THE BANK OF SAGA LTD.

The risk that deterioration in a borrower's financial condition or a decline in collateral value will necessitate additional provisions for loan loss reserves or write-offs of loans. The non-performing loan ratio stood at 1.87% as of the end of March 2026 (1.99% in the same period of the previous year), showing an improving trend, but in the event of a deterioration in the economic environment, additional provisions may be required, potentially affecting business performance. The Bank has established a system to make sufficient provisions in advance for anticipated loss portions, thereby limiting the impact to a minimal level.

The Bank holds government bonds and other bonds, equities, investment trusts, and foreign currency-denominated assets and liabilities, and a decline in bond prices or stock prices, or fluctuations in exchange rates, may result in losses that affect business performance. In addition, since mismatches in interest rates or maturities exist among assets and liabilities such as loans, securities, and deposits, there is also a risk that interest income may decrease due to interest rate fluctuations. The General Planning Division is focusing on enhancing ALM (comprehensive asset and liability management), aiming to control risk while achieving both profitability and soundness.

There is a risk that the Bank may be unable to secure necessary funds due to deterioration in its financial condition, or may be forced to raise funds at significantly higher interest rates than usual. There is also a possibility that the Bank could incur losses by being forced to trade at significantly disadvantageous prices if market disruptions make market transactions difficult. Liquidity risk is monitored monthly through ALM meetings and other means, and a system for implementing agile measures has been established.

If the domestic standard under the Banking Act (minimum 4%) is not met, there is a risk that the Bank may receive an order from the Commissioner of the Financial Services Agency to suspend all or part of its operations. Factors affecting the capital adequacy ratio include a decline in the value of the securities portfolio, an increase in credit-related expenses, a decline in the recoverability of deferred tax assets or restrictions on their inclusion, and changes to the standards or calculation methods for the capital adequacy ratio. Since deferred tax assets are based on forecasts and assumptions regarding future taxable income, if they are judged to be unrecoverable, a write-down may cause the capital adequacy ratio to decline.

The suspension of information systems could have a significant social impact, such as through disruption of settlement functions, and if a major system outage occurs due to system failure, unauthorized use, external cyberattacks, or failures at outsourcing partners, it could have a material impact on business operations, performance, and financial condition due to loss of credibility and the incurrence of recovery costs. The Bank strives to enhance its risk management system through measures such as establishing backup systems, making communication lines redundant, and strengthening cybersecurity measures.

There is a risk that clerical errors may occur in the many administrative processes involved in deposits, loans, foreign exchange, and other operations, leading to accidents, money laundering, or failure to fulfill obligations to prevent the financing of terrorism and proliferation. Clerical errors can undermine the accuracy and speed of operations and may also develop into compliance issues. The Bank continuously works to enhance management capabilities and improve administrative standards through the enhancement of regulations and manuals, head office group training, and on-site guidance at branches.

There is a possibility that uncertainties or deficiencies in legal relationships arising in various transactions, or a lack of compliance, could result in damage to credibility or losses. The Bank Group conducts its operations in accordance with various laws and regulations, but legal risk potentially exists due to the increasing complexity and diversification of laws and regulations. If a violation of laws or regulations occurs, it could result in serious consequences such as administrative sanctions, damages, or loss of credibility.

The occurrence of crime, natural disasters, infectious diseases, or other events may cause losses due to damage to branches and other facilities, as well as disruption to the business operations of the Bank Group. As a regional bank with its main business base in Saga Prefecture, responding to region-specific natural disaster risks is important. The Bank strives to mitigate risk through the development of business continuity plans (BCP) and other measures, but in the event of a large-scale disaster, an impact on business performance and financial condition may be unavoidable.

This is the risk of incurring losses due to rumors that misrepresent the Bank's management conditions, and the Bank recognizes that rumors that damage credibility can cause unforeseen losses for a financial institution. In today's world, where information spreads rapidly through social media and other channels, there is a risk that the impact of rumors could expand within a short period of time. Damage to credibility could lead to deposit outflows and loss of business clients, potentially having a material impact on business performance and financial condition.

There is a possibility that unfair or improper personnel management practices (issues related to compensation, allowances, dismissal, etc.) or discriminatory conduct (power harassment, sexual harassment, maternity harassment, etc.) could result in damage to credibility or losses. If human resources risk materializes, it could lead to litigation risk and administrative guidance, as well as negatively affecting recruitment and talent acquisition. The development of an appropriate personnel management system and improvement of the workplace environment remain ongoing challenges.