THE TAIKO BANK,LTD.

There is a risk that non-performing loans and credit costs may increase due to a deterioration in domestic economic conditions or regional economic trends, changes in the financial condition of borrowers, or unforeseen natural disasters. Approximately 70% of loans are extended to borrowers in the local Niigata Prefecture, resulting in a high degree of dependence on the regional economy. Although the Bank responds through rigorous self-assessment, large-exposure borrower management, and management improvement support activities, such developments could adversely affect business results and financial condition and could lead to a decrease in capital.

The allowance for doubtful accounts is recorded based on assumptions regarding the condition of borrowers, collateral values, and economic conditions. However, if actual loan losses exceed expectations due to a significant deterioration in economic conditions or a substantial decline in collateral values, additional provisioning may be required. In addition, changes in the future business performance outlook of borrowers may cause the allowance in the following consolidated fiscal year to increase or decrease. Although regular verification and review are conducted, this could adversely affect business results and financial condition.

In investment activities involving financial instruments subject to market fluctuations, such as bonds and investment trusts, a significant rise in domestic interest rates could reduce the value of the bond portfolio, resulting in valuation losses or realized losses, which could lead to a decline in the capital adequacy ratio. In addition, a significant decline in stock prices could result in valuation losses or realized losses on shares held. The Bank addresses this risk through risk measurement using VaR and a reporting and deliberation framework via the monthly ALM Committee.

There is a risk that, due to major changes in market conditions or a deterioration in the creditworthiness of the Bank Group, it may become difficult to secure necessary funds, requiring fund procurement at extremely high interest rates or resulting in deposit outflows exceeding expectations. In addition, during periods of financial market turmoil, market liquidity may decline significantly, potentially leading to a decline in the value of held assets such as securities or forcing transactions at unfavorable prices. The Bank has established management standards, including the amount of liquid assets held, to ensure the appropriateness of liquidity risk management.

As the Bank has no overseas business locations, it is required to maintain a capital adequacy ratio of 4% or more under domestic standards on both a consolidated and non-consolidated basis. If this ratio falls below the required level, there is a risk that the Bank may receive orders from regulatory authorities to suspend all or part of its operations. The capital adequacy ratio could decline due to a combination of factors, including deteriorating business results, an increase in non-performing loan disposals, and fluctuations in market prices.

In addition to poor computer system quality and human error, system failures caused by external factors such as cyberattacks or natural disasters could affect business operations, results, and financial condition. The Bank addresses this through the duplication of core systems, establishment of a backup center, formulation of a cyberattack response manual, and drills assuming system failures.

If the management framework for preventing financial crimes and money laundering/terrorist financing is inadequate and financial crimes occur beyond expectations, this could affect business results and financial condition due to countermeasure costs, fines, and reputational damage. The Bank has established the "Anti-Money Laundering/Counter-Terrorist Financing Policy and Regulations," set up an Anti-Money Laundering Office, and is advancing organizational countermeasures through coordination among its sales, administrative, and audit divisions.

There is a risk that if actual taxable income differs from projections due to the occurrence of large-scale non-performing loan disposals or amendments to tax-related laws and regulations, it may be determined that part or all of the deferred tax assets are not recoverable, resulting in a reduction of deferred tax assets. Although the Bank currently records deferred tax assets based on reasonable and conservative estimates of future taxable income, this could adversely affect business results and financial condition.

If officers or employees violate laws and regulations, this could damage the credibility of the Bank Group and adversely affect business results and business development. Similarly, if a leakage of personal information or other data occurs, there is a risk of reputational damage. The Bank manages this risk through the establishment of an effective compliance framework, safety management measures in compliance with the Personal Information Protection Act, and the implementation of rigorous internal audits.

If a large-scale disaster beyond expectations occurs, such as an earthquake or other natural disaster, power outage, or infectious disease outbreak, there is a risk that all or part of operations may be suspended due to damage to facilities and systems or difficulty securing personnel. In addition, an increase in credit-related expenses due to the deteriorating financial condition of affected business partners could adversely affect business operations and results. Although the Bank has formulated a business continuity plan (BCP) and implemented countermeasures, there are limits to its ability to respond to disasters that exceed expectations.