THE SHIMANE BANK, LTD.

With loans to small and medium-sized enterprises and individuals accounting for a large proportion of the credit portfolio, there is a risk that non-performing loans exceeding expectations may arise due to rising resource prices, labor shortages, deterioration of the regional economy, declines in real estate prices, and other factors. If there is a divergence between the estimated allowance for loan losses and actual losses, additional provisioning may become necessary, which could affect operating results and financial position. The Bank endeavors to verify the appropriateness of provisioning levels through financing based on business feasibility assessments, management improvement support, and stress tests based on downside scenarios.

With Shimane and Tottori prefectures (the San'in region) as its primary business area, the Bank has a high proportion of loans to small and medium-sized enterprises in the construction industry and to individuals engaged in real estate leasing, creating a risk that deterioration in regional economic conditions will directly affect business performance. If business expansion cannot be expected due to a downturn in the regional economy, or if credit-related expenses increase, this may affect operating results and financial position. The Bank strives to diversify borrowers by industry and by loan size, while also strengthening business turnaround support.

Loan interest rates, bond yields, and deposit interest rates are all affected by market interest rate trends, and the Bank carries a maturity gap between short-term and long-term rates arising from differences in the repricing dates of deposits, loans, and other instruments. If unexpected fluctuations occur in market interest rates, a mismatch between fund management and fund procurement may affect operating results and financial position. The Bank sets risk limits appropriate to its management capacity and seeks to secure stable earnings through position management.

The Bank holds stocks, marketable bonds, beneficiary certificates, and other securities. At the end of the consolidated fiscal year, valuation differences on other securities stood at ¥(12,614) million, an expansion of unrealized losses of ¥2,938 million compared to the end of the previous fiscal year. Deterioration in the external environment—such as heightened geopolitical risk, surging crude oil prices, stock price declines, sharp increases in interest rates, or significant currency fluctuations—may result in the realization of impairment losses or a further expansion of unrealized losses. The Bank determines its investment policy annually at Board of Directors meetings and conducts strict risk management by setting investment limits and loss-cut rules.

While the Bank's capital adequacy ratio currently substantially exceeds the Basel III domestic standard (4%), if the ratio declines due to an increase in credit-related expenses, impairment losses on securities, changes in the standards for calculating the capital adequacy ratio, or other factors, the Bank may become subject to administrative dispositions such as a business suspension order from the Commissioner of the Financial Services Agency. In addition, if deferred tax assets exceed the amount permitted under Basel III standards, there is a risk that inclusion in core capital will be restricted, thereby lowering the capital adequacy ratio. The Bank monitors risk within the scope of its management capacity, including capital, through the practice of integrated risk management.

The migration to the next-generation banking system (new core banking online system) was completed in July 2025 and is currently operating stably; however, if a major system outage or malfunction occurs due to natural disasters such as earthquakes, hardware or software failures, computer crimes, or other causes, this may result in operational restrictions and affect operating results and financial position. The Bank has implemented security measures to prevent unauthorized external access and information leaks.

If customers' personal information or internal confidential information is leaked externally due to intrusion into computer systems by malicious third parties, or human error or accidents by officers, employees, or outsourcing partners, this may damage the Bank's corporate credibility and affect operating results and financial position. The Bank has established information management regulations, formulated rules for information management methods, and strives to ensure thorough management to the greatest extent possible.

Numerous financial institutions are present in the San'in region (Shimane and Tottori prefectures), the Bank's main business base, and if the Bank is unable to secure an advantage over other banks amid intensifying competition, this may affect operating results and financial position. The Bank strives to respond promptly and accurately to customer needs, and has set improving the quality of face-to-face service as a basic policy of its medium-term management plan.

If the medium-term management plan "Furusato San'in Kasseika Project!", formulated from FY2025, fails to be achieved due to internal and external factors such as intensifying competition, changes in the business environment, a sluggish economic environment, or deterioration in customers' financial conditions, this may affect operating results and financial position. The plan sets forth "financial soundness" and "creation of shared value with customers" as key themes, and promotes community-based management through enhanced local engagement.

Losses related to retirement benefit obligations may arise due to declines in the market value of pension assets, lower investment yields, changes in actuarial assumptions, and other factors, and unfunded obligations may also be negatively affected by prior service costs arising from changes to the pension plan. In addition, if it is determined that recovery of part or all of deferred tax assets is difficult based on projections of future taxable income, or if there is a change in tax rates, deferred tax assets may be reduced, which may affect operating results and financial position. Under Basel III, there is an upper limit on the inclusion of deferred tax assets in capital, and any amount in excess of this limit becomes a factor lowering the capital adequacy ratio.