for those companies that have elected to continue to apply
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." The adoption of SFAS No. 148 did not have an impact on the Company's consolidated
financial statements.

In
November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial

14

---

statements about its obligations under certain guarantees that it has issued. This Interpretation also incorporates, without change, the guidance in Financial Accounting Standards Board
Interpretation No. 34 ("FIN 34"), "Disclosure of Indirect Guarantees of Indebtedness of Others," which is being superceded. FIN 45 also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligations to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 and
are included in the notes to the Company's consolidated financial statements. The adoption of FIN 45 did not have an impact on the Company's consolidated financial statements.

Common Stock and Dividends

The Company had issued and outstanding 30,921,327 shares of $1.00 par value Common Stock held by approximately 2,120 holders of record at March 24, 2003.
The book value of the stock, adjusted for stock dividends, at December 31, 2002 was $18.91 per share compared with $16.38 per share at December 31, 2001.

The
Common Stock is traded on the NASDAQ National Market under the symbol "IBOC." The following table sets forth the approximate high and low bid prices in the Company's Common Stock,
adjusted for stock dividends during 2001 and 2002, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2002. 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 $40.74 per share at March 24, 2003.

High

Low2002:First quarter

$
35.89

$
32.93Second quarter


41.99


38.00Third quarter


42.59


30.25Fourth quarter


41.51


34.35


High

Low2001:First quarter

$
31.80

$
25.20Second quarter


38.78


26.80Third quarter


32.80


27.44Fourth quarter


35.84


24.86


The
Company paid cash dividends to the shareholders in 2002 of $.32 per share on April 15, and $.37 per share on October 15, adjusted for stock dividends, or $22,015,000 in
the aggregate. In 2001, the Company paid cash dividends of $.32 per share on April 16, and $.32 per share on October 15, adjusted for stock dividends, or $21,182,000 in the aggregate.
The Company has no set schedule for paying cash or stock

15

---

dividends and does not guarantee that they will continue to be declared. In addition, the Company has issued stock dividends during the last five-year period as follows:

Date

Stock DividendMay 16, 1997

25
%May 22, 1998

25
%May 20, 1999

25
%May 18, 2000

25
%May 17, 2001

25
%May 20, 2002

25
%


The
Company's principal source of funds to pay cash dividends on its Common Stock is cash dividends from its bank subsidiaries. There are certain statutory limitations on the payment of
dividends from the subsidiary banks. For a discussion of the limitations, please see Note 19 of notes to Consolidated Financial Statements.

Recent Sales of Unregistered Securities

No equity securities were sold by the Company during the fiscal year ended December 31, 2002 that were not registered under the Securities Act of 1933.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2002, with respect to the Company's compensation plans:

|                                                              |       | (A)       |           | (B) |       | (C)  
|------------------------------------------------------------- | ----- | --------- | --------- | --- | ----- | -----
|
|Equity Compensation plans approved by security holders        |       | 1,353,295 |           | $   | 17.97 |      
|Equity Compensation plans not approved by security holders(1) |       | 187,500   |           | $   | 20.80 |      
|                                                              |       |           |           |     |       |      
|                                                              | Total |           | 1,540,795 |     | $     | 18.31
|                                                              |       |           |           |     |       |      

---

16

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INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Shareholders
International Bancshares Corporation:

We
have audited the accompanying consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2002, in conformity with accounting principles generally accepted in the United States of America.

As
discussed in Notes 1 and 15 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets.



San
Antonio, Texas
February 21, 2003,
    except as to the fifth
    paragraph of Note 16,
    which is as of March 7, 2003

17

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Condition        December 31, 2002 and 2001        (Dollars in Thousands, Except Per Share
Amounts)

|                                                                                                           |                                                                                                                                | 2002                                |                                            | 2001      |          
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------------------ | --------- | ---------
|ASSETS                                                                                                     |                                                                                                                                |                                     |                                            |           |          
|Cash and due from banks                                                                                    |                                                                                                                                | $                                   | 141,204                                    |           | $        
|Federal funds sold                                                                                         |                                                                                                                                |                                     | 13,000                                     |           |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total cash and cash equivalents            |           |          
|Time deposits with banks                                                                                   |                                                                                                                                |                                     | 99                                         |           |          
|Investment securities:                                                                                     |                                                                                                                                |                                     |                                            |           |          
|Held to maturity (Market value of $2,060 on December 31, 2002 and $2,085 on December 31, 2001)             |                                                                                                                                |                                     | 2,060                                      |           |          
|Available for sale (Amortized cost of $2,992,906 on December 31, 2002 and $2,889,542 on December 31, 2001) |                                                                                                                                |                                     | 3,070,711                                  |           |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total investment securities                |           |          
|Loans:                                                                                                     |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           | Commercial, financial and agricultural                                                                                         |                                     |                                            | 1,595,140 |          
|                                                                                                           | Real estatemortgage                                                                                                           |                                     |                                            | 507,837   |          
|                                                                                                           | Real estateconstruction                                                                                                       |                                     |                                            | 276,595   |          
|                                                                                                           | Consumer                                                                                                                       |                                     |                                            | 160,546   |          
|                                                                                                           | Foreign                                                                                                                        |                                     |                                            | 233,276   |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total loans                                |           |          
|                                                                                                           | Less unearned discounts                                                                                                        |                                     |                                            | (3,832    | )        
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Loans, net of unearned discounts           |           |          
|                                                                                                           | Less allowance for possible loan losses                                                                                        |                                     |                                            | (44,213   | )        
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Net loans                                  |           |          
|Bank premises and equipment, net                                                                           |                                                                                                                                |                                     | 185,477                                    |           |          
|Accrued interest receivable                                                                                |                                                                                                                                |                                     | 35,193                                     |           |          
|Other investments                                                                                          |                                                                                                                                |                                     | 203,733                                    |           |          
|Identified intangible assets                                                                               |                                                                                                                                |                                     | 7,169                                      |           |          
|Goodwill                                                                                                   |                                                                                                                                |                                     | 67,442                                     |           |          
|Other assets                                                                                               |                                                                                                                                |                                     | 44,198                                     |           |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total assets                               |           | $        
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                       |                                                                                                                                |                                     |                                            |           |          
|Liabilities:                                                                                               |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           | Deposits:                                                                                                                      |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                | Demandnon-interest bearing         |                                            | $         | 683,966  
|                                                                                                           |                                                                                                                                | Savings and interest bearing demand |                                            |           | 1,262,907
|                                                                                                           |                                                                                                                                | Time                                |                                            |           | 2,293,026
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total deposits                             |           |          
|                                                                                                           | Securities sold under repurchase agreements                                                                                    |                                     |                                            | 457,915   |          
|                                                                                                           | Other borrowed funds and long term debt                                                                                        |                                     |                                            | 1,185,857 |          
|                                                                                                           | Other liabilities                                                                                                              |                                     |                                            | 64,700    |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total liabilities                          |           |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|Shareholders' equity:                                                                                      |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           | Common shares of $1.00 par value. Authorized 75,000,000 shares; issued 41,766,439 shares in 2002 and 33,214,263 shares in 2001 |                                     |                                            | 41,766    |          
|                                                                                                           | Surplus                                                                                                                        |                                     |                                            | 30,821    |          
|                                                                                                           | Retained earnings                                                                                                              |                                     |                                            | 560,613   |          
|                                                                                                           | Accumulated other comprehensive income                                                                                         |                                     |                                            | 49,957    |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | 683,157                                    |           |          
|                                                                                                           | Less cost of shares in treasury, 10,506,298 shares in 2002 and 6,991,148 shares in 2001                                        |                                     |                                            | (135,893  | )        
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total shareholders' equity                 |           |          
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          
|                                                                                                           |                                                                                                                                |                                     | Total liabilities and shareholders' equity |           | $        
|                                                                                                           |                                                                                                                                |                                     |                                            |           |          

See accompanying notes to consolidated financial statements.

18

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Income        Years ended December 31, 2002, 2001 and 2000        (Dollars in Thousands,
Except Per Share Amounts)

|                                                                  |                                                                         | 2002        |                                                              | 2001       |         | 2000    |           
|----------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------- | ------------------------------------------------------------ | ---------- | ------- | ------- | ----------
|Interest income:                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Loans, including fees                                                   |             | $                                                            | 183,803    |         | $       | 199,028   
|                                                                  | Time deposits with banks                                                |             |                                                              | 36         |         |         | 162       
|                                                                  | Federal funds sold                                                      |             |                                                              | 671        |         |         | 1,142     
|                                                                  | Investment securities:                                                  |             |                                                              |            |         |         |           
|                                                                  |                                                                         | Taxable     |                                                              |            | 164,272 |         |           
|                                                                  |                                                                         | Tax-exempt  |                                                              |            | 4,990   |         |           
|                                                                  | Other                                                                   |             |                                                              | 156        |         |         | 586       
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Total interest income                                        |            |         | 353,928 |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Interest expense:                                                 |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Savings and interest bearing demand deposits                            |             |                                                              | 14,185     |         |         | 23,585    
|                                                                  | Time deposits                                                           |             |                                                              | 57,907     |         |         | 106,754   
|                                                                  | Federal funds purchased and securities sold under repurchase agreements |             |                                                              | 19,696     |         |         | 23,100    
|                                                                  | Other borrowings and Long term debt                                     |             |                                                              | 24,627     |         |         | 47,369    
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Total interest expense                                       |            |         | 116,415 |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Net interest income                                          |            |         | 237,513 |           
|Provision for possible loan losses                                |                                                                         |             | 8,541                                                        |            |         | 8,631   |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Net interest income after provision for possible loan losses |            |         | 228,972 |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Non-interest income:                                              |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Service charges on deposit accounts                                     |             |                                                              | 52,648     |         |         | 42,497    
|                                                                  | Other service charges, commissions and fees                             |             |                                                              |            |         |         |           
|                                                                  |                                                                         | Banking     |                                                              |            | 13,000  |         |           
|                                                                  |                                                                         | Non-Banking |                                                              |            | 5,669   |         |           
|                                                                  | Investment securities transactions, net                                 |             |                                                              | 2,303      |         |         | (1,010    
|                                                                  | Other investments, net                                                  |             |                                                              | (2,598     | )       |         | 10,636    
|                                                                  | Other income                                                            |             |                                                              | 14,623     |         |         | 11,340    
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Total non-interest income                                    |            |         | 85,645  |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Non-interest expense:                                             |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Employee compensation and benefits                                      |             |                                                              | 65,907     |         |         | 58,962    
|                                                                  | Occupancy                                                               |             |                                                              | 13,211     |         |         | 11,190    
|                                                                  | Depreciation of bank premises and equipment                             |             |                                                              | 16,153     |         |         | 13,434    
|                                                                  | Professional fees                                                       |             |                                                              | 6,089      |         |         | 5,019     
|                                                                  | Stationery and supplies                                                 |             |                                                              | 4,079      |         |         | 3,664     
|                                                                  | Amortization of intangible assets                                       |             |                                                              | 1,812      |         |         | 5,378     
|                                                                  | Advertising                                                             |             |                                                              | 6,010      |         |         | 6,846     
|                                                                  | Other                                                                   |             |                                                              | 41,582     |         |         | 30,948    
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Total non-interest expense                                   |            |         | 154,843 |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Income before income taxes                                   |            |         | 159,774 |           
|Income taxes                                                      |                                                                         |             | 54,013                                                       |            |         | 41,721  |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Income before cumulative change in accounting principle           |                                                                         |             | 105,761                                                      |            |         | 83,342  |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Cumulative effect of a change in accounting principle, net of tax |                                                                         |             | 5,130                                                        |            |         |        |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  |                                                                         |             | Net income                                                   |            | $       | 100,631 |           
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Basic earnings per common share:                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Weighted average number of shares outstanding                           |             |                                                              | 31,964,465 |         |         | 33,076,056
|                                                                  | Income before cumulative effect of a change in accounting principle     |             | $                                                            | 3.31       |         | $       | 2.52      
|                                                                  | Cumulative effect of a change in accounting principle, net of tax       |             |                                                              | (.16       | )       |         |          
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Net income                                                              |             | $                                                            | 3.15       |         | $       | 2.52      
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|Diluted earnings per common share:                                |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Weighted average number of shares outstanding                           |             |                                                              | 32,695,278 |         |         | 33,682,362
|                                                                  | Income before cumulative effect of a change in accounting principle     |             | $                                                            | 3.23       |         | $       | 2.47      
|                                                                  | Cumulative effect of a change in accounting principle, net of tax       |             |                                                              | (.15       | )       |         |          
|                                                                  |                                                                         |             |                                                              |            |         |         |           
|                                                                  | Net income                                                              |             | $                                                            | 3.08       |         | $       | 2.47      
|                                                                  |                                                                         |             |                                                              |            |         |         |           

See accompanying notes to consolidated financial statements.

19

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Comprehensive Income        Years ended December 31, 2002, 2001, and 2000        (Dollars in
Thousands)

|                                        |                                                                                               | 2002 |         | 2001   |   | 2000   
|--------------------------------------- | --------------------------------------------------------------------------------------------- | ---- | ------- | ------ | - | -------
|Net income                              |                                                                                               | $    | 100,631 |        | $ | 83,342 
|                                        |                                                                                               |      |         |        |   |        
|Other comprehensive income, net of tax: |                                                                                               |      |         |        |   |        
|                                        | Net unrealized gains on securities available for sale arising during the year                 |      |         | 31,809 |   |        
|                                        | Reclassification adjustment for gains on securities available for sale included in net income |      |         | 543    |   |        
|                                        | Change in fair value of equity method investee's derivatives                                  |      |         | (616   | ) |        
|                                        |                                                                                               |      |         |        |   |        
|Comprehensive income                    |                                                                                               | $    | 132,367 |        | $ | 120,726
|                                        |                                                                                               |      |         |        |   |        

See
accompanying notes to consolidated financial statements.

20

---

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Shareholders' Equity        Years ended December 31, 2002, 2001 and 2000        (in Thousands)

|                                                             |                                                              | Number
of Shares                                                                                               |     | Common
Stock |        | Surplus |       | Retained
Earnings |       | Accumulated
Other
Comprehensive
Income (Loss) |         | Treasury
Stock |         | Total   |     
|------------------------------------------------------------ | ------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------- | --- | ------------ | ------ | ------- | ----- | ----------------- | ----- | --------------------------------------------- | ------- | -------------- | ------- | ------- | ----
|Balances at December 31, 1999                                |                                                              | 21,092                                                                                                         |     | $            | 21,092 |         | $     | 24,050            |       | $                                             | 385,942 |                | $       | (36,912 | )   
|                                                             | Net income                                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         | 75,174         |         |         |    
|                                                             | Dividends:                                                   |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Shares issued                                                                                                  |     | 5,280        |        |         | 5,280 |                   |       |                                              |         |                | (5,280  | )       |     
|                                                             |                                                              | Cash                                                                                                           |     |             |        |         |      |                   |       |                                              |         |                | (21,040 | )       |     
|                                                             | Purchase of treasury stock                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         |               |         |         |    
|                                                             | Exercise of stock options                                    |                                                                                                                | 109 |              |        | 109     |       |                   | 1,883 |                                               |         |               |         |         |    
|                                                             | Other comprehensive income, net of tax:                      |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |     |             |        |         |      |                   |       |                                              |         |                |        |         |     
|                                                             |                                                              |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|Balances at December 31, 2000                                |                                                              | 26,481                                                                                                         |     |              | 26,481 |         |       | 25,933            |       |                                               | 434,796 |                |         | (19,163 | )   
|                                                             | Net income                                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         | 83,342         |         |         |    
|                                                             | Dividends:                                                   |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Shares issued                                                                                                  |     | 6,628        |        |         | 6,628 |                   |       |                                              |         |                | (6,628  | )       |     
|                                                             |                                                              | Cash                                                                                                           |     |             |        |         |      |                   |       |                                              |         |                | (21,182 | )       |     
|                                                             | Purchase of treasury stock                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         |               |         |         |    
|                                                             | Exercise of stock options                                    |                                                                                                                | 105 |              |        | 105     |       |                   | 1,631 |                                               |         |               |         |         |    
|                                                             | Other comprehensive income, net of tax:                      |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|Change in fair value of equity method investee's derivatives |                                                              |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         | (4,906  | )   
|                                                             |                                                              |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|Balances at December 31, 2001                                |                                                              | 33,214                                                                                                         |     |              | 33,214 |         |       | 27,564            |       |                                               | 490,328 |                |         | 18,221  |     
|                                                             | Net income                                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         | 100,631        |         |         |    
|                                                             | Dividends:                                                   |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Shares issued                                                                                                  |     | 8,331        |        |         | 8,331 |                   |       |                                              |         |                | (8,331  | )       |     
|                                                             |                                                              | Cash                                                                                                           |     |             |        |         |      |                   |       |                                              |         |                | (22,015 | )       |     
|                                                             | Purchase of treasury stock                                   |                                                                                                                |    |              |        |        |       |                   |      |                                               |         |               |         |         |    
|                                                             | Exercise of stock options                                    |                                                                                                                | 221 |              |        | 221     |       |                   | 3,257 |                                               |         |               |         |         |    
|                                                             | Other comprehensive income, net of tax:                      |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             |                                                              | Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|                                                             | Change in fair value of equity method investee's derivatives |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         | (616
|                                                             |                                                              |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     
|Balances at December 31, 2002                                |                                                              | 41,766                                                                                                         |     | $            | 41,766 |         | $     | 30,821            |       | $                                             | 560,613 |                | $       | 49,957  |     
|                                                             |                                                              |                                                                                                                |     |              |        |         |       |                   |       |                                               |         |                |         |         |     

See accompanying notes to consolidated financial statements.

21

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Consolidated Statements of Cash Flows        Years ended December 31, 2002, 2001 and 2000        (Dollars in Thousands)

|                                                 |                                                                                   | 2002                                                         |                                           | 2001       |          | 2000    |           
|------------------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | ---------- | -------- | ------- | ----------
|Operating activities:                            |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 | Net income                                                                        |                                                              | $                                         | 100,631    |          | $       | 83,342    
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities: |                                                              |                                           |            |          |         |           
|                                                 |                                                                                   | Impairment charges and write downs on investments            |                                           |            | 9,393    |         |           
|                                                 |                                                                                   | Provision for possible loan losses                           |                                           |            | 8,541    |         |           
|                                                 |                                                                                   | Depreciation of bank premises and equipment                  |                                           |            | 16,153   |         |           
|                                                 |                                                                                   | Gain on sale of bank premises and equipment                  |                                           |            | (2,129   | )       |           
|                                                 |                                                                                   | Depreciation and amortization of leasing assets              |                                           |            | 2,694    |         |           
|                                                 |                                                                                   | Gain on sale of branch banks                                 |                                           |            | (3,087   | )       |           
|                                                 |                                                                                   | Accretion of investment securities discounts                 |                                           |            | (4,046   | )       |           
|                                                 |                                                                                   | Amortization of investment securities premiums               |                                           |            | 16,909   |         |           
|                                                 |                                                                                   | Gain/Loss on investment securities transactions              |                                           |            | (2,303   | )       |           
|                                                 |                                                                                   | Amortization of intangible assets                            |                                           |            | 1,812    |         |           
|                                                 |                                                                                   | Equity loss (earnings) from affiliates and other investments |                                           |            | 4,531    |         |           
|                                                 |                                                                                   | Deferred tax expense (benefit)                               |                                           |            | (655     | )       |           
|                                                 |                                                                                   | (Increase) decrease in accrued interest receivable           |                                           |            | (1,537   | )       |           
|                                                 |                                                                                   | Net (increase) decrease in other assets                      |                                           |            | (897     | )       |           
|                                                 |                                                                                   | Net (decrease) in other liabilities                          |                                           |            | (11,254  | )       |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 |                                                                                   |                                                              | Net cash provided by operating activities |            |          | 134,756 |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|Investing activities:                            |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 | Proceeds from maturities of securities                                            |                                                              |                                           | 5,330      |          |         | 2,060     
|                                                 | Proceeds from sales of available for sale securities                              |                                                              |                                           | 330,152    |          |         | 568,058   
|                                                 | Purchases of available for sale securities                                        |                                                              |                                           | (1,749,496 | )        |         | (1,284,871
|                                                 | Principal collected on mortgage-backed securities                                 |                                                              |                                           | 1,300,115  |          |         | 1,051,520 
|                                                 | Proceeds from matured time deposits with banks                                    |                                                              |                                           | 1,253      |          |         | 2,669     
|                                                 | Purchases of time deposits with banks                                             |                                                              |                                           | (99        | )        |         | (594      
|                                                 | Net increase in loans                                                             |                                                              |                                           | (161,450   | )        |         | (128,412  
|                                                 | Purchases of other investments                                                    |                                                              |                                           | (11,166    | )        |         | (3,544    
|                                                 | Distributions from other investments                                              |                                                              |                                           | 5,275      |          |         | 1,609     
|                                                 | Purchases of bank premises and equipment                                          |                                                              |                                           | (15,056    | )        |         | (29,661   
|                                                 | Proceeds from sales of bank premises and equipment                                |                                                              |                                           | 3,371      |          |         | 119       
|                                                 | Cash paid in excess of net assets acquired                                        |                                                              |                                           |           |          |         | (41,415   
|                                                 | Cash acquired in purchase transactions                                            |                                                              |                                           |           |          |         | 73,881    
|                                                 | Cash disposed in sale transactions                                                |                                                              |                                           | (44,010    | )        |         |          
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 |                                                                                   | Net cash provided by (used in) investing activities          |                                           |            | (335,781 | )       |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|Financing activities:                            |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 | Net (decrease) increase in non-interest bearing demand deposits                   |                                                              |                                           | (11,272    | )        |         | 27,109    
|                                                 | Net increase (decrease) in savings and interest bearing demand deposits           |                                                              |                                           | 107,068    |          |         | 83,701    
|                                                 | Net (decrease) increase in time deposits                                          |                                                              |                                           | (95,459    | )        |         | (57,324   
|                                                 | Net (decrease) increase in securities sold under repurchase agreements            |                                                              |                                           | (256,760   | )        |         | 484,567   
|                                                 | Proceeds from issuance of other borrowed funds and long term debt                 |                                                              |                                           | 2,055,329  |          |         | 1,825,296 
|                                                 | Principal payments on other borrowed funds                                        |                                                              |                                           | (1,646,768 | )        |         | (2,480,500
|                                                 | Purchase of treasury stock                                                        |                                                              |                                           | (63,594    | )        |         | (21,144   
|                                                 | Proceeds from stock transactions                                                  |                                                              |                                           | 3,478      |          |         | 1,736     
|                                                 | Payments of cash dividends                                                        |                                                              |                                           | (21,984    | )        |         | (21,158   
|                                                 | Payments of cash dividends in lieu of fractional shares                           |                                                              |                                           | (31        | )        |         | (24       
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 |                                                                                   | Net cash provided by (used in) financing activities          |                                           |            | 70,007   |         |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|(Decrease) increase in cash and cash equivalents |                                                                                   |                                                              | (131,018                                  | )          |          | 159,094 |           
|Cash and cash equivalents at beginning of year   |                                                                                   |                                                              | 285,222                                   |            |          | 126,128 |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|Cash and cash equivalents at end of year         |                                                                                   | $                                                            | 154,204                                   |            | $        | 285,222 |           
|                                                 |                                                                                   |                                                              |                                           |            |          |         |           
|Supplemental cash flow information:              |                                                                                   |                                                              |                                           |            |          |         |           
|                                                 | Interest paid                                                                     |                                                              | $                                         | 123,963    |          | $       | 209,384   
|                                                 | Income taxes paid                                                                 |                                                              |                                           | 51,759     |          |         | 35,993    

See accompanying notes to consolidated financial statements.

22

---



INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES        Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

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

Consolidation and Basis of Presentation

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

The
Company, through its subsidiaries, is primarily engaged in the business of banking, including the acceptance of checking and savings deposits and the making of commercial, real
estate, personal, home improvement, automobile and other installment and term loans. The primary markets of the Company are South 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
preparation of the consolidated financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statement of condition and income and expenses for the periods. Actual results could differ
significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for possible
loan losses.

Per Share Data

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

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

23

---

"trading", while unrealized holding gains and losses related to those securities classified as "available-for-sale" are excluded from net income and reported net of tax as
other comprehensive income and in shareholders' equity as accumulated other comprehensive income until realized. The Company did not maintain any trading securities during the three year period ended
December 31, 2002.

Mortgage-backed
securities held at December 31, 2002 and 2001 represent participating interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Premiums and discounts are amortized using the straight-line method over the contractual maturity of the loans adjusted for anticipated prepayments. Income
recognized under the straight-line method is not materially different from income that would be recognized under the level yield or "interest method". Mortgage-backed securities are either
issued or guaranteed by the U.S. Government or its agencies. Market interest rate fluctuations can affect the prepayment speed of principal and the yield on the security.

Unearned Discounts

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

Provision and Allowance for Possible Loan Losses

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

Management
believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's bank
subsidiaries allowances for possible loan losses. Such agencies may require the Company's bank subsidiaries to 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 Company's bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be un-collectible. 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

24

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foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan possible losses, if necessary. Any subsequent
write-downs are charged against other non-interest expense. Operating expenses of such properties and gains and losses on their disposition are included in other non-interest
expense.

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

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

Stock Options

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148 ("SFAS
No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the fair value based
method of accounting for stock-based employee compensation for those companies that have elected to continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." The adoption of SFAS No. 148 did not have an impact on the Company's consolidated financial statements.

At
December 31, 2002, the Company had one stock-based employee compensation plan, which is described more fully in Note 14. The Company accounts for the plan under the
recognition and measurement principles of APB 25 and related interpretations. No stock-based employee cost is reflected in net income,
as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and

25

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earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation.

|                                                                                                                                       |             | Years Ended December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | -------
|
|
|Net income, as reported                                                                                                                |             | $                        | 100,631
|Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax related tax effects |             |                          | (1,535 
|                                                                                                                                       |             |                          |        
|Pro forma net income                                                                                                                   |             | $                        | 99,096 
|                                                                                                                                       |             |                          |        
|Earnings per share:                                                                                                                    |             |                          |        
|Basic earnings                                                                                                                         |             |                          |        
|                                                                                                                                       | As reported |                          | $      
|                                                                                                                                       | Pro forma   |                          |        
|Diluted earnings                                                                                                                       |             |                          |        
|                                                                                                                                       | As reported |                          | $      
|                                                                                                                                       | Pro forma   |                          |        

Net Income Per Share

Basic Earnings Per Share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding. The computation of diluted EPS
assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options is considered in earnings per share
calculations if dilutive, using the treasury stock method.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. Through
2001, the Company amortized goodwill related to acquisitions prior to July 1, 2001 on a straight-line basis over 15 years and identifiable intangibles on a
straight-line basis over their estimated periods of benefit. In addition, the Company reviewed its intangible assets periodically for other-than-temporary
impairments. If such impairments were indicated, recoverability of the asset was assessed based on expected undiscounted net cash flows.

In
June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS No. 141"), "Business Combinations",
and SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions in SFAS No. 142. SFAS No. 142 requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for

26

---

impairment in accordance with SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

On
July 1, 2001, the Company adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as required for goodwill and intangible assets resulting from
business combinations consummated after June 30, 2001.

The
Company adopted the remaining provisions of SFAS No. 142 as of January 1, 2002. See Note 15 for the effects of the adoption of SFAS No. 142.

In
October 2002, the Financial Accounting Standards Board issued SFAS No. 147 ("SFAS No. 147") "Acquisitions of Certain Financial Institutions, an amendment of FASB
Statements No 72 and 144 and FASB Interpretation No. 9". SFAS No. 72 required that in acquisitions of financial institutions, any excess of the fair value of liabilities assumed over the
fair value of tangible and intangible assets acquired be accounted for as an unidentifiable intangible asset and subsequently amortized. SFAS No. 72 unidentified intangible assets were excluded
from the scope of SFAS No. 141 and SFAS No. 142. Except for transactions between two or more mutual companies, SFAS No. 147 removes acquisitions of financial institutions from the
scope of SFAS No. 72 and FASB Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. SFAS
No. 147 is effective October 1, 2002 and requires that if the transaction that gave rise to the unidentified intangible asset was a business combination, the carrying amount of that
asset shall be reclassified to goodwill as of the later of the date of acquisition or the date of the full application of SFAS No. 142. SFAS No. 147 also requires that any interim or
annual financial statements that reflect the amortization of the unidentified intangible asset subsequent to the full application of SFAS 142 shall be restated to remove that amortization
expense. The Company adopted SFAS No. 147 as of October 1, 2002. Upon the adoption of SFAS No. 147, the Company reclassified $10,487,000 from intangible assets to goodwill and
reversed $792,000 of amortization expense recognized during 2002 related to the SFAS 72 unidentified intangible asset.

Impairment of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses
financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of SFAS No 121, establishes a single accounting model for
long-lived assets to be disposed of by sale, and resolves certain implementation issues not previously addressed by SFAS No. 121. SFAS No. 144 also supercedes the accounting
and reporting provisions of Financial Accounting Standards Board Opinion No. 30, ("Opinion No. 30") "Reporting the Results of OperationsReporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business; however, it retains the requirement in Opinion
No. 30 to report separately discontinued operations and extends the reporting to a component of an entity, rather than a segment of a business, that either has been disposed of or is classified
as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 did not have an impact on the Company's consolidated financial statements.

27

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Consolidated Statements of Cash Flows

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

Accounting for Transfers and Servicing of Financial Assets

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

Segments of an Enterprise and Related Information

The Company applies the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in determining its reportable
segments and related disclosures. Management of the Company believes that it does not have separate reportable operating segments under the provisions of SFAS No. 131. The Company's
non-banking operations do not meet the threshold for reporting as separate segments.

Derivative Instruments

The Company currently does not directly engage in hedging activities and does not directly hold any derivative instruments or embedded derivatives. However, the
Company's equity method investee, Aircraft Finance Trust ("AFT"), uses derivative instruments to manage the interest rate on the bonds that AFT has issued. The derivative instruments qualify as cash
flow hedges under the provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and as such, the Company's proportionate share of changes in fair value of the
derivative instruments are included in comprehensive income and accumulated other comprehensive income, net of tax. The Company adopted SFAS No. 133 on January 1, 2001 and the adoption
did not have a significant impact on its consolidated financial statements.

Guarantor's Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This Interpretation also incorporates, without
change, the guidance in Financial Accounting Standards Board Interpretation No. 34 ("FIN 34"), "Disclosure of Indirect Guarantees of Indebtedness of Others," which is being superceded. FIN 45
also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligations
to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal

28

---

year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, and are included in the notes to the
Company's consolidated financial statements. The adoption of FIN 45 did not have an impact on the Company's consolidated financial statements.

Reclassifications

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

(2) Acquisitions

Effective December 31, 2001, the Company completed its acquisition of National Bancshares Corporation of Texas. The acquisition was effected through a
tender offer by the Company's subsidiary, NBC Acquisitions Corp. ("NBC Acquisition"), for all the outstanding shares of National Bancshares Corporation of Texas, ("NBC"), followed by the merger of NBC
Acquisitions with and into NBC. Additionally, on December 31, 2001, NBC's subsidiary commercial bank, NBC Bank, N.A. ("NBC Bank"), was merged with and into the Company's lead bank, IBC, and the
three former NBC Bank branches located in Laredo, Texas were transferred to another subsidiary bank, Commerce Bank, Laredo, Texas.

The
acquisition of NBC was accounted for as a purchase under the provisions of SFAS No. 141. The purchase price for the outstanding common shares of NBC in the tender offer and
the merger was $24.75 per common share, and the total consideration paid to NBC shareholders was $93,681,000 (exclusive of amounts paid to option holders).

The
following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition, in thousands.

Cash and due from banks

$
73,881Investments


222,445Net loans


278,200Goodwill


24,192Other intangible asset


10,934Other assets


26,079Total assets acquired


635,731Deposits


(531,461
)Other liabilities


(10,589
)Total liabilities assumed


(542,050
)Net assets acquired

$
93,681


The
intangible asset is core deposit premium and has a useful life of approximately 10 years. Goodwill and the other intangible asset in the amount of approximately $35,126,000
are deductible for tax purposes. The amount of goodwill that was not amortized under the provisions of SFAS No. 142 for the year ended December 31, 2001 was not significant.

29

---

The
following unaudited pro forma financial information is presented to show the impact on the Company's results of operations assuming that the NBC acquisition was consummated on
January 1, 2001.

For the year ended
December 31, 2001(Dollars in Thousands, except Per Share Data)
(Unaudited)Interest income

$
430,161Interest expense


216,396Net interest income


213,765Provision for possible loan losses


9,546Non-interest income


81,967Non-interest expense


161,380Income before income taxes


124,806Income taxes


41,942Net income

$
82,864Per common share:Basic

$
2.50Diluted

$
2.45


Effective
April 1, 2001, IBC through its insurance agency subsidiary, acquired the assets of Grove Agency Insurance, Inc., of Corpus Christi, Texas. The acquisition was
accounted for as a purchase transaction. In connection with the acquisition, IBC recorded goodwill totaling $1,575,000.

Effective
February 16, 2001, IBC acquired the assets of First Equity Corporation, an Austin-based mortgage banker. The acquisition was accounted for as a purchase transaction. In
connection with the acquisition, IBC recorded goodwill totaling $4,864,000.

Effective
October 2, 2000, the Company purchased a controlling interest in the GulfStar Group, a Houston-based investment banking firm serving middle-market corporations primarily
in Texas. The
acquisition was accounted for as a purchase transaction. In connection with the acquisition, the Company recorded goodwill totaling $13,199,000.

During
2000, IBC established an insurance agency subsidiary and acquired the assets of two insurance agencies in Texas. The acquisitions were accounted for as purchase transactions. In
connection with the acquisitions, IBC recorded goodwill totaling $3,003,000.

30

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(3) Investment Securities

The amortized cost and estimated fair value by type of investment security at December 31, 2002 are as follows:

|                                                 |  | Held to Maturity
|------------------------------------------------ |  | ----------------
|
|
|Other securities                                 |  | $               
|                                                 |  |                 
|Total investment securities                      |  | $               
|                                                 |  |                 
|
|
|
|U.S. Treasury securities                         |  | $               
|Mortgage-backed securities                       |  |                 
|Obligations of states and political subdivisions |  |                 
|Other securities                                 |  |                 
|Equity securities                                |  |                 
|                                                 |  |                 
|Total investment securities                      |  | $               
|                                                 |  |                 

The
amortized cost and estimated fair value of investment securities at December 31, 2002, by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

|                                       |  | Held to Maturity |       | Available for Sale
|-------------------------------------- |  | ---------------- | ----- | ------------------
|
|
|Due in one year or less                |  | $                | 225   |                   
|Due after one year through five years  |  |                  | 1,735 |                   
|Due after five years through ten years |  |                  | 100   |                   
|Due after ten years                    |  |                  |      |                   
|Mortgage-backed securities             |  |                  |      |                   
|Equity securities                      |  |                  |      |                   
|                                       |  |                  |       |                   
|Total investment securities            |  | $                | 2,060 |                   
|                                       |  |                  |       |                   

31

---

The
amortized cost and estimated fair value by type of investment security at December 31, 2001 are as follows:

|                                                 |  | Held to Maturity
|------------------------------------------------ |  | ----------------
|
|
|Other securities                                 |  | $               
|                                                 |  |                 
|Total investment securities                      |  | $               
|                                                 |  |                 
|
|
|
|U.S. Treasury securities                         |  | $               
|Mortgage-backed securities                       |  |                 
|Obligations of states and political subdivisions |  |                 
|Other securities                                 |  |                 
|Equity securities                                |  |                 
|                                                 |  |                 
|Total investment securities                      |  | $               
|                                                 |  |                 

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

The
amortized cost and fair value of available for sale investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements
and short-term fixed borrowings was $1,439,122,000 and $1,486,472,000, respectively, at December 31, 2002.

Proceeds
from the sale of securities available-for-sale were $330,152,000, $568,058,000 and $163,085,000 during 2002, 2001 and 2000, respectively. Gross gains of
$2,396,000, $5,693,000 and $434,000 and gross losses of $93,000, $6,703,000 and $4,682,000 were realized on the sales in 2002, 2001 and 2000, respectively.

32

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(4) Allowance for Possible Loan Losses

A summary of the transactions in the allowance for possible loan losses for the years ended December 31, 2002, 2001 and 2000 is as follows:

|                             |                                                     | 2002 |        | 2001   |   | 2000   |       
|---------------------------- | --------------------------------------------------- | ---- | ------ | ------ | - | ------ | ------
|
|Balance at December 31, 2001 |                                                     | $    | 40,065 |        | $ | 30,812 |       
|                             |                                                     |      |        |        |   |        |       
|                             | Losses charged to allowance                         |      |        | (5,257 | ) |        | (4,269
|                             | Recoveries credited to allowance                    |      |        | 1,329  |   |        | 936   
|                             |                                                     |      |        |        |   |        |       
|                             | Net losses charged to allowance                     |      |        | (3,928 | ) |        | (3,333
|                             | Provision charged to operations                     |      |        | 8,541  |   |        | 8,631 
|                             | Acquired (disposed)in purchase or sale transactions |      |        | (465   | ) |        | 3,955 
|                             |                                                     |      |        |        |   |        |       
|Balance at December 31, 2002 |                                                     | $    | 44,213 |        | $ | 40,065 |       
|                             |                                                     |      |        |        |   |        |       

Loans
accounted for on a non-accrual basis at December 31, 2002, 2001 and 2000 amounted to $3,903,000, $8,252,000 and $6,273,000, respectively. The effect of such
non-accrual loans reduced interest income by $567,000, $695,000 and $842,000 for the years ended December 31, 2002, 2001 and 2000,
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 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 $3,428,000 at December 31, 2002, $4,958,000 at December 31, 2001 and $5,226,000 at December 31, 2000. The average recorded investment in impaired
loans during 2002, 2001, and 2000 was $4,289,000, $5,997,000 and $6,064,000, respectively. The total allowance for possible loan losses related to these loans was $266,000, $515,000 and $1,772,000 at
December 31, 2002, 2001 and 2000, respectively. Interest income on impaired loans of $112,000, $412,000 and $279,000 was recognized for cash payments received in 2002, 2001 and 2000,
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 losses
will occur.

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

While
management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers
carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be un-collectible and

33

---

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, 2002 was adequate to absorb probable 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, 2002 and 2001 were as follows:

|                                       |                                                  | Estimated
useful lives           |              | 2002 |          | 2001  |        
|-------------------------------------- | ------------------------------------------------ | -------------------------------- | ------------ | ---- | -------- | ----- | -------
|
|Bank buildings and improvements        |                                                  | 5 - 40 years                     |              | $    | 146,670  |       | $      
|Furniture, equipment and vehicles      |                                                  | 1 - 20 years                     |              |      | 109,679  |       |        
|Land                                   |                                                  |                                  |              |      | 34,750   |       |        
|Real estate held for future expansion: |                                                  |                                  |              |      |          |       |        
|                                       | Land, building, furniture, fixture and equipment |                                  | 7 - 27 years |      |          | 1,072 |        
|Less: accumulated depreciation         |                                                  |                                  |              |      | (106,694 | )     |        
|                                       |                                                  |                                  |              |      |          |       |        
|                                       |                                                  | Bank premises and equipment, net |              |      |          | $     | 185,477
|                                       |                                                  |                                  |              |      |          |       |        

34

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(6) Deposits

Deposits as of December 31, 2002 and 2001 and related interest expense for the years ended December 31, 2002, 2001 and 2000 were as follows:

2002

2001(Dollars in Thousands)Deposits:Demandnon-interest bearingDomestic

$
613,215

$
627,135Foreign


70,751


68,083Total demand non-interest bearing


683,966


695,218Savings and interest bearing demandDomestic


962,019


930,861Foreign


300,888


282,382Total savings and interest bearing demand


1,262,907


1,213,243Time, certificates of deposit $100,000 or moreDomestic


500,622


519,819Foreign


1,010,610


1,024,136Less than $100,000Domestic


437,514


519,480Foreign


344,280


360,938Total time, certificates of deposit


2,293,026


2,424,373Total deposits

$
4,239,899

$
4,332,834


2002

2001

2000(Dollars in Thousands)Interest Expense:Savings and interest bearing demandDomestic

$
11,320

$
18,636

$
21,756Foreign


2,865


4,949


6,189Total savings and interest bearing demand


14,185


23,585


27,945Time, certificates of deposit $100,000 or moreDomestic


13,442


25,609


28,359Foreign


24,743


46,447


51,675Less than $100,000Domestic


12,652


21,402


24,756Foreign


7,070


13,296


15,953Total time, certificates of deposit


57,907


106,754


120,743Total interest expense on deposits

$
72,092

$
130,339

$
148,688


35

---



(7) Securities Sold Under Repurchase Agreements

The Company's bank subsidiaries have entered into repurchase agreements with Salomon Brothers 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 $498,869,000, $478,875,000 and $145,096,000 during 2002, 2001 and 2000, respectively, and the maximum amount outstanding at any month end during 2002, 2001 and 2000 was $684,839,000,
$769,262,000 and $231,663,000, respectively.

Further
information related to repurchase agreements at December 31, 2002 and 2001 is set forth in the following table:

|                        |                      | Collateral Securities |   | Repurchase Borrowing | 
|----------------------- | -------------------- | --------------------- | - | -------------------- | 
|
|
|December 31, 2002 Term: |                      |                       |   |                      | 
|                        | Overnight agreements |                       | $ | 70,384               | 
|                        | 1 to 29 days         |                       |   | 23,154               | 
|                        | 30 to 90 days        |                       |   | 60,637               | 
|                        | Over 90 days         |                       |   | 430,715              | 
|                        |                      |                       |   |                      | 
|                        | Total                |                       | $ | 584,890              | 
|                        |                      |                       |   |                      | 
|December 31, 2001 Term: |                      |                       |   |                      | 
|                        | Overnight agreements |                       | $ | 272,657              | 
|                        | 1 to 29 days         |                       |   | 45,282               | 
|                        | 30 to 90 days        |                       |   | 84,606               | 
|                        | Over 90 days         |                       |   | 354,064              | 
|                        |                      |                       |   |                      | 
|                        | Total                |                       | $ | 756,609              | 
|                        |                      |                       |   |                      | 

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

(8) Other Borrowed Funds and Long Term Debt

Other borrowed funds and long-term debt as of December 31, 2002 and 2001 were as follows:

2002

2001(Dollars in Thousands)Federal Home Loan Bank borrowings

$
1,050,857

$
709,296Capital Securities


135,000


68,000Total other borrowings and long term debt

$
1,185,857

$
777,296


Federal
Home Loan Bank borrowings are short term fixed borrowings issued by the Federal Home Loan Bank of Dallas at the market price offered at the time of funding. These borrowings are
secured by mortgage-backed investment securities. The weighted average interest rate on the short-term fixed borrowings outstanding at December 31, 2002 and 2001 was 1.80% and
1.96%, respectively, and the

36

---

weighted average interest rate for the year 2002 and 2001 was 1.96% and 2.06%, respectively. The average daily balance on short-term fixed borrowings was $747,772,000 and $1,337,947,000
during 2002 and 2001, respectively, and the maximum amount outstanding at any month end during 2002 and 2001 was $1,020,000,000 and $1,605,000,000, respectively.

Beginning
in March 2001, the Company began issuing debt in the form of Capital Securities. The Capital Securities are subordinated and junior in right of payment to all present
and future senior indebtedness of the Company, and arepari passuwith one another. The Company has fully and unconditionally guaranteed the obligations
of each of the Trusts issuing the Capital Securities. The Company has the right, unless an Event of Default has occurred and is continuing, to defer payment of interest on the Capital Securities for
up to ten consecutive semi-annual periods. The redemption prior to maturity of any of the Capital Securities may require the prior approval of the Federal Reserve
and/or other regulatory bodies The following table illustrates key information about each of the Capital Securities and their interest rate at December 31, 2002:

|          |  | Capital
Securities
Issued |         | Repricing
Frequency |               | Interest
Rate |       | Interest Rate
Index |              | Maturity Date |               | Optional
Redemption
Date
|--------- |  | ------------------------- | ------- | ------------------- | ------------- | ------------- | ----- | ------------------- | ------------ | ------------- | ------------- | ------------------------
|
|Trust I   |  | $                         | 10,000  |                     | Fixed         |               | 10.18 | %                   | Fixed        |               | June 2031     |                         
|Trust II  |  | $                         | 25,000  |                     | Semi-Annually |               | 5.61  | %                   | LIBOR + 3.75 |               | July 2031     |                         
|Trust III |  | $                         | 33,000  |                     | Semi-Annually |               | 5.17  | %                   | LIBOR + 3.75 |               | December 2031 |                         
|Trust IV  |  | $                         | 22,000  |                     | Semi-Annually |               | 5.32  | %                   | LIBOR + 3.70 |               | April 2032    |                         
|Trust V   |  | $                         | 20,000  |                     | Quarterly     |               | 5.51  | %                   | LIBOR + 3.65 |               | July 2032     |                         
|Trust VI  |  | $                         | 25,000  |                     | Quarterly     |               | 5.27  | %                   | LIBOR + 3.45 |               | November 2032 |                         
|          |  |                           |         |                     |               |               |       |                     |              |               |               |                         
|          |  | $                         | 135,000 |                     |               |               |       |                     |              |               |               |                         
|          |  |                           |         |                     |               |               |       |                     |              |               |               |                         

(9) Earnings per Share

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

37

---

potential common shares outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended December 31, 2002, 2001, and 2000 is set forth in the
following table:

|                   |                                  | Income
(Numerator) |         | Shares
(Denominator) |            | Per-Share
Amount
|------------------ | -------------------------------- | ------------------ | ------- | -------------------- | ---------- | ----------------
|
|December 31, 2002: |                                  |                    |         |                      |            |                 
|Basic EPS          |                                  |                    |         |                      |            |                 
|                   | Net income                       |                    | $       | 100,631              |            | 31,964,465      
|                   | Potential dilutive common shares |                    |         |                      |            | 730,813         
|                   |                                  |                    |         |                      |            |                 
|Diluted EPS        |                                  | $                  | 100,631 |                      | 32,695,278 |                 
|                   |                                  |                    |         |                      |            |                 
|December 31, 2001: |                                  |                    |         |                      |            |                 
|Basic EPS          |                                  |                    |         |                      |            |                 
|                   | Net income                       |                    | $       | 83,342               |            | 33,076,056      
|                   | Potential dilutive common shares |                    |         |                      |            | 606,306         
|                   |                                  |                    |         |                      |            |                 
|Diluted EPS        |                                  | $                  | 83,342  |                      | 33,682,362 |                 
|                   |                                  |                    |         |                      |            |                 
|December 31, 2000: |                                  |                    |         |                      |            |                 
|Basic EPS          |                                  |                    |         |                      |            |                 
|                   | Net income                       |                    | $       | 75,174               |            | 33,482,444      
|                   | Potential dilutive common shares |                    |         |                      |            | 423,101         
|                   |                                  |                    |         |                      |            |                 
|Diluted EPS        |                                  | $                  | 75,174  |                      | 33,905,545 |                 
|                   |                                  |                    |         |                      |            |                 

(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 $2,662,000, $2,084,000 and $1,845,000 were charged to income for the years ended
December 31, 2002, 2001, and 2000, respectively.

(11)  International Operations

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

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

38

---

A
summary of assets attributable to international operations at December 31, 2002 and 2001 are as follows:

2002

2001(Dollars in Thousands)Loans:Commercial

$
180,209

$
228,610Others


53,068


44,428233,277


273,038Less allowance for possible loan losses


(1,179
)

(1,502
)Net loans

$
232,098

$
271,536Accrued interest receivable

$
1,357

$
1,282


At
December 31, 2002, the Company had $62,833,000 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 $14,128,000, $22,389,000 and $22,826,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

(12)  Income Taxes

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

|        |          | 2002    |                     | 2001 |        | 2000  
|------- | -------- | ------- | ------------------- | ---- | ------ | ------
|
|Current |          |         |                     |      |        |       
|        |          | U.S.    |                     | $    | 54,550 |       
|        |          | Foreign |                     |      | 118    |       
|        |          |         |                     |      |        |       
|        |          |         | Total current taxes |      |        | 54,668
|        | Deferred |         |                     | (655 | )      |       
|        |          |         |                     |      |        |       
|        |          |         | Total income taxes  |      | $      | 54,013
|        |          |         |                     |      |        |       

39

---

Total
income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35% for 2002, 2001 and 2000 to income before income taxes. The reasons for the
differences for the years ended December 31 are as follows:

|                                |                            | 2002               |        | 2001   |        | 2000   |       
|------------------------------- | -------------------------- | ------------------ | ------ | ------ | ------ | ------ | ------
|Computed expected tax expense   |                            | $                  | 55,921 |        | $      | 43,772 |       
|Change in taxes resulting from: |                            |                    |        |        |        |        |       
|                                | Tax-exempt interest income |                    |        | (1,692 | )      |        | (1,590
|                                | Leasing activities         |                    |        | 3,031  |        |        | 1,239 
|                                | Employee benefits          |                    |        | (2,707 | )      |        | (2,110
|                                | Other                      |                    |        | (540   | )      |        | 410   
|                                |                            |                    |        |        |        |        |       
|                                |                            | Actual tax expense |        | $      | 54,013 |        | $     
|                                |                            |                    |        |        |        |        |       

The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are reflected
below:

2002

2001(Dollars in Thousands)Deferred tax assets:Loans receivable, principally due to the allowance for possible loan losses

$
13,422

$
11,863Net unrealized loss on derivative instruments of equity method investee


332


2,641Other real estate owned


553


267Goodwill


2,763


Other


259


348Total deferred tax assets


17,329


15,119Deferred tax liabilities:Net unrealized gains on available for sale investment securities


(27,231
)

(12,439
)Lease financing receivable


(16,549
)

(16,871
)Bank premises and equipment, principally due to differences in depreciation


(3,592
)

(2,822
)FHLB stock


(5,139
)

(4,433
)Other


(1,181
)

(1,234
)Total deferred tax liabilities


(53,692
)

(37,799
)Net deferred tax liability

$
(36,363
)
$
(22,680
)


40

---



(12)  Income Taxes (Continued)

The
net deferred tax liability of $36,363,000 and $22,680,000 at December 31, 2002 and 2001, respectively, is included in other liabilities in the consolidated statements of
condition.

The
Company did not record a valuation allowance against deferred tax assets at December 31, 2002, 2001 and 2000 because management has concluded it is more likely than not the
Company will have future taxable earnings in excess of future tax deductions.

(13)    Other Investments

Included in other investments is the Company's investment in Aircraft Finance Trust ("AFT"), a special purpose business trust formed to acquire and lease
aircraft. The Company accounts for its investment in AFT under the equity method of accounting. AFT utilizes derivative instruments to manage the interest rate on bonds that it has issued. The
derivatives qualify as cash flow hedges and are reported at fair value. The Company records its proportionate share of the fair value of the derivatives as an increase or decrease in the investment in
AFT and accumulated other comprehensive income, net of tax.

The
Company's proportionate share of earnings or losses of AFT were losses of $6,799,000 and $1,766,000 for the years ended December 31, 2002 and 2001, respectively, and earnings
of $1,069,000 for the year ended December 31, 2000. Because of the losses from operations that AFT has reported as a result of the events of September 11 and the impact on the airline
industry including continued declines in air travel and continued reduced demand for commercial aircraft, the Company evaluated its investment, which resulted in the Company recording an impairment
charge of $6,081,000 in 2002.

At
December 31, 2002 and 2001, the Company's investment in AFT, excluding its proportionate share of the fair value of the AFT derivatives was $948,000 and $13,828,000,
respectively. The Company's investment including the proportionate share of the fair value of the AFT derivatives at December 31, 2002 and 2001, was $0 and $6,281,000, respectively.

(14)    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"). On April 5, 2001, the Board of Directors amended the 1996 plan and added 300,000 shares to the
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
Company granted nonqualified stock options exercisable for a total of 187,500 shares, adjusted for stock dividends, of Common Stock to certain employees of the GulfStar Group. The
grants were not made under either the 1987 Plan or the 1996 Plan. The options are exercisable for a period of seven years and vest in equal increments over a period of five years. All options granted
to the GulfStar Group employees had an option price of not less than the fair market value of the Common Stock on or about the date of grant.

41

---

The
following table summarizes the pertinent information (adjusted for stock distributions) with regard to the Company's stock options.

Option Price
per share

Options
outstandingBalance at December 31, 1999






1,355,760Terminated

$12.00

-
34.40

(750
)Granted

23.55

-
27.52

395,312Exercised

12.59

-
24.18

(108,954
)Balance at December 31, 2000






1,641,368Terminated

$10.06




(54.263
)Granted

24.32

-
27.20

307,187Exercised

10.48

-
27.52

(105,513
)Balance at December 31, 2001






1,788,779Terminated

$10.06

-
27.24

(26,932
)Granted






Exercised

8.05

-
27.24

(221,052
)Balance at December 31, 2002






1,540,795


At
December 31, 2002, 2001, and 2000, 1,057,089, 732,012, and 531,004 options were exercisable, respectively, and as of December 31, 2002, 313,030 shares were available for
future grants under the 1996 Plan, as amended. 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, 2002:

|                |  | Options Outstanding |  | Options Exercisable
|--------------- |  | ------------------- |  | -------------------
|
|$  8.04         |  | 179,119             |  | .5 years           
|15.47 - 21.30   |  | 529,913             |  | 2.4 years          
|19.66 - 20.37   |  | 30,643              |  | 3.10 years         
|18.84 - 22.02   |  | 305,488             |  | 5.3 years          
|20.48 - 20.80   |  | 205,627             |  | 5.10 years         
|27.20 - 29.20   |  | 290,005             |  | 6.9 years          
|                |  |                     |  |                    
|$  8.04 - 29.20 |  | 1,540,795           |  |                    
|                |  |                     |  |                    

42

---

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

2001

2000Expected life (years)

5

5Interest rate

4.42
%
5.81
%Volatility

31.14
%
35.54
%


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.

(15)    Adoption of SFAS 142

The Company fully adopted the remaining provisions of SFAS No. 142 as of January 1, 2002 and discontinued amortizing goodwill relating to business
combinations consummated before July 1, 2001. As of the date of the adoption, the Company had unamortized goodwill in the amount of $69,639,000 and unamortized identifiable intangible assets in
the amount of $21,978,000. The Company evaluated its existing intangible assets and goodwill that were acquired in prior purchase business combinations and determined that no reclassifications were
necessary in order to conform with the new classification criteria in SFAS No. 141 for recognition apart from goodwill. The Company has reassessed the useful lives and residual values of all
intangible assets acquired in purchase business combinations and determined that no amortization adjustments were necessary and no intangible assets had indefinite lives.

The
Company performed a transitional assessment of whether there is an indication that goodwill is impaired. The Company concluded that it is probable that the goodwill related to its
investment services reporting unit is impaired. The amount of the impairment is $7,893,000, or $5,130,000, net of tax, which is reported as a cumulative effect of a change in accounting principle, net
of tax. The fair value of the investment services reporting unit was estimated using a combination of capitalized cash flows, discounted cash flows and multiples based on publicly traded company's
market capitalization to sales.

43

---

The
following table reconciles the Company's reported net income and earnings per share amounts to the adjusted amounts adding back previous amounts of goodwill amortization:

Years Ended
December 31,2002

2001

2000(Amounts in thousands, except for per share data)Reported net income

$
100,631

$
83,342

$
75,174Add back:Goodwill amortization, net of tax





2,846


2,092Adjusted net income

$
100,631

$
86,188

$
77,266Basic earnings per share:Reported net income

$
3.15

$
2.52

$
2.25Goodwill amortization





.09


.06Adjusted net income

$
3.15

$
2.61

$
2.31Diluted earnings per share:Reported net income

$
3.08

$
2.47

$
2.22Goodwill amortization





.08


.06Adjusted net income

$
3.08

$
2.56

$
2.28


Changes
in the carrying amount of goodwill are as follows for the year ended December 31, 2002:

Balance as of December 31, 2001

$
69,639Adjustments to deferred tax asset and goodwill relating to a 2001 acquisition


(488
)Record disposition of goodwill related to the sale of branches acquired in 2001


(4,303
)Impairment charge


(7,893
)Reclassification of intangible assets to goodwill upon adoption of SFAS No. 147 (Note 1)


10,487Balance as of December 31, 2002

$
67,442


44

---

Information
on the Company's identified intangible assets follows:

Carrying
Amount

Accumulated
Amortization

NetDecember 31, 2002Core deposit premium

$
14,150

$
6,981

$
7,169Total

$
14,150

$
6,981

$
7,169December 31, 2001Core deposit premium

$
16,660

$
5,169

$
11,492SFAS 72 unidentified intangible


15,279


4,792


10,487Total

$
31,939

$
9,961

$
21,978


Amortization
expense of intangible assets for the years ended December 31, 2002, 2001 and 2000 was $1,812,000, $5,378,000, and $4,220,000, respectively. Estimated amortization
expense for each of the five succeeding fiscal years, and thereafter, is as follows:

Fiscal
year ended:

Total(in thousands)2003

$
1,2762004


9842005


7982006


6902007


690Thereafter


2,731Total

$
7,169


(16)    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 to the consolidated financial position or results of operations of the Company. However, many of these matters are in various stages of proceedings and
further developments could cause management to revise its assessment of these matters.

The
Company leases portions of its banking premises and equipment under operating leases. Total rental expense for the years ended December 31, 2002, 2001 and 2000 and
non-cancellable lease commitments at December 31, 2002 were not significant.

Cash
of approximately $62,628,000 and $43,671,000 at December 31, 2002 and 2001, respectively, was maintained to satisfy regulatory reserve requirements.

45

---

The
Company's lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions. The lease-financing transactions in two of the partnerships
have been examined by the Internal Revenue Service ("IRS"). In both partnerships, the lead bank subsidiary is the owner of a ninety-nine percent (99%) limited partnership interest. The IRS
has issued separate Notice of Final Partnership Administrative Adjustments ("FPAAs") to the partnerships and on September 25, 2001, and January 10, 2003, the Company filed lawsuits
contesting the adjustments asserted in the FPAAs. Prior to filing the lawsuits, the Company was required to deposit the estimated tax due of approximately $4,083,000 with respect to the first FPAA,
and $7,710,606 with respect to the second FPAA, with the IRS pursuant to the Internal Revenue Code. No reliable prediction can be made at this time as to the likely outcome of the lawsuits; however,
if the lawsuits 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 the partnerships'
lease-financing transactions would be in question and penalties and interest could be assessed by the IRS.

In
order to curtail the accrual of additional interest related to the disputed tax benefits and because interest rates are unfavorable, the Company decided to submit to the IRS the
interest which would have accrued based on the adjustments proposed in the FPAAs related to both of the lease-financing transactions. On March 7, 2003, the Company submitted to the IRS a total
of $13,640,797 of interest on the proposed adjustments. If the lawsuits are decided in favor of the Company the prepaid interest and deposits will be returned to the Company plus interest thereon.

Management
has estimated the Company's exposure in connection with these transactions and has reserved an appropriate amount based on the estimated exposure at December 31, 2002.
Management intends to continue to evaluate the merits of each matter and make appropriate revisions to the reserve amount as deemed necessary.

(17)    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 $50,780,000 and $31,014,000 at December 31, 2002 and 2001, respectively.

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

In the normal course of business, the bank subsidiaries are party to financial instruments with off-statement of condition risk to meet the financing needs of
their customers. These financial instruments include commitments to their customers. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts
recognized in the statement of condition. The contract amounts of these instruments reflect the extent of involvement the bank subsidiaries have in particular classes of

46

---

financial instruments. At December 31, 2002, the following amounts of financial instruments, whose contract amounts represent credit risks, were outstanding:

Commitments to extend credit

$
626,330,000Credit card lines


33,290,000Standby letters of credit


59,657,000Commercial letters of credit


3,176,000


The
Company enters into a standby letter of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the standby letters of credit, the Company is required to make payments to the beneficiary
of the letters of
credit upon request by the beneficiary so long as all performance criteria have been met. At December 31, 2002, the maximum potential amount of future payments is $59,657,000.

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

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

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

47

---



(19)    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, 2002, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately
$188,000,000, 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 $399,042,000. The undivided profits of the bank subsidiaries were $251,625,000. 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 Company historically has
not allowed any subsidiary bank to pay dividends in such a manner as to impair its capital adequacy.

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

Quantitative
measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on the following page) of
Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2002, that the Company and each of the bank
subsidiaries met all capital adequacy requirements to which it is subject.

As
of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized all the bank subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized" the Company and the bank subsidiaries must maintain minimum Total risk-based, Tier 1 risk based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of the Company or any of the bank
subsidiaries as well capitalized.

48

---

The
Company's and the bank subsidiaries' actual capital amounts and ratios for 2002 also presented in the following table:

|                                          |                                             | Actual |   | For Capital
Adequacy Purposes |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions |  
|----------------------------------------- | ------------------------------------------- | ------ | - | ----------------------------- |  | ---------------------------------------------------------------- | -
|
|
|
|As of December 31, 2002:                  |                                             |        |   |                               |  |                                                                  |  
|Total Capital (to Risk Weighted Assets):  |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 603,001                       |  | 17.21                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 445,668                       |  | 15.40                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 55,314                        |  | 18.45                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 25,988                        |  | 21.35                                                            |  
|                                          | Commerce Bank                               |        |   | 29,650                        |  | 17.09                                                            |  
|Tier 1 Capital (to Risk Weighted Assets): |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 559,025                       |  | 15.95                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 409,373                       |  | 14.14                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 52,095                        |  | 17.38                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 25,203                        |  | 20.71                                                            |  
|                                          | Commerce Bank                               |        |   | 27,451                        |  | 15.82                                                            |  
|Tier 1 Capital (to Average Assets):       |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 559,025                       |  | 8.71                                                             | %
|                                          | International Bank of Commerce, Laredo      |        |   | 409,373                       |  | 7.98                                                             |  
|                                          | International Bank of Commerce, Brownsville |        |   | 52,095                        |  | 8.78                                                             |  
|                                          | International Bank of Commerce, Zapata      |        |   | 25,203                        |  | 8.22                                                             |  
|                                          | Commerce Bank                               |        |   | 27,451                        |  | 6.68                                                             |  

49

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The Company's and the bank subsidiaries' actual capital amounts and ratios for 2001 are also presented in the following table:

|                                          |                                             | Actual |   | For Capital
Adequacy Purposes |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions |  
|----------------------------------------- | ------------------------------------------- | ------ | - | ----------------------------- |  | ---------------------------------------------------------------- | -
|
|
|
|As of December 31, 2001:                  |                                             |        |   |                               |  |                                                                  |  
|Total Capital (to Risk Weighted Assets):  |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 490,124                       |  | 15.06                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 370,123                       |  | 13.42                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 43,797                        |  | 18.42                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 20,291                        |  | 28.66                                                            |  
|                                          | Commerce Bank                               |        |   | 22,180                        |  | 12.96                                                            |  
|Tier 1 Capital (to Risk Weighted Assets): |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 450,059                       |  | 13.83                                                            | %
|                                          | International Bank of Commerce, Laredo      |        |   | 336,486                       |  | 12.20                                                            |  
|                                          | International Bank of Commerce, Brownsville |        |   | 40,822                        |  | 17.17                                                            |  
|                                          | International Bank of Commerce, Zapata      |        |   | 19,737                        |  | 27.88                                                            |  
|                                          | Commerce Bank                               |        |   | 20,034                        |  | 11.70                                                            |  
|Tier 1 Capital (to Average Assets):       |                                             |        |   |                               |  |                                                                  |  
|                                          | Consolidated                                |        | $ | 450,059                       |  | 6.67                                                             | %
|                                          | International Bank of Commerce, Laredo      |        |   | 336,486                       |  | 7.00                                                             |  
|                                          | International Bank of Commerce, Brownsville |        |   | 40,822                        |  | 8.15                                                             |  
|                                          | International Bank of Commerce, Zapata      |        |   | 19,737                        |  | 9.72                                                             |  
|                                          | Commerce Bank                               |        |   | 20,034                        |  | 8.33                                                             |  

(20) Fair Value of Financial Instruments

The fair value estimates, methods, and assumptions for the Company's financial instruments at December 31, 2002 and 2001 are outlined below.



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



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

50

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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.



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, 2002 and 2001, the carrying amount of fixed rate performing loans was $970,967,000 and $1,407,367,000
respectively, and the estimated fair value was $977,985,000 and $1,406,633,000, 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 judgmentally determined using available market and specific
borrower information. As of December 31, 2002 and 2001, the net carrying amount of non-performing loans was a reasonable estimate of the fair value.



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, 2002 and 2001. 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, 2002 and 2001, the carrying amount of time deposits was $2,293,026,000 and $2,424,373,000, respectively, and the estimated
fair value was $2,273,994,000 and $2,395,652,000, respectively.



Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at December 31, 2002 and 2001.



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

51

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

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

52

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

Statements of Condition  (Parent Company Only)        December 31, 2002 and 2001  (Dollars in Thousands)

|                                     |                                             | 2002                                       |         | 2001     |        
|------------------------------------ | ------------------------------------------- | ------------------------------------------ | ------- | -------- | -------
|ASSETS                               |                                             |                                            |         |          |        
|Cash                                 |                                             | $                                          | 4,783   |          | $      
|Repurchase Agreements                |                                             |                                            | 12,750  |          |        
|Other investments                    |                                             |                                            | 5,464   |          |        
|Notes receivable                     |                                             |                                            | 20,374  |          |        
|Investment in subsidiaries           |                                             |                                            | 634,665 |          |        
|Other assets                         |                                             |                                            | 6,921   |          |        
|                                     |                                             |                                            |         |          |        
|                                     | Total assets                                |                                            | $       | 684,957  |        
|                                     |                                             |                                            |         |          |        
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                             |                                            |         |          |        
|Liabilities:                         |                                             |                                            |         |          |        
|                                     | Due to IBC Trusts (Subordinated Debentures) |                                            |         | 135,000  |        
|                                     | Due to IBC Trading                          |                                            |         | 21       |        
|                                     | Due to IBC Capital Trusts                   |                                            |         | 1,068    |        
|                                     | Other liabilities                           |                                            |         | 1,604    |        
|                                     |                                             |                                            |         |          |        
|                                     |                                             | Total liabilities                          |         |          | 137,693
|                                     |                                             |                                            |         |          |        
|Shareholders' equity:                |                                             |                                            |         |          |        
|                                     | Common shares                               |                                            |         | 41,766   |        
|                                     | Surplus                                     |                                            |         | 30,821   |        
|                                     | Retained earnings                           |                                            |         | 560,613  |        
|                                     | Accumulated other comprehensive income      |                                            |         | 49,957   |        
|                                     |                                             |                                            |         |          |        
|                                     |                                             |                                            | 683,157 |          |        
|                                     | Less cost of shares in treasury             |                                            |         | (135,893 | )      
|                                     |                                             |                                            |         |          |        
|                                     |                                             | Total shareholders' equity                 |         |          | 547,264
|                                     |                                             |                                            |         |          |        
|                                     |                                             | Total liabilities and shareholders' equity |         | $        | 684,957
|                                     |                                             |                                            |         |          |        

53

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

Statements of Income  (Parent Company Only)        Years ended December 31, 2002, 2001 and 2000  (Dollars in Thousands)

|                                                                            |                                      | 2002                                                                                      |        | 2001   |         | 2000  
|--------------------------------------------------------------------------- | ------------------------------------ | ----------------------------------------------------------------------------------------- | ------ | ------ | ------- | ------
|Income:                                                                     |                                      |                                                                                           |        |        |         |       
|                                                                            | Dividends from subsidiaries          |                                                                                           | $      | 27,500 |         | $     
|                                                                            | Interest income on notes receivable  |                                                                                           |        | 2,297  |         |       
|                                                                            | Interest income on other investments |                                                                                           |        | 778    |         |       
|                                                                            | Other interest income                |                                                                                           |        |       |         |       
|                                                                            | Gain on sale of other securities     |                                                                                           |        |       |         |       
|                                                                            | Other                                |                                                                                           |        | 2,334  |         |       
|                                                                            |                                      |                                                                                           |        |        |         |       
|                                                                            |                                      | Total income                                                                              |        |        | 32,909  |       
|                                                                            |                                      |                                                                                           |        |        |         |       
|Expenses:                                                                   |                                      |                                                                                           |        |        |         |       
|                                                                            | Interest Expense (Debentures)        |                                                                                           |        | 7,040  |         |       
|                                                                            | Other                                |                                                                                           |        | 1,126  |         |       
|                                                                            |                                      |                                                                                           |        |        |         |       
|                                                                            |                                      | Total expenses                                                                            |        |        | 8,166   |       
|                                                                            |                                      |                                                                                           |        |        |         |       
|                                                                            |                                      | Income before federal income taxes and equity in undistributed net income of subsidiaries |        |        | 24,743  |       
|Income tax (benefit) expense                                                |                                      |                                                                                           | (1,578 | )      |         | 578   
|                                                                            |                                      |                                                                                           |        |        |         |       
|                                                                            |                                      | Income before equity in undistributed net income of subsidiaries                          |        |        | 26,321  |       
|Equity in undistributed (dividends in excess of) net income of subsidiaries |                                      |                                                                                           | 74,310 |        |         | (8,635
|                                                                            |                                      |                                                                                           |        |        |         |       
|                                                                            |                                      | Net income                                                                                |        | $      | 100,631 |       
|                                                                            |                                      |                                                                                           |        |        |         |       

54

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

Statements of Cash Flows  (Parent Company Only)        Years ended December 31, 2002, 2001 and 2000  (Dollars in Thousands)

|                          |                                                                                   | 2002                                                                        |       | 2001    |         | 2000 |         
|------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | ------- | ------- | ---- | --------
|Operating activities:     |                                                                                   |                                                                             |       |         |         |      |         
|                          | Net income                                                                        |                                                                             | $     | 100,631 |         | $    | 83,342  
|                          | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                             |       |         |         |      |         
|                          |                                                                                   | Gain on sale of other investments                                           |       |         |        |      |         
|                          |                                                                                   | Increase in other liabilities                                               |       |         | 553     |      |         
|                          |                                                                                   | (Equity in undistributed) dividends in excess of net income of subsidiaries |       |         | (74,310 | )    |         
|                          |                                                                                   |                                                                             |       |         |         |      |         
|                          |                                                                                   | Net cash provided by operating activities                                   |       |         | 26,874  |      |         
|                          |                                                                                   |                                                                             |       |         |         |      |         
|Investing activities:     |                                                                                   |                                                                             |       |         |         |      |         
|                          | Contributions to subsidiaries                                                     |                                                                             |       | (8,937  | )       |      | (119,157
|                          | Purchase of repurchase agreement with banks                                       |                                                                             |       | (10,150 | )       |      | (2,600  
|                          | Proceeds from sales of available for sale securities                              |                                                                             |       |        |         |      |        
|                          | Purchase of available for sale other securities                                   |                                                                             |       |        |         |      | (5,000  
|                          | Principal collected on mortgage-backed securities                                 |                                                                             |       | 1,556   |         |      | 3,223   
|                          | Net decrease in notes receivable                                                  |                                                                             |       | 10,309  |         |      | 4,698   
|                          | Decrease in other assets                                                          |                                                                             |       | (289    | )       |      | (2,377  
|                          |                                                                                   |                                                                             |       |         |         |      |         
|                          | Net cash (used in) provided by investing activities                               |                                                                             |       | (7,511  | )       |      | (121,213
|                          |                                                                                   |                                                                             |       |         |         |      |         
|Financing activities:     |                                                                                   |                                                                             |       |         |         |      |         
|                          | Proceeds from issuance of subordinated debentures                                 |                                                                             |       | 67,000  |         |      | 68,000  
|                          | Proceeds from stock transactions                                                  |                                                                             |       | 3,478   |         |      | 1,736   
|                          | Payments of cash dividends                                                        |                                                                             |       | (21,984 | )       |      | (21,158 
|                          | Payments of cash dividends in lieu of fractional shares                           |                                                                             |       | (31     | )       |      | (24     
|                          | Purchase of treasury stock                                                        |                                                                             |       | (63,594 | )       |      | (21,143 
|                          |                                                                                   |                                                                             |       |         |         |      |         
|                          | Net cash (used in) provided by financing Activities                               |                                                                             |       | (15,131 | )       |      | 27,411  
|                          |                                                                                   |                                                                             |       |         |         |      |         
|                          | Increase (decrease) in cash and cash equivalents                                  |                                                                             |       | 4,232   |         |      | (182    
|Cash at beginning of year |                                                                                   |                                                                             | 551   |         |         | 733  |         
|                          |                                                                                   |                                                                             |       |         |         |      |         
|Cash at end of year       |                                                                                   | $                                                                           | 4,783 |         | $       | 551  |         
|                          |                                                                                   |                                                                             |       |         |         |      |         

55

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

|                                                                                                                                                                                                                                        |                                                                     | Fourth
Quarter                                                      |   | Third
Quarter |      | Second
Quarter |        | First
Quarter |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ------------- | ---- | -------------- | ------ | ------------- | -
|2002                                                                                                                                                                                                                                    |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Interest income                                                     |                                                                     | $ | 87,007        |      | $              | 91,486 |               | $
|                                                                                                                                                                                                                                        | Interest expense                                                    |                                                                     |   | 27,652        |      |                | 29,695 |               |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Net interest income                                                 |                                                                     |   | 59,355        |      |                | 61,791 |               |  
|                                                                                                                                                                                                                                        | Provision for possible loan losses                                  |                                                                     |   | 2,178         |      |                | 2,232  |               |  
|                                                                                                                                                                                                                                        | Non-interest income                                                 |                                                                     |   | 25,347        |      |                | 26,629 |               |  
|                                                                                                                                                                                                                                        | Non-interest expense                                                |                                                                     |   | 42,170        |      |                | 38,921 |               |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Income before income taxes                                          |                                                                     |   | 40,354        |      |                | 47,267 |               |  
|                                                                                                                                                                                                                                        | Income taxes                                                        |                                                                     |   | 12,890        |      |                | 16,394 |               |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Income before cumulative effect of a change in accounting principle |                                                                     |   | 27,464        |      |                | 30,873 |               |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Cumulative effect of a change in accounting principle, net of tax   |                                                                     |   |              |      |                |       |               |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Net income                                                          |                                                                     | $ | 27,464        |      | $              | 30,873 |               | $
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        | Per common share:                                                   |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Basic                                                               |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Income before cumulative effect of a change in accounting principle |   | $             | ..87 |                | $      | ..97          |  
|                                                                                                                                                                                                                                        |                                                                     | Cumulative effect of a change in accounting principle, net of tax   |   |               |     |                |        |              |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Net income                                                          |   | $             | ..87 |                | $      | ..97          |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Diluted                                                             |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Income before cumulative effect of a change in accounting principle |   | $             | ..85 |                | $      | ..95          |  
|                                                                                                                                                                                                                                        |                                                                     | Cumulative effect of a change in accounting principle, net of tax   |   |               |     |                |        |              |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|                                                                                                                                                                                                                                        |                                                                     | Net income                                                          |   | $             | ..85 |                | $      | ..95          |  
|                                                                                                                                                                                                                                        |                                                                     |                                                                     |   |               |      |                |        |               |  
|Net income and per common share amounts for the first three quarters have been re-stated to reflect the reversal of $792,000 amortization expense in accordance with SFAS No. 147 (see note 1 to the Consolidated
Financial Statements) |                                                                    

56

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|2001 |                                    |         |   |        |      |   |        |      |   |        |      |   |        
|---- | ---------------------------------- | ------- | - | ------ | ---- | - | ------ | ---- | - | ------ | ---- | - | -------
|     | Interest income                    |         | $ | 85,099 |      | $ | 91,159 |      | $ | 99,681 |      | $ | 108,174
|     | Interest expense                   |         |   | 37,075 |      |   | 45,817 |      |   | 54,882 |      |   | 63,034 
|     |                                    |         |   |        |      |   |        |      |  
|     | Net interest income                |         |   | 48,024 |      |   | 45,342 |      |   | 44,799 |      |   | 45,140 
|     | Provision for possible loan losses |         |   | 2,114  |      |   | 1,962  |      |   | 2,428  |      |   | 2,127  
|     | Non-interest income                |         |   | 21,828 |      |   | 22,785 |      |   | 21,065 |      |   | 20,152 
|     | Non-interest expense               |         |   | 37,199 |      |   | 33,928 |      |   | 33,488 |      |   | 30,826 
|     |                                    |         |   |        |      |   |        |      |  
|     | Income before income taxes         |         |   | 30,539 |      |   | 32,237 |      |   | 29,948 |      |   | 32,339 
|     | Income taxes                       |         |   | 10,146 |      |   | 10,793 |      |   | 10,048 |      |   | 10,734 
|     |                                    |         |   |        |      |   |        |      |  
|     | Net income                         |         | $ | 20,393 |      | $ | 21,444 |      | $ | 19,900 |      | $ | 21,605 
|     |                                    |         |   |        |      |   |        |      |  
|     | Adjusted net income                |         | $ | 21,105 |      | $ | 22,156 |      | $ | 20,611 |      | $ | 22,316 
|     |                                    |         |   |        |      |   |        |      |  
|     | Per common share:                  |         |   |        |      |   |        |      |   |        |      |   |        
|     |                                    | Basic   |   | $      | .62  |   | $      | .65  |   | $      | .60  |   | $      
|     |                                    | Diluted |   | $      | ..61 |   | $      | ..64 |   | $      | ..58 |   | $      
|     | Adjusted per common share:         |         |   |        |      |   |        |      |   |        |      |   |        
|     |                                    | Basic   |   | $      | .64  |   | $      | .67  |   | $      | .62  |   | $      
|     |                                    | Diluted |   | $      | ..63 |   | $      | ..66 |   | $      | ..61 |   | $      

Adjusted
net income and adjusted net income per common share are adjusted for the exclusion of goodwill amortization, net of tax. Beginning 2002, new accounting standards eliminated the
amortization of goodwill.

57

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INTERNATIONAL BANCSHARES CORPORATION        OFFICERS AND DIRECTORS

|OFFICERS                                                                                                                                                                                                                                                            |  | DIRECTORS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DENNIS E. NIXON
Chairman of the Board and President
R. DAVID GUERRA
Vice President
EDUARDO J. FARIAS
Vice President
RICHARD CAPPS
Vice President
IMELDA NAVARRO
Treasurer
WILLIAM CUELLAR
Auditor
LUISA D. BENAVIDES
Secretary
MARISA V. SANTOS
Assistant Secretary |  | DENNIS E. NIXON
President
International Bank of Commerce
R. DAVID GUERRA
President
International Bank of Commerce
Branch in McAllen, Texas
LEONARDO SALINAS
Investments
IMELDA NAVARRO
Senior Executive Vice President
International Bank of Commerce
LESTER AVIGAEL
Retail Merchant
Chairman of the Board
International Bank of Commerce
IRVING GREENBLUM
Retail Merchant
RICHARD E. HAYNES
Attorney at Law
Real Estate Investments
SIOMA NEIMAN
International Entrepreneur
PEGGY J. NEWMAN
Investments
DANIEL B. HASTINGS, JR.
Licensed U.S. Custom Broker
President
Daniel B. Hastings, Inc.
ANTONIO R. SANCHEZ, JR.
Chairman of the Board
Sanchez Oil & Gas Corporation;
Investments

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