ANNUAL REPORT 2011 Year ended March 31, 2011

THE NANTO BANK, LTD. 16, Hashimoto-cho, City, Nara 630-8677, Phone: (0742)22-1131

010_0550701372309.indd 2 2011/09/30 18:27:34 ANNUAL REPORT 2011

CONTENTS 01 Consolidated Financial Highlights 17 Initiatives for Local Development

02 Message from the President 18 Contributions to the Local Community (CSR Initiatives) 06 Medium-Term Management Plan 21 Board of Directors and Corporate 08 Business results for the year ended Auditors March 31, 2011 22 Consolidated Financial Statements 10 Corporate Governance 50 Independent Auditors’ Report 11 Compliance 51 Capital Management 12 Risk Management 52 Organization, Group Network 16 Management System Regarding Customer Protection 53 Affiliates and Subsidiaries, Bank Data

PROFILE The Nanto Bank, Ltd. (the “Bank” or “Nanto Bank”) is based in , a region rich in tradition and culture dating back to its development as Japan’s first capital in the early 8th century. Since its establishment in 1934, Nanto Bank has achieved steady growth in partnership with its region and continues to maintain a sound finan- cial structure. As of March 31, 2011, Nanto Bank had deposits of ¥4,181.0 billion, loans of ¥2,709.6 billion, and total assets of ¥4,608.5 billion.

Nanto Bank’s domestic network of 132 branches extends beyond Nara Prefecture to the neighboring prefectures of , , Hyogo, Mie, , and . The Bank has become a trusted institution in communities throughout its region thanks to its commitment to regionally focused services designed to meet the needs of local customers.

Nanto Bank continues to make a positive contribution to

regional economic development by providing a comprehen- KYOTO OSAKA sive range of financial services, including overseas services, HYOGO and maintains representative offices in Hong Kong and . TOKYO MIE NARA (NARA PREFECTURE) CORPORATE PHILOSOPHY WAKAYAMA 1. Pursuing sound and efficient management 2. Providing superior comprehensive financial services 3. Contributing to regional prosperity 4. Striving to become a highly reliable, friendly and attractive bank

010_0550701372309.indd 3 2011/09/30 18:27:35 Consolidated Financial Highlights

Thousands of Millions of yen U.S. dollars 2011 2010 2009 2008 2007 2011 For the year: Total income ...... ¥92,751 ¥95,942 ¥109,639 ¥118,188 ¥122,121 $ 1,115,466 Total expenses ...... 78,711 83,145 134,276 108,262 111,789 946,614 Income (loss) before income taxes ...... 14,039 12,796 (24,637) 9,926 10,331 168,839 Net income (loss) ...... 6,584 7,293 (22,324) 5,170 6,419 79,182 At year-end: Total assets ...... 4,608,561 4,568,768 4,607,649 4,565,111 4,654,230 55,424,666 Loans and bills discounted ...... 2,709,612 2,730,540 2,854,567 2,679,469 2,631,388 32,587,035 Securities ...... 1,668,948 1,560,110 1,425,966 1,540,174 1,699,653 20,071,533 Deposits and negotiable certificates of deposit ...... 4,181,096 4,117,975 4,083,246 4,082,565 4,155,660 50,283,776 Total liabilities ...... 4,401,386 4,361,672 4,445,015 4,366,001 4,426,365 52,933,084

Minority interests ...... 25,125 24,621 24,447 24,852 24,222 302,164 Total net assets ...... 207,175 207,095 162,634 199,109 227,865 2,491,581

Common stock ...... 29,249 29,249 29,249 29,249 29,249 351,761

Per share data: Yen U.S. dollars

Net income (loss) ...... ¥ 23.88 ¥ 26.45 ¥ (80.87) ¥ 18.67 ¥ 23.14 $ 0.28 Stockholders’ equity ...... 660.24 661.81 501.09 630.66 734.48 7.94

Capital adequacy ratio (%) ...... 11.74 12.12 10.06 10.78 11.15

Note: U.S. dollar amounts are included solely for the convenience of readers and are calculated at the exchange rate of ¥83.15 to US$1.00, the rate prevailing on March 31, 2011.

Net Income Total Assets Total Net Assets (Billions of yen) (Billions of yen) (Billions of yen)

227.8 4,654.2 4,565.1 4,607.6 4,568.7 4,608.5 207.0 207.1 7.2 199.1 6.4 6.5 5.1 162.6

-22.3

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

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010_0550701372309.indd 1 2011/09/30 18:27:36 MessageMessage fromfrom thethe PresidentPresident

The purpose of this Annual Report 2011 is to disclose our performance in fiscal 2010 (the year ended March 31, 2011) and the initiatives conducted during the fiscal year. We would appreciate it if you would read through the report for your reference. Although there were concerns mainly over the increase in prices for raw materials in the Japanese economy, the economic climate continued to improve, supported by a recovery in production activities, which led to gradual improvements in the employment situation. However, it is expected that production activities will remain sluggish for the near term due to the oc- currence of the Great East Japan Earthquake. Individual consumer sentiment has also deteriorated as a result and significant consideration is required concerning future risks of economic downturn. Although these events have had a wide-ranging impact on business performance in the regional economy centered on Nara Prefecture, new development that will bring new life to the local economy has been triggered by the Commemorative Events for the 1,300th Anniversary of Nara Heijo-kyo Capital held last year, and the plans for the Commemorative Events Following the 1,300th Anniversary are gradually being actualized. Against this background, the Bank has launched the new medium-term management plan, Best Value NANTO (April 2011 to March 2014). We aim for further increase of corporate value as we grow together with the region based on the four basic policies and eight key strategies that have been set forth in this plan. We look forward to your continued support as all of our officers and employees devote their full efforts to the achievement of this plan.

Aim for Further Increase of Corporate Value through Our New Medium-Term Management Plan I. Our Business Environment

recovery in the production activities of companies in Nara Prefecture, accompanying the nationwide restoration of pro- duction facilities, and tourist numbers are also expected to gradually recover as the prevailing atmosphere of self- restraint becomes more relaxed in the future. The Bank’s business environment has remained difficult due mainly to the long-term downturn in the economy and financial markets triggered by the bankruptcy of Lehman Brothers. Within this business environment, the Bank has striven to expand its marketing base with the deployment of region-based marketing activities and improve risk manage- ment through its previous medium term management plan, More Value “NANTO”. The impact of the Great East Japan Earthquake has contribut- The Bank launched the new medium-term management ed to an overall weak Japanese economy, as production activ- plan, Best Value NANTO (three-year plan) in April 2011. ities and consumer spending suffer. However, the restoration Targeting our 80th anniversary in June 2014, all the Bank of production facilities has proceeded steadily and this is officers and employees are united in their commitment to expected to contribute to a recovery in individual consumer build stronger relationships of trust between stakeholders sentiment in the future. including the local community, customers and shareholders, A wide range of sectors in the local economy centered on in addition to efforts to improve customer satisfaction and Nara Prefecture have been impacted as the earthquake has increase corporate value. caused interruptions in the supply chain and a decrease in tourist numbers. However, there have been some signs of

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010_0550701372309.indd 2 2011/09/30 18:27:38 II. New Medium-Term Management Plan

The new medium-term management plan, Best Value Through this plan, we will strive to strengthen our mar- NANTO represents the second and final stage of our long- keting structure for the improvement of customer satisfaction term vision established in 2008 of “aiming to further increase and strengthened earnings ability, as well as the further corporate value - a bank that grows together with the region enhancement of operational efficiency. it serves,” targeting our 80th anniversary in June 2014.

1. Improving customer satisfaction and strengthening earnings ability through deployment of community-focused marketing • Promoting Relationship-based Local Banking ness, while strengthening the coordination between the head- The Bank believes that facilitating finance for small and quarters and branches. medium enterprises is an important mission for regional financial institutions and strives to facilitate finance for these • Strengthening our marketing structure entities. Since the Act concerning Temporary Measures to The Bank is working towards strengthening of our marketing Facilitate Financing for SMEs (Small and Medium-Sized structure through mainly the establishment of new operation- Enterprises), etc. came into effect two years ago, we have al bases and further buildup of loans, deposits, and assets created a Basic Policy on Facilitating Finance and made under management. improvements to internal systems to enable more active facil- In addition to our existing operating area, we are increas- itation of finance for these enterprises than in the past. ing our presence in the Osaka area, which is consider to be a At the Corporate Finance Support Office that has been key region, by establishing new bases of operations and con- established in the Credit Analysis Division, expert staffs pro- tinuing aggressive placement of employees. When selecting vide advice and support on matters such as drafting manage- locations for new branches, we consider continuity with Nara ment improvement plans and conducting initiatives together Prefecture and existing branches, and set up branches in with companies to resolve management issues, in addition to regions with deep connections in order to enhance our guidance on reducing the burdens of debt service. branch network. Although some of our branches in Osaka are We have also provided flexible and prompt response to upper-floor branches for corporate customers, we are making inquiries from clients requiring new loans or help concerning a gradual shift to street-level branches. forcible changes in existing loan terms due mainly to reduc- The Sakai Branch was converted to a street-level branch tions in sales following the recent earthquake. in April 2011 in order to provide full services for individual In addition to financing, the Bank has established a com- customers. We will continue to convert upper-floor branches prehensive support structure in response to the various needs to street-level branches in the future depending on market of customers, as it deploys solution-oriented marketing and characteristics as we make efforts to both strengthen market- sales with a unified headquarters and branch office structure ing capabilities and improve customer satisfaction. that incorporates departments such as the Venture Business We are also actively promoting transactions relating to Support Office and the Asia Business Support Group. assets under management and personal loans with individual Specifically, we provide business matching opportunities customers in Nara Prefecture and the rest of our existing in Japan and overseas to support the expansion of our cus- operating area, while we strive to maintain and improve our tomers’ business, in addition to actively supporting business loan market share, including business loans. succession and M&A projects for our customers. We also uti- The Individual Sales Division was newly established in lize our representative offices in Hong Kong and Shanghai to April 2011 with the aim to strengthen marketing and plan- provide detailed support for businesses looking to expand ning capabilities to support individual customers. In addition, and conduct business overseas, especially in Asia. business at eleven locations of L-Plaza was also started in In this manner we promote Relationship-based Local April 2011. L-Plaza provides a wide range of services, Banking which are the origin of the regional banking busi- including housing loans and respond to inquiries concerning

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010_0550701372309.indd 3 2011/09/30 18:27:38 MessageMessage fromfrom thethe PresidentPresident

housing loans and asset management. For the convenience of We have also strengthened solution-oriented marketing our customers, L-Plaza is open also on weekends. Female and sales proposals for corporate clients and business owners employees serve not only as bank tellers, but also as retail as we strive to provide the detailed support that can only be sales staff, as they provide detailed guidance for individual provided by regional financial institutions in our aim to be a customers concerning asset management. bank that grows together with its customers.

2. Efficient use of corporate resources For the Bank to secure stable earnings in the future, in addi- plan also incorporates a thorough and further review of over- tion to the establishment of new branches and the enhance- all business expenses. ment of existing branches, we also need to continue making The fostering of the human resources who will act to pro- aggressive investments, such as investments in IT for the mote these measures is also essential for the Bank to grow advancement of our operations. together with the region and improve in value and satisfac- For this reason, we have made efforts to reduce business tion for all stakeholders. Accordingly, we will strive to foster expenses through the review and streamlining of headquar- highly-knowledgeable and experienced human resources ters and branch operations. The medium-term management worthy of the trust of our customers.

3. Enhancement and upgrading of internal control systems The Bank considers the advancement of business manage- In terms of risk management, efforts have been made to ment, including the enhancement and upgrading of internal control risks and returns through initiatives that allow for control systems to be an important management issue, and more advanced and enhanced management of risks. has made efforts to enhance our compliance framework and In the future we will continue efforts to further enhance incorporate more advanced and enhanced risk management. and upgrade internal control systems so that we can gain Efforts have been made to strengthen the compliance even more trust from stakeholders. framework through improvements in the effectiveness of monitoring and we have adopted preventive measures to avoid any inappropriate transactions.

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010_0550701372309.indd 4 2011/09/30 18:27:39 4. Promotion of enduring community contributions Since the Bank was founded, as part of our corporate philos- medium-term management plan, and in our aim to be “a ophy of contributing to regional prosperity, we have been bank that grows together with the region it serves”, we con- actively involved in community and public activities, in addi- tinually promote CSR (corporate social responsibility) activi- tion to conventional banking business such as deposits and ties that serve as a pillar for environmental conservation ini- loans. tiatives and social action programs. The “promotion of enduring community contributions” has been established as one of the basic policies in the new

• Environmental conservation initiatives tributed to society in a wide variety of ways that take advan- In 2002, we earned ISO 14001 environmental management tage of regional characteristics through unique initiatives. standard and we have continued steady programs to conserve We have supported the Yoshino Heart Project since 2009, energy and reduced paper and waste. In addition, we have whose mission is forest conservation through vitalization of actively implemented measures that will contribute to the the local industry of Nara Prefecture, forestry industry, and prevention of global warming, such as weeding of the Nanto other related industries. Through promoting the use of woods Forest in Asuka village by employee volunteers and setting produced in Yoshino, we are striving to stimulate the industry up Recycling Centers to make use of disposed documents. in Yoshino region and preserve forests. From last year, the Bank started new environmental conser- Nanto Bank also participates as a special member of the vation initiatives as it installed rooftop gardens at two newly Yoshino Cherry Tree Preservation Group, a group that was constructed branches in Osaka prefecture and introduced founded to protect the shiroyama-zakura (cherry trees electric cars as company cars. famous for their blossoms) at Mount Yoshino. Many of our We have made efforts to provide financial backing for customers supported our Yoshino Cherry Tree Time Deposit environmental conservation initiatives in the banking busi- that was made available from January to April 2011, in ness through the provision of environmentally-friendly finan- which 0.01% of total deposits were donated to a Cherry Tree cial products and services, such as the provision of preferen- Fund. Total deposits for this program amounted to ¥30 bil- tial interest rates for loans on homes that use wood from lion. forests in Nara Prefecture. In tourism, the Commemorative Events for the 1,300th Anniversary of Nara Heijo-kyo Capital held last year were • Social action programs successful and had a large positive economic effect. We have so far striven to carry out public programs that Centering on the Tourism Planning Office, the Bank will include: the Small Kindness Society, which conducts clean- cooperate with the promotion of activities such as the Post ups and blood donation in the local community; academic 1,300th Anniversary in the future. scholarships through the Nanto Scholarship Society. The We will continue to be actively involved in initiatives for Manyo Charity Walk provides opportunities to walk around community contributions in the future with the local commu- historical sites featured in Manyoshu (a collection of nity as we strive to increase corporate value. Japanese poetry) twice a year, in which donations are given to social welfare councils in accordance with the number of President Yasuo Ueno participants. The Nanto Bank Hockey Team, which was founded in 1982, promotes social exchange programs with the local community through hockey. We have thus long con-

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010_0550701372309.indd 5 2011/09/30 18:27:39 2011/09/30 18:27:40

Improvement in Improvement community and shareholder value (Local community and customer value) customer satisfaction Improvement in local Improvement Strengthened financial financial Strengthened capabilities provision service Improvement in profitability Improvement w in the future, we will work towards establishing towards will work w in the future, we Specifically, this plan will be implemented based on four this plan will be implemented Specifically, new operational bases and strengthen our marketing bases and strengthen our marketing operational new reinforce stable to efforts make structure while we sector. earnings ability in the market To expand the scope of operations and continue to to the scope of operations and continue expand To gro  • with the region it serves”, established in 2008 (a six-year 2008 (a six-year established in it serves”, with the region This in June 2014. our 80th anniversary vision), targeting between to maintain a balance aims strategy management while seeking sustainable growth. and efficiency profitability strategies. key basic policies and eight - ork Key strategies Key fice network, which will focus on business loans, by enhancing our office loans, by enhancing our office which will focus on business network, fice Corporate philosophy Pursuing sound and efficient management Pursuing sound and efficient services financial superior comprehensive Providing prosperity to regional Contributing bank highly reliable, friendly and attractive to become a Striving 3 4 1 2 Improvement in Improvement of employees treatment Improvement in Improvement (Employee value) (Employee employee motivation employee The Medium-Term Management Plan—Best Value NANTO Value Plan—Best Management The Medium-Term A positive cycle with stakeholders A positive cycle with stakeholders through improvement of our brand network mainly in Osaka prefecture network market share including business loans, mainly in Nara prefecture; the potential markets loans, mainly in Nara prefecture; the potential share including business market Construct a long-term and stable earnings structure by strengthening earnings ability in the market sector by strengthening earnings ability in the market Construct a long-term and stable earnings structure Establish a geographically broad-based business of Establish a geographically broad-based business and personal loans, and maintain or increase the loan focused on assets in custody Expand of personal banking business  This medium-term management plan represents the sec- This medium-term management Increase customer satisfaction and enhance profitability through relationship-based relationship-based through and enhance profitability customer satisfaction Increase local banking towards creating business opportunities through improved opportunities through improved creating business towards for the local solution-oriented marketing and convenience custom- to improve community and customers, and strive and strengthen earnings ability. er satisfaction We will devote ourselves to deployment of business business of to deployment ourselves devote will We the local community as we w together closely with 2. 1. 3.  ond and final stage of our long-term vision of “aiming to fur stage of our long-term vision ond and final I. • The Bank has launched the Best Value NANTO medium- NANTO Value has launched the Best The Bank April be enacted from The plan will plan. term management 2014. 2011 to March together - a bank that grows value ther increase corporate Medium-Term Management Plan Management Medium-Term

Medium-Term Management Plan 6 010_0550701372309.indd 6 7

Medium-Term Management Plan 2011/09/30 18:27:41 ork towards more advanced and enhanced and enhanced advanced more ork towards Numerical targetNumerical target (April 2008 to March 2011)(April 2008 to March 2011) over ¥20 billion over Fiscal year 2013 Fiscal year management of risks. We will actively strive to foster human resources to to resources human foster to strive actively will We support these measures. of risks and returns, management more efficient For we will w development of the regional society and economy in society and economy in of the regional development corporate social responsibility. our order to fulfill   • • (the year ending March 31, 2014) ending March (the year (April 2011 to March 2014) (April 2011 to March 2014) Core operational net profits: net profits: operational Core Key strategies Key Key strategies Key strategies Key Long-term visionLong-term vision More Value “NANTO” Best Value NANTOBest Value NANTO work to gain even more trust from more trust from even to gain work “Aiming to further increase corporate value corporate value “Aiming to further increase“Aiming to further increase Measures Measures To maintain the balance between profitability and soundness while seeking and soundness between profitability maintain the balance To target strategy a long-term business established we have sustainable growth, and the environment based on the outlook on future changes in the business at the Bank. current awareness f. To make this possible we will streamline this possible we will streamline make To f. utions to environmental preservation and the and the preservation utions to environmental Four basic policies basic policies Four Four Stage 1Stage 1 Stage 2Stage 2 vating staff vating Eight key strategies strategies Eight key Eight key — a bank that grows together with the region it serves” together with the region it serves” — a bank that grows— a bank that grows Foster human resources with high-level and practical marketing capabilities as well as management abilities for educating and capabilities as well as management and practical marketing human resources with high-level Foster moti  stakeholders. stakeholders. headquarters and branch operations, and conduct a operations, and conduct a headquarters and branch in an expenses of business review comprehensive use corporate resources. to efficiently effort We will employ corporate resources to make continual corporate resources to make will employ We contrib We will strive towards further strengthening of our further strengthening of our towards strive will We compliance frame We will invest in key fields and increase the number of the and increase fields in key will invest We sales staf 8. Enhancement of CSR initiatives 5. Shift staff to the sales sector by streamlining headquarters and branch operations to the sales sector by streamlining headquarters 5. Shift staff framework 6. Further enhancement of our compliance and enhanced risk management 7. More advanced 4.    • • • IV. Promotion of enduring community contributions Promotion IV. III. Enhancement and upgrading of internal control systems control and upgrading of internal III. Enhancement II. Efficient use of corporate resources of corporate use II. Efficient 010_0550701372309.indd 7 The Medium-Term Management Plan—Best Value NANTO Value Plan—Best Management The Medium-Term 2011/09/30 18:27:41 6.5 (Billions of yen) (Billions of yen) (Billions of yen) 2011 2011 2011 4,181.0 2,709.6 12.7 7.2 Ordinary income Net income 2010 2010 2010 2,730.5 4,117.9 10.9 (22.3) 2009 2009 2009 4,083.2 2,854.5 (26.6) 5 0 0 0 15 10 (5) (20) (25) (30) 3,500 3,000 2,500 4,000 3,000 2,000 Ordinary income and net income Ordinary Loan balance Deposit balance - Deposits and loans Earnings Nonetheless, the balance of loans decreased by ¥20.9 bil- porate demand for funds remained stagnant under the current climate in the local economy. severe lion from the previous fiscal year to ¥2,709.6 billion as cor as billion ¥2,709.6 to year fiscal previous the from lion Loans of forms to on smooth supply of fund in a variety focused We enterprises as well as small meet the needs of middle market customers and medium-sized enterprises on top of individual servic- to promote community-focused financial in an effort responding to the demand for funds of the es, while actively local governments. Deposits fiscal the previous Deposits increased by ¥63.1 billion from in both growth year to ¥4,181 billion as a result of the solid to This reflects our efforts and corporate deposits. individual products and services, together with our con- enrich financial tinued focus on stable fund raising. Ordinary income and net income Ordinary - fis billion from the previous increased ¥1.8 Ordinary income general of reversal the to thanks billion, ¥12.7 to year cal in increase an with along losses, loan possible for reserve etc.) bonds, government (Japanese bonds on (losses) gains ¥6.5 to year on year billion ¥0.7 by decreased income Net in income taxes. billion due to an increase Business results for the year ended March 31, 2011. 31, March ended year the for results Business

Business results for the year ended March 31, 2011. 8 010_0550701372309.indd 8 9

Business results for the year ended March 31, 2011. 2011/09/30 18:27:41 (%) (%) 6.00 5.00 4.00 3.00 2011 10.20 3.23 1.7 2.0 15.4 87.5 68.2 2011 Restructured Loans Delinquent Loans 3.20 9.57 2010 2.6 3.3 15.6 87.5 65.9 2010 3.40 Loans to Bankrupt Obligors Three Months or More Due Loans Past 8.63 2009 3.8 2.0 97.1 67.4 23.8 2009 Ratio 0 0 80 40 120 Based on the Tier 1 measure, which consists of fundamen- 1 measure, which Tier Based on the 9.00 6.00 3.00 12.00 Risk-managed loans Tier I ratio Tier Loans (Billions of yen) - earnings, the consolidat core capital and retained tal items as at 10.20%, maintaining high levels. ed capital ratio stood (%) 2011 11.74 2010 12.12 2009 10.06 Capital adequacy ratios Capital Bad debts 0 8.00 2.00 4.00 6.00 14.00 12.00 10.00 Capital adequacy ratio Domestic Standards As of March 31, 2011, consolidated capital adequacy ratio ratio adequacy capital consolidated 2011, 31, March of As benchmark 4% the beyond far was which 11.74%, was to domestic standards. required of banks subject Risk-managed loans of comprised Law, Banking the under loans, Risk-managed Past Loans Loans, Delinquent Obligors, Bankrupt to Loans They Loans. Restructured and More, or Months Three Due of balance the 2011, 31, March of As only. loans to refer representing 3.23% risk-managed loans totaled ¥87.5 billion, 0.03 points year on of total loans outstanding, an increase of year. 010_0550701372309.indd 9 2011/09/30 18:27:42

Corporate Auditor’s Office (As of July 1, 2011) Assistance Appointment/Dismissal Board of Corporate Auditors (5 Corporate Auditors (including 3 External Corporate Auditors)) Report Co- operation Internal Audit Division Auditing Report Internal Auditing Discussion Session In regards to the corporate auditors’ audits, operational operational audits, auditors’ corporate the to regards In The Board of Corporate Auditors meeting is held once a The Board of Corporate Additionally, the Managing Directors’ Committee Committee Directors’ Managing the Additionally, in order to supplement appropriate operational Moreover, Subsidiaries Consolidated Conference audits and accounting audits are performed at the sole discre- Audit results are reported to the Board tion of such auditors. the and Directors, Representative Auditors, Corporate of Board of Directors. directors in performance of their duties in various ways, ways, various in duties their of performance in directors Directors, of Board the of meetings attending by including the Managing Directors’ Committee, and other committees, as well as presenting their opinions. needed. as basis ad-hoc an on also and principle in month of Board the assists Office Auditor’s Corporate The members. Auditors with three full-time staff Corporate Also, they allow for continuously increasing corporate values corporate values continuously increasing for allow Also, they parties. the aforementioned of to the expectations responding as are system governance corporate the of aspects main The 1, 2011). (as of July follows the chairman, the president, the senior Meeting, comprising (3 person), and the managing directors (1 directors managing a week in principle as a decision mak- persons) is held once man- daily concerning matters important for institution ing decision making is attempted. prompt Thereby, agement. of and advancement to diversification in response execution the Committee, ALM the as such committees operations, been established. have and the like Compliance Committee, Group Operation Supervision Appointment/Dismissal/Supervision Report Cooperation Instruction President (14 Directors) Stockholders’ Meeting Board of Directors (Deliberation of Important Cases) (Titled Directors/Standing Corporate Auditors) Directors/Standing Corporate (Titled Managing Directors’ Committee Appointment/Dismissal Committees ALM Committee Consent of Appointment and Reappointment/Judgment of Reasonableness of Auditing Consent of Appointment and Reappointment/Judgment Compliance Committee ecution of duties is conducted in conformance with laws, regulations, and articles of incorporation (Compliance system) and regulations, ecution of duties is conducted in conformance with laws, veness and independence of auditing by corporate auditors, and other systems, etc. veness Headquarters Branches icient conduct of execution of duties icient conduct of execution Report Report Review Auditing Evaluation Appointment/Dismissal Accounting Auditor Systems to Ensure Proper Conduct of Business Proper Systems to Ensure Internal Audit Audit Audit and Internal Auditors’ Corporate Matters related to Corporate Auditors and the Board of Corporate Auditors Auditors Corporate and the Board of Auditors to Corporate Matters related Corporate Governance System Governance Corporate System to ensure that ex System for retention and control of information System for management of risk of loss (Risk management system) System for eff Bank and subsidiaries in the corporate group comprising the System to ensure proper conduct of business System to ensure effecti

To ensure that all management decisions are fair and and fair are decisions management all that ensure To The Board of Directors holds a regular meeting once a a once meeting regular a holds Directors of Board The ● ● ● ● ● ● Corporate Governance Structure Corporate Governance In order for the Bank to ensure the proper conduct of its business, the Board of Directors made a decision to manage the structure In order for the Bank to ensure the proper conduct of its business, outlined below. The Internal Audit Division consists of 41 staff members members staff 41 of consists Division Audit Internal The is division This experience. and knowledge necessary with independence responsible for internal audits, and it preserves are results Audit audited. are that departments the from the and Committee Directors’ Managing the to reported Board of Directors. legal, the corporate auditors properly monitor and audit the legal, The Bank is structured with a corporate auditor system con- profound with auditors corporate full-time two of sisting and accounting and finance operations, bank of knowledge (inde- auditors corporate external independent highly three corporate auditors combine their The five pendent officers). and and capabilities to enhance the effectiveness knowledge auditors corporate the by conducted audits of transparency Auditors. and the Board of Corporate month in principle, and it convenes extraordinary meetings meetings extraordinary convenes it and principle, in month deci- Directors, of Board the of meetings At necessary. as managerial matters and opera- sions are made on important addi- In attend. auditors corporate all and execution, tional various and execution operational concerning reports tion, committees are made. The Board of Directors, comprising 14 directors, plays a cen- The Board of Directors, of Board The system. governance corporate our in role tral - is strictly applied, and prompt and effi Directors Regulations is undertaken. cient decision making Corporate Governance Corporate includes priorities management important most our of One realiz- and and efficiency management transparency enhancing - confi strong the us earn factors These management. fair ing and other stakeholders, customers, stockholders dence of our governance. corporate strengthen and fulfill to us allowing

Corporate Governance 10 010_0550701372309.indd 10 11 Compliance 2011/09/30 18:27:42 gards gards The Bank has attempted to avoid and mitigate legal risks legal and mitigate The Bank has attempted to avoid The Bank takes the following approaches in order to ganization. Plans and supervision of compliance are carried ganization. via legal examination by external experts, such as corporate experts, by external examination via legal and the Compliance & Risk Management Division. lawyers, increase compliance awareness of and respond to risks. legal e compliance is drawn up each year and undergoes appropriate up each year and undergoes e compliance is drawn ve compiled a Compliance Handbook, which serves as a guidebook compiled a Compliance Handbook, which serves ve Antisocial Forces in order to take a resolute stand against anti-social a resolute stand against in order to take Antisocial Forces work for the compliance system, we have set our compliance regulations, established rules for established rules regulations, set our compliance for the compliance system, we have work es to properly operate a Compliance Hotline internal reporting system that was established to prevent legal legal established to prevent reporting system that was es to properly operate a Compliance Hotline internal To instill a compliance mindset throughout the Bank, we ha To on Response to The Bank has established the Regulations A Compliance Program consisting of concrete plans to achiev A Compliance Program consisting of concrete The Bank striv To establish a basic frame To to compliance are the responsibility of the Compliance Committee, which is Deliberations and decisions of matters related or across the bank’s chaired by the President and operates horizontally In recognition of the public missions and social responsibilities that financial institutions need to perform, the Bank re institutions need to missions and social responsibilities that financial In recognition of the public review. compliance with laws and regulations as the most important management issues and established Charter of Corporate Behavior, Charter of Corporate Behavior, most important management issues and established as the and regulations compliance with laws trust from all stakeholders to gain to follow and employees Policies and Code of Conduct, for all officers which consists of Basic our customers and shareholders. including local communities, of disciplinary action as means of in the administration and transparency disciplinary action, and demonstrate fairness and regulations. laws establishing a clear stance on compliance with out in the Compliance & Risk Management Division. and to rectify them immediately. occur, them promptly if they to discover occur, violations and misconduct before they conduct group training and and regularly and employees, all officers to compliance and has been distributed for achieving workgroups. of individual seminars at the workplaces attempt to and block any strong measures to intervene society and take of civil forces that pose a threat to the order and security relationship with the Bank. create any

Responses to Legal Risk Thorough Execution of Compliance Thorough ● ● ● ● ● ● ● Compliance The term “legal risk” refers to risk of incurring loss or dam- The term “legal - resulting from neg age arising from violation of obligations business inappropriate and customers concerning ligence practice. and/or market Compliance refers to strict observance ethicsof andsocial norms regulations, as as laws, well ordinances, government and the bank’s regulations. This is essential for banks to faithfully carry out our social responsibilities and public missions. 010_0550701372309.indd 11 2011/09/30 18:27:42 Division Compliance & Compliance Risk Management ( ) Compliance Structure Compliance Committee Division Compliance & Risk Legal Risk Compliance & Management Division Risk Management (Compliance Small-Committee) ( ) Division General Affairs Tangible Assets Risk Division Personnel Personnel Risk Committee Committee General Managers’ General Managers’ Committee Managing Directors’ Headquarters Deputy The situation of each risk is evaluated at a monthly ALM at a monthly The situation of each risk is evaluated Division General Planning Reputational Risk aims to create an advanced risk management system, so that so system, management risk advanced an create to aims management sound and appropriate maintain can Bank the to its customers. reliable services and provide to intending method, management risk integrated the using - appropri at adequacy capital its and risks of amount the keep Biannually, its management vitality. in the light of ate levels for amounts) based (risk capital risk determines Bank the of its capital adequacy, of risk within the scope each category to VaR) of each risk (e.g. to limiting the value with a view the amount of risk capital. of level appropriate the decides which meeting, Committee - more effec risk control to implement, aiming at conducting - the view risk and return management from and efficient tive - profit higher and management sound maintaining of point of capital. utilization ability alongside effective Operational Risk Division Systems Risk Operations Control External Auditing (Compliance & Risk Management Division) Directors Board of Internal Audit Division Division Operations Control Administrative Risk ( ) ( ) ( ) ( ) ( ) Risk Management Structure Division Compliance & Risk Management Liquidity Risk ( ) Compliance & Risk Management Division Divisions of Headquarters/Branches/Consolidated Subsidiaries Division System Risk Committee Compliance & Risk Management Market Risk (Warning Council) Emergency Council Credit Division Analysis Board of Credit Risk ( ) ( ) ALM Committee Corporate Auditors (ALM Small-Committee) Auditing in Charge Operation Risk Management Coordination Risk Management Committees Organization Main Division Risk Categories ( ) The Bank has adopted a policy of Risk Management Management Risk of policy a adopted has Bank The Furthermore, it defines its basic risk management policies Furthermore, it defines In such an environment, the Bank regards risk manage- risk regards Bank the environment, an such In Supervising Division Risk Management Structure Coordination, under which it quantifies various risks by by risks various quantifies it which under Coordination, in risk management regulations and other requirements requirements other and regulations management risk in Regulations, Coordination Management Risk the including to appropriately manage the risks. in an effort To cope with the various risks that the Bank faces in operat- risks that the Bank faces cope with the various To units for specified it has established ing its banking business, the incorporates also Bank The risk. of category each for responsible Division Management Risk & Compliance a precise coordination, in order to gain the risk management expeditious and sizes of risks and take understanding of areas them. steps towards ment as one of its most important management issues and and issues management important most its of one as ment Risk Management Risk surrounding environment management the years, recent In risks the and drastically, changed has institutions financial and complex. become more diversified have face they

Risk Management 12 010_0550701372309.indd 12 13 Risk Management 2011/09/30 18:27:42 The Bank regularly and appropriately reviews transaction and appropriately reviews The Bank regularly loan portfolios, the Bank the management of overall For As for the capital adequacy assessment, the Bank posi- Bank the assessment, adequacy capital the for As ment and other methods, with which the Bank subjectively subjectively Bank the which with methods, other and ment In credit capability. recognizes and manages each customer’s of setting an interest rate (Pricing) a policy addition, we have customers according to their rat- to be applied to individual measures we take Through this, ing-based creditworthiness. - profit and increase risk management to strengthen our credit ability. debt with borrowers the to limits credit establishes and terms, credit reducing to view a with amount, certain a exceeding risk by conducting strict credit control. by system support assessment efficient more on worked has e.g. analysis, segment including systems, several using estate real a analysis, group-based rating or industry-based the quantified system, designed to refine collateral evaluation of credit risk which calculates possible collateral evaluation losses in future by using statistical methods, etc. tions itself to be able to review the allocation of its internal the allocation to be able to review tions itself and other capital strategies necessary internal capital, discuss ALM Committee the monthly-held necessary actions through with management sound a maintain to intend We meeting. increase and practices control risk appropriate of help the internal our of utilization effective the through profitability management capital internal this operating fully by capital, structure. branches, in conformity to the Regulations on Self- on Regulations the to conformity in branches, are then subjected Assessment results Assets. Assessment of - process, where the results are exam to a rigorous verification the by audited further Division Analysis Credit the by ined the results, audit the to According Division. Audit Internal and depreciation of amounts appropriate determines Bank appropriate perform to strives it way, this In allowances. the improve and maintain and practices assessment asset soundness of assets. -

s assets. It is an important method of ’ Our credit analysis and risk management measures measures management risk and analysis credit Our The Credit Analysis Division consists of the Credit Credit the of consists Division Analysis Credit The We have established the Credit Analysis Division as a risk Analysis Division established the Credit have We We also use the integrated risk management method to to method management risk integrated the use also We The Bank conducts a quarterly assessment of its internal The Bank conducts a The Bank carries out the following assessment of its its of assessment following the out carries Bank The Managing Asset Appraisals Managing Asset Appraisals Managing Credit Risk Managing Credit Managing Internal Capital Internal Managing

• assets held of individual Appraisals are for the review Asset institution in order to comprehend the accurate by a financial status of the institution include rigorous self-assessment, credit rating which is con- credit rating which self-assessment, rigorous include used in self-assess- classifications sistent with the borrower Analysis Group, which handles general screening and indus- Analysis Group, which handles general screening screening; the Management Group, which inten- try-specific has performance business whose supervises borrowers sively Office, Support Finance Corporate the and deteriorated; business with borrowers assist to established was which units these Together initiatives. recovery and restructuring - risk management tai form a structure that supports flexible circumstances of each customer. lored to the specific ly compare the level of these risks with internal capital so as of ly compare the level our of assessments the out carry and risk each control to for each risk. internal capital adequacy - the cred management body that is responsible for examining the management it standing of customers, loan screening and of claims. quantify the various risks faced by the Bank, and we regular we and Bank, the by faced risks various the quantify • Bank the assets, its of soundness continuing the ensure To that structure screening credit a under risk credit manages operations. operates independently of marketing capital adequacy by analyzing factors that cause the capital the capital cause that by analyzing factors adequacy capital I ratio to fluctuate. Tier ratio and adequacy Managing Internal Capital refers to the implementation of of implementation the to refers Capital Internal Managing capital, internal of level sufficient a maintain to measures capital the of computation and assessment adequacy capital ratio. adequacy • assets. Actual assessments are conducted by its operating operating its by conducted are assessments Actual assets. credit risk management and a preliminary procedure to to procedure preliminary a and management risk credit and depreciation of amount the determine appropriately financial the by conducted assessment Asset allowances. institution itself is referred to as a self-assessment. 010_0550701372309.indd 13 2011/09/30 18:27:43 Operational risk should be reduced to a minimum for for minimum a to reduced be should risk Operational - into one of three lev situation is classified The cash flow Allowable risk limits are measured based on VaR and and VaR on based measured are limits risk Allowable administration. At the same time, the Bank aims to raise staff At the same time, the Bank aims to raise staff administration. training standards by conducting regular work administrative the guidance. Separately, work office temporary or programs admin- efficient and accurate more establish to intends Bank the systemization and cen- operations by facilitating istrative processes. tralization of administrative administrative risk, systems risk, reputational risk, personnel administrative risk. risk, tangible assets risk and legal Bank the therefore operations, of management smooth and structure efficient more and better establish to intends systems in order to adequately cope with the risk, aiming to of materialization of the risk or minimize the effect prevent materialized risk. Division monitors the management conditions. The ALM ALM The conditions. management the monitors Division and monitoring overall for responsible also is Committee of monitoring the including risk, flow cash of management for liquidation and the amount of funds that assets available the Bank can procure. “con- phase,” “regular situations: financial to according els developed has Bank The phase.” “crisis and phase” cern in implemented flexibly be can that systems management each of these situations. determined by the Bank’s ALM Committee biannually, in in biannually, Committee ALM Bank’s the by determined and conditions market status, capital its of consideration to efforts members make operation staff Market other factors. limits. risk allowable with these while complying profits gain - reve ALM Committee obtains actual risk and month, Every and discusses appro- operation market nue results from each generate earnings efficiently to control risks and priate ways condi- other and prospects market the of account taking by stress test which to the with regard tions. In addition to this, extreme on the Bank from the markets’ measures the impact of projections, the Bank is aware VaR fluctuations exceeding for the last fluctuation in each market the maximum scope of events. 10 years, bracing up for contingency

- reg Administrative of The Bank reinforces the provisions At the Bank, departments in charge of operational risks risks operational of charge in departments Bank, the At According to monthly fund management plans formulated According to monthly fund management plans Managing Administrative Managing Administrative Risk Managing Operational Risks Managing Liquidity Risk Managing Market Risk Market Managing

- the regula compliance with strict staff ulations and requires in its accurate and strict customer confidence tions to achieve apply the perspectives of specialists to the management of of management the to specialists of perspectives the apply a as loss-making of risk the to refers risk Administrative processes along- accurate administrative result of neglecting side occurrences of accidents or fraud. Operational risk is the risk of the Bank management result- Operational risk is the risk of the Bank management failed or inadequate to due loss, a making Bank the in ing and of executives processes of banking operations, activities other and temporary and part-time (including employees external as well as or systems, workers) classified similarly events. by the ALM Committee, the Securities and International International and Securities the Committee, ALM the by position on a cash flow closely manages the Bank’s Division Management Risk & Compliance the and basis day-to-day Liquidity risk, known as fund-raising risk, is defined as the as fund-raising risk, is defined Liquidity risk, known of possibility the to due loss, a making Bank the of risk the required funds either encountering an obstacle in raising procurement of because of a mismatch between the use and of funds; or being forced to outflow funds or an unexpected at higher interest rates than usual. borrow The Bank controls its market operations under a system of of system a under operations market its controls Bank The based on a clear demarcation checks and balances reciprocal transactions, implement which units, office front between process- administrative out carry which units, office back and unit responsible for risk management middle office The ing. which Division, Management Risk & Compliance the is with compliance checks systems, management risk develops and requirements other and regulations management risk market of performance profit and positions the monitors also Division Management Risk & Compliance The units. analyses to quantify the risk levels carries out wide-ranging including deposits, loans and securi- of assets and liabilities, of analytical uses a variety the division ties. In its analyses, and basis point at risk (VaR) techniques, including the value simula- fluctuation rate interest and methods (BPV) value timely provide to used are work this of results The tions. reports to management. • • • Risk Management Risk •

Risk Management 14 010_0550701372309.indd 14 15 Risk Management 2011/09/30 18:27:43 When a crisis occurs, the Bank responds by having an an having by responds Bank the occurs, crisis a When Through day-to-day personnel management, the Bank Bank the management, personnel day-to-day Through tangible of eventuation the that recognizes Bank The With a view to conducting strict control of customer data strict control to conducting a view With - busi of appropriateness the and management of soundness the at situation management risk the ascertaining by ness that verifying and evaluating levels, branch and division internal control is appropriately maintained and functioning advice as necessary. and providing effectively, - Council, Response Headquarters or other organi Emergency in centralized supervi- information and engage zation gather sion and command to minimize the impact of the crisis on its operations. business incorporates a system to prevent the materialization of the the of materialization the prevent to system a incorporates spread of damaging rumors about the of the risk. In the event to action swift and appropriate take will system its Bank, the situation. curtail them and retrieve on of the impact that personnel risk has ascertains the extent - operations and responds with personnel develop its business - ensure the smooth con ment and personnel assignments that duct of its business. of execution the on impact major a have could risk assets to minimize the risk by developing, and endeavors business and man- enhancing and upgrading systems for ascertaining aging such risk. and other confidential information, the Bank takes various various takes Bank the information, confidential other and - sys computer the of use unauthorized prevent to measures of It addresses the provision tem or leakage of information. services by establishing security mea- safer and more assured for regulations handling of formulation the as such sures important and data computer of encryption data, classified codes, and others. information, e.g. security

Crisis Management Posture Internal Audit Audit Posture Internal - an internal auditing organiza Audit Division, The Internal Tangible assets refer to personal property and real estate, assets refer to personal property and Tangible The Bank recognizes that personnel risk can have a major have The Bank recognizes that personnel risk can The Bank recognizes the danger of impact from reputa- from impact of danger the recognizes Bank The Managing Tangible Assets Managing Risk Tangible Managing Personnel Risk Managing Personnel Managing Reputational Risk Managing Reputational Managing System Risk Managing

tion, promotes risk management and strives to ensure the the ensure to strives and management risk promotes tion, risk management, in order to respond Along with the above suitably to the occurrence and materialization of crises relat- sys- or disaster natural a as such operations business to ed appropriately positioned tems malfunction, the Bank is now Crisis a formulated having crises, these manage to Management Plan and response manuals to tackle each type of crisis. For the enhancement and reinforcement of risk management, For function of the internal the effective it is necessary to verify problems as needed. control and improve such as owned or leased land, buildings, equipment attached or leased land, buildings, such as owned and fittings. and fixtures to buildings impact on the Bank’s management and business operations operations business and management Bank’s the on impact preparedness to establish, maintain and improve and strives manage such risk. to effectively damage to the risk of loss from assets risk involves Tangible insufficient crime, disasters, of result a as assets