Hokuhoku Financial Group, Inc.

Due to a combination of factors such as failure to achieve targeted loan volumes and interest margins, deterioration of the competitive environment, delays in cost reduction, delays in digitalization, and difficulty securing human resources, the profitability enhancement measures implemented by the Group may fail to produce the originally expected results. In particular, in regional areas facing declining birthrates and labor mobility, the risk of difficulty securing the human resources necessary for business diversification and sophistication is increasing. As a countermeasure, the Board of Directors and other bodies monitor profitability conditions and discuss additional measures.

The majority of the Company's income depends on dividends from its bank subsidiaries, and if the receipt of dividends is restricted due to regulatory constraints or deterioration in the performance of the bank subsidiaries, the Company itself may face difficulty paying dividends. The Company continuously monitors the earnings conditions of its bank subsidiaries and strives to maintain its dividend policy.

The Group is legally required to maintain a capital adequacy ratio based on the domestic standard (currently 4%), and if the ratio declines due to increased credit costs, declines in the value of securities holdings, reversal of deferred tax assets, changes in regulatory standards, or other factors, the Group may face administrative dispositions such as dividend restrictions or business suspension orders. The Group continuously evaluates the adequacy of its capital through integrated risk management using VaR (99% confidence level) and stress testing.

As the Group's main business base is the three Hokuriku prefectures and Hokkaido, and the proportion of these regions within the credit portfolio is high, deterioration of the regional economy poses a risk of directly increasing non-performing loans and credit costs through increased loan defaults and declines in collateral value. There is also concentration of credit exposure to manufacturing, wholesale, and local government sectors, and changes in the business environment of specific industries may affect the credit portfolio. The Group manages and grasps credit risk through its internal rating system and self-assessment system, and implements appropriate write-offs and provisions.

If the value of securities held declines significantly due to fluctuations in interest rates, stock prices, bond markets, foreign exchange rates, and other factors, impairment losses or valuation losses may occur, adversely affecting business performance and potentially causing a decline in the capital adequacy ratio. The Group handles various financial products including derivatives, and the risk during sudden changes in market conditions is significant. This is controlled through an integrated risk management framework using VaR (99% confidence level).

If significant changes in market conditions occur or if external credit ratings are downgraded due to deteriorating performance, the Group may be forced to raise funds at significantly higher interest rates or may face deteriorating cash flow, adversely affecting its business performance and financial condition. Liquidity management under stress conditions is regularly confirmed through daily cash flow monitoring and management indicators with set alarm lines and crisis lines.

If a significant system failure occurs in the shared five-bank system (MEJAR) used by Hokuriku Bank and Hokkaido Bank, or if increasingly sophisticated cyberattacks result in the leakage of important information or system outages, this may adversely affect business operations, performance, and financial condition. The Group implements system management based on FISC security standards, has established a CSIRT for incident response, and conducts regular cyberattack response drills.

If important information such as customer data is leaked, tampered with, or improperly used due to intrusion by malicious third parties or human error by officers, employees, or outsourcing partners, this may adversely affect business operations and performance through the materialization of compensation claims and reputational risk. There is also an increasing risk that the sophistication and scale of financial crimes exploiting AI and other technologies may lead to substantial costs for damage compensation and preventive measures. The Group conducts regular monitoring of outsourcing partners and implements preventive measures in cooperation with police and other authorities.

Climate change risk may adversely affect the Group's business performance through two pathways: damage to the branch network and impact on business continuity due to increasingly severe natural disasters, and increased credit costs due to deterioration in the financial condition of borrower companies resulting from stricter regulations associated with the transition to a decarbonized society. There is also a risk of deteriorating performance if the Group's efforts and disclosures regarding climate change risk are deemed insufficient. The Group has expressed its support for the TCFD recommendations and is working to identify and assess risks and enhance information disclosure.

If deficiencies in legal compliance or inadequate anti-money laundering measures are discovered, this may have a significant impact on business operations and performance through administrative dispositions such as business suspension or fines, or through loss of public trust. There is also a risk that future changes in accounting systems, tax systems, or regulations could lead to increased costs or constraints on business operations. The Group prepares and reviews a compliance program annually and continuously monitors and analyzes the impact of regulatory changes.