FIDEA Holdings Co. Ltd.

Shonai Bank and Hokuto Bank are planning to merge during fiscal year 2026, but unforeseen circumstances related to administrative and system integration, the materialization of operational risk, and cost escalation or unexpected additional expenses could result in the merger's effects falling short of initial expectations. Deterioration in customer relationships could also adversely affect business results and financial condition. The Group has established a merger preparation committee and functional subcommittees to work toward preventing the materialization of such risks.

As earnings are heavily dependent on interest income from loans and income from securities investment, continued interest rate hikes could adversely affect business results and financial condition through deterioration in the valuation of held securities and increased credit-related expenses. There is also a recognized risk that insufficient pass-through of policy rate increases to lending rates could lead to a decline in earnings. Many of the relevant factors, such as economic conditions, price trends, and the Bank of Japan's monetary policy, are beyond the Group's control.

In addition to the shrinking regional economy due to the declining birthrate, aging population, and population decline, competition is intensifying due to the entry of companies from other industries into the financial sector and the consolidation of regional financial institutions. Failure to secure a competitive advantage could damage the existing revenue base or increase liquidity risk due to competition for deposits. The Group aims to maintain competitiveness through the execution of its sales strategy but recognizes the risk of deteriorating business results should such efforts fail to succeed.

A prolonged weak yen and rising resource and commodity prices, which push up corporate cost-of-sales ratios, could worsen the business conditions of investee and borrower companies, leading to increased credit-related expenses. Revisions to plans for investment projects, including project finance, could also put pressure on earnings. The Group strives to prevent deterioration of loan assets through regular monitoring of the loan portfolio and thorough ongoing credit management.

If financial markets fluctuate significantly due to monetary policy trends in various countries or the materialization of geopolitical risks, the value of held securities could decline substantially, resulting in impairment or other losses. Deterioration in valuation gains/losses on securities due to rising domestic interest rates and falling domestic and overseas stock prices has been identified as a top risk. The Group's basic approach is to diversify investments into highly liquid and safe assets, and it manages this risk thoroughly through the setting of various holding limits and loss management thresholds.

If a system failure occurs due to a cyber attack such as targeted attack emails, human error, equipment failure, or a disaster, this could disrupt settlement operations and adversely affect business results and financial condition. The materialization of potential threats, including third-party risk, is also recognized as a risk factor. The Group addresses this through stable system operation and security measures based on various management regulations, as well as strict information management.

Diversifying career values and a more fluid labor market driven by rising wages are increasing the risk of talent outflow, while there is also a growing need to secure highly specialized personnel to respond to digitalization and IT adoption. The loss of capable personnel, delays in addressing diversity, and difficulties in new hiring and talent development could reduce competitiveness and service capability. The Group is continuously working on talent acquisition, development, and improving employee motivation.

The increasing sophistication and scale of financial crimes such as special fraud could result in substantial costs for compensating affected customers and for preventive measures. Inadequate response to anti-money laundering and counter-terrorism financing measures could lead to administrative sanctions or reputational damage. The Group treats the prevention of harm, strengthening of security, and reinforcement of its anti-money laundering management framework as important management priorities.

Physical damage from abnormal weather and natural disasters associated with climate change, as well as stricter regulations accompanying the transition to a low-carbon society, could adversely affect the business and financial condition of the Group and its borrowers. A delayed response to TCFD and TNFD could also lead to a loss of stakeholder trust and a resulting decline in corporate value, which has been identified as a top risk. The Group has expressed its support for the TCFD and TNFD recommendations and is working on response and disclosure in each of the categories of governance, strategy, risk management, and metrics and targets.

If the capital adequacy ratio falls below the domestic standard (4%) due to impairment losses from declining market values of securities, increased risk in loans and securities, changes in calculation standards, restrictions on the recognition of deferred tax assets, or other factors, the Group could become subject to guidance or orders under the Banking Act. As a holding company, there is also a risk that deterioration in the earnings of its bank subsidiaries could directly affect its dividend-paying capacity. The Group strives to manage this risk through optimization of portfolio management.