SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

     For the fiscal year ended                    Commission file number
        December 31, 1998                                0-9439

                      INTERNATIONAL BANCSHARES CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

              TEXAS                                   74-2157138
    (State of Incorporation)             (I.R.S. Employer Identification No.)

      1200 San Bernardo Avenue
      Laredo, Texas 78042-1359                   Area Code (956) 722-7611
  (Address of principal executive             (Registrant's telephone number)
        office and Zip Code)

          Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of Each Exchange On
       Title of Each Class                              Which Registered
      ---------------------                        --------------------------
              None                                          None

          Securities Registered Pursuant to Section 12(g) of the Act:

                           Common Stock ($1.00 Par Value)
                          --------------------------------
                                  (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes [ ]   No [X].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 19, 1999 was $399,370,664 based on the closing sales
price of the stock on such date.

As of March 19, 1999, there were 14,118,158 shares of the Registrant's Common
Stock outstanding.

Portions of the following documents are incorporated by reference into the
designated parts of this Form 10-K: (a) Annual Report to security holders for
the fiscal year ended December 31, 1998 (in Parts I and II) and (b) Proxy
Statement dated April 15, 1999 (in Part III).
<PAGE>
                                      CONTENTS

                                       PART I
                                                                           PAGE
                                                                           ----

Item 1.   Business..........................................................  3
Item 2.   Properties........................................................ 26
Item 3.   Legal Proceedings................................................. 27
Item 4.   Submission of Matters to a Vote of Security Holders............... 27
Item 4A.  Executive Officers of the Registrant.............................. 27

                                       PART II

Item 5.   Market for the Registrant's Common Stock
            and Related Security Holder Matters............................. 28
Item 6.   Selected Financial Data........................................... 28
Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations............................. 28
Item 7A.  Quantitative and Qualitative Disclosure about Market Risk......... 28
Item 8.   Financial Statements and Supplementary Data....................... 28
Item 9.   Changes In and Disagreements with Accountants on
            Accounting and Financial Disclosure............................. 28

                                      PART III

Item 10.  Directors and Executive Officers of the Registrant................ 28
Item 11.  Executive Compensation............................................ 28
Item 12.  Security Ownership of Certain Beneficial Owners and Management.... 29
Item 13.  Certain Relationships and Related Transactions.................... 29

                                       PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K... 29

FORWARD LOOKING INFORMATION

Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate," "expect,"
"intend" and "project," as well as other words or expressions of similar meaning
are intended to identify forward-looking statements. Readers are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date of this annual 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.

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.


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<PAGE>
Item 1. BUSINESS

GENERAL

      International Bancshares Corporation (the "Company") is a bank holding
company with four bank subsidiaries providing commercial and retail banking
services through 93 main banking and branch facilities located in 28 communities
in South and Southeast Texas. The Company was incorporated under the General
Corporation Law of the State of Delaware in 1979 and has its principal corporate
offices in Laredo, Texas. Effective June 7, 1995, the Company's state of
incorporation was changed from Delaware to Texas. The Company was organized for
the purpose of operating as a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended, and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "FRB"). As a registered bank holding company, the Company may own
one or more banks and may engage directly, or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act and by the FRB. The Company's principal
assets at December 31, 1998 consisted of all the outstanding capital stock of
four Texas state banking associations (the "Banks" or "bank subsidiaries"). All
of the Company's bank subsidiaries are members of the Federal Deposit Insurance
Corporation.

     The bank subsidiaries are in the business of gathering funds from various
sources and investing these funds in order to earn a return. Funds gathering
primarily takes the form of accepting demand and time deposits from individuals,
partnerships, corporations and public entities. Investments principally are made
in loans to various individuals and entities as well as in debt securities of
the U.S. Government and various other entities whose payments are guaranteed by
the U.S. Government. Historically, the bank subsidiaries have primarily focused
on providing commercial banking services to small and medium sized businesses
located in its trade area and international banking services. In recent years,
the bank subsidiaries have also emphasized consumer and retail banking,
including mortgage lending and credit card services, as well as branches
situated in retail locations and grocery stores.

      The Company's philosophy focuses on customer service as represented by its
motto, "We Do More." The Banks maintain a strong commitment to their local
communities by, among other things, appointing selected members of the
communities in which the Banks' branches are located to local advisory boards
(the "local boards"). The local boards direct the operations of the branches,
with the supervision of the lead Bank's board of directors, and assist in
introducing prospective customers to the Banks as well as developing or
modifying products and services to meet customer needs. The Banks function
largely on a delegated basis, and the Company believes that such decentralized
structure enhances the commitment of the Banks to the communities in which their
branches are located. In contrast to many of its principal competitors, the
credit decisions of the Banks are made locally and promptly. The Company
believes that the knowledge and expertise afforded by the local boards are key
components to sound credit decisions.

      Expense control is an essential element in the Company's profitability.
The Company has centralized virtually all of the Banks' back office support and
investment functions in order to achieve consistency and cost efficiencies in
the delivery of products and services. The Company's efficiency ratio (other
operating expenses


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<PAGE>
divided by net interest income and other operating income) for the year ended
December 31, 1998 stands at 53% and has been under 53% for each of the last five
years, which the Company believes is well below national peer group ratios. One
of the benefits derived from such operating efficiencies is that the Company is
not subjected to undue pressure to generate interest income from high-risk
loans. Accordingly, the Company believes it is able to be more selective and
conservative with respect to its credit decisions. Despite this lack of economic
pressure, the Banks aggressively pursue, with the help of the local boards,
quality credits with an emphasis on loans to small and medium sized businesses.

      During the last eight years, IBC, as defined below, has been an active
acquiror of financial institutions and banking assets in its trade area. The
community focus of IBC and the involvement of the local boards has resulted in
IBC becoming aware of acquisition possibilities in the ordinary course of its
business and in many instances before other potential purchasers. IBC's decision
to pursue an acquisition is based on a multitude of factors, including the
ability to efficiently assimilate the operations and assets of the acquired
entity, the cost efficiencies to be attained and the growth potential of the
market.

      On July 28, 1980, the Company acquired all of the outstanding shares of
its predecessor, International Bank of Commerce ("IBC"), which is today the
flagship bank of the Company, representing 85% of the Company's banking assets.
IBC was chartered under the banking laws of Texas in 1966 and has its principal
place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is
a wholly-owned subsidiary of the Company. Since the acquisition of the flagship
bank in 1980, the Company formed three banks and acquired $1,846,435,000 in
assets and assumed $1,762,577,000 of deposits in numerous acquisition
transactions, which totals are as of the acquisition date and do not take into
account any runoff or other subsequent events. In addition to the acquisitions,
IBC has also focused on deposit growth from its traditional banking activities.

      Effective February 19, 1999, IBC purchased certain assets and assumed
certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus
Christi, Texas. IBC purchased loans of approximately $4,590,000 and assumed
deposits of approximately $28,399,000 and received cash and other assets in the
amount of approximately $23,809,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $2,525,000 which are being amortized on a straight line basis
over a fifteen year period.

      Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of totaling $17,613,000 which are
being amortized on a straight line basis over a fifteen year period.

      Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash and other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC


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<PAGE>
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 which are being amortized on a straight line basis over a fifteen
year period.

      For more information regarding the acquisition transactions of the Company
during the last three years, see note 2 of notes to Consolidated Financial
Statements of the Company located on page 23 of the 1998 Annual Report which is
incorporated herein by reference.

      In addition to IBC, the Company has three other bank subsidiaries. The
three additional banks are (i) Commerce Bank, a Texas state banking association
which commenced operations in 1982, located in Laredo, Texas ("Commerce Bank");
(ii) International Bank of Commerce, a Texas state banking association which
commenced operations in 1984, located in Brownsville, Texas ("IBC-Brownsville");
and (iii) International Bank of Commerce, a Texas state banking association
which commenced operations in 1984, located in Zapata, Texas ("IBC-Zapata").

      The Company also has four non-banking subsidiaries. They are (i) IBC Life
Insurance Company, a Texas chartered subsidiary which reinsures a small
percentage of credit life and accident and health risks related to loans made by
bank subsidiaries, (ii) IBC Trading Company, an export trading company which is
currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bank holding
company incorporated in the State of Delaware, and (iv) IBC Capital Corporation,
a company incorporated in the State of Delaware for the purpose of holding
certain investments of the Company.

SERVICES AND EMPLOYEES

      The Company, through its bank subsidiaries, IBC, Commerce Bank, IBC Zapata
and IBC Brownsville, is engaged in the business of banking, including the
acceptance of checking and savings deposits and the making of commercial, real
estate, personal, home improvement, automobile and other installment and term
loans. Certain of the bank subsidiaries are very active in facilitating
international trade along the United States border with Mexico and elsewhere.
The international banking business of the Company includes providing letters of
credit, making commercial and industrial loans, and a nominal amount of currency
exchange. As part of its international strategy the Company also aims to provide
a full array of banking services to "maquiladoras," including, account and
payroll services. A "maquiladora" is a type of assembly or manufacturing plant
under Mexican law which is typically owned by a United States company and
located on Mexico's northern border for the purpose of temporarily importing
materials to be assembled in Mexico and re-exported to the United States. Each
bank subsidiary also offers other related services, such as credit cards,
travelers' checks, safety deposit, collection, notary public, escrow, drive-up
and walk-up facilities and other customary banking services. Additionally, each
bank subsidiary makes available certain securities products through third party
providers. The bank subsidiaries also make banking services available during
traditional and nontraditional banking hours through their network of 168
automated teller machines, and through their branches situated in retail
locations and grocery stores. To date, as part of the Company's expansion of its
retail banking services, 33 grocery store branches have been opened.

      The Company owns U.S. service mark registrations for "INTERNATIONAL BANK
OF COMMERCE," "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE
CENTRE," and



                                         5
<PAGE>
"IT'S A BRIGHTER CHRISTMAS" as well as the design marks depicting the United
States and Mexico and the design mark depicting "WALL STREET INTERNATIONAL." In
addition, the Company owns Texas service mark registrations for "CHECK'N SAVE,"
"WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE" and the design
marks depicting "CHECK'N SAVE" and "WALL STREET INTERNATIONAL," as well as the
design marks depicting the United States and Mexico. Also, IBC owns certain
pending applications for federal registrations of other proprietary service
marks and is regularly investigating the availability of service mark
registrations related to certain proprietary products.

      No material portion of the business of the Company may be deemed seasonal
and the deposit and loan base of the Company's bank subsidiaries are diverse in
nature. There has been no material effect upon the Company's capital
expenditures, earnings or competitive position as a result of Federal, State or
local environmental regulation.

      As of December 31, 1998 the Company and its subsidiaries employed
approximately 1,235 persons full-time and 192 persons part-time.

COMPETITION

      The Company is the largest minority-owned bank holding company in the
United States, with more than a majority of its common stock being held by
Hispanic shareholders. The Company is the second largest independent Texas bank
holding company. The primary market area of the Company is South and Southeast
Texas, an area bordered on the east by the Houston area, to the northwest by San
Antonio, to the southwest by Laredo and to the southeast by Brownsville. The
Company has increased its market share in its primary market area over the last
seven years through strategic acquisitions. The Company, through its bank
subsidiaries, competes for deposits and loans with other commercial banks,
savings and loan associations, credit unions and nonbank entities, which nonbank
entities serve as an alternative to traditional financial institutions and are
considered to be formidable competitors.

      The Company and its bank subsidiaries do a significant amount of business
for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits
from persons and entities domiciled in Mexico comprise a significant portion of
the deposit base of the Company's bank subsidiaries. Such deposits comprised
approximately 38%, 35% and 39% of the Company's bank subsidiaries' total
deposits as of December 31, 1998, 1997 and 1996, respectively.

SUPERVISION AND REGULATION

      GENERAL - THE COMPANY. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal

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<PAGE>
deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earnings of the
Company are affected by the fiscal and monetary policies of the Federal Reserve
System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.

      FRB APPROVALS. The Company is a registered bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking (the "DOB"). The Company is required to file with the FRB annual
reports and other information regarding the business operations of itself and
its subsidiaries. It is also subject to examination by the FRB. Under the BHCA,
a bank holding company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of any voting stock of any company which
is not a bank or bank holding company, and must engage only in the business of
banking, managing, controlling banks, and furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of any company provided such shares do not constitute
more than 5% of the outstanding voting shares of the company and so long as the
FRB does not disapprove such ownership. Another exception to this prohibition is
the ownership of shares of a company the activities of which the FRB has
specifically determined to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto.

      The restrictions on the activities of bank holding companies could change
significantly if the Glass-Steagall Act of 1935 is reformed. Current
congressional debate over reforming the Glass-Steagall Act is centered around
whether enhanced bank powers should be conducted within a holding company or
through bank subsidiaries. It is impossible to predict at this time whether any
of the reform proposals will pass, or what effect the proposals would have on
the Company or its subsidiaries.

      The BHCA and the Change in Bank Control Act of 1978 require that,
depending on the circumstances, either FRB approval must be obtained or notice
must be furnished to the FRB and not disapproved prior to any person or company
acquiring "control" of a bank holding company, such as the Company, subject to
certain exceptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities where the bank holding company, such as the Company, has registered
Securities under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act").

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



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<PAGE>
      INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which
rewrote federal law governing the interstate expansion of banks in the United
States. Effective as of September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any State
in the United States, provided that the target bank meets the minimum age (up to
a maximum of five years, which is the maximum Texas has adopted) established by
the host State. Under the Interstate Banking Act, an anti-concentration limit
will bar interstate acquisitions that would give a bank holding company control
of more than ten percent (10%) of all deposits nationwide or thirty percent
(30%) of any one State's deposits, or such higher or lower percentage
established by the host State. The anti-concentration limit in Texas has been
set at twenty percent (20%) of all federally insured deposits in Texas. As of
December 31, 1998, many of Texas' largest bank holding companies had either
merged with or been acquired by out-of-state banking concerns.

      In addition to providing for interstate acquisitions of banks by bank
holding companies, the Interstate Banking Act provides for interstate branching
by permitting mergers between banks domiciled in different States beginning June
1, 1997. The Interstate Banking Act provides that States may opt out of
interstate branching by enacting non-discriminatory legislation prohibiting
interstate bank mergers before June 1, 1997. In 1995, Texas passed legislation
opting out of the interstate branching provisions of The Interstate Banking Act
until September 1999. In May 1998, the Texas DOB determined that the Texas
opt-out statute was not effective and the Texas DOB began accepting applications
for interstate branching transactions. Currently, legislation implementing
interstate branching is pending in the Texas legislature. No accurate prediction
can be made at this time as to how this legislation will affect the Company
and/or its bank subsidiaries.

      FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Texas Banking Commissioner may bring enforcement proceedings against a bank
holding company in Texas.

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


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<PAGE>
      CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.

      AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports and examination related correspondence. In
addition, financial statements prepared in accordance with generally accepted
accounting principles, management's certifications concerning responsibility for
the financial statements, internal controls and compliance with legal
requirements designated by the FDIC, and an attestation by the auditor regarding
the statements of management relating to the internal controls must be
submitted. For institutions with total assets of more than $3 billion,
independent auditors may be required to review quarterly financial statements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that independent audit committees be formed, consisting of outside
directors only. The committees of such institutions must include members with
experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.

      GENERAL - BANK SUBSIDIARIES. All of the bank subsidiaries of the Company
are state banks subject to regulation by, and supervision of, the Texas DOB and
the FDIC. All of the bank subsidiaries of the Company are members of the FDIC,
which currently insures the deposits of each member bank to a maximum of
$100,000 per depositor. For this protection, each member bank pays a statutory
assessment and is subject to the rules and regulations of the FDIC. The premiums
increase incrementally based on the rating of the member bank.

      DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC
through the Bank Insurance Fund ("BIF") to the extent provided by law. Under the
FDIC's risk-based insurance system, BIF-insured institutions are currently
assessed premiums of between zero and twenty seven cents per $100 of eligible
deposits, depending upon the institution's capital position and other
supervisory factors. During 1996, Congress enacted legislation that, among other
things, provides for assessments against BIF-insured institutions that will be
used to pay certain Financing Corporation ("FICO") obligations. In addition to
any BIF insurance assessments, BIF-insured banks are expected to make payments
for the FICO obligations equal to $0.01296 per $100 of eligible deposits each
year during 1997 through 1999. Thereafter, BIF and Savings Association Insurance
Fund payers will be assessed pro rata for the FICO bond obligations.

      CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently
required to meet certain minimum regulatory capital guidelines utilizing total
capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31,
1998 the Company's ratio of total capital-to-risk-weighted assets was 14.45%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
exposure into account in assessing capital adequacy, and encourage the holding
of liquid, low-risk assets. At least one-half of


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the minimum total capital must be comprised of Tier 1 Capital elements. Tier 1
Capital of the Company is comprised of common shareholders' equity. The core
deposit intangibles and goodwill of $43,692,000 booked in connection with all
the financial institution acquisitions of the Company are deducted from the sum
of core capital elements when determining the capital ratios of the Company.

      In addition, the FRB has established minimum leverage ratio guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
Tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to
three percent for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank holding companies
will generally be required to maintain a leverage ratio of at least four to five
percent. The Company's leverage ratio at December 31, 1998 was 6.50 percent. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the FRB will
continue to consider a "tangible tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The FRB has
not advised the Company of any specific minimum leverage ratio or tangible tier
1 leverage ratio applicable to it.

      Each of the Company's bank subsidiaries is subject to similar capital
requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a
leverage ratio in excess of five percent as of December 31, 1998. As of that
date, the federal banking agencies had not advised any of the bank subsidiaries
of any specific minimum leverage ratio applicable to it.

      Effective December 19, 1992, the federal bank regulatory agencies adopted
regulations which mandate a five-tier scheme of capital requirements and
corresponding supervisory actions to implement the prompt corrective action
provisions of FDICIA. The regulations include requirements for the capital
categories that will serve as benchmarks for mandatory supervisory actions.
Under the regulations, the highest of the five categories would be a well
capitalized institution with a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution
would be prohibited from declaring any dividends, making any other capital
distribution or paying a management fee if the capital ratios drop below the
levels for an adequately capitalized institution, which are 8%, 4% and 4%,
respectively. The corresponding provisions of FDICIA mandate corrective actions
be taken if a bank is undercapitalized. Based on the Company and each of the
bank subsidiaries capital ratios as of December 31, 1998, the Company and each
of the bank subsidiaries were classified as "well capitalized" under the
applicable regulations.

      In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997, the federal banking agencies jointly adopted
regulations that amend the risk-based capital standards to incorporate measures
for market risk. Applicable banking institutions will be required to adjust
their risk-based capital ratio to reflect market risk. On December 19, 1996, the
FFIEC revised the Uniform Financial Institutions Rating System


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commonly referred to as the CAMEL rating system. A sixth component addressing
sensitivity to market risk was added. Sensitivity to market risk reflects the
degree to which changes in interest rates, foreign exchange rates, commodity
prices or equity prices can adversely affect a financial institution's earnings
or economic capital.

      STATE ENFORCEMENT POWERS. The Banking Commissioner of Texas may determine
to close a Texas state bank when she finds that the interests of depositors and
creditors of a state bank are jeopardized through its insolvency or imminent
insolvency and that it is in the best interest of such depositors and creditors
that the bank be closed. The Texas DOB also has broad enforcement powers over
the Bank, including the power to impose orders, remove officers and directors,
impose fines and appoint supervisors and conservators.

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

      TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act ("Act")
became effective and the Texas Banking Code of 1943 was repealed. The purpose of
the Act was to modernize and streamline the Texas banking laws. One of the many
significant provisions of the Act adopts by reference the Texas Business
Corporation Act, subject to modification by the Banking Commissioner. Among
other matters, these corporate provisions will permit Texas state banks to merge
with non-banking business entities, while national banks are only permitted to
merge with banking entities. During 1997, the Texas Constitution was amended to
permit home equity lending in Texas effective January 1, 1998 and the Company's
bank subsidiaries are currently offering home equity loans.

      CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required to
assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The FDIC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. Each bank subsidiary
received either an "outstanding" or "satisfactory" CRA rating in its most
recently completed examination. Further, there are fair lending laws which
prohibit discrimination in connection with lending decisions.

      CONSUMER LAWS. In addition to the laws and regulations discussed herein,
the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set
forth herein is not

                                         11
<PAGE>
exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
among others. These laws and regulations mandate certain disclosure requirements
and regulate the manner in which financial institutions must deal with customers
when taking deposits or making loans to such customers. The Bank must comply
with the applicable provisions of these consumer protection laws and regulations
as part of their ongoing customer relations.

      AFFILIATE TRANSACTIONS. The Company, IBC and the other bank subsidiaries
of the Company are "affiliates" within the meaning of Section 23A of the Federal
Reserve Act which sets forth certain restrictions on loans and extensions of
credit between a bank subsidiary and affiliates, on investments in an
affiliate's stock or other securities, and on acceptance of such stock or other
securities as collateral for loans. Such restrictions prevent a bank holding
company from borrowing from any of its bank subsidiaries unless the loans are
secured by specific obligations. Further, such secured loans and investments by
a bank subsidiary are limited in amount, as to a bank holding company or any
other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to
the bank holding company and its affiliates, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Certain restrictions do not apply to 80% or
more owned sister banks of bank holding companies. Each bank subsidiary of the
Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act
requires that the terms of affiliate transactions be comparable to terms of
similar non-affiliate transactions.

      INSIDER LOANS. The restrictions on loans to directors, executive officers,
principal shareholders and their related interests (collectively referred to
herein as "insiders") contained in the Federal Reserve Act and Regulation O
apply to all insured institutions and their subsidiaries and holding companies.
These restrictions include limits on loans to one borrower and conditions that
must be met before such a loan can be made. There is also an aggregate
limitation on all loans to insiders and their related interests. These loans
cannot exceed the institution's total unimpaired capital and surplus, and the
FDIC may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.

      LENDING RESTRICTIONS. The operations of the Banks are also subject to
lending limit restrictions pertaining to the extension of credit and making of
loans to one borrower. The scope and requirements of such laws and regulations
have been expanded significantly in recent years. Further, under the BHCA and
the regulations of the FRB thereunder, the Company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements with respect to any
extension of credit or provision of property or services; however, recently the
FRB adopted a rule relaxing tying restrictions by permitting a bank holding
company to offer a discount on products or services if a customer obtains other
products or services from such company.

      DIVIDENDS. The ability of the Company to pay dividends is largely
dependent on the amount of cash derived from dividends declared by its bank
subsidiaries. The payment of dividends by any bank or bank holding company is
affected by the requirement to maintain adequate capital as discussed above. At
December 31, 1998 there was an aggregate of approximately $38,208,000 available
for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata
and IBC Brownsville under the applicable



                                         12
<PAGE>
restrictions, assuming that each of such banks continues to be classified as
"well capitalized". Further, the Company could expend the entire $38,208,000 and
continue to be classified as "well capitalized". Note 17 of notes to
Consolidated Financial Statements of the Company located on page 35 of the 1998
Annual Report is incorporated herein by reference.

      POWERS. As a result of FDICIA, the authority of the FDIC over
state-chartered banks was expanded. FDICIA limits state-chartered banks to only
those principal activities permissible for national banks, except for other
activities specifically approved by the FDIC. The new Texas Banking Act includes
a parity provision which establishes procedures for state banks to notify the
Banking Commissioner if the bank intends to conduct any activity permitted for a
national bank that is otherwise denied to a state bank. The Banking Commissioner
has thirty (30) days to prohibit the activity.

      During 1996, the Office of the Comptroller of the Currency (the "OCC")
adopted a major overhaul of its rules governing corporate applications,
practices, and notices. The new rule incorporates a risk-based approach to
corporate applications and activities of national banks. The new rule includes
authority for operating subsidiaries to conduct for the first time activities
beyond those permitted for national banks directly. Under the new rule, an
operating subsidiary engaged in activities not permissible for the parent bank
must observe certain separateness requirements. National banks must file
applications for prior OCC approval to establish, or acquire, operating
subsidiaries engaged in activities that are not permissible for the parent bank
and the OCC may grant such approval on a case by case basis. Pursuant to the
Texas parity provision, a Texas state bank may be permitted to engage in such
activities permitted for national banks if notice is provided to the Banking
Commissioner and the Banking Commissioner does not prohibit the activity.

      SUBCHAPTER S. As part of the Small Business Job Protection Act of 1996,
financial institutions are now eligible to make an S election for federal income
tax purposes. To qualify as an S corporation, a financial institution must (i)
not use the reserve method of accounting for bad debts, (ii) have only one class
of stock, (iii) have no more than seventy-five shareholders, and (iv) have no
foreign shareholders. The Company currently does not qualify for the S election.

      INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and the bank subsidiaries in substantial
and unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.

YEAR 2000

      This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third party,


                                         13
<PAGE>
and regulatory uncertainties and other contingencies, many of which are beyond
the control of the Company. In addition, these forward-looking statements are
based upon the Company's current internal assessments and remediation plans,
incorporating certain representations of third-party servicers, and are subject
to change. Accordingly, there can be no assurance that the Company's results of
operations will not be adversely affected by difficulties or delays in the
Company's or third parties' Year 2000 readiness efforts.

      Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.

      The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan consists of a five-phase program ("Action Plan")
recommended by the Federal Financial Institutions Examination Council. This
Action Plan consists of awareness, assessment, renovation, validation and
implementation processes. The Action Plan provides for addressing critical and
noncritical issues, with the assignment of responsibility and target dates for
completion, and as of December 31, 1998, the Company was principally involved in
the validation and implementation phases of the Action Plan. Testing of core
applications, such as mainframe software, hardware, and network applications
were substantially complete by December 31, 1998.

      Currently, the Company estimates that the dollar amount to remediate its
Year 2000 issue will be less than one million dollars. The data processing
system which the Company purchased in 1990 was substantially Year 2000
compliant. The cost of remediating the remaining Year 2000 issues are based on
management's best estimates which were derived utilizing assumptions of future
events including the continued availability of certain resources, third party
vendor remediation plans and other factors. The related costs totaled
approximately $620,000 for the year 1998. The eligible costs are being expensed
as incurred.

      The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition. However, the Year 2000 issue is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results.

      Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.


                                         14
<PAGE>
      Regardless of the Year 2000 compliance of the Company's systems, there is
no complete assurance that the Company will not be adversely affected to the
extent other entities not affiliated with the Company are unsuccessful in
properly addressing this issue. In an effort to minimize this possibility,
active communication has been ongoing between the Company and its external
service providers and intermediaries. In addition, a risk reduction program was
initiated in 1998 that addresses potential Year 2000 exposure in the loan
portfolio. Correspondence has been sent by the Company to customers and
suppliers during 1998 urging them to adequately address their Year 2000 issues,
and such communication is planned to continue throughout 1999. However, there
can be no guarantee that customers and suppliers will become Year 2000 compliant
on a timely basis or in a manner that is compatible with the Company's systems.
Significant business interruptions or failures by key business customers,
suppliers, trading partners or governmental agencies resulting from the effects
of the Year 2000 issue could have a material adverse effect on the Company.

      The Company currently has in place a remediation and contingency plan in
the event an application has unresolved Year 2000 issues as well as a disaster
recovery plan in the event of an unforeseen interruption in the Company's data
processing capabilities. These plans focus on an application-by-application
strategy that would be implemented in the event of Year 2000 related problems in
particular applications, which strategies include, among others, the replacement
of the faulty application as well as strategies to be employed should the
Company suffer an area wide interruption of data processing capabilities due to
loss of power or communications or a similar failure, which strategies would
include, among others, alternate processing facilities.

      While the Company will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Company will not be adversely affected in the
event of a prolonged disruption or failure.

      Additionally, there can be no assurance that the banking or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of the Company's Action Plan.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

      The main areas in which the Company has directed its lendable assets are
(i) commercial, financial and industrial loans; (ii) real estate loans; and
(iii) loans to individuals for household, family and other consumer
expenditures. The relationship that these three categories of loans bear to the
total assets of the Company and other detailed statistical information about the
business of the Company are presented on the following pages.


                                         15
<PAGE>
          DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

      The following table sets forth a comparative summary of average interest
earning assets and average interest bearing liabilities and related interest
yields for the years ended December 31, 1998, 1997 and 1996 (Dollars in
Thousands) (Note 1). Nonaccrual loans have been included in assets for the
purpose of this analysis:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,       
                                       --------------------------------------------------------------------------------
                                                         1998                                       1997                 
                                       ---------------------------------------    -------------------------------------  
                                         AVERAGE                     AVERAGE       AVERAGE                     AVERAGE   
                                         BALANCE      INTEREST      RATE/COST      BALANCE        INTEREST    RATE/COST  
                                         -------      --------      ---------      -------        --------    ---------  
   ASSETS
<S>                                    <C>           <C>                 <C>      <C>            <C>            <C>      
Interest earning assets:
   Loans, net of unearned discounts:
     Domestic ......................   $ 1,351,796   $   133,221         9.86%    $ 1,152,566    $  115,527     10.02%   
     Foreign .......................       141,869        11,795         8.31         128,923        11,821      9.17    
   Investment securities:                                                                                                
     Taxable .......................     2,771,927       179,030         6.46       2,121,927       146,820      6.92    
     Tax-exempt ....................         4,824           241         5.00           1,348            90      6.68    
   Time deposits with banks ........         1,005            89         8.86             404            47     11.63    
   Federal funds sold ..............        22,738         1,462         6.43          14,906         1,120      7.51    
   Other ...........................         2,686           336        12.51           2,565           307     11.97    
                                       -----------   -----------                  -----------    ----------              
     Total interest-earning assets .   $ 4,296,845   $   326,174         7.59     $ 3,422,639    $  275,732      8.06    
                                                                                                                         
Non-interest earning assets:                                                                                             
   Cash and due from banks .........   $   131,539                                $   144,573                            
   Bank premises and equipment, net        134,152                                    105,800                            
   Other assets ....................       132,620                                    117,381                            
   Less allowance for possible                                                                                           
     loan losses ...................       (25,837)                                   (23,075)                           
                                       -----------                                -----------                            
     Total .........................   $ 4,669,319                                $ 3,767,318                            
                                       ===========                                ===========                            
   LIABILITIES AND                                                                                                       
   SHAREHOLDERS' EQUITY                                                                                                  
                                                                                                                         
Interest bearing liabilities:                                                                                            
   Savings and interest bearing                                                                                          
     demand deposits ...............   $   867,594   $    26,419         3.05%    $   722,559    $   22,152      3.07%   
   Time deposits:                                                                                                        
     Domestic ......................     1,009,000        53,230         5.28         905,157        46,456      5.13    
     Foreign .......................       964,459        48,593         5.04         821,214        42,957      5.23    
   Securities sold under                                                                                                 
     repurchase agreements and                                                                                           
     federal funds purchased .......       257,589        13,396         5.20         301,511        15,754      5.23    
   Other borrowings ................       751,628        39,969         5.32         331,308        18,052      5.45    
   Other ...........................         2,664           302        11.34            --            --        --      
                                       -----------   -----------                  -----------    ----------              
     Total interest bearing                                                                                              
       liabilities .................   $ 3,852,934   $   181,909         4.72     $ 3,081,749    $  145,371      4.72    
Non-interest bearing liabilities:                                                                                        
   Demand deposits .................       433,863                                    361,379                            
   Other liabilities ...............        35,532                                     26,261                            
Shareholders' equity ...............       346,990                                    297,929                            
                                       -----------                                -----------                            
     Total .........................   $ 4,669,319                                $ 3,767,318                            
                                       ===========                                ===========            
          Net interest income ......                 $   144,265                                 $  130,361              
                                                     ===========                                 ==========              
          Net yield on interest                                                                                          
            earning assets .........                                     3.36%                                   3.81%   
                                                                        =====                                   =====    
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                       --------------------------------------
                                                         1996
                                        -------------------------------------
                                           AVERAGE                  AVERAGE
                                           BALANCE     INTEREST    RATE/COST
<S>                                     <C>            <C>            <C>   
   ASSETS

Interest earning assets:
   Loans, net of unearned discounts:
     Domestic ......................    $ 1,073,524    $ 108,852      10.14%
     Foreign .......................        126,067       10,331       8.19
   Investment securities:                                         
     Taxable .......................      1,449,211       99,411       6.86
     Tax-exempt ....................         23,916        1,292       5.40
   Time deposits with banks ........            708           53       7.49
   Federal funds sold ..............         32,369        1,540       4.76
   Other ...........................          2,576          300      11.65
                                        -----------    ---------
     Total interest-earning assets .    $ 2,708,371    $ 221,779       8.19
                                                                  
Non-interest earning assets:                                      
   Cash and due from banks .........    $    94,972
   Bank premises and equipment, net          85,584
   Other assets ....................         89,450
   Less allowance for possible                                    
     loan losses ...................        (19,866)
                                        -----------
     Total .........................    $ 2,958,511
                                        ===========
   LIABILITIES AND                                                
   SHAREHOLDERS' EQUITY                                           
                                                                  
Interest bearing liabilities:                                     
   Savings and interest bearing                                   
     demand deposits ...............    $   617,090    $  18,390       2.98%
   Time deposits:                                                 
     Domestic ......................        645,782       32,065       4.97
     Foreign .......................        748,343       37,652       5.03
   Securities sold under                                          
     repurchase agreements and                                    
     federal funds purchased .......        236,223       12,151       5.14
   Other borrowings ................        137,404        7,114       5.18
   Other ...........................           --           --         --
                                        -----------    ---------
     Total interest bearing                                       
       liabilities .................    $ 2,384,842    $ 107,372       4.50
Non-interest bearing liabilities:                                 
   Demand deposits .................        297,539
   Other liabilities ...............         21,927
Shareholders' equity ...............        254,203
                                        -----------
     Total .........................    $ 2,958,511
                                        ===========                         
          Net interest income ......                   $ 114,407
                                                       =========
          Net yield on interest                                   
            earning assets .........                                   4.22%
                                                                      =====
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.


                                       16
<PAGE>
                      INTEREST RATES AND INTEREST DIFFERENTIAL


     The following table analyzes the changes in net interest income during 1998
and 1997 and the relative effect of changes in interest rates and volumes for
each major classification of interest earning assets and interest-bearing
liabilities. Nonaccrual loans have been included in assets for the purpose of
this analysis, which reduces the resulting yields (Note 1):

<TABLE>
<CAPTION>
                                             1998 COMPARED TO 1997              1997 COMPARED TO 1996
                                      --------------------------------    --------------------------------
                                            NET INCREASE (DECREASE)            NET INCREASE (DECREASE)
                                                    DUE TO                              DUE TO
                                      --------------------------------    --------------------------------
                                       VOLUME        RATE       TOTAL      VOLUME        RATE       TOTAL
                                      --------    ---------   --------    --------    ---------   --------
                                            (Dollars in Thousands)            (Dollars in Thousands)
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>     
Interest earned on:
  Loans, net of unearned discounts:
    Domestic ......................   $ 19,574    $ (1,880)   $ 17,694    $  7,970    $ (1,295)   $  6,675
    Foreign .......................      1,133      (1,159)        (26)        237       1,253       1,490
  Investment securities:
    Taxable .......................     42,507     (10,297)     32,210      46,532         877      47,409
    Tax-exempt ....................        179         (28)        151      (1,450)        248      (1,202)
  Time deposits with banks ........         55         (13)         42         (28)         22          (6)
  Federal funds sold ..............        521        (179)        342      (1,062)        642        (420)
  Other ...........................         15          14          29          (1)          8           7
                                      --------    --------    --------    --------    --------    --------

  Total interest income ...........   $ 63,984    $(13,542)   $ 50,442    $ 52,198    $  1,755    $ 53,953
                                      --------    --------    --------    --------    --------    --------

Interest incurred on:
  Savings and interest
    bearing demand deposits .......   $  4,413    $   (146)   $  4,267    $  3,197    $    565    $  3,762
  Time deposits:
    Domestic ......................      5,398       1,376       6,774      13,323       1,068      14,391
    Foreign .......................      7,247      (1,611)      5,636       3,767       1,538       5,305
  Securities sold under
    repurchase agreements and
    federal funds purchased .......     (2,269)        (89)     (2,358)      3,388         215       3,603
  Other borrowings ................     22,358        (441)     21,917      10,548         390      10,938
  Other ...........................        302        --           302        --          --          --
                                      --------    --------    --------    --------    --------    --------

  Total interest expense ..........   $ 37,449    $   (911)   $ 36,538    $ 34,223    $  3,776    $ 37,999
                                      --------    --------    --------    --------    --------    --------

Net interest income ...............   $ 26,535    $(12,631)   $ 13,904    $ 17,975    $ (2,021)   $ 15,954
                                      ========    ========    ========    ========    ========    ========
</TABLE>

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


                                       17
<PAGE>
                              INTEREST RATE SENSITIVITY

     The net interest rate sensitivity as of December 31, 1998 is illustrated in
the following table. This information reflects the balances of assets and
liabilities whose rates are subject to change. As indicated in the table, the
Company is liability sensitive during the early time periods and is asset
sensitive in the longer periods. The table shows the sensitivity of the balance
sheet at one point in time and is not necessarily indicative of the position at
future dates.

<TABLE>
<CAPTION>
                                     RATE/MATURITY      RATE/MATURITY      RATE/MATURITY       RATE/MATURITY
DECEMBER 31, 1998                       3 MONTHS        OVER 3 MONTHS       OVER 1 YEAR            OVER
(DOLLARS IN THOUSANDS)                  OR LESS           TO 1 YEAR          TO 5 YEARS           5 YEARS              TOTAL
================================================================================================================================
SECTION A
--------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>                 <C>                 <C>              
RATE SENSITIVE ASSETS
FEDERAL FUNDS SOLD ...............   $    26,000                --                  --                  --          $    26,000
DUE FROM BANK INTEREST EARNING ...           284               1,089                --                  --                1,373
INVESTMENT SECURITIES ............       375,673             499,617           1,609,580             523,007          3,007,877
LOANS, NET OF NON-ACCRUALS .......     1,165,399             114,420             232,097             105,910          1,617,826
--------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS .............   $ 1,567,356         $   615,126         $ 1,841,677         $   628,917        $ 4,653,076
--------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........   $ 1,567,356         $ 2,182,482         $ 4,024,159         $ 4,653,076      


================================================================================================================================
SECTION B                                                                                                         
--------------------------------------------------------------------------------------------------------------------------------

RATE SENSITIVE LIABILITIES                                                                                        
                                                                                                                  
TIME DEPOSITS ....................   $   922,423         $   825,529         $   259,556         $       309        $ 2,007,817
OTHER INTEREST BEARING DEPOSITS ..     1,112,382                --                  --                  --            1,112,382
FED FUNDS PURCHASED AND REPOS ....        63,988              60,911              10,801                --              135,700
OTHER BORROWINGS .................     1,074,000                --                  --                  --            1,074,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES   $ 3,172,793         $   886,440         $   270,357         $       309        $ 4,329,899
--------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES .   $ 3,172,793         $ 4,059,233         $ 4,329,590         $ 4,329,899      


================================================================================================================================
SECTION C                                                                                                         
--------------------------------------------------------------------------------------------------------------------------------

REPRICING GAP ....................   $(1,605,437)        $  (271,314)        $ 1,571,320         $   628,608        $   323,177
CUMULATIVE REPRICING GAP .........    (1,605,437)         (1,876,751)           (305,431)            323,177            323,177
RATIO OF INTEREST-SENSITIVE                                                                                       
   ASSETS TO LIABILITIES .........           .49                 .69                6.81                --                 1.08
RATIO OF CUMULATIVE, INTEREST-                                                                                    
   SENSITIVE ASSETS TO LIABILITIES           .49                 .54                 .93               1.08
================================================================================================================================
</TABLE>

                                         18

<PAGE>
                                INVESTMENT SECURITIES

      The following table sets forth the carrying value of investment securities
as of December 31, 1998, 1997 and 1996:


                                          YEARS ENDED DECEMBER 31,
                                 -----------------------------------------
                                     1998           1997           1996
                                 ----------     -----------    -----------
                                          (Dollars in Thousands)
U.S. Treasury securities      
  Available for sale .........   $  207,688     $  202,123     $    5,020
Mortgage-backed securities
  Available for sale .........    2,551,395      2,347,722      1,734,484
Obligations of states and
 political subdivisions
  Held to maturity ...........          518            695            858
  Available for sale .........       28,200            520          1,014
Equity securities
  Available for sale .........       62,995         30,383         16,201
Other securities
  Held to maturity ...........        1,990          2,015          1,990
  Available for sale .........      155,091           --             --
                                 ----------     ----------     ----------

      Total ..................   $3,007,877     $2,583,458     $1,759,567
                                 ==========     ==========     ==========

     The following tables set forth the contractual maturities of investment
securities at December 31, 1998 and the average yields of such securities,
except for the totals which reflect the weighted average yields. Actual
maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties.

<TABLE>
<CAPTION>
                                                                 AVAILABLE FOR SALE
                                                                      MATURING
                        =========================================================================================================
                                                        AFTER ONE                  AFTER FIVE
                                 WITHIN                 BUT WITHIN                 BUT WITHIN                      AFTER
                                ONE YEAR                FIVE YEARS                  TEN YEARS                    TEN YEARS
                        ----------------------    -----------------------   ---------------------------    ----------------------
                                ADJUSTED                 ADJUSTED                    ADJUSTED                     ADJUSTED
                            COST       YIELD         COST        YIELD         COST            YIELD          COST         YIELD
                        ----------   ---------    ----------   ----------   ----------      -----------    -----------   --------
                                                               (Dollars in Thousands)
<S>                     <C>             <C>       <C>                       <C>                  <C>       <C>             <C>  
U.S. Treasury and
  obligations of
  other U.S. Govern-
  agencies ..........   $    1,490      5.69%     $     --           -%     $   12,500           7.30%     $  193,553      6.72%
Mortgage-backed                                                                                            
  securities ........       22,642      6.52         269,442      7.22         320,268           7.56       1,922,515      6.99
Obligations of states                                                                                      
  and political                                                                                            
  subdivisions ......         --         --              538      5.81             479           7.70          27,217      5.15
Other securities ....         --         --             --                                        --          158,916      6.00
Equity securities ...       62,276      5.75            --         --               --            --              --        --
                        ----------                -----------               ----------                     ----------
                                                                                                           
          Total .....   $   86,408      5.95%     $  269,980      7.22%     $  333,247           7.55%     $2,302,201      6.88%
                        ==========                ==========                ==========                     ==========
</TABLE>

                                         19
<PAGE>
<TABLE>
<CAPTION>
                                                        HELD TO MATURITY
                                                            MATURING
                        -----------------------------------------------------------------------------
                                                 AFTER ONE           AFTER FIVE
                              WITHIN             BUT WITHIN          BUT WITHIN            AFTER
                             ONE YEAR            FIVE YEARS           TEN YEARS          TEN YEARS
                        -----------------    -----------------    -----------------   ---------------
                             ADJUSTED             ADJUSTED             ADJUSTED           ADJUSTED
                          COST      YIELD     COST       YIELD     COST      YIELD     COST    YIELD
                        -------    ------   --------   -------    -------   -------   ------  -------
                                                      (Dollars in Thousands)
<S>                     <C>         <C>      <C>         <C>      <C>                  <C>           
Obligations of states
  and political
  subdivisions ......   $  140      8.50%    $  378      8.93%    $  --          -%    $ --       -% 
Other securities ....        5      6.75      1,825      8.10        160      6.76       --      --
                        ------               ------               ------               ----
         Total ......   $  145      8.44%    $2,203      8.24%    $  160      6.76%    $ --       -%
                        ======               ======               ======               ====
</TABLE>

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

                                   LOAN PORTFOLIO

     The amounts of loans outstanding, by classification, at December 31, 1998,
1997, 1996, 1995 and 1994 are shown in the following table:

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                           -----------------------------------------------------------------------
                                1998          1997           1996           1995           1994
                           -----------    -----------    -----------    -----------    -----------
                                                    (Dollars in Thousands)
<S>                        <C>            <C>            <C>            <C>            <C>        
Commercial, financial
  and agricultural .....   $   896,060    $   800,964    $   723,061    $   722,274    $   668,359
Real estate-mortgage ...       215,689        188,122        193,101        200,998        201,998
Real estate-construction        94,374         59,239         32,610         39,527         46,584
Consumer ...............       250,917        272,478        161,594        124,843        122,751
Foreign ................       166,324        130,401        128,932        120,748        106,707
                           -----------    -----------    -----------    -----------    -----------
     Total loans .......     1,623,364      1,451,204      1,239,298      1,208,390      1,146,399
Unearned discount ......        (8,025)        (6,508)        (3,303)        (3,479)        (3,885)
                           -----------    -----------    -----------    -----------    -----------
     Loans, net of
unearned discount ......   $ 1,615,339    $ 1,444,696    $ 1,235,995    $ 1,204,911    $ 1,142,514
                           ===========    ===========    ===========    ===========    ===========
</TABLE>

     The table on the following page shows the amounts of loans (excluding real
estate mortgages and consumer loans) outstanding as of December 31, 1998 which,
based on remaining scheduled repayments of principal, are due in the years
indicated. Also, the amounts due after one year are classified according to the
sensitivity to changes in interest rates:


                                       20
<PAGE>
                                                  MATURING
                             -------------------------------------------------
                                          AFTER ONE
                                WITHIN    BUT WITHIN     AFTER
                               ONE YEAR   FIVE YEARS   FIVE YEARS      TOTAL
                             ----------   ----------   ----------   ----------
                                               (Dollars in Thousands)

Commercial, financial and
  agricultural ...........   $  321,101   $  460,414   $  114,545   $  896,060
Real estate - construction       50,977       40,205        3,192       94,374
Foreign ..................       79,784       75,370       11,170      166,324
                             ----------   ----------   ----------   ----------

          Total ..........   $  451,862   $  575,989   $  128,907   $1,156,758
                             ==========   ==========   ==========   ==========


                                                INTEREST SENSITIVITY
                                              -----------------------
                                                FIXED       VARIABLE
                                                RATE          RATE
                                              --------      ---------
                                              (Dollars in Thousands)

Due after one but within five years .....     $116,601       $459,388
Due after five years ....................       41,213         87,694
                                              --------       --------

          Total .........................     $157,814       $547,082
                                              ========       ========

     The following table presents information concerning the aggregate amount of
non-accrual, past due and restructured domestic loans; certain loans may be
classified in one or more category:
                                            YEARS ENDED DECEMBER 31,
                                  -------------------------------------------
                                   1998     1997     1996     1995     1994
                                  ------   ------   ------   ------   -------
                                          (Dollars in Thousands)
Loans accounted for on
  a non-accrual basis ..........  $4,868   $5,014   $3,363   $5,291   $2,895
Loans contractually past
  due ninety days or more
  as to interest or prin-
  cipal payments ...............   8,543    9,700    5,075    7,954    5,605
Loans accounted for as
  "troubled debt restruc-
  turings" .....................     592      363    1,462    2,742    1,990

     The following table presents information concerning the aggregate amount of
non-accrual and past due foreign loans extended to persons or entities in Mexico
or to the Mexican Government, certain loans may be classified in one or more
category:

                                           YEARS ENDED DECEMBER 31,
                                 ------------------------------------------
                                   1998    1997     1996     1995     1994
                                 -------  -------  ------   -------  ------
                                              (Dollars in Thousands)
Loans accounted for on
  a non-accrual basis .........  $  670   $  728   $1,062   $  942   $  732
Loans contractually past
  due ninety days or more
  as to interest or prin-
  cipal payments ..............     242    2,096    1,321      944    1,086



                                         21
<PAGE>
     The gross income that would have been recorded during 1998 on non-accrual
and restructured loans in accordance with their original contract terms was
$632,000 on domestic loans and $76,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1998 was $6,000 on domestic loans
and none for foreign loans.

     The non-accrual loan policy of the bank subsidiaries is to discontinue the
accrual of interest on loans when management determines that it is probable that
future interest accruals will be uncollectible. Interest income on non-accrual
loans is recognized only to the extent payments are received or when, in
management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals. Under special circumstances, a loan may be
more than 90 days delinquent as to interest or principal and not be placed on
non-accrual status. When any of the above occurs, loan officers are required to
recommend placing a loan on non-accrual status by sending a memo to the senior
loan officer who gives instructions to the commercial note teller that the loan
is on non-accrual status. When a loan is placed on non-accrual status, any
interest accrued but not paid is reversed and charged to operations against
interest income.

     The preceding tables indicate that there are certain loans technically past
due 90 days or more on performing status. This situation generally results when
a bank subsidiary has a borrower who is experiencing financial difficulties but
not to the extent that requires a restructuring of indebtedness. The majority of
this category is composed of loans that are considered to be adequately secured
and/or for which there has been a recent payment.

     The Company believes, after reviewing each bank subsidiary's loan
portfolio, that the majority of the loans with a loss potential have been
included under the categories of past due and non-accrual. Adjustments to the
loan loss allowance have been made for other credits that may have
characteristics indicating a potential for future non-performing status and some
possible loss.

     The following table presents certain information about cross-border
outstanding loans, acceptances, and accrued interest thereon, related to Mexico:

                                                   YEARS ENDED DECEMBER 31,
                                            -----------------------------------
                                               1998         1997         1996
                                            ---------    ---------    ---------
                                                (Dollars in Thousands)
Loans:
  Commercial, financial, industrial
    and agricultural ....................   $ 135,328    $  91,945    $  86,861
  Real estate-mortgage ..................       8,133       18,416       20,591
  Consumer ..............................      22,863       20,040       21,480
                                            ---------    ---------    ---------

                                              166,324      130,401      128,932

   Less allowance for possible
    loan losses .........................      (1,124)      (1,184)      (1,101)
                                            ---------    ---------    ---------

           Net loans ....................   $ 165,200    $ 129,217    $ 127,831
                                            =========    =========    =========

Accrued interest receivable .............   $   1,327    $   1,198    $   1,317
                                            =========    =========    =========


                                         22
<PAGE>
                           SUMMARY OF LOAN LOSS EXPERIENCE

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

<TABLE>
<CAPTION>
                                                              AT YEARS ENDED DECEMBER 31,
                                    ---------------------------------------------------------------------------
                                        1998           1997             1996            1995            1994
                                    -----------     -----------     -----------     -----------     -----------
                                                              (Dollars in Thousands)
<S>                                 <C>             <C>             <C>             <C>             <C>        
Loans, net of unearned discounts,
  outstanding at December 31, ...   $ 1,615,339     $ 1,444,696     $ 1,235,995     $ 1,204,911     $ 1,142,514
                                    ===========     ===========     ===========     ===========     ===========
Average loans outstanding during
  the year (Note 1) .............   $ 1,493,664     $ 1,281,489     $ 1,199,591     $ 1,202,136     $ 1,055,246
                                    ===========     ===========     ===========     ===========     ===========
Balance of allowance
  at January 1, .................   $    24,516     $    21,036     $    18,455     $    17,025     $    13,831
Provision charged to expense ....         8,571           7,740           6,630           5,150           3,804
                                    -----------     -----------     -----------     -----------     -----------

Loans charged-off:
  Domestic:
  Commercial, financial
   and agricultural .............        (2,180)         (1,503)         (1,518)         (2,248)         (1,073)
  Real estate-mortgage ..........          (157)           (279)           (261)           (619)           (685)
  Consumer ......................        (6,483)         (4,552)         (3,363)         (1,849)           (816)
  Foreign .......................           (65)             (2)            (23)            (48)           (148)
                                    -----------     -----------     -----------     -----------     -----------

Total loans charged-off .........        (8,885)         (6,336)         (5,165)         (4,764)         (2,722)
                                    -----------     -----------     -----------     -----------     -----------


Recoveries credited to allowance:
  Domestic:
  Commercial, financial
    and agricultural ............           795             270             305             190             236
  Real estate mortgage ..........            18             382              51              80             968
  Consumer ......................           531             250             755             229             237
  Foreign .......................             5              95               5             110             227
                                    -----------     -----------     -----------     -----------     -----------
Total recoveries ................         1,349             997           1,116             609           1,668
                                    -----------     -----------     -----------     -----------     -----------

Net loans charged-off: ..........        (7,536)         (5,339)         (4,049)         (4,155)         (1,054)
                                    -----------     -----------     -----------     -----------     -----------

Allowance acquired in purchase
  transactions ..................          --             1,079            --               435             444
                                    -----------     -----------     -----------     -----------     -----------
Balance of allowance
  at December 31, ...............   $    25,551     $    24,516     $    21,036     $    18,455     $    17,025
                                    ===========     -----------     -----------     -----------     -----------

Ratio of net loans charged-off
  during the year to average
  loans outstanding during
  the year (Note 1) .............           .50%            .42%            .34%            .35%            .10%
                                    ===========     ===========     ===========     ===========     ===========
Ratio of allowance to loans, net
  of unearned discounts, out-
  standing at December 31, ......          1.58%           1.70%           1.70%           1.53%           1.49%
                                    ===========     ===========     ===========     ===========     ===========
</TABLE>

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


                                       23
<PAGE>
    Each bank subsidiary has always provided an amount for possible loan losses
sufficient both to cover net loan losses sustained and to maintain an
appropriate balance in the allowance for possible loan losses that considers the
element of risk which is estimated to be present in outstanding loans. The
aggregate allowance for possible loan losses of all bank subsidiaries
approximated 1.58% and 1.70% of total loans of bank subsidiaries, net of
unearned income, for December 31, 1998 and 1997, respectively.

    The amount charged against 1998 earnings and the other years presented as a
provision for possible loan losses was the sum required to bring the allowance
to the point which management of each bank subsidiary considers adequate to
cover potential loan losses. Such a determination is based on a continual and
conservative review process of the loan portfolio performed by senior officers
of each bank subsidiary who consider certain factors, including but not limited
to, previous loss experience in portfolio segments and assessment of current
economic conditions.

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

<TABLE>
<CAPTION>
                                                                 AT DECEMBER 31,                                               
                ------------------------------------------------------------------------------------------------------------------
                         1998                    1997                  1996                    1995                   1994
                ---------------------  ---------------------   --------------------   ----------------------  --------------------
                             PERCENT                PERCENT                PERCENT                  PERCENT               PERCENT  
                ALLOWANCE    OF LOANS  ALLOWANCE    OF LOANS   ALLOWANCE   OF LOANS   ALLOWANCE     OF LOANS  ALLOWANCE   OF LOANS
                ---------    --------  ---------    --------   ---------   --------   ---------     --------  ---------   --------
                                                              (Dollars in Thousands)
<S>              <C>           <C>      <C>           <C>      <C>           <C>       <C>           <C>      <C>           <C>  
Commercial,
financial and
  agricultural   $15,022       55.2%    $14,149       55.2%    $12,981       58.3%     $11,569       59.7%    $10,335       58.3%
Real estate                                                                                                   
  mortgage ...     3,616       13.3       3,323       12.9       3,467       15.6        3,219       16.6       3,123       17.6
Real estate                                                                                                   
  construction     1,582        5.8       1,047        4.1         586        2.6          633        3.3         720        4.1
Consumer .....     4,207       15.5       4,813       18.8       2,901       13.1        1,999       10.4       1,898       10.7
Foreign ......     1,124       10.2       1,184        9.0       1,101       10.4        1,035       10.0         949        9.3
                 -------      -----     -------      -----     -------      -----      -------      -----     -------      -----
                 $25,551      100.0%    $24,516      100.0%    $21,036      100.0%     $18,455      100.0%    $17,025      100.0%
                 =======      =====     =======      =====     =======      =====      =======      =====     =======      =====
</TABLE>

                                       24
<PAGE>
                                      DEPOSITS

     The average amount of deposits, based on month-end balances and interest
expense is summarized for the years indicated in the following table:


                                              For the Years ended December 31,
                                            ------------------------------------
                                                1998        1997         1996
                                            ----------   ----------   ----------
                                                    (Dollars in Thousands)
Deposits:
   Demand - non-interest bearing
          Domestic ......................   $  377,084   $  317,759   $  256,186
          Foreign .......................       56,779       43,620       41,353
                                            ----------   ----------   ----------
          Total demand non-interest
            bearing .....................      433,863      361,379      297,539
                                            ----------   ----------   ----------
   Savings and interest bearing demand
          Domestic ......................      660,870      560,956      459,451
          Foreign .......................      206,724      161,603      157,639
                                            ----------   ----------   ----------
          Total savings and interest
            bearing demand ..............      867,594      722,559      617,090
                                            ----------   ----------   ----------

   Time certificates of deposit
     $100,000 or more:
          Domestic ......................      465,789      363,471      280,550
          Foreign .......................      713,060      602,170      546,643

     Less than $100,000:
          Domestic ......................      543,211      541,686      365,232
          Foreign .......................      251,399      219,044      201,700
                                            ----------   ----------   ----------
   Total time, certificates of
       deposit ..........................    1,973,459    1,726,371    1,394,125
                                            ----------   ----------   ----------

   Total deposits .......................   $3,274,916   $2,810,309   $2,308,754
                                            ==========   ==========   ==========
Interest Expense:
   Savings and interest bearing demand
          Domestic ......................   $   21,580   $   17,559   $   14,079
          Foreign .......................        4,839        4,593        4,311
                                            ----------   ----------   ----------
   Total savings and interest
     bearing demand .....................       26,419       22,152       18,390
                                            ----------   ----------   ----------

   Time, certificates of deposit
     $100,000 or more
          Domestic ......................       24,484       19,256       14,193
          Foreign .......................       36,865       32,532       28,561
     Less than $100,000
          Domestic ......................       28,746       27,200       17,872
          Foreign .......................       11,728       10,425        9,091
                                            ----------   ----------   ----------
   Total time, certificates
     of deposit .........................      101,823       89,413       69,717
                                            ----------   ----------   ----------

   Total interest expense on deposits ...   $  128,242   $  111,565   $   88,107
                                            ==========   ==========   ==========


                                         25
<PAGE>
     Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1998 are summarized as follows:


                                                    DECEMBER 31, 1998
                                                  ----------------------
                                                  (Dollars in Thousands)
      3 months or less...........................       $  575,516
      Over 3 but through 12 months...............          491,583
      Over 12 months.............................          140,841
                                                        ----------
           Total.................................       $1,207,940
                                                        ==========


                             RETURN ON EQUITY AND ASSETS

     Certain key ratios for the Company for the years ended December 31, 1998,
1997 and 1996 follows (Note 1):

                                                 YEARS ENDED DECEMBER 31,
                                              -----------------------------
                                                1998       1997       1996
                                              -------     ------    -------
Percentage of net income to:
   Average shareholders' equity ...........    15.48%     16.41%     17.45%
   Average total assets ...................     1.15       1.30       1.50
Percentage of average shareholders'
   equity to average total assets .........     7.43       7.91       8.59
Percentage of cash dividends per share
   to net income per share ................    23.65      11.37       9.87

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

                                 FOREIGN ACTIVITIES

     Information regarding foreign activities has been provided in the preceding
sections and Note 11 of notes to consolidated financial statements located on
page 36 of the 1998 Annual Report to Shareholders which is incorporated herein
by reference.

Item 2.  PROPERTIES

      The principal offices of the Company and IBC are located at 1200 San
Bernardo Avenue, Laredo, Texas in a modern building owned and completely
occupied by the Company and IBC and containing approximately 97,000 square feet.
The bank subsidiaries of IBC have a total of 93 main banking and branch
facilities. All the facilities are customary to the banking industry. Most of
the bank subsidiaries own their banking facilities and the remainder are leased.
The facilities are located in Laredo, San Antonio, Houston, Zapata, the Rio
Grande Valley of Texas and the Coastal Bend area of Texas.

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

                                       26
<PAGE>
Item 3.  LEGAL PROCEEDINGS

     The Company and its bank subsidiaries are 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 and its subsidiaries have determined,
based on discussions with their 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 financial condition or
results of operations of the Company and its subsidiaries. However, many of
these matters are in various stages of proceedings and further developments
could cause management to revise its assessment of these matters.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Since the 1998 Annual Meeting of Shareholders of the Company held on May
21, 1998, no matter was submitted to a vote of Registrant's security holders
through the solicitation of proxies or otherwise.

Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     Certain information is set forth in the following table concerning the
executive officers of the Company, each of whom has been elected to serve until
the 1999 Annual Meeting of shareholders and until his successor is duly elected
and qualified.

<TABLE>
<CAPTION>
                                                                          OFFICER OF 
                                                                          THE COMPANY 
     NAME                   AGE          POSITION OF OFFICE               OR IBC SINCE
   -------                 -----         ------------------              --------------
<S>                          <C>                                              <C> 
Dennis E. Nixon              56          Chairman of the Board and            1979
                                         President of the Company,
                                         Chief Executive Officer of IBC

Leonardo Salinas             65          Vice President of the Company        1982
                                         and Senior Executive Vice
                                         President of IBC

R. David Guerra              46          Vice President of the Company        1986
                                         and President of IBC McAllen
                                         Branch

Imelda Navarro               41          Treasurer of the Company             1982
                                         and Senior Executive Vice
                                         President of IBC
</TABLE>

There are no family relationships among any of the named persons. Each executive
officer has held the same position or another executive position with the
Company or IBC during the past five years.


                                         27
<PAGE>
                                       PART II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
            MATTERS

     The information set forth under the caption "Common Stock and Dividends"
located on page 11 and 12 of Registrant's 1998 Annual Report is incorporated
herein by reference.

Item 6.  SELECTED FINANCIAL DATA

     The information set forth under the caption "Selected Financial Data"
located on page 1 of Registrant's 1998 Annual Report is incorporated herein by
reference.

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

     The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" located on pages 2
through 12 of Registrant's 1998 Annual Report is incorporated herein by
reference.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The information set forth under the caption "Liquidity and Capital
Resources" located on pages 5 and 6 of the Registrant's 1998 Annual Report is
incorporated herein by reference.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements located on pages 14 through 18 of
Registrant's 1998 Annual Report are incorporated herein by reference.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

     None.
                                      PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     There is incorporated in this Item 10 by reference (i) that portion of the
Company's definitive proxy statement dated April 15, 1999 entitled "Election of
Directors" and (ii) Item 4A of this report entitled "Executive Officers of the
Registrant."

Item 11. EXECUTIVE COMPENSATION

     There are incorporated in this Item 11 by reference those portions of the
Company's definitive proxy statement dated April 15, 1999 entitled "Executive
Compensation"; provided, however, that such incorporation by reference shall not
include the information referred to in item 402(a) (8) of Securities and
Exchange Commission Regulation S-K.


                                       28
<PAGE>
Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     There are incorporated in this Item 12 by reference those portions of the
Company's definitive proxy statement dated April 15, 1999 entitled "Principal
Shareholders" and "Security Ownership of Management."

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated in this Item 13 by reference that portion of the
Company's definitive proxy statement dated April 15, 1999 entitled "Interest of
Management in Certain Transactions."

                                       PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  DOCUMENTS

        1.  The consolidated financial statements of the Company and
            subsidiaries are incorporated into Item 8 of this report by
            reference from the 1998 Annual Report to Shareholders filed as an
            exhibit hereto and they include:

            Independent Auditors' Report

            Consolidated:
            Statements of Condition as of December 31, 1998 and 1997 
            Statements of Income for the years ended December 31, 1998, 1997 and
            1996
            Statements of Comprehensive Income for the years ended December 31,
            1998, 1997 and 1996 
            Statements of Shareholders' Equity for the years ended December 31,
            1998, 1997 and 1996 
            Statements of Cash Flows for the years ended December 31, 1998, 1997
            and 1996 
            Notes to Financial Statements

        2.  All Financial Statement Schedules are omitted as the required
            information is inapplicable or the information is presented in the
            financial statements or related notes.

        3. The following exhibits are filed as a part of this Report:

            (3)(a)*-Articles of Incorporation of International Bancshares
            Corporation incorporated herein as an exhibit by reference to the
            Current Report, Exhibit 3.1 therein, under the Securities Exchange
            Act of 1934, filed by Registrant on Form 8-K with the Securities and
            Exchange Commission on June 20, 1995, SEC File No. 09439.

            (3)(b)*-By-Laws of International Bancshares Corporation incorporated
            herein as an exhibit by reference to the Current Report, Exhibit 3.2
            therein, under the Securities Exchange Act of 1934, filed by
            Registrant on Form 8-K with the Securities and Exchange Commission
            on June 20, 1995, SEC File No. 0-9439.


                                         29
<PAGE>
            (3)(c) -Articles of Amendment to the Articles of Incorporation of
            International Bancshares Corporation dated May 22, 1998.

            (10)*-Sublease between Commerce Bank and Americity Federal Savings
            Bank incorporated herein as an exhibit by reference to the Annual
            Report, Exhibit 11(b) therein, under the Securities Exchange Act of
            1934, filed by Registrant on Form 10-K with the Securities and
            Exchange Commission on March 23, 1982, SEC File No. 0-9439.

            (10a)*-Purchase and Assumption Agreement dated June 29, 1990 by and
            between the Resolution Trust Corporation, receiver of Valley Federal
            Savings Association and New Valley Federal Savings Association
            incorporated herein as an exhibit by reference to the Annual Report,
            Exhibit 10(a) therein, under the Securities Exchange Act of 1934,
            filed by Registrant on Form 10-K with the Securities and Exchange
            Commission on March 30, 1992, SEC File No. 0-9439.

            (10b)*-Purchase and Assumption Agreement for Oakar transaction dated
            June 29, 1990 between New Valley Federal Savings Association,
            International Bancshares Corporation and International Bank of
            Commerce incorporated herein as an exhibit by reference to the
            Annual Report, Exhibit 10(b) therein, under the Securities Exchange
            Act of 1934, filed by Registrant on Form 10-K with the Securities
            and Exchange Commission on March 30, 1991, SEC File No. 0-9439.

            (10c)*-Purchase and Assumption Agreement dated June 21, 1991 by and
            between the Resolution Trust Corporation, receiver of Travis Federal
            Savings and Loan Association and New Travis Federal Savings
            Association incorporated herein as an exhibit by reference to the
            Annual Report, Exhibit 10(c) therein, under the Securities Exchange
            Act of 1934, filed by Registrant on Form 10-K with the Securities
            and Exchange Commission on March 30, 1992, SEC File No. 0-9439.

            (10d)*-Oakar Agreement dated June 21, 1991 between New Travis
            Federal Savings Association and International Bank of Commerce
            incorporated herein as an exhibit by reference to the Annual Report,
            Exhibit 10(d) therein, under the Securities Exchange Act of 1934,
            filed by Registrant on Form 10-K with the Securities and Exchange
            Commission on March 30, 1992, SEC File No. 0-9439.

            (10e)*+-The 1987 International Bancshares Corporation Key
            Contributor Stock Option Plan as amended and restated (formerly the
            International Bancshares Corporation 1981 Incentive Stock Option
            Plan) incorporated herein as an exhibit by reference to Exhibit 28
            to the Registration Statement on Form S-8 filed with the Securities
            and Exchange Commission on July 13, 1987, SEC File No. 33-15655.


                                       30
<PAGE>
            (10f)*-Merger Agreement by and between International Bank of
            Commerce, Michigan National Corporation and First State Bank and
            Trust Company, dated May 5, 1994 incorporated herein by reference to
            Exhibit 10(f) of the Form 10Q filed with the Securities and Exchange
            Commission on August 15, 1994, SEC File No. 0-9439.

            (10g)*-Merger Agreement by and between International Bank of
            Commerce, and The Bank of Corpus Christi, dated August 19, 1994
            incorporated herein by reference to Exhibit 10(g) of Form 10-Q filed
            with the Securities and Exchange Commission on November 14, 1994,
            SEC File No. 0-9439.

            (10h)*-Merger Agreement by and between International Bank of
            Commerce, and Stone Oak National Bank, dated February 28, 1995,
            incorporated by reference to Exhibit 10(h) of the Registrant's
            Quarterly Report on Form 10Q for the period ended March 31, 1995,
            filed with the Securities and Exchange Commission on May 15, 1995,
            SEC File No. 0-9439.

            (10i)*-Agreement and Plan of Merger dated as of June 7, 1995, by and
            between International Bancshares Corporation, a Delaware
            corporation, and International Bancshares Corporation, a Texas
            corporation, incorporated herein by reference to Exhibit 2 of the
            Current Report on Form 8-K filed with the Securities and Exchange
            Commission on June 20, 1995, SEC File No. 0-9439.

            (10j)*-Purchase and Assumption Agreement dated as of February 27,
            1996, by and between International Bank of Commerce, River Valley
            Bank, F.S.B. and Western Capital Holdings, Inc. incorporated herein,
            by reference to Exhibit 10(j) of the Registrant's Annual Report on
            Form 10-K filed with the Securities and Exchange Commission on April
            1, 1996, SEC File No. 09439.

            (10k)*-Purchase of Asset and Liability Agreement dated as of July
            30, 1996, by and between International Bank of Commerce and Home
            Savings of America F.S.B. incorporated herein by reference to
            Exhibit 10(k) of the Registrant's Quarterly Report on Form 10-Q
            filed with the Securities and Exchange Commission on November 13,
            1996.

            (10l)*+-The 1996 International Bancshares Corporation Stock Option
            Plan incorporated herein by reference to Exhibit 99.1 to the Post
            Effective Amendment No. 1 to Form S-8 filed with the Securities and
            Exchange Commission on March 21, 1997, SEC File No. 33-15655.

            (10m)*+-Executive Incentive Compensation Plan of the Registrant
            incorporated herein by reference to exhibit "A" of the Registrant's
            Proxy Statement filed with the Securities Exchange Commission on
            April 15, 1997, SEC File No. 09439.

            (10n)*- Agreement and Plan of Merger by and among International
            Bancshares Corporation, University Bancshares, Inc., Joe L.
            Allbritton and Robert L. Allbritton, dated as of August 15, 1997.

            (13)**-International Bancshares Corporation 1998 Annual Report


                                       31
<PAGE>
            (21) -List of Subsidiaries of International Bancshares Corporation
                  as of March 19, 1999

            (23) -Accountants' Consent

            (27) -Financial Data Schedule

            -----------------------
            *  Previously filed
            ** Deemed filed only with respect to those portions thereof
               incorporated herein by reference
            +  Executive Compensation Plans and Arrangements

(b)     REPORTS ON FORM 8-K

        None


                                       32
<PAGE>
                                     SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                    INTERNATIONAL BANCSHARES CORPORATION
                                              (Registrant)

                                    By: /s/ DENNIS E. NIXON
                                            Dennis E. Nixon
                                            President

                                    Date:   MARCH 29, 1999

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.


      SIGNATURES                     TITLE                      DATE
    -------------                   --------                   ------
 /s/ DENNIS E. NIXON          President and Director          MARCH 29, 1999
 Dennis E. Nixon              (Principal Executive Officer)

 /s/ IMELDA NAVARRO           Treasurer                       MARCH 29, 1999
 Imelda Navarro               (Principal Financial Officer)

 /s/ LEONARDO SALINAS         Vice President and              MARCH 29, 1999
 Leonardo Salinas             Director

 /s/ LESTER AVIGAEL           Director                        MARCH 29, 1999
 Lester Avigael

 /s/ IRVING GREENBLUM         Director                        MARCH 29, 1999
 Irving Greenblum

 /s/ R. DAVID GUERRA          Director                        MARCH 29, 1999
 R. David Guerra

 /s/ RICHARD E. HAYNES        Director                        MARCH 29, 1999
 Richard E. Haynes

 /s/ ROY JENNINGS, JR.        Director                        MARCH 29, 1999
 Roy Jennings, Jr.

___________________________   Director                        ______________
 Sioma Neiman

 /s/ ANTONIO R. SANCHEZ JR.   Director                        MARCH 29, 1999
 Antonio R. Sanchez Jr.

 /s/ PEGGY J. NEWMAN          Director                        MARCH 29, 1999
 Peggy J. Newman


                                       33
<PAGE>
                                  EXHIBIT INDEX

Exhibit (3)(c) -  Articles of Amendment to the Articles of Incorporation of
                  International Bancshares Corporation dated May 22, 1998, page 
                  35

Exhibit 13 -      International Bancshares Corporation 1998 Annual Report, 
                  Exhibit 13, page 1

Exhibit 21 -      List of Subsidiaries of International Bancshares Corporation 
                  as of March 19, 1999, page 130

Exhibit 23 -      Accountants' Consent, page 131

Exhibit 27 -      Financial Data Schedule, page 132


                                       34