Yamaguchi Financial Group, Inc.

As a regional financial institution with its primary business base in Yamaguchi Prefecture, Hiroshima Prefecture, and Kitakyushu City, if the business conditions of borrowers deteriorate due to a downturn in the domestic and overseas economy or the occurrence of natural disasters, non-performing loans and credit-related expenses may increase, adversely affecting operating results and financial condition. The allowance for loan losses is accumulated based on the status of business partners and expected loss rates, but if unforeseen circumstances arise, such as a significant deterioration in economic conditions or a decline in collateral value, additional provisions may be required. A system has been established to prevent the materialization of credit-related expenses by discussing and supporting the early implementation of countermeasures for companies facing management challenges.

In a situation where mismatches exist in the amounts and maturities of fund investment and fund procurement, unexpected interest rate fluctuations caused by changes in global economic and financial conditions or changes in domestic and overseas fiscal and monetary policies may adversely affect operating results and financial condition. In addition, if there is a continued, broad-based, and substantial decline in the prices of the large volume of marketable securities held, there is a risk of impairment or valuation losses. As countermeasures, the Group sets limits on securities balances, establishes criteria for discussing total profit/loss and valuation gains/losses, quantifies and monitors risk, and reduces positions through the sale of held assets or hedge transactions as necessary.

If a decline in the Group's creditworthiness or a significant deterioration in financial markets causes an outflow of funds, or if fundraising in the market becomes difficult, forcing the Group to raise funds at higher-than-usual interest rates, losses may occur. "Difficulty in market funding and deposit outflows (yen) due to domestic economic downturn" and "difficulty in foreign currency market funding due to global recession" have been identified as material risks, which also include the risk of declining foreign currency liquidity. As countermeasures, the Group monitors the balance of investment and funding as well as the status of large-scale fund procurement, sets limits on market-based funding gaps, establishes required levels of liquidity reserves, and sets limits on the holding of low-liquidity assets.

As the Group has overseas business locations, it is required to comply with the internationally uniform consolidated capital adequacy ratio regulations (total capital adequacy ratio of 8% or more, etc.), and the capital adequacy ratio may decline due to valuation differences on held securities or fluctuations in risk assets. In addition, deferred tax assets are based on forecasts and assumptions regarding future taxable income, and if determined to be unrecoverable, they will be reduced, which may lead to a decline in the capital adequacy ratio. If the capital conservation buffer level falls below the required level, restrictions will be placed on dividends and other outflows outside the Group, which may adversely affect operating results and financial condition.

The occurrence of cyber attacks including ransomware, unauthorized access, information leaks, and other incidents may result in business suspension or impacts on customer information, causing significant effects on management. There is a risk that advances in frontier AI and other technologies will lead to more sophisticated and automated attacks, increasing the frequency of occurrences and expanding the impact through ripple effects via outsourcing partners. This has been identified as a material risk, and the Group has established countermeasures based on cybersecurity standards that take attack trends into account, as well as a system to minimize the scope and impact of damage when risks materialize.

A material risk has been identified in which failure to adequately respond to advances in digital technology and AI and changes in the competitive environment may lead to a decline in service competitiveness and stagnation in operational efficiency, affecting growth. Amid deregulation of the financial system and increasing entry into the financial sector by companies in other industries, delays in digital adaptation could directly lead to a loss of competitive advantage. The Group is advancing its response by positioning DX promotion as a pillar of its management strategy in the YMFG Medium-Term Management Plan (FY2025-FY2029).

A material risk has been identified in which changes in regional demographics and industrial structure, as well as changes in customer behavior, may shrink the customer base and affect the revenue structure, with a particularly strong tendency to be affected by the regional economies of Yamaguchi Prefecture, Hiroshima Prefecture, and Kitakyushu City, which constitute the Group's primary business base. In addition, significant deregulation of the financial system, consolidation among regional financial institutions, and intensified competition from entry by other industries may adversely affect operating results and financial condition if the Group is unable to secure a competitive advantage in its business base. The Group is working to maintain and expand its customer base through the development of community-based comprehensive financial services.

A material risk has been identified in which simultaneous progression of price increases and economic downturn may affect operating results and financial condition through deteriorating corporate earnings, increased credit costs, and fluctuations in market conditions. A rapid rise in interest rates driven by concerns over fiscal deterioration may also affect financial condition through the valuation of held securities and interest rate sensitivity. The Group addresses this through risk quantification using unified metrics such as VaR and risk capital allocation management within its integrated risk management framework.

Both transition risk, arising from changes in regulations, technology, and market conditions accompanying the shift to a decarbonized society, and physical risk, arising from the intensification of natural disasters, temperature changes, and sea level rise, exist, and these risks are characterized by their tendency to materialize by spreading across various risk categories such as credit risk, market risk, liquidity risk, and operational risk. This has been identified as a material risk, and concerns also exist regarding the impact on operating results and financial condition through investees and borrowers. The Group is incorporating climate change risk into its integrated risk management framework and is advancing the establishment of a management system across each risk category.

A material risk has been identified in which failure to secure and develop the necessary management and specialized personnel may affect strategy execution and business operations, and inappropriate working conditions, workplace environments, and safety conditions may also lead to a decline in competitiveness and efficiency. In addition, a risk has been recognized as material in which insufficient response to human rights issues (such as harassment) may damage social credibility and affect organizational management, thereby impacting the Group's management. As countermeasures, the Group is promoting the utilization of diverse talent through the review of its personnel system and the strengthening of mid-career hiring, among other measures.