International Bancshares (IBOC) Risk Analysis

AI-driven technologies are rapidly evolving and complex, and successfully integrating AI tools requires substantial investment, expertise, and continuous monitoring. Our adoption and implementation of AI tools into our banking services, processes, and products presents significant technological risks, uncertainties, and unpredictable outcomes that could result from errors or biases in AI models, data inconsistencies, compliance violations, unforeseen system failures, or operational disruptions. Flaws in our introduction and use of AI technologies could create unintended consequences, amplify our costs, and inadvertently expose us to security vulnerabilities and technological inefficiencies that could hamper the customer experience, negatively impact transaction processing, and undermine our risk-management processes. Furthermore, as the use of AI continues to evolve in the banking industry, so too will the AI-related regulations governing the banking and financial-services sectors. Regulators may impose new compliance requirements concerning AI governance, model validation, ethical use of AI, cybersecurity, data privacy, and automated decision-making, which may increase our costs and administrative burdens and restrict our ability to utilize AI for banking services, such as customer engagement, credit underwriting, fraud detection, and other banking functions. Our ability to adopt new forms of technologies and AI may be thwarted by the emergence of complex industry-wide standards, uncertainties in the legislative and regulatory environment governing AI in banking, and difficulties in establishing proper governance and controls related to new AI technologies that are compliant with evolving regulatory requirements. Incorporating AI solutions and complying with emerging regulatory frameworks may require significant resources, time, and technological investment. Additionally, any errors in AI-based models that generate biased or inaccurate results could cause us to make uninformed business decisions based on faulty data, potentially leading to financial losses and operational inefficiencies, and to face regulatory scrutiny, reputational damage, or legal liability. Failure to comply with AI-related regulations or to effectively manage AI-related risks could adversely affect our business, financial condition, and results of operations.

The Dodd-Frank Act provides that courts must make preemption determinations on a case-by-case basis with the respect to particular state laws and can no longer rely on blanket preemption determinations. Also, the CFPB is authorized to protect consumers from "unfair," "deceptive" and "abusive" acts and practices. Depending on the future actions of the CFPB, the likelihood of lawsuits against financial institutions related to allegedly "unfair," "deceptive" and "abusive" acts and practices could increase. Moreover, the costs related to such lawsuits would be significantly increased if the CFPB restricts the use of arbitration and/or class action waivers in consumer banking contracts.

Our success depends, to a certain extent, on local, national, and international economic and political conditions and local, as well as governmental monetary policies. We are particularly affected by conditions in our primary market areas of south, central, and southeast Texas, including Austin, Dallas and Houston, the State of Oklahoma and Mexico. If economic conditions in these market areas weaken or worsen due to a decline in oil prices or other factors, or fail to improve or to continue to improve, we could experience an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, any of which could have a material adverse impact on our financial condition and results of operations.

We do a significant amount of business for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of our Subsidiary Banks, and some of our Subsidiary Banks are highly active in facilitating international trade along the United States border with Mexico and elsewhere. The imposition of tariffs and trade restrictions by the United States on Mexico may weaken the Mexican economy, reduce cross-border trade, and ultimately negatively impact the financial wellbeing of our customer base in Mexico, potentially leading to lower deposit balances or increased withdrawals from our depositors domiciled in Mexico. In turn, a decline in our deposit base and liquidity could strain our ability to compete with other financial institutions that are less reliant on cross-border deposits. Furthermore, in response to any increase in geopolitical tensions or strained U.S.–Mexico relations, depositors from Mexico may seek alternative financial institutions that they consider to be more integrated within the Mexican financial industry, which could cause us to face increased competition. Declined economic activity in Mexico and cross-border trade resulting from the imposition of tariffs and trade restrictions may lead to lower deposit balances, increase the likelihood of loan defaults, and reduce the demand for the banking products and services that our Subsidiary Banks provide to customers domiciled in Mexico, reducing the circulating of money in our border communities as well as the major cities in Texas.