Hachijuni Nagano Bank, Ltd.

If the financial condition or business status of counterparties deteriorates due to fluctuations in economic conditions in Japan, overseas, and within Nagano Prefecture, non-performing loans and credit-related expenses may increase, adversely affecting business performance and leading to a decline in capital. Approximately 50% of total loans are extended within Nagano Prefecture, of which approximately 76% are to SMEs and individuals, resulting in a structure in which credit risk is significantly affected by regional economic trends. In response, the Bank is strengthening its understanding of counterparties' actual conditions, assigning appropriate credit ratings, and calculating loan loss provisions based on long-term average values that take business cycle fluctuations into account.

The Bank holds bonds with interest rate risk, such as Japanese and U.S. government bonds, and if domestic and overseas interest rates rise significantly, valuation losses may occur, adversely affecting business performance and leading to a decline in the capital adequacy ratio. In response, the Bank establishes market risk management policies on a semi-annual basis, sets maximum risk amounts and loss limits by transaction type and counterparty, and has established a system to report the risk status to the responsible officer on a daily basis.

The Bank holds marketable equity securities, and if a significant decline in stock prices occurs, impairment or valuation losses may arise, adversely affecting business performance and leading to a decline in the capital adequacy ratio. Based on its market risk management policy, the Bank sets loss limits and manages the balance between risk and return appropriately.

The Bank has a high dependence on market-based procurement for foreign currency funds, and a sharp deterioration in domestic and overseas economic conditions, financial market turmoil, deterioration in the Bank's business performance, or a rating downgrade could force procurement at higher-than-usual interest rates, or make procurement itself difficult, thereby affecting business performance. In response, the Bank manages, on a daily basis, management indicators that restrain excessive dependence on market funding and short-term funding, and has secured means of emergency foreign currency funding by entering into commitment-based currency swap agreements with multiple counterparties.

Because the Bank has overseas business locations, it is subject to the internationally uniform standard (Basel regulations), and if the capital adequacy ratio falls below the required level, the Bank may receive an order from the Commissioner of the Financial Services Agency to suspend all or part of its business operations. The main factors affecting this include an increase in risk assets due to deteriorating creditworthiness, an increase in credit-related expenses, a decline in the value of securities, restrictions on the recognition of deferred tax assets, and changes in calculation standards. The Bank addresses this through annual business plan formulation and regular capital assessments via stress testing.

Both "transition risk," arising from the introduction of policies and regulations and technological changes associated with decarbonization, and "physical risk," arising from the intensification of natural disasters, may adversely affect the business and finances of the Bank and its counterparties, and may increase credit-related expenses due to impairment of collateral asset value, among other effects. The Bank has expressed its support for the TCFD recommendations and is working to identify and assess risks and expand information disclosure in line with the TCFD.

If computer system downtime or malfunction occurs, or if information is destroyed or leaked due to an external cyberattack, this could affect business performance through the suspension of settlement functions and services and a loss of social trust. To prevent operational risk from materializing and to minimize its impact, the Bank conducts risk assessments annually, and the departments responsible for head office operations carry out risk reduction activities.

Future changes in laws, systems, regulations, etc., and situations arising from such changes, may affect the business operations and performance of the Bank and its consolidated subsidiaries. While the Bank currently conducts its operations in compliance with existing regulations, it faces the need to respond to changes in the regulatory environment.

If compliance with laws and regulations related to the prevention of money laundering and terrorist financing is found to be insufficient, this could adversely affect the group's overall business operations and performance through administrative sanctions such as fines imposed by domestic and overseas authorities, suspension of overseas remittance operations due to termination of correspondent banking agreements, and loss of social trust. The Bank Group positions the prevention of money laundering, etc. as a key management priority and is working to strengthen its management framework.

If a large-scale earthquake, typhoon, or other natural disaster occurs in Nagano Prefecture, the Bank's main business base, this could directly or indirectly affect business performance through damage to the Bank's assets and an increase in credit risk resulting from deterioration in the business performance of counterparties. Given the regionally concentrated structure in which approximately 50% of total loans are extended within Nagano Prefecture, changes in the regional economic environment have a significant impact on business performance, and the Bank strives to avoid the occurrence of such risks and to respond appropriately when they occur.