North Pacific Bank, Ltd.

As of the end of FY2026 (ending March 2026), the amount of non-performing loans (claims under the Banking Act and the Financial Function Revitalization Act) stood at ¥93.4 billion, with a low ratio to total loans of 1.13%. However, deterioration of the Hokkaido economy due to soaring resource and material prices, worsening business conditions of borrowers, and fluctuations in real estate and stock prices could increase non-performing loans and credit-related costs, adversely affecting business performance and financial condition. The Bank works to curb increases in non-performing loans through daily customer dialogue to grasp business changes and through management improvement support.

Loans to the wholesale and retail industries, the real estate and goods rental industries, and local governments account for a relatively high proportion of the loan portfolio, and changes in the business environment of these industries could adversely affect business performance and financial condition. When deterioration in specific industries is a concern, the Bank introduces periodic analysis and management measures, and controls the portfolio based on the principle of eliminating large concentrations of credit and diversifying into smaller exposures.

As a bank operating under domestic standards, the Bank is required to maintain a capital adequacy ratio of 4% or higher on both a consolidated and non-consolidated basis; if the ratio falls below 4%, the Bank could be subject to measures such as a business suspension order from the Financial Services Agency. In FY2026 (ending March 2026), the consolidated capital adequacy ratio was 13.18% and the non-consolidated ratio was 12.80%, both currently at sufficient levels, but a decline in the value of the securities portfolio, an increase in risk assets, and the reversal of deferred tax assets, among other factors, could push the ratio down. The Bank conducts fixed-point verification of capital adequacy through integrated stress tests twice a year.

Fluctuations in interest rates, exchange rates, stock prices, and bond markets could adversely affect the value of the bond portfolio, including holdings of Japanese government bonds, and the valuation of equities. In particular, in a rising interest rate environment, the value of the bond portfolio could decline, and when stock prices fall, impairment and valuation losses could occur, adversely affecting business performance and financial condition. The Bank has established a market risk management framework and continues to monitor risk exposure.

If a cyberattack from outside the Bank, a system outage or malfunction, or destruction or leakage of information occurs, it could lead to the suspension of settlement functions or services and a loss of social trust, adversely affecting business performance and financial condition. In light of the recent intensification of cyber threats, the Bank has established the Hokuyo CSIRT to gather and understand information on attack trends and vulnerabilities and to build a framework for rapid response.

As the Bank's main business base is Hokkaido, if the regional economy deteriorates more than expected due to a significant contraction in inbound demand, reductions in public works spending, or other factors, it may become difficult to expand the revenue base and credit risk could increase. The Bank strives to contribute to the sustainability of the regional economy by working to enhance the value of businesses in Hokkaido through understanding of their operations and support for management improvement.

If business assets or collateral real estate of client companies are damaged by increasingly severe and frequent natural disasters such as typhoons, heavy rain, and heavy snowfall (physical risk), it could lead to an increase in credit-related expenses and disruption to business continuity. In addition, tightening of policies and regulations, technological innovation, and changes in market structure associated with the transition to decarbonization (transition risk) could reduce the profitability and asset value of certain industries and business partners, increasing credit risk. The Bank is advancing the development of its risk management framework through its response to the TCFD and TNFD.

If customer information is leaked due to human error by officers, employees, or outsourced contractors, or due to unauthorized access by an external party, it could result in claims for damages and a loss of social trust, adversely affecting business performance and financial condition. The Bank has implemented information leakage prevention measures, including establishing basic policies and handling regulations for group company information management, appointing information management supervisors and managers in each department, providing employee training, and implementing security measures.

Future changes in laws, regulations, policies, accounting systems, and other frameworks could result in increased costs and operational restrictions, adversely affecting business performance and financial condition. Changes in the calculation standards for the capital adequacy ratio (the finalized Basel III framework has been applied since the end of March 2024) and revisions to accounting standards could also be contributing factors. At present, it is difficult to estimate in advance the impact of future changes to the system.

The various business strategies being implemented to strengthen profitability (such as expanding the loan spread, increasing fee income, and reducing expenses) may not produce the results initially anticipated. Failure of these strategies could hinder the strengthening of the revenue base and adversely affect business performance and financial condition. The Bank strives for early detection of warning signs and implementation of countermeasures through agile risk monitoring (in principle, conducted monthly).