THE SHIGA BANK,LTD.

Deterioration in economic conditions or the financial condition of borrowers may result in loan losses that substantially exceed the provisions estimated based on historical loan loss ratios. Unexpected discounted sales resulting from declines in the value of collateral real estate and securities, or from the off-balance-sheeting of non-performing loans, are also factors that could increase credit-related expenses. The Bank addresses these risks through the recording of allowance for loan losses and partial direct write-offs; however, if regional economic deterioration or credit concerns regarding large borrowers materialize, this could have a material impact on business performance and the capital adequacy ratio.

The Bank's principal source of earnings is net interest income from deposits and loans, and depending on changes in monetary policy and the maturity structure of funding and investments, interest rate fluctuations may have a negative impact on earnings. In addition, the bond portfolio, including government and municipal bonds, is subject to the risk of unrealized valuation losses when interest rates rise, which could lead to a decline in the capital adequacy ratio. The Bank conducts forward-looking scenario analyses premised on a "world with interest rates" at the ALM Committee and other bodies, but responding to interest rate fluctuations beyond expectations may prove difficult.

The Bank holds a substantial amount of marketable equity securities, and a significant decline in share prices could result in impairment or valuation losses, leading to deterioration in business performance and a decline in the capital adequacy ratio. If geopolitical risk or economic deterioration in Japan or overseas spreads across the equity markets as a whole, the impact could be far-reaching. The Bank manages its equity holding levels based on its Risk Appetite Framework, but the effectiveness of this framework may be limited during sudden market changes.

With the expansion of non-face-to-face channels and the promotion of digitalization, the importance of system risk is increasing, and unexpected failures, malfunctions, or unauthorized use could make it difficult to continue operations and could lead to a decline in social trust. In particular, the risk of system failures due to unforeseen circumstances or the occurrence of unexpected additional costs during migration to the next-generation system is recognized as a top risk. The Bank strives to implement security measures and ensure stable operations, but the impact of a large-scale system failure could be significant in terms of both business performance and creditworthiness.

With the growing cyber risk, there is a possibility that attacks causing unauthorized access or system failures may occur at the Bank or at outside vendors and business partners, leading to interruptions in the provision of financial services, leakage of customer information, or unauthorized fund transfers. Financial crimes such as phishing scams and SNS-based investment fraud are also becoming increasingly complex and sophisticated, creating a risk of increased compensation costs and loss of social trust. The Bank has implemented measures such as establishing a system monitoring framework, training officers and employees, and cooperating with police authorities, but complete defense against increasingly sophisticated methods remains difficult.

The Bank has positioned risks related to money laundering, terrorist financing, proliferation financing, and sanctions violations as important management issues, and has established a risk-based management framework; however, there is a possibility that increasingly sophisticated fraud schemes, such as special fraud, could render the AML framework inadequate, resulting in fraudulent transactions. If violations of laws and regulations occur, administrative sanctions from domestic and overseas authorities and loss of social trust could have a material impact on business activities and performance. The risk of administrative sanctions due to fraudulent transactions with anti-social forces is also recognized as a top risk.

The Bank's business base is centered on Shiga Prefecture, including the Kinki region, Tokyo, and the Tokai region, and there is a risk that the customer base could shrink and earning power could decline due to the decline of regional industries and the progression of population decline and low birthrate/aging society. Deterioration in the regional economy is also directly linked to increased credit costs, and could have a compound effect on business performance through increased credit risk. The Bank recognizes this risk as a challenge for growth and reflects it in its management strategy, but responding to structural demographic changes remains a medium- to long-term challenge.

With the progress of deregulation in the financial system, competition has intensified across banking, securities, and insurance sectors, and competition to acquire deposits and loans has become even more severe due to innovation in digital technology and the entry of companies from other industries into banking. There is a risk that earning power could decline due to narrowing margins and a shrinking customer base, and delays in responding to digital strategy could lead to inferior customer convenience. If the Bank is unable to secure a competitive advantage against other financial institutions, this could have an impact on business performance and financial condition.

As the Bank has overseas business locations, it must satisfy consolidated and non-consolidated capital adequacy ratio regulations based on internationally uniform standards, and minimum levels are also stipulated for the leverage ratio, liquidity coverage ratio, and net stable funding ratio. If the capital adequacy ratio declines due to increased credit-related expenses, a decline in the value of the securities portfolio, an increase in retirement benefit obligations, or restrictions on the recording of deferred tax assets, there is a risk that the Bank could be subject to restrictions on external outflows or business suspension orders by the authorities. Future changes to regulatory standards or the introduction of new regulations could also affect business performance and financial condition.

If officers, employees, branches, or systems are damaged by a large-scale natural disaster or infectious disease outbreak, this could impede business continuity, and various risks could increase and materialize through adverse effects on the economy and markets as a whole. The intensification of abnormal weather associated with climate change could increase credit costs through business disruption at business partners and damage to collateral property, and there is also a risk that policy and regulatory responses associated with the transition to a decarbonized society could affect the business performance of business partners, which could in turn spread to the Bank's creditworthiness and business performance. The Bank has implemented measures such as formulating a BCP, but the impact of severe damage, if it occurs, could be far-reaching.