INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)

SELECTED FINANCIAL DATA

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

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

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

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

Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International Bancshares Corporation and subsidiaries (the "Company") on a consolidated basis for the three-year period ended December 31, 2002. The Company is a financial holding company with four bank subsidiaries operating in over 95 main banking and branch facilities in South and Southeast Texas, and ten non-bank subsidiaries. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.

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

Risk factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements include, among others the following possibilities: (I) changes in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense expectations, (II) changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest rate environment that may reduce margins, (III) changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject, including, without limitation, banking, tax, securities, insurance and employment laws and regulations, (IV) the loss of senior management or operating personnel, (V) increased competition from both within and outside the banking industry, (VI) changes in local, national and international economic business conditions which adversely affect the Company's customers and their ability to transact profitable business with the Company, including the ability of its borrowers to repay their loans according to their terms or a change in the value of the related collateral, (VII) the timing, impact and other uncertainties of the Company's potential future acquisitions including the Company's ability to identify suitable potential future acquisition candidates, the success or failure in the integration of their operations, and the Company's ability to maintain its current branch network and to enter new markets successfully and capitalize on growth opportunities, (VIII) changes in the Company's ability to pay dividends on its Common Stock, (IX) the effects of the litigation and proceedings pending with the Internal Revenue Service regarding the Company's lease financing transactions, and (X) additions to the Company's loan loss reserves as the result of changes in local, national, or international conditions which adversely affect the Company's customers. It is not possible to foresee or identify all such factors. The Company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

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

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

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

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

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

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

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

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

Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities.

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

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

Expense control is an essential element in the Company's profitability. This is achieved through maintaining optimum staffing levels, an effective budgeting process, and internal consolidation of bank functions. Non-interest expense includes such items as wages and employee benefits, net occupancy expenses, equipment expenses and other operating expenses such as Federal Deposit Insurance Corporation ("FDIC") insurance. Non-interest expense increased 14.3% in 2002 to $154,843,000 from $135,441,000 in 2001, which increased 21.0% from $111,957,000 in 2000. The increases in non-interest expense for the three years ended 2002 were due to the expanded operations of the Company's bank subsidiaries.

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

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

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

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

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

The allowance for possible loan losses consists of the aggregate loan loss allowances of the bank subsidiaries. The allowances are established through charges to operations in the form of provisions for possible loan losses. Loan losses or recoveries are charged or credited directly to the allowances. Management of each of the bank subsidiaries, along with management of the Company, continually reviews the allowances to determine whether additional provisions should be made after considering the preceding factors.

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

While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be un-collectible and that it should be wholly or partially charged off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at December 31, 2002 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 13.

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

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

policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in Mexico be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The composition of such loans and the related amounts of allocated allowance for possible loan losses as of December 31, 2002 is presented below.

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

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

The maintenance of adequate liquidity provides the Company's bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. The bank subsidiaries of the Company derive their liquidity largely from deposits of individuals and business entities. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a stable source of funding. Deposits from persons and entities domiciled in Mexico comprise a significant and stable portion of the deposit base of the Company's bank subsidiaries. Such deposits comprised approximately 41%, 40%

and 42% of the Company's bank subsidiaries' total deposits as of December 31, 2002, 2001 and 2000, respectively. Other important funding sources for the Company's bank subsidiaries during 2002 and 2001 have been wholesale liabilities with the Federal Home Loan Bank ("FHLB") and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. Primary liquidity of the Company and its subsidiaries has been maintained by means of increased investment in shorter-term securities, certificates of deposit and loans. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

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

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

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

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

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

At December 31, 2002, based on these simulations, a rate shift of 200 basis points in interest rates either up or down will not vary earnings by more than 3 percent of projected 2003 net interest income. A 200 basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments.

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

Principal sources of liquidity and funding for the Company are dividends from subsidiaries and borrowed funds, with such funds being used to finance the Company's cash flow requirements. The Company closely monitors the dividend restrictions and availability from the bank subsidiaries as disclosed in Note 19 to the Consolidated Financial Statements. At December 31, 2002, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $188,000,000, assuming that each bank subsidiary continues to be classified as "well capitalized" under the applicable regulations. The restricted capital (capital, surplus and certified surplus) of the bank subsidiaries was approximately $399,042,000 as of December 31, 2002. The undivided profits of the bank subsidiaries were approximately $251,625,000 as of December 31, 2002.

As of December 31, 2002, the Company has outstanding $1,185,857,000 in other borrowed funds and long-term debt. In addition to borrowed funds and dividends, the Company has a number of other available alternatives to finance the growth of its existing banks as well as future growth and expansion.

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At December 31, 2002, shareholders' equity was $547,264,000 compared to $497,028,000 at December 31, 2001, an increase of $50,236,000, or 10%. The increase in shareholders' equity resulted from the retention of earnings and comprehensive income. Comprehensive income includes unrealized gains or losses on securities held available for sale and changes in the fair value of derivative instruments of an equity method investee, net of tax. The accumulated other comprehensive income is not included in the calculation of regulatory capital ratios.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Common Stock is traded on the NASDAQ National Market under the symbol "IBOC." The following table sets forth the approximate high and low bid prices in the Company's Common Stock, adjusted for stock dividends during 2001 and 2002, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2002. Some of the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing sales price of the Company's Common Stock was $40.74 per share at March 24, 2003.

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

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

Date	Stock Dividend
May 16, 1997	25	%
May 22, 1998	25	%
May 20, 1999	25	%
May 18, 2000	25	%
May 17, 2001	25	%
May 20, 2002	25	%

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

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

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

We have audited the accompanying consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

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

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

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2002 and 2001

(Dollars in Thousands, Except Per Share Amounts)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2002, 2001 and 2000

(Dollars in Thousands, Except Per Share Amounts)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended December 31, 2002, 2001, and 2000

(Dollars in Thousands)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

Years ended December 31, 2002, 2001 and 2000

(in Thousands)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2002, 2001 and 2000

(Dollars in Thousands)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

The Company classifies debt and equity securities into one of these categories: held-to-maturity, available-for-sale, or trading. Such classifications are reassessed for appropriate classification at each reporting date. Securities classified as "held-to-maturity" are carried at amortized cost for financial statement reporting, while securities classified as "available-for-sale" and "trading" are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as

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

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

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

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

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

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

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal). Prior to

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cash and due from banks		$	73,881
Investments			222,445
Net loans			278,200
Goodwill			24,192
Other intangible asset			10,934
Other assets			26,079

	Total assets acquired		635,731

Deposits			(531,461	)
Other liabilities			(10,589	)
	Total liabilities assumed		(542,050	)

Net assets acquired		$	93,681

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

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

		For the year ended December 31, 2001
		(Dollars in Thousands, except Per Share Data) (Unaudited)
Interest income		$	430,161
Interest expense			216,396

Net interest income			213,765
Provision for possible loan losses			9,546
Non-interest income			81,967
Non-interest expense			161,380

Income before income taxes			124,806
Income taxes			41,942

Net income		$	82,864

Per common share:
	Basic	$	2.50
	Diluted	$	2.45

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

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

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

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

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

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

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

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

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

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

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

Loans accounted for on a non-accrual basis at December 31, 2002, 2001 and 2000 amounted to $3,903,000, $8,252,000 and $6,273,000, respectively. The effect of such non-accrual loans reduced interest income by $567,000, $695,000 and $842,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected.

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

Impaired loans were $3,428,000 at December 31, 2002, $4,958,000 at December 31, 2001 and $5,226,000 at December 31, 2000. The average recorded investment in impaired loans during 2002, 2001, and 2000 was $4,289,000, $5,997,000 and $6,064,000, respectively. The total allowance for possible loan losses related to these loans was $266,000, $515,000 and $1,772,000 at December 31, 2002, 2001 and 2000, respectively. Interest income on impaired loans of $112,000, $412,000 and $279,000 was recognized for cash payments received in 2002, 2001 and 2000, respectively.

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

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

that it should be wholly or partially charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at December 31, 2002 was adequate to absorb probable losses from loans in the portfolio at that date.

A summary of bank premises and equipment, by asset classification, at December 31, 2002 and 2001 were as follows:

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

			2002		2001
			(Dollars in Thousands)
Deposits:
	Demand—non-interest bearing
		Domestic	$	613,215	$	627,135
		Foreign		70,751		68,083

	Total demand non-interest bearing			683,966		695,218

	Savings and interest bearing demand
		Domestic		962,019		930,861
		Foreign		300,888		282,382

	Total savings and interest bearing demand			1,262,907		1,213,243

	Time, certificates of deposit $100,000 or more
		Domestic		500,622		519,819
		Foreign		1,010,610		1,024,136
	Less than $100,000
		Domestic		437,514		519,480
		Foreign		344,280		360,938

	Total time, certificates of deposit			2,293,026		2,424,373

	Total deposits		$	4,239,899	$	4,332,834

			2002		2001		2000
			(Dollars in Thousands)
Interest Expense:
	Savings and interest bearing demand
		Domestic	$	11,320	$	18,636	$	21,756
		Foreign		2,865		4,949		6,189

	Total savings and interest bearing demand			14,185		23,585		27,945

	Time, certificates of deposit $100,000 or more
		Domestic		13,442		25,609		28,359
		Foreign		24,743		46,447		51,675
	Less than $100,000
		Domestic		12,652		21,402		24,756
		Foreign		7,070		13,296		15,953

	Total time, certificates of deposit			57,907		106,754		120,743

	Total interest expense on deposits		$	72,092	$	130,339	$	148,688

The Company's bank subsidiaries have entered into repurchase agreements with Salomon Brothers and individual customers of the bank subsidiaries. The purchasers have agreed to resell to the bank subsidiaries identical securities upon the maturities of the agreements. Securities sold under repurchase agreements were mortgage-backed book entry securities and averaged $498,869,000, $478,875,000 and $145,096,000 during 2002, 2001 and 2000, respectively, and the maximum amount outstanding at any month end during 2002, 2001 and 2000 was $684,839,000, $769,262,000 and $231,663,000, respectively.

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

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

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

	2002		2001
	(Dollars in Thousands)
Federal Home Loan Bank borrowings	$	1,050,857	$	709,296
Capital Securities		135,000		68,000

Total other borrowings and long term debt	$	1,185,857	$	777,296

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

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

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

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

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

The Company has a deferred profit sharing plan for full-time employees with a minimum of one year of continuous employment. The Company's annual contribution to the plan is based on a percentage, as determined by the Board of Directors, of income before income taxes, as defined, for the year. Allocation of the contribution among officers and employees' accounts is based on length of service and amount of salary earned. Profit sharing costs of $2,662,000, $2,084,000 and $1,845,000 were charged to income for the years ended December 31, 2002, 2001, and 2000, respectively.

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

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

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

			2002			2001
			(Dollars in Thousands)
Loans:
	Commercial		$	180,209		$	228,610
	Others			53,068			44,428

				233,277			273,038
	Less allowance for possible loan losses			(1,179	)		(1,502	)

		Net loans	$	232,098		$	271,536

	Accrued interest receivable		$	1,357		$	1,282

At December 31, 2002, the Company had $62,833,000 in outstanding international commercial letters of credit to facilitate trade activities. The letters of credit are issued primarily in conjunction with credit facilities, which are available to various Mexican banks doing business with the Company.

Income directly attributable to international operations was $14,128,000, $22,389,000 and $22,826,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

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

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

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

			2002			2001
			(Dollars in Thousands)
Deferred tax assets:
	Loans receivable, principally due to the allowance for possible loan losses		$	13,422		$	11,863
	Net unrealized loss on derivative instruments of equity method investee			332			2,641
	Other real estate owned			553			267
	Goodwill			2,763			—
	Other			259			348

	Total deferred tax assets			17,329			15,119

Deferred tax liabilities:
	Net unrealized gains on available for sale investment securities			(27,231	)		(12,439	)
	Lease financing receivable			(16,549	)		(16,871	)
	Bank premises and equipment, principally due to differences in depreciation			(3,592	)		(2,822	)
	FHLB stock			(5,139	)		(4,433	)
	Other			(1,181	)		(1,234	)

	Total deferred tax liabilities			(53,692	)		(37,799	)

		Net deferred tax liability	$	(36,363	)	$	(22,680	)

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

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

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

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

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

On April 3, 1996, the Board of Directors adopted the 1996 International Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan replaced the 1987 International Bancshares Corporation Key Contributor Stock Option Plan (the "1987 Plan"). On April 5, 2001, the Board of Directors amended the 1996 plan and added 300,000 shares to the plan. Under the 1987 Plan and the 1996 Plan both qualified incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") may be granted. Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years.

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

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

		Option Price per share			Options outstanding
Balance at December 31, 1999					1,355,760
	Terminated	$12.00	-	34.40	(750	)
	Granted	23.55	-	27.52	395,312
	Exercised	12.59	-	24.18	(108,954	)
Balance at December 31, 2000					1,641,368
	Terminated	$10.06			(54.263	)
	Granted	24.32	-	27.20	307,187
	Exercised	10.48	-	27.52	(105,513	)

Balance at December 31, 2001					1,788,779
	Terminated	$10.06	-	27.24	(26,932	)
	Granted			—	—
	Exercised	8.05	-	27.24	(221,052	)

Balance at December 31, 2002					1,540,795

At December 31, 2002, 2001, and 2000, 1,057,089, 732,012, and 531,004 options were exercisable, respectively, and as of December 31, 2002, 313,030 shares were available for future grants under the 1996 Plan, as amended. All options granted under the 1987 Plan and the 1996 Plan had an option price of not less than the fair market value of the Company's common stock at the date of grant and a vesting period of five years.

The following table summarizes information about stock options outstanding at December 31, 2002:

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

	2001		2000
Expected life (years)	5		5
Interest rate	4.42	%	5.81	%
Volatility	31.14	%	35.54	%

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

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

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

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

			Years Ended December 31,
			2002		2001		2000
			(Amounts in thousands, except for per share data)
Reported net income			$	100,631	$	83,342	$	75,174
	Add back:
		Goodwill amortization, net of tax		—		2,846		2,092

Adjusted net income			$	100,631	$	86,188	$	77,266

Basic earnings per share:
	Reported net income		$	3.15	$	2.52	$	2.25
	Goodwill amortization			—		.09		.06

	Adjusted net income		$	3.15	$	2.61	$	2.31

Diluted earnings per share:
	Reported net income		$	3.08	$	2.47	$	2.22
	Goodwill amortization			—		.08		.06

	Adjusted net income		$	3.08	$	2.56	$	2.28

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

Balance as of December 31, 2001		$	69,639
	Adjustments to deferred tax asset and goodwill relating to a 2001 acquisition		(488	)
	Record disposition of goodwill related to the sale of branches acquired in 2001		(4,303	)
	Impairment charge		(7,893	)
	Reclassification of intangible assets to goodwill upon adoption of SFAS No. 147 (Note 1)		10,487

Balance as of December 31, 2002		$	67,442

		Carrying Amount		Accumulated Amortization		Net
December 31, 2002
	Core deposit premium	$	14,150	$	6,981	$	7,169

	Total	$	14,150	$	6,981	$	7,169

December 31, 2001
	Core deposit premium	$	16,660	$	5,169	$	11,492
	SFAS 72 unidentified intangible		15,279		4,792		10,487

	Total	$	31,939	$	9,961	$	21,978

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

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

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

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

The Company's lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions. The lease-financing transactions in two of the partnerships have been examined by the Internal Revenue Service ("IRS"). In both partnerships, the lead bank subsidiary is the owner of a ninety-nine percent (99%) limited partnership interest. The IRS has issued separate Notice of Final Partnership Administrative Adjustments ("FPAAs") to the partnerships and on September 25, 2001, and January 10, 2003, the Company filed lawsuits contesting the adjustments asserted in the FPAAs. Prior to filing the lawsuits, the Company was required to deposit the estimated tax due of approximately $4,083,000 with respect to the first FPAA, and $7,710,606 with respect to the second FPAA, with the IRS pursuant to the Internal Revenue Code. No reliable prediction can be made at this time as to the likely outcome of the lawsuits; however, if the lawsuits are decided adversely to the partnerships, all or a portion of the $12 million in tax benefits previously recognized by the Company in connection with the partnerships' lease-financing transactions would be in question and penalties and interest could be assessed by the IRS.

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

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

In the ordinary course of business, the Corporation and its subsidiaries make loans to directors and executive officers of the Corporation, including their affiliates, families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectibility or present other unfavorable features. The aggregate amounts receivable from such related parties amounted to approximately $50,780,000 and $31,014,000 at December 31, 2002 and 2001, respectively.

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

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

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

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

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

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

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

Bank regulatory agencies limit the amount of dividends, which the bank subsidiaries can pay the Corporation, through IBC Subsidiary Corporation, without obtaining prior approval from such agencies. At December 31, 2002, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $188,000,000, assuming that each subsidiary bank continues to be classified as "well capitalized" pursuant to the applicable regulations. The restricted capital of the bank subsidiaries was approximately $399,042,000. The undivided profits of the bank subsidiaries were $251,625,000. In addition to legal requirements, regulatory authorities also consider the adequacy of the bank subsidiaries' total capital in relation to their deposits and other factors. These capital adequacy considerations also limit amounts available for payment of dividends. The Company historically has not allowed any subsidiary bank to pay dividends in such a manner as to impair its capital adequacy.

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

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

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

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

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

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

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

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

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

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

For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. At December 31, 2002 and 2001, the carrying amount of fixed rate performing loans was $970,967,000 and $1,407,367,000 respectively, and the estimated fair value was $977,985,000 and $1,406,633,000, respectively.

Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and specific borrower information. As of December 31, 2002 and 2001, the net carrying amount of non-performing loans was a reasonable estimate of the fair value.

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of December 31, 2002 and 2001. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on currently offered rates. At December 31, 2002 and 2001, the carrying amount of time deposits was $2,293,026,000 and $2,424,373,000, respectively, and the estimated fair value was $2,273,994,000 and $2,395,652,000, respectively.

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

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

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

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

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

Statements of Condition
(Parent Company Only)

December 31, 2002 and 2001
(Dollars in Thousands)

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

Statements of Income
(Parent Company Only)

Years ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)

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

Statements of Cash Flows
(Parent Company Only)

Years ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Condensed Quarterly Income Statements

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

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

	Amount of Loans		Related Allowance for Possible Losses
	(Dollars in Thousands)
Secured by certificates of deposit in United States banks	$	132,224	$	63
Secured by United States real estate		35,235		383
Secured by other United States collateral (securities, gold, silver, etc.)		8,275		15
Foreign real estate guaranteed under lease obligations primarily by U.S. companies		5,755		51
Direct unsecured Mexican sovereign debt (principally former FICORCA debt)		3,293		—
Other (principally Mexico real estate)		48,495		667

	$	233,277	$	1,179

		(Dollars in Thousands)
Balance at December 31, 2001		$	1,502
	Charge-offs		(115	)
	Recoveries		35

	Net charge-offs		(80	)
	Provision charged to operations		(243	)

Balance at December 31, 2002		$	1,179

	Capital Securities Issued		Repricing Frequency	Interest Rate		Interest Rate Index	Maturity Date	Optional Redemption Date
	(in thousands)
Trust I	$	10,000	Fixed	10.18	%	Fixed	June 2031	June 2011
Trust II	$	25,000	Semi-Annually	5.61	%	LIBOR + 3.75	July 2031	July 2006
Trust III	$	33,000	Semi-Annually	5.17	%	LIBOR + 3.75	December 2031	December 2006
Trust IV	$	22,000	Semi-Annually	5.32	%	LIBOR + 3.70	April 2032	April 2007
Trust V	$	20,000	Quarterly	5.51	%	LIBOR + 3.65	July 2032	July 2007
Trust VI	$	25,000	Quarterly	5.27	%	LIBOR + 3.45	November 2032	November 2007

	$	135,000

		Payments due by Period
Contractual Cash Obligations		Total		Less than One Year		One to Three Years		Four to Five Years		After Five Years
Securities sold under repurchase Agreements		$	457,915	$	157,915	$	—	$	—	$	300,000
Federal Home Loan Bank borrowings		$	1,050,857		1,050,080		690		—		87
Trust Preferred Securities		$	135,000		125,000		—		—		10,000

	Total Contractual Cash Obligations	$	1,643,772	$	1,332,995	$	690	$		$	310,087

		Amount of Commitment Expiration Per Period
Commercial Commitments		Total		Less than One Year		One to Three Years		Four to Five Years		After Five Years
Financial & Performance
	Standby Letters of Credit	$	59,657	$	55,871	$	3,752	$	34	$	—
Commercial Letters of Credit		$	3,176		3,176		—		—		—
Credit Card Lines		$	33,290		33,290		—		—		—
Other Commercial Commitments		$	626,330		382,692		243,489		3,359		790

	Total Commercial Commitments	$	722,453	$	475,029	$	243,241	$	3,393	$	790

		High		Low
2002:
	First quarter	$	35.89	$	32.93
	Second quarter		41.99		38.00
	Third quarter		42.59		30.25
	Fourth quarter		41.51		34.35

		High		Low
2001:
	First quarter	$	31.80	$	25.20
	Second quarter		38.78		26.80
	Third quarter		32.80		27.44
	Fourth quarter		35.84		24.86

		(A)	(B)		(C)
Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
Equity Compensation plans approved by security holders		1,353,295	$	17.97	313,030
Equity Compensation plans not approved by security holders(1)		187,500	$	20.80	—

	Total	1,540,795	$	18.31	313,030

				2002			2001
ASSETS
Cash and due from banks				$	141,204		$	177,122
Federal funds sold					13,000			108,100

			Total cash and cash equivalents		154,204			285,222
Time deposits with banks					99			1,253
Investment securities:
Held to maturity (Market value of $2,060 on December 31, 2002 and $2,085 on December 31, 2001)					2,060			2,085
Available for sale (Amortized cost of $2,992,906 on December 31, 2002 and $2,889,542 on December 31, 2001)					3,070,711			2,925,121

			Total investment securities		3,072,771			2,927,206
Loans:
	Commercial, financial and agricultural				1,595,140			1,488,196
	Real estate—mortgage				507,837			441,296
	Real estate—construction				276,595			271,026
	Consumer				160,546			180,652
	Foreign				233,276			273,038

			Total loans		2,773,394			2,654,208
	Less unearned discounts				(3,832	)		(5,676	)

			Loans, net of unearned discounts		2,769,562			2,648,532
	Less allowance for possible loan losses				(44,213	)		(40,065	)

			Net loans		2,725,349			2,608,467
Bank premises and equipment, net					185,477			190,051
Accrued interest receivable					35,193			33,850
Other investments					203,733			197,275
Identified intangible assets					7,169			21,978
Goodwill					67,442			69,639
Other assets					44,198			46,460

			Total assets	$	6,495,635		$	6,381,401

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
	Deposits:
		Demand—non-interest bearing		$	683,966		$	695,218
		Savings and interest bearing demand			1,262,907			1,213,243
		Time			2,293,026			2,424,373

			Total deposits		4,239,899			4,332,834
	Securities sold under repurchase agreements				457,915			714,675
	Other borrowed funds and long term debt				1,185,857			777,296
	Other liabilities				64,700			59,568

			Total liabilities		5,948,371			5,884,373

Shareholders' equity:
	Common shares of $1.00 par value. Authorized 75,000,000 shares; issued 41,766,439 shares in 2002 and 33,214,263 shares in 2001				41,766			33,214
	Surplus				30,821			27,564
	Retained earnings				560,613			490,328
	Accumulated other comprehensive income				49,957			18,221

					683,157			569,327
	Less cost of shares in treasury, 10,506,298 shares in 2002 and 6,991,148 shares in 2001				(135,893	)		(72,299	)

			Total shareholders' equity		547,264			497,028

			Total liabilities and shareholders' equity	$	6,495,635		$	6,381,401

				2002			2001			2000
Interest income:
	Loans, including fees			$	183,803		$	199,028		$	212,522
	Time deposits with banks				36			162			157
	Federal funds sold				671			1,142			929
	Investment securities:
		Taxable			164,272			184,576			196,284
		Tax-exempt			4,990			4,861			5,119
	Other				156			586			321

			Total interest income		353,928			390,355			415,332

Interest expense:
	Savings and interest bearing demand deposits				14,185			23,585			27,945
	Time deposits				57,907			106,754			120,743
	Federal funds purchased and securities sold under repurchase agreements				19,696			23,100			8,160
	Other borrowings and Long term debt				24,627			47,369			94,908

			Total interest expense		116,415			200,808			251,756

			Net interest income		237,513			189,547			163,576
Provision for possible loan losses					8,541			8,631			6,824

			Net interest income after provision for possible loan losses		228,972			180,916			156,752

Non-interest income:
	Service charges on deposit accounts				52,648			42,497			35,348
	Other service charges, commissions and fees
		Banking			13,000			9,993			8,423
		Non-Banking			5,669			6,132			1,130
	Investment securities transactions, net				2,303			(1,010	)		(4,248	)
	Other investments, net				(2,598	)		10,636			13,941
	Other income				14,623			11,340			9,202

			Total non-interest income		85,645			79,588			63,796

Non-interest expense:
	Employee compensation and benefits				65,907			58,962			47,900
	Occupancy				13,211			11,190			9,204
	Depreciation of bank premises and equipment				16,153			13,434			12,220
	Professional fees				6,089			5,019			4,565
	Stationery and supplies				4,079			3,664			3,268
	Amortization of intangible assets				1,812			5,378			4,220
	Advertising				6,010			6,846			4,257
	Other				41,582			30,948			26,323

			Total non-interest expense		154,843			135,441			111,957

			Income before income taxes		159,774			125,063			108,591
Income taxes					54,013			41,721			33,417

Income before cumulative change in accounting principle					105,761			83,342			75,174

Cumulative effect of a change in accounting principle, net of tax					5,130			—			—

			Net income	$	100,631		$	83,342		$	75,174

Basic earnings per common share:
	Weighted average number of shares outstanding				31,964,465			33,076,056			33,482,444
	Income before cumulative effect of a change in accounting principle			$	3.31		$	2.52		$	2.25
	Cumulative effect of a change in accounting principle, net of tax				(.16	)		—			—

	Net income			$	3.15		$	2.52		$	2.25

Diluted earnings per common share:
	Weighted average number of shares outstanding				32,695,278			33,682,362			33,905,545
	Income before cumulative effect of a change in accounting principle			$	3.23		$	2.47		$	2.22
	Cumulative effect of a change in accounting principle, net of tax				(.15	)		—			—

	Net income			$	3.08		$	2.47		$	2.22

			Number of Shares	Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 1999			21,092	$	21,092	$	24,050	$	385,942		$	(36,912	)	$	(40,736	)	$	353,436
	Net income		—		—		—		75,174			—			—			75,174
	Dividends:
		Shares issued	5,280		5,280		—		(5,280	)		—			—			—
		Cash	—		—		—		(21,040	)		—			—			(21,040	)
	Purchase of treasury stock		—		—		—		—			—			(10,419	)		(10,419	)
	Exercise of stock options		109		109		1,883		—			—			—			1,992
	Other comprehensive income, net of tax:
		Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment	—		—		—		—			17,749			—			17,749

Balances at December 31, 2000			26,481		26,481		25,933		434,796			(19,163	)		(51,155	)		416,892
	Net income		—		—		—		83,342			—			—			83,342
	Dividends:
		Shares issued	6,628		6,628		—		(6,628	)		—			—			—
		Cash	—		—		—		(21,182	)		—			—			(21,182	)
	Purchase of treasury stock		—		—		—		—			—			(21,144	)		(21,144	)
	Exercise of stock options		105		105		1,631		—			—			—			1,736
	Other comprehensive income, net of tax:
		Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment										42,290						42,290
Change in fair value of equity method investee's derivatives												(4,906	)					(4,906	)

Balances at December 31, 2001			33,214		33,214		27,564		490,328			18,221			(72,299	)		497,028
	Net income		—		—		—		100,631			—			—			100,631
	Dividends:
		Shares issued	8,331		8,331		—		(8,331	)		—			—			—
		Cash	—		—		—		(22,015	)		—			—			(22,015	)
	Purchase of treasury stock		—		—		—		—			—			(63,594	)		(63,594	)
	Exercise of stock options		221		221		3,257		—			—			—			3,478
	Other comprehensive income, net of tax:
		Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment										32,352						32,352
	Change in fair value of equity method investee's derivatives											(616	)					(616	)

Balances at December 31, 2002			41,766	$	41,766	$	30,821	$	560,613		$	49,957		$	(135,893	)	$	547,264

				2002			2001			2000
Operating activities:
	Net income			$	100,631		$	83,342		$	75,174
	Adjustments to reconcile net income to net cash provided by operating activities:
		Impairment charges and write downs on investments			9,393			—			—
		Provision for possible loan losses			8,541			8,631			6,824
		Depreciation of bank premises and equipment			16,153			13,434			12,222
		Gain on sale of bank premises and equipment			(2,129	)		(13	)		(171	)
		Depreciation and amortization of leasing assets			2,694			3,069			1,747
		Gain on sale of branch banks			(3,087	)		—			—
		Accretion of investment securities discounts			(4,046	)		(9,213	)		(18,397	)
		Amortization of investment securities premiums			16,909			9,579			10,313
		Gain/Loss on investment securities transactions			(2,303	)		1,010			4,248
		Amortization of intangible assets			1,812			5,378			4,220
		Equity loss (earnings) from affiliates and other investments			4,531			(7,666	)		(7,647	)
		Deferred tax expense (benefit)			(655	)		2,788			7,593
		(Increase) decrease in accrued interest receivable			(1,537	)		8,402			(5,332	)
		Net (increase) decrease in other assets			(897	)		(12,098	)		3,014
		Net (decrease) in other liabilities			(11,254	)		(1,227	)		(788	)

			Net cash provided by operating activities		134,756			105,416			93,020

Investing activities:
	Proceeds from maturities of securities				5,330			2,060			1,573
	Proceeds from sales of available for sale securities				330,152			568,058			163,085
	Purchases of available for sale securities				(1,749,496	)		(1,284,871	)		(578,602	)
	Principal collected on mortgage-backed securities				1,300,115			1,051,520			353,699
	Proceeds from matured time deposits with banks				1,253			2,669			1,184
	Purchases of time deposits with banks				(99	)		(594	)		(1,778	)
	Net increase in loans				(161,450	)		(128,412	)		(342,537	)
	Purchases of other investments				(11,166	)		(3,544	)		(12,797	)
	Distributions from other investments				5,275			1,609			5,943
	Purchases of bank premises and equipment				(15,056	)		(29,661	)		(22,676	)
	Proceeds from sales of bank premises and equipment				3,371			119			446
	Cash paid in excess of net assets acquired				—			(41,415	)		(16,202	)
	Cash acquired in purchase transactions				—			73,881			—
	Cash disposed in sale transactions				(44,010	)		—			—

		Net cash provided by (used in) investing activities			(335,781	)		211,419			(448,662	)

Financing activities:
	Net (decrease) increase in non-interest bearing demand deposits				(11,272	)		27,109			74,312
	Net increase (decrease) in savings and interest bearing demand deposits				107,068			83,701			(14,561	)
	Net (decrease) increase in time deposits				(95,459	)		(57,324	)		157,635
	Net (decrease) increase in securities sold under repurchase agreements				(256,760	)		484,567			106,356
	Proceeds from issuance of other borrowed funds and long term debt				2,055,329			1,825,296			2,365,500
	Principal payments on other borrowed funds				(1,646,768	)		(2,480,500	)		(2,313,000	)
	Purchase of treasury stock				(63,594	)		(21,144	)		(10,419	)
	Proceeds from stock transactions				3,478			1,736			1,992
	Payments of cash dividends				(21,984	)		(21,158	)		(21,016	)
	Payments of cash dividends in lieu of fractional shares				(31	)		(24	)		(24	)

		Net cash provided by (used in) financing activities			70,007			(157,741	)		346,775

(Decrease) increase in cash and cash equivalents					(131,018	)		159,094			(8,867	)
Cash and cash equivalents at beginning of year					285,222			126,128			134,995

Cash and cash equivalents at end of year				$	154,204		$	285,222		$	126,128

Supplemental cash flow information:
	Interest paid			$	123,963		$	209,384		$	247,698
	Income taxes paid				51,759			35,993			26,520

	Held to Maturity
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Carrying value
	(Dollars in Thousands)
Other securities	$	2,060	$	—	$	—		$	2,060	$	2,060

Total investment securities	$	2,060	$	—	$	—		$	2,060	$	2,060

	Available for Sale
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Carrying value
	(Dollars in Thousands)
U.S. Treasury securities	$	12,344	$	245	$	—		$	12,589	$	12,589
Mortgage-backed securities		2,820,538		74,908		(108	)		2,895,338		2,895,338
Obligations of states and political subdivisions		105,489		827		(364	)		105,952		105,952
Other securities		47,125		2,250		(600	)		48,775		48,775
Equity securities		7,410		647		—			8,057		8,057

Total investment securities	$	2,992,906	$	78,877	$	(1,072	)	$	3,070,711	$	3,070,711

		2002			2001			2000
		(Dollars in Thousands)
Balance at December 31, 2001		$	40,065		$	30,812		$	26,770

	Losses charged to allowance		(5,257	)		(4,269	)		(3,682	)
	Recoveries credited to allowance		1,329			936			900

	Net losses charged to allowance		(3,928	)		(3,333	)		(2,782	)
	Provision charged to operations		8,541			8,631			6,824
	Acquired (disposed)in purchase or sale transactions		(465	)		3,955			—

Balance at December 31, 2002		$	44,213		$	40,065		$	30,812

			Estimated useful lives	2002			2001
				(Dollars in Thousands)
Bank buildings and improvements			5 - 40 years	$	146,670		$	141,661
Furniture, equipment and vehicles			1 - 20 years		109,679			103,752
Land					34,750			36,042
Real estate held for future expansion:
	Land, building, furniture, fixture and equipment		7 - 27 years		1,072			1,123
Less: accumulated depreciation					(106,694	)		(92,527	)

		Bank premises and equipment, net		$	185,477		$	190,051

		Collateral Securities				Repurchase Borrowing
		Book Value of Securities Sold		Fair Value of Securities Sold		Balance of Liability		Weighted Average Interest Rate
		(Dollars in Thousands)
December 31, 2002 Term:
	Overnight agreements	$	70,384	$	72,362	$	28,990	1.18	%
	1 to 29 days		23,154		23,602		18,223	2.03	%
	30 to 90 days		60,637		62,121		46,327	2.05	%
	Over 90 days		430,715		449,013		364,375	4.66	%

	Total	$	584,890	$	607,098	$	457,915	3.99	%

December 31, 2001 Term:
	Overnight agreements	$	272,657	$	272,401	$	274,946	1.76	%
	1 to 29 days		45,282		45,810		31,594	3.74	%
	30 to 90 days		84,606		86,133		59,874	3.22	%
	Over 90 days		354,064		358,740		348,261	4.90	%

	Total	$	756,609	$	763,084	$	714,675	2.83	%

	Options Outstanding				Options Exercisable
Range of Exercise prices	Number Outstanding at 12/31/02	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable At 12/31/02	Weighted- Average Exercise Price
$ 8.04	179,119	.5 years	$	8.04	179,119	$	8.04
15.47 - 21.30	529,913	2.4 years		15.70	529,913		15.70
19.66 - 20.37	30,643	3.10 years		19.77	24,514		19.77
18.84 - 22.02	305,488	5.3 years		18.58	183,992		18.58
20.48 - 20.80	205,627	5.10 years		20.43	82,250		20.43
27.20 - 29.20	290,005	6.9 years		27.27	58,001		27.27

$ 8.04 - 29.20	1,540,795				1,057,089

		Income (Numerator)		Shares (Denominator)	Per-Share Amount
		(Dollars in Thousands, Except Per Share Amounts)
December 31, 2002:
Basic EPS
	Net income	$	100,631	31,964,465	$	3.15
	Potential dilutive common shares			730,813

Diluted EPS		$	100,631	32,695,278	$	3.08

December 31, 2001:
Basic EPS
	Net income	$	83,342	33,076,056	$	2.52
	Potential dilutive common shares			606,306

Diluted EPS		$	83,342	33,682,362	$	2.47

December 31, 2000:
Basic EPS
	Net income	$	75,174	33,482,444	$	2.25
	Potential dilutive common shares			423,101

Diluted EPS		$	75,174	33,905,545	$	2.22

				2002			2001		2000
				(Dollars in Thousands)
Current
		U.S.		$	54,550		$	38,849	$	25,702
		Foreign			118			84		122

			Total current taxes		54,668			38,933		25,824
	Deferred				(655	)		2,788		7,593

			Total income taxes	$	54,013		$	41,721	$	33,417

			2002			2001			2000
Computed expected tax expense			$	55,921		$	43,772		$	38,007
Change in taxes resulting from:
	Tax-exempt interest income			(1,692	)		(1,590	)		(1,596	)
	Leasing activities			3,031			1,239			(1,386	)
	Employee benefits			(2,707	)		(2,110	)		(1,994	)
	Other			(540	)		410			386

		Actual tax expense	$	54,013		$	41,721		$	33,417

		Total
		(in thousands)
	2003	$	1,276
	2004		984
	2005		798
	2006		690
	2007		690
	Thereafter		2,731

Total		$	7,169

Commitments to extend credit	$	626,330,000
Credit card lines		33,290,000
Standby letters of credit		59,657,000
Commercial letters of credit		3,176,000

		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount		Ratio		Amount		Ratio		Amount		Ratio
						(greater than or equal to)		(greater than or equal to)		(greater than or equal to)		(greater than or equal to)
		(Dollars in thousands)
As of December 31, 2002:
Total Capital (to Risk Weighted Assets):
	Consolidated	$	603,001	17.21	%	$	280,365	8.00	%	$	350,456	10.00	%
	International Bank of Commerce, Laredo		445,668	15.40			231,582	8.00			289,478	10.00
	International Bank of Commerce, Brownsville		55,314	18.45			23,986	8.00			29,983	10.00
	International Bank of Commerce, Zapata		25,988	21.35			9,737	8.00			12,171	10.00
	Commerce Bank		29,650	17.09			13,882	8.00			17,343	10.00
Tier 1 Capital (to Risk Weighted Assets):
	Consolidated	$	559,025	15.95	%	$	140,182	4.00	%	$	210,273	6.00	%
	International Bank of Commerce, Laredo		409,373	14.14			115,791	4.00			173,687	6.00
	International Bank of Commerce, Brownsville		52,095	17.38			11,993	4.00			17,990	6.00
	International Bank of Commerce, Zapata		25,203	20.71			4,868	4.00			7,303	6.00
	Commerce Bank		27,451	15.82			6,941	4.00			10,412	6.00
Tier 1 Capital (to Average Assets):
	Consolidated	$	559,025	8.71	%	$	256,640	4.00	%	$	320,800	5.00	%
	International Bank of Commerce, Laredo		409,373	7.98			205,229	4.00			256,537	5.00
	International Bank of Commerce, Brownsville		52,095	8.78			23,729	4.00			29,661	5.00
	International Bank of Commerce, Zapata		25,203	8.22			12,260	4.00			15,325	5.00
	Commerce Bank		27,451	6.68			16,440	4.00			20,550	5.00

			2002			2001
ASSETS
Cash			$	4,783		$	551
Repurchase Agreements				12,750			2,600
Other investments				5,464			6,654
Notes receivable				20,374			30,683
Investment in subsidiaries				634,665			518,263
Other assets				6,921			8,417

	Total assets		$	684,957		$	567,168

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
	Due to IBC Trusts (Subordinated Debentures)			135,000			68,000
	Due to IBC Trading			21			21
	Due to IBC Capital Trusts			1,068			28
	Other liabilities			1,604			2,091

		Total liabilities		137,693			70,140

Shareholders' equity:
	Common shares			41,766			33,214
	Surplus			30,821			27,564
	Retained earnings			560,613			490,328
	Accumulated other comprehensive income			49,957			18,221

				683,157			569,327
	Less cost of shares in treasury			(135,893	)		(72,299	)

		Total shareholders' equity		547,264			497,028

		Total liabilities and shareholders' equity	$	684,957		$	567,168

			2002			2001			2000
Income:
	Dividends from subsidiaries		$	27,500		$	88,245		$	22,000
	Interest income on notes receivable			2,297			2,985			3,771
	Interest income on other investments			778			899			399
	Other interest income			—			310			321
	Gain on sale of other securities			—			—			386
	Other			2,334			3,097			904

		Total income		32,909			95,536			37,781

Expenses:
	Interest Expense (Debentures)			7,040			2,014			—
	Other			1,126			967			476

		Total expenses		8,166			2,981			476

		Income before federal income taxes and equity in undistributed net income of subsidiaries		24,743			92,555			27,305
Income tax (benefit) expense				(1,578	)		578			663

		Income before equity in undistributed net income of subsidiaries		26,321			91,977			26,642
Equity in undistributed (dividends in excess of) net income of subsidiaries				74,310			(8,635	)		48,532

		Net income	$	100,631		$	83,342		$	75,174

			Fourth Quarter		Third Quarter		Second Quarter		First Quarter
2002
	Interest income		$	87,007	$	91,486	$	88,444	$	86,993
	Interest expense			27,652		29,695		28,773		30,297

	Net interest income			59,355		61,791		59,671		56,696
	Provision for possible loan losses			2,178		2,232		2,057		2,074
	Non-interest income			25,347		26,629		18,456		15,213
	Non-interest expense			42,170		38,921		38,531		35,222

	Income before income taxes			40,354		47,267		37,539		34,613
	Income taxes			12,890		16,394		12,674		12,054

	Income before cumulative effect of a change in accounting principle			27,464		30,873		24,865		22,559

	Cumulative effect of a change in accounting principle, net of tax			—		—		—		(5,130	)

	Net income		$	27,464	$	30,873	$	24,865	$	17,429

	Per common share:
		Basic
		Income before cumulative effect of a change in accounting principle	$	.87	$	.97	$	.77	$	.69
		Cumulative effect of a change in accounting principle, net of tax		—		—		—		(.16	)

		Net income	$	.87	$	.97	$	.77	$	.53

		Diluted
		Income before cumulative effect of a change in accounting principle	$	.85	$	.95	$	.75	$	.68
		Cumulative effect of a change in accounting principle, net of tax		—		—		—		(.15	)

		Net income	$	.85	$	.95	$	.75	$	.53

Net income and per common share amounts for the first three quarters have been re-stated to reflect the reversal of $792,000 amortization expense in accordance with SFAS No. 147 (see note 1 to the Consolidated Financial Statements)

2001
	Interest income		$	85,099	$	91,159	$	99,681	$	108,174
	Interest expense			37,075		45,817		54,882		63,034

	Net interest income			48,024		45,342		44,799		45,140
	Provision for possible loan losses			2,114		1,962		2,428		2,127
	Non-interest income			21,828		22,785		21,065		20,152
	Non-interest expense			37,199		33,928		33,488		30,826

	Income before income taxes			30,539		32,237		29,948		32,339
	Income taxes			10,146		10,793		10,048		10,734

	Net income		$	20,393	$	21,444	$	19,900	$	21,605

	Adjusted net income		$	21,105	$	22,156	$	20,611	$	22,316

	Per common share:
		Basic	$	.62	$	.65	$	.60	$	.81
		Diluted	$	.61	$	.64	$	.58	$	.80
	Adjusted per common share:
		Basic	$	.64	$	.67	$	.62	$	.84
		Diluted	$	.63	$	.66	$	.61	$	.83