The Bank of Iwate, Ltd.

The risk that non-performing loans may increase more than expected due to fluctuations in economic conditions, real estate prices, and stock prices, or deterioration in the business condition of borrowers. As of March 31, 2026, the consolidated non-performing loan ratio was 2.49%. A significant deterioration in economic conditions could necessitate an increase in the allowance for loan losses, potentially adversely affecting the financial position and results of operations. This risk is managed through monitoring by the Credit Risk Committee and integrated risk management methods such as VaR.

This encompasses interest rate risk arising from mismatches in interest rates and maturities among loans, securities, and deposits, price fluctuation risk in government bonds, equities, and other instruments, and foreign exchange risk related to foreign-currency-denominated assets and liabilities. Rising interest rates may reduce profits or cause losses, and declines in equity and bond prices may impair asset value. Monitoring is conducted through the ALM Committee, and integrated risk management is implemented using unified measures such as VaR.

This includes the risk that unexpected outflows of funds could make cash management difficult, as well as market liquidity risk, whereby held bonds and other assets can only be sold at prices significantly more disadvantageous than usual during market disruptions. Heightened geopolitical risk and instability in financial markets could serve as triggers. Fund management measures such as improving creditworthiness and establishing emergency response systems are implemented, with monitoring conducted by the ALM Committee.

This encompasses a wide range of internal risks, including clerical errors and fraud, system failures and unauthorized use, legal violations, unfair conduct in personnel management, damage to tangible assets, and reputational damage. Conduct risk (loss of credibility and business opportunities due to inappropriate conduct by officers and employees) is also recognized as a top risk. Efforts are being made to strengthen the management framework for each risk category through monitoring by the Operational Risk Committee.

Business disruption and information leakage due to malware infection and information security vulnerabilities, as well as increasingly sophisticated AI-driven cyber attacks, are recognized as top risks. A successful attack could adversely affect the financial position and results of operations through damages compensation and administrative sanctions. The Bank has formulated a "Basic Policy on Cybersecurity" and has established the Iwate Bank CSIRT as a permanent body, strengthening its incident management framework by holding regular meetings, in principle, every other month.

Iwate Prefecture, the Bank's primary operating base, has one of the highest rates of population decline in Japan, and there is a risk that population decline, the outflow of inherited deposits outside the prefecture, and reduced demand for funds could lead to a shrinking customer base. Regional economic contraction could increase credit risk through the deterioration of business conditions among client companies and make it more difficult to secure human resources, destabilizing the management foundation. As a regional financial institution, the Bank is promoting a medium-term management plan that aims to achieve both regional co-creation and corporate growth, but there is a possibility that progress may not proceed as planned due to changes in the external environment.

Under domestic standards, the Bank is required to maintain a capital adequacy ratio of at least 4% on both a consolidated and non-consolidated basis; as of March 31, 2026, the ratios were 11.17% on a consolidated basis and 10.85% on a non-consolidated basis. If the ratio declines due to increased costs of non-performing loan disposal, a decline in the value of the securities portfolio, the inability to recover deferred tax assets, strengthening of capital adequacy regulations, or other factors, there is a risk that the Bank could be subject to prompt corrective action, including business suspension orders, from the Commissioner of the Financial Services Agency. The Bank may also be affected by the timing and content of enhanced Basel regulations and mandatory IFRS adoption.

The Bank recognizes both transition risk arising from measures such as carbon taxes and physical risk arising from natural disasters such as flooding, either of which could affect the financial position through increased credit costs or damage to owned branches. Large-scale natural disasters have also been selected as a top risk, with scenarios including branch damage, business disruption, and deterioration in the business conditions of client companies due to earthquakes, floods, tsunamis, and other events. Climate-related risks are managed on an integrated basis by the Sustainability Promotion Committee, and business continuity plans have been formulated to establish emergency response systems.

In addition to competition from other financial institutions within Iwate Prefecture, intensifying competition from new entrants from other industries and internet banks poses a risk of adversely affecting the financial position and results of operations if the Bank is unable to secure a competitive advantage. The shrinking of the market due to regional economic contraction could further intensify the competitive environment. Under the 22nd Medium-Term Management Plan, the Bank is working to establish a competitive advantage based on three policies: "transforming the business portfolio," "enhancing regional growth potential," and "strengthening organizational resilience."

There is a risk that violations of laws and regulations related to money laundering and similar matters could adversely affect the financial position and results of operations. This is also related to conduct risk, as inappropriate conduct by officers and employees could lead to a loss of credibility. Based on a risk-based approach that takes into account business fields, sales areas, and trends, the Bank formulates policies, procedures, and plans, and implements and operates risk mitigation measures.