sapporo hokuyo group annual report 2012 · sapporo hokuyo holdings, inc. and our consolidated...

2012Sapporo Hokuyo Group ANNUAL REPORT

2 A Message from the President

3 Highlights

7 CSR

11 Further Stimulation of Regional Economies

13 Medium-Term Business Plan

15 Corporate Governance

17 Compliance

18 Risk Management

20 Information for Investors

22 Financial Section

29 History

Sapporo Hokuyo Group Annual Report 2012

1

• Provide quality service to our business partners and progress together with our customers

• Improve our corporate value and win a high level of trust from our stockholders and the market

• Create a rewarding workplace where employees can fully display their abilities

Business Principles

A Message from the President

On behalf of everyone at the Sapporo Hokuyo Group, I offer my warmest greetings to all our stakeholders and

readers of this report.

Sapporo Hokuyo Holdings, Inc. and our consolidated subsidiary, the North Pacific Bank, Ltd., deliberated on a

merger agreement at meetings of our respective boards of directors on May 15, 2012, and voted to merge our

two companies pending approval from the relevant authorities. The agreement was signed on the same day. The

merger is being planned so that the North Pacific Bank will survive and assume the operations of Sapporo Hokuyo

Holdings, which will cease operations. Our intention is that Sapporo Hokuyo Holdings will be dissolved on the date

the merger comes into effect, October 1, 2012.

When the company was incorporated in April 2001, our most pressing issue was to integrate the operations of

our two subsidiary banks, the North Pacific Bank and the Sapporo Bank. Since then, we have worked hard to

merge those banks, integrate their systems, streamline the branch network, and restructure the group’s card loan

and leasing operations.

During this time, the group has attempted to negotiate the rough waters of business administration churned by

the global financial crisis and the European debt crisis—not only do we find ourselves in a time of great change,

the change itself is becoming ever more sudden. In light of which, we at Sapporo Hokuyo Holdings endeavor to

keep abreast of the times by streamlining and speeding up our decision-making processes, building a stronger and

healthier financial foundation, and continuing to make a genuine contribution to the revitalization of the regional

economy by providing smooth, hassle-free banking services. To that end, we have decided to discontinue the

holding company system we currently use, and restructure the group so that it is centered on the North Pacific

Bank.

Here at the Sapporo Hokuyo Group, it is our fervent wish to become the go-to financial institution for our

clients and the regional community at large. To achieve that, we must provide the services that people need; not

only should we provide the helpful, hassle-free services that represent the core of a bank’s operations, we need to

also provide value-added services such as consulting, in which we identify clients’ problems and concerns and offer

solutions to overcome them.

In doing so, each and every one of us at the Sapporo Hokuyo Group is determined to pull together in a

concerted effort to fulfill the expectations people have for us by earning and retaining our stakeholders’ trust and

offering real benefits for our community.

September 2012


2

Sapporo Hokuyo Holdings, Ltd.

Junji Ishii, President


3

(¥ billions, %)

Highlights

115.1

92.5

19.4

3.1

78.0

12.3

(6.2)

4.5

1.5

49.4

24.1

37.5

67.4

114.8

92.5

19.1

3.1

77.9

(7.4)

12.6

4.2

0.9

29.4

12.2

37.1

67.6

20122011

Year ended Mar. 31,

0.2

(0.0)

0.3

(0.0)

0.0

19.8

(18.9)

0.2

0.6

20.0

11.8

0.3

(0.2)

Increase/(Decrease)

Consolidated core gross profit

Net interest income

Net fees and commissions

Net other operating income

General and administrative expenses

Net other income, etc.

Credit cost

Gains (losses) on securities

Others

Ordinary profit

Net income

Consolidated core operating profit

Core OHR

Income Summary (Consolidated)

Consolidated core gross profit = Net interest income (Interest income – Interest expenses) + Net fees and commissions (Fees and commissions (income) – Fees and commissions (expenses)) + Net other operating income (Other operating income – Other operating expenses) – Gains (losses) on bondsGains (losses) on securities = Gains (losses) on bonds + Gains (losses) on stocks + Gains (losses) on money held in trustConsolidated core operating profit = Consolidated core gross profit – Expenses (excluding nonrecurring losses)

Consolidated core gross profits for FY2011 were up 200 million yen year-on-year to 115.1 billion yen on the back of

a 300-million-yen increase in income from fees and commissions, which totaled 19.4 billion yen for the year.

Ordinary profit rose 20 billion yen year-on-year to 49.4 billion yen on the back of a 6.2-billion-yen drop in reserve for

bad debts, which totaled 18.9 billion yen for the year, thanks to a reduction in bad-loan interest. In addition to

amendments to Japan’s taxation system, an uncertain economic outlook convinced us to plan conservatively for

future taxable income and, as a result, deferred tax assets were reversed to bring income taxes deferred to 17.6

billion yen, a year-on-year increase of 5.9 billion yen. The large increase in ordinary profit saw net income increase

11.8 billion yen year-on-year to 24.1 billion yen. Consolidated core operating profits were up 300 million yen

year-on-year to 37.5 billion yen, and core OHR was down 0.2 points year-on-year to 67.4%.

Sapporo Hokuyo Group


4

Private, corporate, and public deposits all

increased, and deposits were up 287 billion

yen or 4.1% year-on-year to 7,128 billion

yen as of March 31, 2012. Deposit assets

totaled 502 billion yen and, when

combined with the aforementioned depos-

its, create a total of 7,631 billion yen, up

270 billion yen or 3.6% year-on-year. Loans

were up 199 billion yen or 3.8% year-on-

year to 5,428 billion yen as of March 31,

2012, on the back of an increase in loans to

businesses and regional government

organizations. Loans extended to clients in

Hokkaido were up 84 billion yen or 1.6%

year-on-year to 5,090 billion yen.

Mar-11 Mar-12

(¥ billions, %)

Hig

hlig

hts

Deposits, Loans and Securities (Banking Sector)

8

7

6

5

4

3

2

1

0

Deposits Deposit assets

Loans and bills discounted In Hokkaido

¥ trn7.60.5

7.1

5.4

5.0

7.3

0.5

6.8

5.2

5.0

Mar-10

7.3

0.5

6.8

5.2

5.0

7.3

0.5

6.8

5.2

5.0

Deposits

Deposit assets

Safe custody of public bonds

Investment trusts

Total

Individual annuityinsurance, etc.

6,841

519

356

163

7,361

222

As of Mar. 31,2011

7,128

502

357

145

7,631

279

As of Mar. 31,2012

287

(16)

0

(17)

270

56

1,593

3,430

5,228

5,006

1,590

3,478

5,428

5,090

(2)

47

199

84

4.1

(3.2)

0.0

(10.5)

3.6

25.5

(0.1)

1.3

3.8

1.6

Individual clients

SMEs

Loans and bills discounted

In Hokkaido

Increase/(Decrease)

Ratio

Increase/(Decrease)

Deposits include negotiable certificates of deposits.

Sapporo Hokuyo Group Annual Report 2012 Sapporo Hokuyo Group Annual Report 2012

5

6


Capital Adequacy Ratio (Domestic) (Consolidated)

Yields and Spreads, etc. (Banking Sector)

Yield on interest earning assets was down

0.05 points year-on-year to 1.42% due to a

reduction in yield on loans and bills

discounted. Total funding cost was down

0.05 points year-on-year to 1.19% due to a

reduction in yield on deposits and NCD. As a

result, the interest rate spread was roughly

the same as the preceding year at 0.23%.

As of March 31, 2012, the consolidated

capital adequacy ratio was up 0.31 points

year-on-year to 11.30% on the back of an

increase in shareholders’ equity resulting

from the accumulation of profits. The Tier Ⅰ

ratio was up 0.49 points year-on-year to

8.24%.

Unrealized Gains (Losses) on Securities (Consolidated)

Problem Assets Based on the Financial Reconstruction Law (Banking Sector)

As of March 31, 2012, consolidated

unrealized gains on securities for the

Sapporo Hokuyo Group were down 9 billion

yen year-on-year to 61 billion yen.

Specifically, gains on stocks were down 3

billion yen year-on-year to 19 billion yen,

gains on bonds were down 2 billion yen

year-on-year to 27 billion yen, and gains on

other securities were down 4 billion yen

year-on-year to 14 billion yen.

As of March 31, 2012, the final disposal of

problem assets based on the Financial

Reconstruction Law progressed over the

course of the fiscal year, and such assets

were down 3 billion yen year-on-year to 176

billion yen. The effective rate of problem

assets was 2.5% assuming partial direct

write-offs.

Hig

hlig

hts

Increase/(Decrease)

11.30

8.24

397

290

108

3,521

10.99

7.75

376

266

111

3,429

0.31

0.49

20

24

(3)

92

Capital adequacy ratio

Tier Ⅰ ratio

Capital

Tier Ⅰ

Tier Ⅱ

Risk-adjusted assets

As of Mar. 31,2011

As of Mar. 31,2012

(¥ billions, %)

%

8.24

11.30

Mar-10

7.30

10.52

Mar-12

7.75

10.99

Mar-11

Capital adequacy ratio Tier Ⅰ ratio

20122011

Year ended Mar. 31, Increase/(Decrease)

1.42

1.60

1.01

1.19

0.04

1.56

0.23

1.47

1.69

0.89

1.24

0.07

1.62

0.23

(0.05)

(0.09)

0.12

(0.05)

(0.03)

(0.06)

0.00

Yield on interest earning assets

Yield on loans and bills discounted

Yield on securities

Total funding cost

Yield on deposits and NCD

Difference of average yield on loansand deposits

Interest rate spread

A

B

C

D

B - D

A - C

(%)

%Yield oninterest earningassets

Interest ratespread

Totalfundingcost

1.421.65

Mar-12

0.23

1.19

1.47

Mar-11

0.23

1.24

0.36

1.29

Mar-10

Stocks Bonds Others ¥ bn Unrealized gains (losses) on securities

71

291823

Mar-1161

27

1419

Mar-12

82

27 2628

Mar-10

Unrealized gains (losses) on securities

Stocks

Bonds

Others

<Reference>

Nikkei stock average (¥)

New 10-year government bond yield (%)

20122011


61

19

27

14

10,083

0.985

71

23

29

18

9,755

1.255

(¥ billions)

(9)

(3)

(2)

(4)

328

(0.270)

(¥ billions, %)

¥ bn %

Percentage oftotal creditprovided

Bankrupt andquasi-bankruptassets

Doubtful assets

Substandardloans

2.6

Mar-11

179

68

79

31

195

77

82

36

2.7

Mar-10

Bankrupt and quasi-bankrupt assets

Doubtful assets

Substandard loans

Problem assets based on the FinancialReconstruction Law

Percentage of total credit provided

*After partial direct write-offs


*Partial direct write-offs have not been implemented.

The figures as they would appear after partial direct write-offs are shown for reference.

20122011


59

86

29

176

3.1

137

2.5

68

79

31

179

3.3

138

2.6

(9)

7

(2)

(3)

(0.2)

(0)

(0.1)

2.5

Mar-12

176

59

86

29


6


Unrealized Gains (Losses) on Securities (Consolidated)

Problem Assets Based on the Financial Reconstruction Law (Banking Sector)

As of March 31, 2012, consolidated

unrealized gains on securities for the

Sapporo Hokuyo Group were down 9 billion

yen year-on-year to 61 billion yen.

Specifically, gains on stocks were down 3

billion yen year-on-year to 19 billion yen,

gains on bonds were down 2 billion yen

year-on-year to 27 billion yen, and gains on

other securities were down 4 billion yen

year-on-year to 14 billion yen.

As of March 31, 2012, the final disposal of

problem assets based on the Financial

Reconstruction Law progressed over the

course of the fiscal year, and such assets

were down 3 billion yen year-on-year to 176

billion yen. The effective rate of problem

assets was 2.5% assuming partial direct

write-offs.

Hig

hlig

hts

Stocks Bonds Others ¥ bn Unrealized gains (losses) on securities

71

291823

Mar-1161

27

1419

Mar-12

82

27 2628

Mar-10

Unrealized gains (losses) on securities

Stocks

Bonds

Others

<Reference>

Nikkei stock average (¥)

New 10-year government bond yield (%)

20122011


61

19

27

14

10,083

0.985

71

23

29

18

9,755

1.255

(¥ billions)

(9)

(3)

(2)

(4)

328

(0.270)

(¥ billions, %)

¥ bn %

Percentage oftotal creditprovided

Bankrupt andquasi-bankruptassets

Doubtful assets

Substandardloans

2.6

Mar-11

179

68

79

31

195

77

82

36

2.7

Mar-10

Bankrupt and quasi-bankrupt assets

Doubtful assets

Substandard loans

Problem assets based on the FinancialReconstruction Law


*After partial direct write-offs


*Partial direct write-offs have not been implemented.

The figures as they would appear after partial direct write-offs are shown for reference.

20122011


59

86

29

176

3.1

137

2.5

68

79

31

179

3.3

138

2.6

(9)

7

(2)

(3)

(0.2)

(0)

(0.1)

2.5

Mar-12

176

59

86

29


7

Sapporo Hokuyo Group’s Concept of Corporate Social ResponsibilitySapporo Hokuyo Group understands CSR as action beyond the sole pursuit of

economic growth, comprehensively implemented by corporations across the range of

management, to contribute to sustainable development surrounding social issues and

environmental protection.

CSR

Socialactivities

Managementactivities

Environmentalactivities

SapporoHokuyoGroup

CSR ActivitiesHere at the Sapporo Hokuyo Group, our management

principles guide us to view corporate social

responsibility as an integral part of our business. We

have two specific sets of guidelines in place regarding

CSR, the Basic Policies for the Environment &

Community Committee and the Sapporo Hokuyo

Group Environmental Policies, which form the basis

for a broad range of activities. The Sapporo Hokuyo

Holdings Environment & Community Committee,

meanwhile, serves to deliberate on the CSR guidelines

and policies for the whole group, and to manage our

progress in fulfilling those responsibilities. If required,

matters discussed by the committee are subsequently

referred to the Group Management Committee and

board of directors for approval. Guidelines and

policies finalized by these methods are then

communicated throughout the group by the

committee office.

We at the Sapporo Hokuyo Group have established

three CSR priority areas based on the roles and

functions required of us as a financial institution in

our regional communities. Those priority areas are the

environment, community healthcare and financial

literacy, which we chose from among multiple

candidates after consideration of their importance as

social issues and potential for sustained development

of the community and the Sapporo Hokuyo Group.


8

Sapporo Hokuyo GroupC

SR

Sapporo Hokuyo Group regards environmental protection as one of its corporate social responsibilities and engages

in environmental protection activities at all levels of the Group.

Environment

Group-wide Environmental Protection Innovations

• A plan is in place to reduce CO2 and NOx emissions.

• Vehicles are gradually being replaced with low-

emission models.

• Printed documents are made with recycled paper

and products certified as environmentally conscious

by the Forest Stewardship Council wherever possible.

• Internal notifications at the North Pacific Bank have

been made paperless.

• Cash card users can choose whether or not they

want to print out a statement when they use an

ATM.

• Important documents that pass their required

storage dates are shredded by a paper recycling

business with enhanced security facilities, thus

ensuring that integrity of sensitive information is

maintained up to and throughout the destruction

process. The old documents are then recycled into

toilet paper.

• Office supplies and items for distribution to

customers are mostly environmentally conscious

products.

• In addition to implementing the “Cool Biz, Warm

Biz” dress code, the North Pacific Bank is replacing

machinery and equipment with energy-efficient

models and making branches gas-free by only using

devices powered by electricity.

• In order to save electric power, the Bank (i) reduces

the time when lights are switched on and keeps

some lights extinguished; (ii) turns off air

conditioning when not needed; (iii) discontinues

personnel elevators; (iv) turns off select ATMs; and

(v) installs LED lighting at ATM locations.

• The Bank head office building has a Comprehensive

Assessment System for Built Environment Efficiency

(CASBEE) ranking of A.

FTSE is a specialized institution that develops global

investment indices and provides data. It was

established with joint funding from the Financial

Times newspaper and the London Stock Exchange.

The FTSE4Good Index for Socially Responsible

Investing (SRI) consists of corporations engaged in

activities that contribute to their communities, for

example, environmental protection, and whose ethics

regulations and employment rules satisfy global

standards. In March 2008, Sapporo Hokuyo Holdings,

Inc. became the first Hokkaido-based company whose

shares are included in this index, in appreciation of

the CSR activities of Sapporo Hokuyo Group.

Third-party Evaluation - FTSE4Good Index

Office: Office functions to be performed by the

Sapporo Hokuyo Holdings office

Subcommittees: Members to be selected by each

group company

Environment & Community Committee

Chairman: the president of

Sapporo Hokuyo Holdings

Vice-chairman: the deputy president of

Sapporo Hokuyo Holdings

Members: Sapporo Hokuyo Group directors


9

Hokku Fund

Always eager to protect the diversity of wildlife in

Hokkaido, the North Pacific Bank has established the

Hokku Fund to contribute to the protection of rare species

on the island. In order to maintain fairness and

transparency in the operation of the fund and use of its

money, the Hokku Fund Selection Committee has been

established incorporating members from the public and

private sectors to oversee fund grants and aid. In fiscal

year 2010, the first year, grants have been made to four

Hokkaido zoos (one each in Maruyama, Asahiyama,

Obihiro and Kushiro) for the preservation of endangered

species and other efforts with an emphasis on

environment-oriented education. In fiscal year 2011,

grants were awarded to three organizations including the

Kushiro City Zoo which was found in urgent need of aid.

Hokku Term Deposit

Part of the Hokku Fund involves the Hokku Term

Deposit that comes without term maturity notice or

deposit statements, and is available at all branches. The

Bank pays to the Hokku Fund an amount equivalent to

0.02% of the Hokku Term Deposit balances. Investing in

Hokku Term Deposit, which features eco-friendly

passbooks, provides accountholders with opportunities

to contribute to and participate in the fund indirectly

and thereby promote biodiversity in Hokkaido.

Hokku-no Mori Forest

The North Pacific Bank was the first Hokkaido-based

business to participate in the Hokkaido Carbon Offset

Forestation Project, which combines the Hokkaido

Corporate Forestation Project operated by the

Hokkaido Government and the independently run

Hokkaido carbon offset certification system. Under

the project, the Bank “buys” the reductions in carbon

dioxide emissions achieved by the use of heating

equipment fired by woody fuel pellets in Date City on

the island, thus offsetting its own carbon emissions.

In return, the Bank plants and nurtures trees in the

Hokku-no Mori Forest.

A Hokku Term Deposit passbook

A tree-planting at Hokku-no Mori Forest

Built with support from the Hokku Fund


10


Support for learning and culture

Themed on the joint fostering by industry and academia of

human resources who will be carrying Hokkaido’s economic

future, the North Pacific Bank maintains partnership

agreements with universities and specialized vocational high

schools in Hokkaido. What is more, the bank instituted joint

research with the Hokkaido University of Education as a

means of promoting the training of educators able to teach

financial literacy and, in an effort to raise children’s

awareness of the importance of finance, provides various

types of financial education, as well as accommodating

internships for university students, among other innovations,

thus providing students in Hokkaido with opportunities to

experience the real world of work. Moreover, for the

furtherance of regional art and culture the Bank provides aid

and assistance such as for the Sapporo Symphony Orchestra

and the Pacific Music Festival.

Contributing to the Regional Community

Banking Products Related to Environmental ProtectionIn support of banking customers with a strong interest in

environmental protection, North Pacific Bank provides a

range of relevant banking products. The bank offers

non-corporate clients Eco-car Loans and home loans to

buy or build eco-friendly residences at preferential rates.

Moreover, for corporate customers, the Bank offers loans

to provide the funds for acquiring environmental

certification, loans for investment in equipment aimed at

CO2 emission reduction and, for those companies that

seek to protect the environment, private placement bonds

with preferential interest rates. Moreover, in order to

Contributing to community healthcare

With a view to contributing to regional health care and

promoting the health of people living in Hokkaido, North

Pacific Bank has concluded comprehensive treaties, and

maintains respective cooperative operations, with three

medical universities in the prefecture. At Hokkaido

University, centered on general medical advisors, the Bank

sponsors Medical Seminars for Citizens by physicians from

Hokkaido University Graduate School of Medicine. At

strengthen the development and credit standing of

corporate customers involved in environment related

business operations and to invigorate the regional

economy, the Bank established the Environmental Business

Support Fund which specializes in environmental matters.

Furthermore, in a partnership related to investing in

companies engaged in promoting environmental

measures, and the provision of other financial services, the

Bank has entered into a partnership agreement with the

Development Bank of Japan in order to contribute to the

furtherance of environmental measures in Hokkaido.

Financial education

A training workshop on how to better interact with people

with disabilities

Sapporo Medical University, in October 2011 an FM radio

program was launched about the activities of the university,

followed in May 2012 by a printed booklet with the

program content and a Commemorative Citizens Seminar

held by faculty who appear in the program. Furthermore, at

Asahikawa Medical University, in April 2012 an AM radio

program was started with health information including

advice on how to prevent illness. North Pacific Bank also

supports the proliferation of medical transplantation

through measures such as providing donor cards at all bank

branches.

Welfare activities

The North Pacific Bank helps also with welfare activities,

including donations and support for the Hokkaido Bone

Marrow Bank Promotion Association. Bank employees

registered as donors may take special paid leave to provide

bone marrow transplants. The Bank also has installed notice

boards at all branches for written messages, provides

training workshops on how best to interact with people with

disabilities, and offers support for people who have difficulty

using ATMs including due to disability, by offering customers

the opportunity to transact their business at bank counters

while incurring only the fee applicable for ATM transactions.

Moreover, work is under way to equip ATMs with handsets

and make bank branches barrier-free.

CS

R

Market Share in Hokkaido

Meeting Fund-raising Needs

Stimulating the Manufacturing Industry

North Pacific Bank

Other regional banks (including postal operations)

Shinkin banks

Agricultural and fisheries cooperative associations

Governmental financial institutions

Other financial institutions


11

Further Stimulation of Regional Economies

In order to accommodate customers’ faster pace of

operations and growing diversity in funding sources,

North Pacific Bank is proactively strengthening

proposal-type external liaising, including a higher

number of loan officers and external liaising

personnel, and segregated handling of loan products

without excessive reliance on collateral and loan

guarantees.

Moreover, in order to accommodate calls for quicker

fund procurement, the Bank has widened the range

of its loan products by including products that use

credit self-assessment, business loans without

collateral or third-party guarantee, automobile

business loans, and loans secured on machinery and

vehicles.

Additionally, the Bank emphasizes funding methods

that make active use of customers’ varied assets such

as asset-based lending (ABL) secured on customers’

operating assets and receivables, project finance, and

products that involve monetizing various kinds of

receivables.

As of March 31, 2012, deposits and loans of North

Pacific Bank represented 19.4% and 29.5%,

respectively, of the Hokkaido prefectural market. The

outstanding balance of loans to entities in Hokkaido

We at the Sapporo Hokuyo Group formulate and implement plans to leverage our community-oriented financial

products and services to spark sustainable development by our trading partners and regional economies. The

public is kept updated on the plans’ progress through regular releases.

was 5,090 billion yen, up 84.2 billion yen, or 1.6%,

on the year, representing 93.7% of loans of North

Pacific Bank.

In order to invigorate the manufacturing industry, the

foundation of Hokkaido’s economic future, the North

Pacific Bank holds an annual business matching and

negotiation event specialized in manufacturing.

Moreover, for providing companies with solutions to

technology issues, the Hokkaido Industrial Research

Institute, the North Pacific Bank, and the Northern

Advancement Center for Science & Technology hold

similar events throughout Hokkaido for individual

advisory on the technical issues brought by

companies. In order to strengthen the foundation of

Hokkaido’s economy, North Pacific Bank will continue

to promote the cooperation of industry and academia

with the financial sectors and support companies

operating in Hokkaido.

(As of March 31, 2012)

Business negotiations

at the Manufacturing Technology Fair

Loans in

Hokkaido

¥17.2 trillion

Loans in

Hokkaido

¥17.2 trillion

29.5%

25.7%17.7%

9.8%

10.1%

7.2%

19.4%

39.9%18.0%

18.3%

4.4%

Deposits in

Hokkaido

¥35.3 trillion

Deposits in

Hokkaido

¥35.3 trillion


Revitalizing the Regional Economy

International Business Support

Further Stimulation of Regional Econom

ies


12

The Group proactively supports the fostering of regional

companies. In addition to proactively supporting

venture businesses such as through investment in a

diversity of funds, we also offer “regional contribution

type” stock investment funds supporting regional

companies in Hokkaido. What is more, we seek to help

small and medium-sized businesses develop new

technologies and products by offering grants through

the North Pacific Bank Dream Fund.

The North Pacific Bank established a department

specializing in “Foods,” “Tourism,” and “Products

Manufacturing and Starting Business” in January,

2012. The Comprehensive Special Zone for Hokkaido

Food Complex International Strategy was designated

in Hokkaido in December, 2012, and the government

decided its policy to extend the Hokkaido Shinkansen

line to Sapporo, Hokkaido. We recognize these events

as good opportunities to enhance advantages of food

and tourism in Hokkaido and will continue to support

our customers from a long-term standpoint with

community supports in the future.

In other areas, the Bank has been cooperating

through alliances with the Hokkaido District Transport

Bureau and municipal governments in various kinds of

tourism promotion and support measures for the

recovery of Hokkaido's tourism-related industries and

the promotion of Hokkaido as a destination for

foreign tourists, such as through the Hokkaido Sweets

Road Program which invites reporters from Chinese

magazines to tour Hokkaido's tourism resource as well

as an exhibition at Thailand's largest international

travel fair, the Thai International Travel Fair 2012,

organized in an alliance with the Sapporo Tourist

Association and the Federation of Hokkaido Chamber

of Commerce and Industry. Additionally, the Bank

engages in various other regional promotion measures

prompted by these events. Moreover, the Bank

executed a collaboration agreement with Niseko-cho,

the third alliance with a municipal government

following Hokkaido and Sapporo, and with

Kutchan-cho in April, 2012. The Bank is providing

information and financial support for various

operations in which the municipality engages.

North Pacific Bank maintains special staff for corporate

invigoration and restructuring. Staff are deployed at

the Business Management Improvements Support

Office, established within Loan Administration

Division Ⅰ, which provides a wide range of advisory as

well as management improvement support for

corporate customers.

In order to provide attentive assistance to Hokkaido

businesses looking to expand their trade and set up

manufacturing bases in Asian markets, the North Pacific

Bank has set up an Asia Desk in its International Affairs

Division and opened representative offices in Dalian and

Shanghai. The Bank has concluded economic

cooperative treaties with the cities marked on the map

and with ministries, holds seminars, provides insights

into China and Vietnam and offers the latest up-to-date

information on import and export trade in the region as

a means of providing regional business support. Indeed,

Asia is viewed as an extremely important market, and

we will continue to build networks to allow us to

provide better support.

The North Pacific Bank is proud to provide attentive

exchange services to fulfill all customers’ foreign

currency requirements, and to provide multi-faceted

assistance for foreign exchange transactions. To achieve

this, the Bank’s International Affairs Division has a

Markets Desk where customers have access to the

latest foreign currency market straight from the

in-house Dealing Room, and also offers a range of

products to hedge against currency market fluctuations.

Regional governments with whom we have executed economic partnership agreements

Asia Desk

HeilongjiangProvince

JilinProvinceLiaoning

ProvinceShenyang

Qingdao

Shanghai (North Pacific Bank

representative office)

Dalian (North Pacific Bank

representative office)

Hong Kong SAR

13 Sapporo Hokuyo Group Annual Report 2012

Medium-Term Business Plan

●Influencing factors and the role of the plan

External FactorsThe Great East Japan Earthquake has caused an increasingly unclear outlook for the domestic economyThe numbers of people and businesses in Hokkaido are decreasing

Internal FactorsThere is an urgent need to expand retained earnings to repay government loans

The Role of the New Medium-Term Business Plan

The plan paves the way for sustained

growth as a means to achieving our

management principles at a high level.

●Business targets

“Accelerating Innovation and Achieving Sustained Growth”1

Term: April 2011 through March 20142

Framework3

Sapporo Hokuyo Group Medium-Term Business PlanThe Sapporo Hokuyo Group launched a new

Medium-Term Business Plan in April 2011. The plan

lays a clear path amid the increasingly murky

economic outlook in the wake of the Great East Japan

Earthquake for the group to build and maintain closer

ties with customers and regional communities and

provide steadfast support for the regional economy.

One of the primary objectives of the plan is

sustainable growth for group customers and

communities through streamlining of business and

greater invigoration of human resources.

The plan has been titled Accelerating Innovation and

Achieving Sustained Growth, a reflection of our

awareness of the need for a brand of innovation and

acceleration that leverages the advantages acquired

through merging our subsidiary banks if we are to achieve

our management principles at a suitably high level.

Medium-Term Business Plan Outline

●Major strategies to achieve business targets

Accelerated innovation to make the North Pacific Bank the preferred bank of customers

Accelerated innovation to provide support for regional growth

Accelerated innovation to achieve stronger revenues

Strategy 1. Steady performance of the new North Pacific Bank Medium-Term Business Plan

Build and maintain closer ties with customers

Thorough streamlining of business

Invigoration of human resources

Enhanced internal management structure and CSR

Strategy 2. Leveraging the Sapporo Hokuyo Group’s comprehensive strengths

(See: Major strategies of the new North Pacific Bank Medium-Term Business Plan)

14Sapporo Hokuyo Group Annual Report 2012

Sapporo Hokuyo GroupM

edium

-Term B

usiness Plan

In the fiscal year to March 2012, the overhead ratio (OHR), credit to small and medium sized enterprise (SME), and

the percentage of obligors under management improvement support surpassed plan.

¥32.1 billion

55.50％

¥1,836.2 billion

24.83％

2.49％

¥31.7 billion

54.14％

¥1,865.5 billion

24.29％

3.16％

+¥0 billion

-1.58％

+¥34.3 billion

-0.52％

+0.75％

-¥0.3 billion

-1.36％

+¥29.3 billion

-0.54％

+0.67％

Fiscal Year to March 2012

¥31.7 billion

55.72％

¥1,831.2 billion

24.81％

2.41％

Start of plan (A)Relative to planRelative to start (C-A)Actual result (C)Plan (B)

Current Status of the North Pacific Bank Business Enhancement Plan (Period Ended March 2012)

Results Plan

A. Strengthening of financial intermediation functions to accommodate the diversifying needs of customers

Progress Regarding Basic Strategies of the Business Enhancement Plan (Period Ended March 2012)

Core operating income

OHR

Credit to SME

Credit to SME as a percentage of total assetsPercentage of obligors under management improvement support

Deposit assets

Support for growth areas

Provision of a diversity of solutions

Apartment loans and residential

housing loans

B. Strengthening of consulting functions consistent with business life stages

Creation of promotion frameworks

Expand all types of proposal tools

Creation of information infrastructure

Establish relationship banking award system.

Introduce management support choices.

Introduce sales support tools.

C. Enforce efficiency gains through business process reviews

Business process reviewsCost reductions through restructuring of bank internal system environments and introduction of new systems.

• Reinforce credit screening capabilities of young and female staff members through loan business trainee programs and loan business training sessions and other such measures.

• Reinforce capability to interact with customers through CRM training and part-timer CS training and other such measures.

• Increase qualification holders such as FPs and SME management consultants.

• Revise insider trading regulations and implement training for strengthening awareness among employees.

• Make customer support departments independent from business administration departments and create frameworks for the unified management of customer feedback and improvement action.

In step with progress in the risk mitigation plan, shift to regular risk management and ALM administration frameworks.

• Proactive support for areas such as medical care, environment, agriculture / food, and tourism as regional growth areas.

• Newly establish a tourism promotion office, food business promotion office, and manufacturing / new business promotion office.

• Overseas business support.

• Loan services through the Loan Plaza and Consulting Center.

• Hosting of loan consultation events on holidays.

• Total review of the residential loan product line-up.

Separately for head office and branch operations, age, and scope of job duties, newly establish job titles designed for personnel invigoration, and for staff with management experience implement effective deployment at branch level or allocation to specialist sections at head office.

Review of branch functionsConsolidation and review based on criteria such as branch markets, customer attributes, status of nearby branch deployment.

Effective staff deploymentReinforce business capabilities through redeployment of (i) staff identified in reviews of business processes and branch functions and (ii) head office administrative staff, to profit generating divisions and business promoting divisions.

E. Strengthening of internal control frameworks and CSR measures

Strengthening of control frameworks for compliance and customer protection

Strengthen risk management frameworks

Implement activities centered on the three themes of environment, regional medical care, and financial education.In June 2012 newly establish a CSR promotion office and strengthen organization frameworks.

CSR measures

Implement the "Changing! campaign" and take measures to improve customer treatment and workplace environments.Improve customer satisfaction through customer satisfaction seminars for part-time staff and through customer satisfaction self checks at core branches.

Strengthen customer satisfaction

D. Personnel invigoration

Personnel training

Personnel invigoration

Proposal based public relations work by the business succession and M&A teams.

Establish consulting department and increase full-time staff for promotion.


15

Sapporo Hokuyo Holdings has adopted a

statutory-auditor governance scheme with eight elected

directors (including two external directors) and five

corporate auditors (including three external auditors).

The tenures of directors of group companies of the

Sapporo Hokuyo Group have been shortened to one year

in order to quickly respond to changes in the operating

environment, create flexible management structures, and

enable the annual assessment of directors’ performance

by the general meeting of shareholders. For group

internal cooperation and coordination related to

strategies and policies for the furtherance of operations,

an Internal Group Management Committee has been

established within Sapporo Hokuyo Holdings consisting

of the chairman, president, deputy president, and

executives of subsidiaries. Moreover, to ensure the

objectivity and transparency of the remuneration system,

and to coordinate remuneration levels for the whole

group, a Group Remuneration Committee consisting of

external directors has been established, which discusses

and finalizes individual remuneration, etc., including for

subsidiaries.

Governance Organs

In order to further enhance management transparency,

two external directors were elected at the ordinary

general meeting of shareholders, and a framework has

been put into place under which these external

directors in coordination with the board of auditors

(including external auditors) monitor the performance

of duties by the directors. External directors attend audit

report meetings as a means of checking on the

company’s internal auditing, as well as meetings of the

Disclosure Committee, Compliance Committee, and Risk

Management Committee to monitor internal controls.

The company elects three external auditors and

considers the supervisory role provided by the external

auditors fully functional. Meetings of auditors and

accounting auditors for exchanging opinions relating to

book closings are attended by external auditors and the

company’s internal audit team, associated with the

mutual exchange of information and opinions.

Moreover, all external officers are registered as

independent corporate officers with the Tokyo Stock

Exchange and the Sapporo Securities Exchange.

We at Sapporo Hokuyo Holdings are dedicated not

only to the timely disclosure of relevant information,

but also to further expanding forums for

communication with shareholders and investors, for

instance through a proactive approach to holding

presentations to educate people about the company.

Through these investor relations activities, we seek to

promote greater understanding of the Sapporo Hokuyo

Group and ensure the group is rated appropriately. For

instance, we hold a biannual meeting in Tokyo to

provide accurate information to institutional investors

about the company, and hold similar events

throughout Hokkaido for private investors. Materials

used in these presentations are, in principle, posted on

our website on the day of the meeting.

Information Disclosure

At Sapporo Hokuyo Holdings have a number of

innovative measures in place to make our company

more shareholder investor friendly. We make a point of

not holding our general meeting of shareholders on

the “rush” days when many companies hold their

meetings all at once, and send out notices of general

meeting of shareholders conventions earlier than

legally required; furthermore we have introduced

online voting for general meeting of shareholders

resolutions and post general meeting of shareholders

materials on our website in order to make voting easier

for shareholders. We are constantly mindful of

maintaining equality among shareholders, and have

stringent internal rules in place to prevent insider

trading. Moreover, in order to prevent violations of

laws and regulations, Sapporo Hokuyo Holdings

prohibits providing benefits to specific shareholders.

Protecting Shareholders’ Rights

Based on its management principles, the company

respects the viewpoints of and seeks to create positive

relations with its customers, shareholders, markets,

employees, and all other stakeholders.

Corporate Governance

External Directors and External Auditors

Creating Positive Relations with Stakeholders


16


Sapporo Hokuyo Holdings, North Pacific Bank, and

Sapporo Hokuyo Lease have established and maintain

Internal Control Basic Policies. Since the company forms a

holding company, Sapporo Hokuyo Holdings has

management administration agreements with three direct

subsidiaries, under which we receive reports on decisions

pertaining to important operations in accordance with

Sapporo Hokuyo Group operational regulations. North

Pacific Bank appropriately exercises control over its

subsidiaries based on established subsidiary control

regulations. The Sapporo Hokuyo Group also has an

internal control framework that incorporates the major

focal points of management monitoring, i.e., risk

management and compliance arrangements, as a means

of ensuring such monitoring by the board of directors

and the board of auditors is robust.

One of the Sapporo Hokuyo Group’s management

principles is to improve our corporate value and win a

high level of trust from our stockholders and the market.

Indeed, ensuring the reliability of financial reporting,

specifically the securities report, is a vitally important part

of the group’s management. To this end, we endeavor

to meet the strict requirements of our Internal Control

Reporting Regime by instituting Basic Policies and

Internal Control Administration Regulations Regarding

Internal Controls on Financial Reporting. In order to

achieve this, as a division charged with the supervision of

internal controls on the Sapporo Hokuyo Group’s

financial reporting, we have established the Internal

Control Management Office.

Internal Control System Maintenance

Internal audits

Sapporo Hokuyo Holdings has established an Internal

Audit Team which as an independent division is engaged

in internal audits of the company and subsidiaries, with

audit results reported at regular intervals to the board of

directors and corporate auditors. Internal audits of

Sapporo Hokuyo Holdings and the head-office functions

of subsidiaries are conducted flexibly, with the frequency

and depth of the probes tailored in accordance with the

internal management performance of discrete divisions.

Moreover, internal audits of subsidiaries are conducted in

close coordination with subsidiaries’ audit divisions,

accompanied by efforts to further raise group-level

internal audit effectiveness through information sharing

with corporate auditors and the corporate auditors’ office.

Corporate audits

The board of auditors validates internal control

frameworks through its operations audits, which include

visiting audits at Sapporo Hokuyo Holdings and its

subsidiaries as well as viewings and inspections of

important documents. Moreover, by attending the board

of directors’ meetings, the board of auditors audits the

legal compliance and appropriateness of directors’

execution of duties. As a dedicated support function to

the board of auditors, a corporate auditors’ office has

been established with knowledgeable full-time staff

capable of audit task verification. To protect their

independence, staff transfers, evaluations, and bonus

assessments require the approval of a full-time corporate

auditor. In order to ensure audit effectiveness, corporate

auditors hold regular meetings for exchanging

information and opinions with the president, the

accounting auditors, subsidiaries’ corporate auditors, and

internal audit staff of the company. We also have a Group

Auditors’ Council, which meets regularly as a means of

promoting communication and the exchange of opinions

with the auditors of subsidiaries. Furthermore, the

company’s full-time corporate auditors and the internal

audit team are present at the meetings of the Disclosure

Committee, Compliance Committee, and Risk

Management Committee, and in this way verify the

internal control status of the company. The Internal

Control Administration Office holds meetings and

exchanges information with accounting auditors and the

internal audit team as a means of ensuring proper internal

controls on financial reporting.

Accounting audits

Sapporo Hokuyo Holdings, North Pacific Bank, and

Sapporo Hokuyo Lease have appointed KPMG AZSA LLC

as their accounting auditor.

Internal Audit, Corporate Audit, and Accounting Audit

Co

rpo

rate

Go

vern

an

ce


17

Compliance

The Sapporo Hokuyo Group ranks compliance among the

top-priority management issues and takes proactive steps to

strengthen compliance frameworks so as to appropriately

fulfill its social responsibilities and public role and to further

raise the trustworthiness of the whole group. Control over

compliance resides with the holding company, which checks

on and provides guidance for compliance framework

maintenance and conformity, and which has a plan in place

for the steady strengthening of group compliance efforts.

The Compliance Committee, which convenes once every three

months, studies and discusses progress on compliance efforts,

while the Internal Audit Team performs in-depth checks on

compliance at Sapporo Hokuyo Holdings and group

companies.

Group companies have their own controlling units through

which they analyze their compliance performance, identify

issues that need overcoming and formulate and implement

detailed methods of doing so. Meanwhile, staff throughout

the whole Sapporo Hokuyo Group are working hard to

improve knowledge and skills in this area, for instance by

holding training workshops and encouraging people to earn

compliance-related qualifications and take distance learning

courses.

At the North Pacific Bank, compliance officers and staff

have been appointed at head office and sales branches in

order to gauge compliance performance and ensure that

policies are firmly established and thoroughly practiced.

Indeed, another way in which we are striving to bolster our

compliance is to have checks on legal compliance at North

Pacific Bank head office and sales branches conducted not

only by the respective controlling units, but in the presence

of auditors from the Audit and Inspection Division. We also

seek to minimize legal risks by performing legal checks on

contracts, internal and external documents, new products,

and new business operations as appropriate. Moreover,

separate from the regular reporting route in case of a

compliance breach, an internal reporting framework has

been put into place for reporting to the controlling unit, the

Personnel Division, the Audit and Inspection Division, and

external institutions.

Compliance Frameworks

Sapporo Hokuyo Holdings oversees the actions of the

whole Sapporo Hokuyo Group for countering organized

crime. These include the institution of Basic Policies for

Dealing with Organized Crime and the establishment of

divisions at each group company charged with ensuring

we have no business with such organizations. Moreover,

in coordination with the police force and legal counsel

North Pacific Bank maintains frameworks for dealing

with organized crime. For all deposit transactions,

lending transactions, and rental deposit box transactions

a Provision for the Exclusion of Organized Crime has

been introduced, among other efforts to prevent any

connection with organized crime.

Shutting Out Organized Crime

To ensure the appropriate protection of material informa-

tion together with the effective usage of information

assets, the group has established Combined Security

Policies and Security Standards whose status of observance

is checked in a timely and appropriate manner. Publicly

released Privacy Policies, the creation of frameworks for

preventing information leaks and frameworks for receiving

and responding to requests for information disclosure are

just some of the ways in which we strive to ensure the

integrity of personal information.

For the purpose of enhancing customer convenience and

customer protection, the North Pacific Bank has estab-

lished Customer Protection Management Policies and

Solicitation Policies for providing customers with appropri-

ate financial products and strives to raise customer

confidence by appropriately running its business opera-

tions.

As steps against the forging and theft of cash cards,

various countermeasures against unauthorized transac-

tions are being implemented, including limits on the

amount that can be withdrawn from an ATM in a day, a

24-hour telephone line for reporting the loss of a card or

bank passbook, compensation in case of forged or stolen

cards, as well as a ban on newly established PIN numbers

that are easy to guess such as birthdays or phone numbers,

and accelerated changeover to IC-type cash cards.

Moreover, since in order to protect customers' interests

from undue loss, frameworks are required for ensuring the

appropriate management of transactions that involve

conflict of interest, the Group has established Conflict of

Interest Management Policies and Conflict of Interest

Management Regulations, among other regulations, and

has established Conflict of Interest Management Basic

Policies also at North Pacific Bank.

Management Frameworks for Personal Information Protection and Customer Protection


18

Sapporo Hokuyo GroupRisk ManagementC

om

plia

nce

/ Risk

Ma

na

gem

en

t

In order to comprehensively manage the various risks of

group companies, the Risk Management Committee

convenes quarterly, assesses the current status of

principal risks such as credit risk, market risk, and

operational risk, and discusses matters concerning the

Financial deregulation, internationalization, and asset securitization have made the risks faced by financial institutions

more varied and complex. This environment requires more strongly than before appropriate risk management and

control so that customers may have confidence in the safety of their banking transactions and elect the North Pacific

Bank as their banking partner. The Sapporo Hokuyo Group has established a Risk Management Committee supervised

by the holding company and, through the unified control of risk management at the North Pacific Bank and other

group companies, aims to ensure the soundness of management and to strengthen and enhance risk management

frameworks. For validating the appropriateness and effectiveness of internal control frameworks, internal check and

control functions are created, internal control frameworks are assessed, and proposals for improvements are made in

the internal audits by North Pacific Bank’s audit division and by the internal audit team of the company.

group’s risk management policies and maintenance of

risk management frameworks. Moreover, risks at North

Pacific Bank are quantified and checks performed to

ensure that total risk volume is within the range of the

capital adequacy ratio.

Measures for Comprehensive Management of Individual Risks

Market risk relates to the risk of loss from value declines

in asset holdings caused by changes in interest rates,

prices of securities, and foreign exchange rates, among

others. For the management of financial institutions it is

critically important to forecast, appropriately avoid, and

mitigate the incidence of market risk. Our Risk

Management Committee identifies the market risk

quantum of North Pacific Bank’s assets under

management and implements frameworks for checking

and managing market risk. North Pacific Bank invests in

low-risk, medium- and long-term diversified investments

with an emphasis on market liquidity, and engages in

securities investment for purposes of ALM adjustment

and for temporarily parking excess funds. The Bank

makes a point of not excessively relying on market

views and not to invest with the aim of short-term

profits. Specific policies for securities investment are

discussed by the Securities Investment Committee,

which includes management members. Moreover, we

seek to manage market risks by ensuring a robust

system of checks through the strict separation of

corporate divisions engaged in market trades, market

risk management and back-room administration.

Furthermore, the Risk Management Committee sets

metrics such as risk limit alarm points, loss limits, and

investment ceilings, thereby exercising effective risk

control.

Market Risk Management

Credit risk refers to the risk of a decline in asset value

or loss of assets by the group due to a deterioration in

an obligor’s financial position or its ability to pay, and

the risks that arise if large-lot loans are tilted toward

or concentrated on specific industries or corporate

groups. We manage credit risk properly by, first,

administering loans appropriately in accordance with

credit status and, second, managing our portfolio in a

way that sees loans collectively so as to prevent

bunching of loans in certain industries or to certain

debtors. The Risk Management Committee identifies

and surveys the group’s whole risk through the

appropriate management of the group’s entire credit

portfolio. Additionally, North Pacific Bank strives to

enhance its credit examination capabilities by working

to ensure the independence of the credit examination

division and enhancing credit examination functions as

well as through internal and external training. With

regard to raising the capabilities of risk management,

the Bank is working to broaden internal rating systems

that reflect the probability that obligors will perform

their obligations. Moreover, in addition to the

continuous operation of a calculation system for credit

risk assets, the Bank gathers data for calculating the

final loss ratio for obligors in default and is working on

estimating average loss amounts.

Credit Risk Management


19

Liquidity risks involve two kinds of risk. One is cash

flow risks, which refers to difficulties in securing the

necessary amount of funds or losses incurred in

having to raise funds at interest rates significantly

higher than normal as a result of unexpected cash

outflows. The other is market liquidity risks, which

refers to the inability to trade on markets or having to

trade at prices considerably less favorable than normal

as a result of market confusion.

The North Pacific Bank provides for proper liquidity

risk management by setting forth basic provisions and

clear risk management policies in its Liquidity Risk

Management Regulations. Cash flow managers keep

close tabs on daily and monthly cash flow trends and

work to minimize cash flow risks, while liquidity risk

managers monitor closely to check for cash flow or

liquidity risks. When major changes arise in the

market environment and the North Pacific Bank’s cash

flow situation, the department immediately reports to

executives and convenes the Risk Management

Committee to make swift decisions about what needs

to be done.

Moreover, the Bank has a minimum liquidity reserve

standard, under which it ensures a sufficient volume

of liquid assets. Not only is the reserve monitored

daily, the Bank also keeps a manual for contingencies

in which liquidity risks arise, and holds periodic drills

to ensure their efficacy.

Liquidity Risk Management

Operational Risk ManagementOperational risk refers to the risk that an operational

process, or an act by a corporate officer or employee,

or a system, is inappropriate, or the risk of loss due to

external circumstances.

The Sapporo Hokuyo Group has established Group

Operational Risk Management Regulations that

stipulate basic matters concerning operational risk

management and manages operational risk based on

a breakdown consistent with risk characteristics into

back office risk, system risk, legal risk, tangible assets

risk, and human risk. In order to prevent risks before

they materialize and to minimize the impact in case

they do, overall controlling units for operational risk

management have been set up at each group

company, with individual risk management divisions

engaging in respective risk management at expert

level. For managing actualized operational risks the

Sapporo Hokuyo Group collects and analyses internal

loss data, for managing latent operational risks

specifies and assesses risks, and for risk management

and elimination has introduced risk control self

assessment (RCSA), which forms a string of processes

that is executed at regular intervals.

With permission of the Financial Services Agency

based on March-end 2007 criteria, the Sapporo

Hokuyo Group has adopted the “Gross profit

allocation method” of operational risk calculation and

works on further raising the capabilities of operational

risk management.

Maintenance of Business Continuity Planning (BCP)As a regional financial institution, the company has

the responsibility in case of an unforeseeable event

such as natural disaster to minimize the impact and to

continue or quickly resume operations. The Sapporo

Hokuyo Group has established Group Crisis

Management Regulations and Group Crisis

Management Rules and maintains frameworks for the

coordinated crisis response of group companies,

centered on the holding company.

Notably, the Business Continuity Plan of North Pacific

Bank provides scenarios of new types of an epidemic

or a terrestrial earthquake hitting Sapporo city. For

the continuation of specified critical operations,

manuals have been prepared with training sessions

held at regular intervals.



20

Trade name

Headquarters

Representative

Capital

Consolidated net assets*

Consolidated total assets*

Business

North Pacific Bank

3-7 Odori, Chuo-ku, Sapporo

Junji Ishii, president

121,101 million yen (consolidated)

344,400 million yen

7,706,554 million yen

Banking

North Pacific Bank Sapporo Hokuyo Holdings

Merger ratio

NB: A total of 398,800,349 common shares in the North Pacific Bank are scheduled to be issued as a part of the merger.

1 1

* Sapporo Hokuyo Holdings’ consolidated net and total assets (current as of March 31, 2012) are listed here because the merger will involve a parent company and its wholly-owned subsidiary.

One common share in the North Pacific Bank will be allocated for each common share in Sapporo Hokuyo Holdings (with the

exception of those held by Sapporo Hokuyo Holdings).

Principal Shareholders (As of March 31, 2012)

Nippon Life Insurance Company 30,954,500 7.75

Meiji Yasuda Life Insurance Company 30,954,000 7.74

Hokkaido Electric Power Co., Inc 23,147,000 5.79

Japan Trustee Services Bank, Ltd. (Trust Account) 21,733,500 5.44

The Master Trust Bank of Japan, Ltd. (Trust Account) 14,536,700 3.63

The Dai-ichi Mutual Life Insurance Company 13,412,000 3.35

MITSUI LIFE INSURANCE COMPANY LIMITED 11,132,000 2.78

NIPPONKOA Insurance Co., Ltd. 10,866,480 2.72

Tokio Marine & Nichido Fire Insurance Co., Ltd. 7,533,240 1.88

Mitsui Sumitomo Insurance Company, Limited 6,805,000 1.70

Percentage of total sharesNumber of shares heldName

Organization of the Group (As of March 31, 2012)

Merger of Sapporo Hokuyo Holdings and the North Pacific Bank

Share Allocation under the Merger

Post-merger Company

Sapporo Hokuyo Holdings, Inc.(Group Management) Sapporo Hokuyo Lease Co., Ltd.

(Leasing)

Sapporo Hokuyo Card Co., Ltd.(Credit Card)

North Pacific Bank, Ltd.(Banking)

(Other Services)Hokuyo Business Service Co., Ltd.

North Pacific Co., Ltd.

Risk Managem

ent / Information for Investors

Information for Investors


21

Ryuzo Yokouchi

Junji Ishii

Ryu Shibata

Mineki Sekikawa

Ryoji Mizushima

Eiichi Masugi

Shun Yamazaki

Fumiyo Fujii

Yasumitsu Ooi

Fumio Sano

Niichi Mutou

Hisao Ooba

Noriyasu Yamada

Chairman

President

Deputy President

Managing Director

Managing Director

Managing Director

Managing Director

Director

Director

Director

Director

Director

Coporate Auditor

Coporate Auditor

Coporate Auditor

Coporate Auditor

Managing Executive Officer






Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Executive Officer

Chairman

President

Deputy President

Director

Director

Director

Director

Director

Corporate Auditor

Corporate Auditor

Corporate Auditor

Corporate Auditor

Corporate Auditor

Ryuzo Yokouchi

Junji Ishii

Ryu Shibata

Mineki Sekikawa

Ryoji Mizushima

Tsukasa Takigawa

Eisaku Nakamura

Yuji Nagashima

Fumiyo Fujii

Satoru Arai

Mitsuru Oketani

Masayuki Takahashi

Noboru Arashida

Hisao Ooba

Yasumitsu Ooi

Nobuhiko Tanabe

Hideki Kambayashi

Junji Kusumoto

Ryosuke Kobayashi

Yukihiro Shimomura

Hidehiko Oumi

Masaaki Ozawa

Shinji Takashima

Hideharu Emoto

Chiaki Mizuguchi

Masaru Otani

Suteshige Ikeda

Osamu Murai

Takanari Tsukami

Yoshiyuki Haraguchi

Minoru Nagano

Takashi Harada

Osamu Sakaguchi

Yuji Takakuwa

Iwao Takeuchi

Shinichi Yanase

Sachio Higashihara

Hiroaki Morita

Directors and Corporate Auditors (As of June 26, 2012)

Sapporo Hokuyo Holdings North Pacific Bank


22


23 Consolidated Balance Sheets

24 Consolidated Statements of Income

24 Consolidated Statements of Comprehensive Income

25 Consolidated Statements of Changes in Net Assets

26 Consolidated Statements of Cash Flows

27 North Pacific Bank: Non-Consolidated Balance Sheets

28 North Pacific Bank: Non-Consolidated Statements of Income

Financial Section


23

Consolidated Balance Sheets (March 31, 2011 and 2012)

Sapporo Hokuyo Holdings Financial Section

Assets:

Cash and due from banks

Call loans and bills purchased

Other debt purchased

Trading account securities

Money held in trust

Securities


Foreign exchanges

Lease receivables and investment assets

Other assets

Tangible fixed assets

Intangible fixed assets

Deferred tax assets

Customers' liabilities for acceptances and guarantees

Allowance for loan losses

Total assets

Millions of yen Millions of U.S. dollars

¥ $

¥ $

¥ $

Note: The rate of ¥82.19 to U.S. $1.00, the foreign exchange rate on March 30, 2012, has been used for translation. The amounts less than one million yen are rounded down. The amounts less than one million dollars are rounded to the nearest million.

2011 2012 2012

Liabilities:

Deposits

Negotiable certificates of deposit

Borrowed money

Foreign exchanges

Other liabilities

Reserve for bonus payments

Reserve for employees' retirement benefits

Reserve for reimbursement of deposits

Reserve for point card certificates

Deferred tax liabilities

Deferred tax liabilities for land revaluation

Acceptances and guarantees

Total liabilities

¥ $

Net assets:

Capital stock

Capital surplus

Retained earnings

Treasury stock

Total shareholders' equity

Valuation difference on available-for-sale securities

Deferred gains or losses on hedges

Revaluation reserve for land

Total accumulated other comprehensive income

Minority interests

Total net assets

Total liabilities and net assets

¥ $

336,116

120,522

13,896

6,073

2,958

1,501,284

5,181,577

1,645

44,184

82,189

101,792

10,513

44,648

54,020

(99,783)

7,401,641

318,923

197,734

16,104

5,349

1,342

1,533,456

5,377,125

1,831

44,267

99,972

98,057

11,171

29,234

52,856

(80,872)

7,706,554

3,880

2,406

196

65

16

18,657

65,423

22

539

1,216

1,193

136

356

643

(984)

93,765

6,731,314

82,780

124,965

34

64,094

1,685

9,065

1,079

229

7

5,454

54,020

7,074,732

6,982,097

121,576

121,183

14

73,640

1,628

3,304

1,149

267

3

4,431

52,856

7,362,154

84,951

1,479

1,474

0

896

20

40

14

3

0

54

643

89,575

73,279

69,866

24,675

(439)

167,380

51,547

(469)

7,317

58,395

101,133

326,909

7,401,641

73,279

69,866

48,133

(440)

190,839

44,605

(349)

7,432

51,687

101,873

344,400

7,706,554

892

850

586

(5)

2,322

543

(4)

90

629

1,239

4,190

93,765


24

Sapporo Hokuyo GroupFin

ancial Sectio

n

Consolidated Statements of Income (Year ended March 31, 2011 and 2012)

Consolidated Statements of Comprehensive Income (Year ended March 31, 2011 and 2012)

Income:

¥ $

Interest income:

Interest on loans and discounts

Interest and dividends on securities

Other interest income

Fees and commissions

Other operating income

Other income

Total income

Millions of U.S. dollars

¥ $

2012

Millions of yen

2011 2012

Income before minority interestsOther comprehensive income



Changes in ownership ineterest in subsidiaries


Comprehensive income

Comprehensive income attributable to owners of the parent

Comprehensive income attributable to minority interests

¥ $

Expenses:

Interest expenses:

Interest on deposits

Other interest expenses

Fees and commissions payments

Other operating expenses


Other expenses

Total expenses

Income before income taxes

Income taxes:

Current

Deferred

Income before minority interests

Minority interests in income

Net income

101,151

86,795

13,840

515

27,406

32,057

6,087

166,703

1,205

1,006

192

7

333

412

146

2,097

99,066

82,713

15,806

546

27,404

33,839

12,009

172,320

14,411

(9,413)

(9,575)

89

71

―4,997

2,868

2,129

323

(76)

(85)

1

―8

247

218

28

26,536

(6,266)

(7,023)

120

―637

20,269

17,947

2,322

8,575

4,697

3,878

8,299

26,671

77,966

18,087

139,600

79

33

46

97

312

950

102

1,540

6,491

2,739

3,752

7,950

25,661

78,053

8,402

126,559

27,102

1,058

11,633

14,411

2,146

12,265

557

19

215

323

29

294

45,760

1,592

17,632

26,536

2,403

24,132


25

Consolidated Statements of Changes in Net Assets (Year ended March 31, 2011 and 2012)

Balance as of March 31, 2010

Changes during the fiscal year

Dividends from surplus

Net income

Purchase of treasury stock

Disposal of treasury stock

Changes of scope of consolidation

Reversal of revaluation reserve for land

Net changes of items other than shareholders' equity

Total changes during the period




Net income



Reversal of revaluation reserve for land




¥

Capitalstock

Capitalsurplus

Retainedearnings

Millions of yen

Treasurystock

Totalshareholders'

equity

Deferredgains orlosses

on hedges

Valuationdifference

onavailable-for-sale

securities

Revaluationreservefor land

Totalaccumulated

othercomprehensive

income

Minorityinterests

Totalnet assets




Net income



Revarsal of revaluation reserve for land




$

Capitalstock

Capitalsurplus

Retainedearnings

Shareholders' equityAccumulated other

comprehensive income

Treasurystock

Totalshareholders'

equity

Deferredgains orlosses

on hedges

Valuationdifference

onavailable-for-sale

securities

Revaluationreservefor land

Total valuation

andtranslation

adjustments

Minorityinterests

Totalnet assets

Shareholders' equityAccumulated other

comprehensive income


73,279

―73,279

73,279

69,866

―69,866

69,866

13,430

(1,196)

12,265

(0)

(223)

399

11,244

24,675

(1,196)

24,132

(0)

522

23,458

48,133

(439)

(0)

0

(0)

(439)

(0)

0

(0)

(440)

156,136

(1,196)

12,265

(0)

0

(223)

399

11,244

167,380

(1,196)

24,132

(0)

0

522

23,458

190,839

61,112

(9,564)

(9,564)

51,547

(6,942)

(6,942)

44,605

(559)

89

89

(469)

120

120

(349)

7,717

(399)

(399)

7,317

114

114

7,432

68,270

(9,874)

(9,874)

58,395

(6,707)

(6,707)

51,687

100,698

434

434

101,133

740

740

101,873

325,105

(1,196)

12,265

(0)

0

(223)

399

(9,440)

1,804

326,909

(1,196)

24,132

(0)

0

522

(5,967)

17,490

344,400

892

―892

850

―850

300

(15)

294

(0)

6

285

586

(5)

(0)

0

(0)

(5)

2,037

(15)

294

(0)

0

6

285

2,322

627

(84)

(84)

543

(6)

1

1

(4)

89

1

1

90

710

(82)

(82)

629

1,230

9

9

1,239

3,977

(15)

294

(0)

0

6

(73)

213

4,190


26


Net cash provided by (used in) operating activities:Income before income taxes and minority interestsDepreciation and amortizationImpairment lossIncrease (decrease) in allowance for loan lossesIncrease (decrease) in reserve for bonus paymentsIncrease (decrease) in reserve for employees' retirement benefitsIncrease (decrease) in reserve for directors' and corporate auditors' retirement benefitsIncrease (decrease) in reserve for reimbursement of depositsIncrease (decrease) in reserve for point card certificatesGain on fund accrualFinancing expensesLosses (gains) related to securities Losses (gains) on money held in trustForeign exchange losses (gains)Losses (gains) on disposal of noncurrent assetsNet decrease (increase) in loans and bills discountedNet increase (decrease) in depositsNet increase (decrease) in negotiable certificates of deposits

Net increase (decrease) in borrowed money (excluding subordinated borrowings)Net decrease (increase) in deposit (excluding deposit paid to Bank of Japan)Net decrease (increase) in call loansNet decrease (increase) in foreign exchanges-assetsNet increase (decrease) in foreign exchanges-liabilitiesProceeds from fund managementPayments for financeOther - net

SubtotalIncome taxes paid

Net cash provided by (used in) operating activities

Net cash provided by (used in) operating activities:Purchase of securitiesProceeds from sales of securitiesProceeds from redemption of securitiesIncrease in money held in trustDecrease in money held in trustPurchase of tangible fixed assetsProceeds from sales of tangible fixed assetsPurchases of intangible fixed assets

Proceeds from sales of investments in subsidiaries resulting in change in scope of consolidation

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities:Increase in subordinated borrowingsDecrease in subordinated borrowingsCash dividends paidCash dividends paid to minority shareholdersPurchase of treasury stockProceeds from sales of treasury stockOther - net

Net cash provided by (used in) investing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Consolidated Statements of Cash Flows (Year ended March 31, 2011 and 2012)


¥ $

2012

Millions of yen

2011 2012

¥ $

Finan

cial Section

55712836

(230)(1)

(70)―10

(1,205)79(55)

(0)48

(2,379)3,053

472(46)(3)

(969)(2)(0)

1,184(97)(80)

386(15)

372

(9,612)5,4523,689

(0)19(41)

5(62)―

(549)

37(37)(15)(19)(0)0

(1)

(35)

(0)

(212)

3,790

3,577

27,1029,928

506(11,487)

38(1,108)

(410)6736

(101,151)8,575(4,280)

(15)2,9861,804

17,7693,6505,228

11,462(1,033)

103,078(444)

2104,295(13,363)(9,019)

154,219(301)

153,917

(591,010)299,763299,147

(16)2,633(8,483)1,224(3,279)

76

55

――

(1,196)(1,770)

(0)0―

(2,967)

(52)

150,953

160,512

311,465

45,76010,5242,980

(18,910)(56)

(5,761)―7038

(99,066)6,491(4,513)

(1)359676

(195,522)250,91838,795(3,782)

(258)(79,641)

(191)(19)

97,352(7,945)(6,536)

31,759(1,214)

30,545

(790,017)448,133303,238

(7)1,587(3,335)

412(5,115)―

(45,102)

3,000(3,000)(1,196)(1,582)

(0)0

(107)

(2,886)

(8)

(17,451)

311,465

294,014


North Pacific Bank Financial Section

Non-Consolidated Balance Sheets (Year ended March 31, 2011 and 2012)

Assets:

Cash and due from banks

Call loans

Other debt purchased

Trading account securities

Money held in trust

Securities


Foreign exchanges

Other assets

Tangible fixed assets

Intangible fixed assets

Deferred tax assets

Customers' liabilities for acceptances and guarantees

Allowance for loan losses

Total assets

Millions of yen Millions of U.S. dollars

¥ $

¥ $

¥ $

2011 2012 2012

Liabilities:

Deposits

Negotiable certificates of deposit

Borrowed money

Foreign exchanges

Other liabilities

Reserve for bonus payments

Reserve for employees' retirement benefits

Reserve for reimbursement of deposits

Reserve for point card certificates

Deferred tax liabilities for land revaluation

Acceptances and guarantees

Total liabilities

¥ $

Net assets:

Capital stock

Capital surplus

Retained earnings

Total shareholders' equity




Total valuation and translation adjustments

Total net assets

Total liabilities and net assets

¥ $

335,937

120,522

13,896

6,073

2,958

1,495,177

5,228,489

1,645

54,481

100,289

10,434

43,583

54,020

(89,069)

7,378,442

316,112

197,734

16,104

5,349

1,342

1,528,009

5,428,137

1,831

68,150

96,615

11,102

28,141

52,856

(71,632)

7,679,855

3,846

2,406

196

65

16

18,591

66,044

22

829

1,176

135

342

643

(872)

93,440

6,745,344

96,200

124,979

34

39,541

1,517

8,881

1,079

176

5,424

54,020

7,077,200

6,993,754

134,996

120,944

14

49,296

1,445

3,115

1,149

220

4,431

52,856

7,362,224

85,093

1,642

1,472

0

600

18

38

14

3

54

643

89,576

121,101

80,513

41,567

243,182

51,256

(469)

7,272

58,059

301,241

7,378,442

121,101

80,513

64,596

266,211

44,337

(349)

7,432

51,419

317,631

7,679,855

1,473

980

786

3,239

539

(4)

90

626

3,865

93,440

North Pacific Bank Financial Section

Sapporo Hokuyo Group Annual Report 2012 28


Non-Consolidated Statements of Income (Year ended March 31, 2011 and 2012) Finan

cial Section

Income:

¥ $

Interest income:

Interest on loans and discounts

Interest and dividends on securities

Other interest income

Fees and commissions

Other operating income

Other income

Total income


¥ $

2012

Millions of yen

2011 2012

Expenses:

Interest expenses:

Interest on deposits

Other interest expenses

Fees and commissions payments

Other operating expenses


Other expenses

Total expenses

Income before income taxes

Income taxes:

Current

Deferred

Net income

100,978

86,834

13,629

514

23,693

3,963

5,777

134,412

1,205

1,007

191

7

286

82

149

1,721

98,998

82,775

15,676

546

23,511

6,734

12,211

141,455

8,749

4,698

4,050

8,933

879

76,395

15,473

110,430

81

33

48

107

9

932

82

1,211

6,673

2,741

3,931

8,782

768

76,594

6,733

99,552

23,981

156

11,385

12,439

510

1

215

294

41,902

95

17,671

24,136


29

History

1999 Start of comprehensive business collaboration between North Pacific Bank, Ltd. and The Sapporo Bank, Ltd.

2000 Agreement on the joint establishment of a holding company.

Approval for joint establishment of a holding company (Sapporo Hokuyo Holdings, Inc.) by stock transfers

given at an extra ordinary general meeting of shareholders of the two banks.

2001 Sapporo Hokuyo Holdings, Inc. established. The holding company listed on the first section of the Tokyo Stock Exchange

and Sapporo Securities Exchange.

2002 Hokuyo Card Co., Ltd. and Sapporo Hokuyo Card Co., Ltd. become subsidiaries of Sapporo Hokuyo Holdings, Inc.

Hokuyo Card Co., Ltd. and Sapporo Hokuyo Card Co., Ltd. were merged (The company name after merging is

Sapporo Hokuyo Card).

Sapporo Hokuyo Holdings implemented the allocation of new stocks to a third party (¥10.2 billion).

2004 Hokuyo Lease Co., Ltd. became a wholly owned subsidiary of Sapporo Hokuyo Holdings through implementing a stock swap.

Hokuyo Lease Co., Ltd. and Sapporo Lease company were merged (The company name after merging is

Sapporo Hokuyo Lease).

2005 Sapporo Hokuyo Holdings implemented a capital increase through a public offering (¥24.6 billion).

2006 Sapporo Hokuyo Card Co., Ltd. and Sapporo Card Co., Ltd. were merged (The company name after merging is Sapporo

Hokuyo Card).

2009 Sapporo Hokuyo Holdings implemented stock split (1:1,000) and adopted share-unit system (100 shares per unit).

2010 Head office relocated.

History of Sapporo Hokuyo Group

History of North Pacific Bank, Ltd.

1917 Established as Hokkaido Mujin, Ltd.

1944 Company's name changed to Hokuyo Mujin, Ltd.

1950 Listed on the Sapporo Securities Exchange.

1951 Obtained license for mutual savings and loan banking business; company's name changed to Hokuyo Sogo Bank, Ltd.

1989 Converted into an ordinary bank and company's name changed to North Pacific Bank, Ltd. Listed on the Tokyo Stock Exchange.

1998 Took over the business of The Hokkaido Takushoku Bank, Ltd.

2000 Two internal systems have been integrated following the take-over of the operations of The Hokkaido Takushoku Bank.

2005 Representative offices established in Dalian and Shanghai in China.

2008 Merger with The Sapporo Bank.

2009 Issuance of Class 1 Preferred Shares (¥100 billion).

2011 Head office relocated.


SAPPORO HOKUYO HOLDINGS, INC.7, Odori Nishi 3-chome, Chuo-ku, Sapporo 060-0042, Japan

Phone: +81-11-261-2417

Facsimile: +81-11-261-2280

http://www.sapporohokuyo.co.jp

NORTH PACIFIC BANK, LTD.7, Odori Nishi 3-chome, Chuo-ku, Sapporo 060-8661, Japan

Phone: +81-11-261-1311

International DivisionPhone: +81-11-261-1328

Facsimile: +81-11-232-6921

SWIFT Code: NORJPJP

Dalian Representative Office10F, Senmao Building,

147 Zhongshan Road, Xigang District, Dalian, P.R. China

Phone: +86-411-8365-8288

Shanghai Representative OfficeRoom 1602, Shanghai International Trade Centre

2201 Yan An Road(W), Shanghai, P.R. China

Phone: +86-21-6275-2666

SAPPORO HOKUYO HOLDINGS, INC.7, Odori Nishi 3-chome, Chuo-ku, Sapporo 060-0042, Japan

Phone: +81-11-261-2417

Facsimile: +81-11-261-2280http://www.sapporohokuyo.co.jp

NORTH PACIFIC BANK, LTD.7, Odori Nishi 3-chome, Chuo-ku, Sapporo 060-8661, Japan

Phone: +81-11-261-1311http://www.hokuyobank.co.jp

Product group from well-managed forests and other controlled sourcesThis pamphlet is printed with environmentally friendly vegetable-based ink.

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