THE TOCHIGI BANK, LTD.

The Bank Group, whose primary business areas are Tochigi Prefecture and Saitama Prefecture, faces the risk that deterioration in the regional economy directly affects the business conditions of borrowers. Downward migration in obligor classifications, declines in collateral value, and unforeseen events may increase non-performing loans and credit-related expenses. While the Group manages provisions for loan losses based on self-assessment, there is a risk that its response may lag in the event of a sudden change in economic conditions.

Fluctuations in interest rates may impair the value of the bond portfolio, including Japanese government bonds, and may also cause losses due to mismatches in interest rates and maturities between loans and securities (assets) and deposits (liabilities). The Group has established an ALM Committee and a Market Investment Committee and hedges risk using interest rate swaps and other instruments, but responding to rapid interest rate fluctuations may be difficult in some cases.

The Bank Group holds marketable securities, and a significant decline in prices could result in valuation losses or impairment losses, adversely affecting its business performance and financial condition. This could also lead to a decline in the capital adequacy ratio, raising the risk of falling below the regulatory minimum standard (4% under the domestic standard). While risk management is conducted through the sale and replacement of bonds and other measures, a sufficient response may be difficult in the event of a sudden market change.

If the capital adequacy ratio falls below the domestic standard (4%), there is a risk of receiving an order from the Commissioner of the Financial Services Agency to suspend all or part of operations. The capital adequacy ratio may decline due to a combination of factors, including increased expenses for disposal of non-performing loans, a decline in the value of the securities portfolio, changes in the standards for calculating the capital adequacy ratio, and reductions in deferred tax assets. The Group aims to control this within the range of its management capacity through integrated risk management.

Cyberattacks, unauthorized access, or computer virus infections targeting the Bank Group's systems or third-party systems could result in the suspension of financial services, information leaks, and the burden of damage compensation. While the Group is working to ensure safe system operations and information protection, responding to increasingly sophisticated and diverse attack methods remains an ongoing challenge.

If customer information or management information is leaked, lost, tampered with, or misused due to human error, unauthorized external access, or in the course of AI use, this could result in a loss of social trust and adversely affect business performance and financial condition. While the Group strives to establish a management framework that includes outside contractors, risks such as clerical errors or system failures at contractors are also inherent.

The Bank Group's primary business base is Tochigi Prefecture and Saitama Prefecture, and Tochigi Prefecture accounts for a large proportion of credit extended by region, meaning that deterioration in the regional economy directly leads to an increase in credit risk. There is a risk that natural disasters or the spread of infectious diseases could simultaneously cause damage to the Bank Group itself, constraints on business activities, and deterioration in the business performance of client companies. The high degree of dependence on the region limits the effect of diversification.

Delays in responding to AI technology could lead to stagnation in the creation of new value and the loss of business opportunities, while risks such as information leaks, copyright infringement, and hallucination also exist in connection with the use of AI. Development and revision of AI-related laws, regulations, and guidelines may necessitate additional system modification and organizational development costs, or force functional restrictions. Building an appropriate framework for managing AI utilization is an urgent task.

There exist both physical risks—physical damage to social infrastructure, the Bank's own real estate, and customer assets due to more severe abnormal weather and natural disasters—and transition risks—an increase in expenses for disposal of non-performing loans resulting from deterioration in the business conditions of borrowers due to stricter decarbonization regulations. While the Group is working to expand its risk identification, assessment, and information disclosure in line with the TCFD framework, there is a risk of a decline in corporate value if its response is deemed inadequate.

A shortage or outflow of the human resources necessary to realize the medium- to long-term management strategy could adversely affect strategy formulation and business operations. Litigation arising from unfair personnel practices or discriminatory conduct (harassment), or the pursuit of employer liability due to unlawful acts by officers and employees, could result in economic losses and a loss of social trust. There is also recognized risk in the event that human resource development and improvement of the internal environment do not proceed as planned.