HIROSHIMA BANKANNUAL REPORT 2018
THE HIROSHIMA BANK, LTD.

Printed in Japan

Profile
Founded in November 1878, The Hiroshima Bank, Ltd. (the “Bank”) is a regional financial
institution headquartered in Hiroshima Prefecture, operating primarily in Hiroshima and thethree neighboring prefectures of Okayama, Yamaguchi and Ehime. In addition to Branches
and Offices in Japan, the Bank has representative offices in Shanghai, Bangkok and Singapore
covering the entire area of East and Southeast Asia. Taking advantage of its extensive network,
the Bank is providing comprehensive financial services including deposit taking, lending,money transfers, foreign currency exchange, and trustee services, along with investment trust
sales and life insurance policies and other commercial banking activities.

■ Management Policy

Shareholder Incentive Plan
We have established shareholder incentives for shareholders to improve their satisfaction.
• Shareholders eligible for the Shareholder Incentive Plan
Hiroshima Bank Head Office(temporary Head Office)■ Financial Results (As of March 31, 2017, non-consolidated)

Management Vision
Building a reliable Hiroshima Bank Group united throughtrusting relations with the regional community

Code of Conduct
The Hiroshima Bank Group shall rigorously implement soundmanagement based on the following code of conduct:
1. Work in step with regional communities to actively contributeto their development
2. Strive to enhance customer satisfaction and peace of mind
3. Continuously enhance the Bank’s corporate value
4. Create a cheerful, rewarding workplace
5. Exercise a high level of compliance

Balance of deposits + NCD¥7,459.3 billion

Balance of loans¥5,852.3 billion¥27.0 billion

Net income

November 1878

Common Stock¥54,573 million

Employees

3,405¥25.8 billion

Capital adequacy ratio(Consolidated)      11.07%(Non-consolidated) 10.79%

Head Office

1-1-7, Nishikaniya, Minami-ku, Hiroshima City,
Hiroshima 732-0804, Japan (temporary Head Office)Branches
and Offices

151 domestic branches, 16 offices, and 3 overseas
representative offices (Shanghai, Bangkok, Singapore)■ Business Operations (As of July 1, 2018)
Comprising Hiroshima Bank, ten subsidiaries, and one affiliated company, the Hiroshima Bank Group provides financial services centered on banking services.
In order to improve the efficiency of banking services, subsidiaries mainly engage in businesses such as financial product transactions related to the Bank,
management and collection of receivables, asset management, credit cards, credit guarantees, and valuation of collateral real estate.
In addition, our affiliated company is mainly engaged in leasing and other businesses in order to answer the diversified needs of the region and tostrengthen our ability to provide integrated financial services.
Hirogin Securities Co., Ltd.
(Financial instruments brokerage operations)• Head Office and branches: 151
Shimanami Servicer Co., Ltd.
Banking operations(Administration and recovery of receivable debts)• Offices: 16
Hirogin REIT Management Co., Ltd.
Hiroshima Bank
(Asset management business)
Hirogin Card Service Co., Ltd.
(Credit card operations)
Other operations• Consolidated subsidiaries: 7
Hirogin Guarantee Co., Ltd.
(Credit guarantee operations)
Hirogin Business Service Co., Ltd.
(Collateral real estate valuation, consolidated financial results, printing, binding services)
Hirogin Wealth Management Co., Ltd.
(Insurance agency operations)Contents• Equity-method affiliates: 1

Hirogin Lease Co., Ltd.
(Leases, automobile leasing)• Unconsolidated subsidiary: 3

HB Asset Funding Corporation(Factoring operations)Blue Investment Limited Partnership(Investment business operations)
Shimanami Value Creation Investment Limited Partnership(Investment business operations)1   Hiroshima Bank’s Network
2  Profile of Hiroshima Prefecture3  Message from the President
4  Summary of Business Performance in FY2017
6  Progress of Mid-Term Management Plan 2017

March 31 every year (hereafter, “the reference date")

Eligible shareholders

Shareholders who have more than 100 shares listed on the Bank's register of shareholders on the reference date

Operational period

From the beginning of July of the year containing the reference date to the end of June of the following year

• Content of the Shareholder Incentive Plan

Preferential tickets will be sent to the eligible shareholders.
One of the following four courses can be chosen for each preferential ticket.
Course nameProfit attributable toowners of the parent■ Corporate Data (As of March 31, 2018, non-consolidated)
Established

Eligible shareholders' reference
date(1) Time deposit course

Course overview
For time deposits made for one year, the course applies an additional interest rate up to the first date of
maturity.

(2) Investment trust course(3) Inheritance-related service
course

The courses provide cashback of 20% of the accumulated fee (excluding tax, ¥20,000 maximum) on eachtransaction.

(4) Hirogin Securities-related
trading course* Information about the Shareholder Incentive Plan is provided in branches and on the Bank's website. For details, please ask at the counter.
* Please study the explanatory notes for each course before choosing it.
* P lease be aware that the Shareholder Incentive Plan may include revisions to the incentive plan itself, including terminating the use of the plan due to changes in the businessenvironment and other factors, or have its contents changed.

We present tickets to the Hiroshima Museum of Art, a nonprofit organization, to our shareholders who make use of the Hirogin time
deposits we have established as shareholder incentives.
• Foundation Hiroshima Museum of Art■ Overview
The Hiroshima Museum of Art was established in November
1978 by Hiroshima Bank in commemoration of the 100th
anniversary of its foundation, as we move through history
together with the region. We hope that the museum can offer
spiritual repose to the people of Hiroshima, the city reduced toruins by the atomic bomb on August 6, 1945. To this end, we
have created a sanctuary of fragrant beauty around the themesof love and healing. We pray that it will also bring repose to
the victims of the bomb that has led to today’s Hiroshima, andpeace to Hiroshima City.

■ The collection
The art gallery exhibits some 80 works throughout the year,
comprising European modern art works centered on the French
Impressionists from the Romantics in the mid-19th century to
the Ecole de Paris school, including paintings by Degas, Monet,
Renoir, Van Gogh and Picasso, and Japanese modern art works
since the Meiji Period, including traditional-style nihonga works.

Address:	3-2 Motomachi, Naka-ku,
Hiroshima City (in Central Park) 730-0011, Japan
Opening Hours:	9:00 a.m.–5:00 p.m. (Last entry 4:30 p.m.)* Open until 7:00 p.m. on fridays during special exhibitions
Closed:	Mondays except during special exhibitions (or the following day if a public holiday
falls on Monday) and December 29–January 2
Note: The‌
museum is sometimes closed temporarily to change exhibitions.

18   Initiatives for ESG
19  Corporate Governance26   Risk Management System
29  Financial Section
61  Corporate Information

HIROSHIMA BANK   ANNUAL REPORT 2018

63

Hiroshima Bank’s Network(As of March 31, 2018)

JAPAN
The leading regional financial institution in the Chugoku and Shikoku regions

Branch network
Shimane:
Yamaguchi:

Okayama:1

10

Branches and Offices:
Hyogo:

7

Hiroshima:

136

Tokyo:

Osaka:

Fukuoka:

167

2

2

Ehime:

6

1

Aichi:

1

1*The number of branches within Hiroshima Prefecture includes
one branch dedicated for bank transfers and one Internet branch.

OVERSEAS
Covering the entire area of East Asia and Southeast Asia

Representative Offices
Shanghai Representative Office

Bangkok Representative Office

Singapore Representative Office

Room 1713, Shanghai International Trade
Centre 2201, Yan An West Road,
Shanghai 200336, China
Tel: +86-(0)21-62752755

14th Fl, Nantawan Building,
161 Ratchadamri Road, Pathumwan,
Bangkok 10330, Thailand
Tel: +66-(0)2-650-5099

65 Chulia Street, #27-03 OCBC Centre,
Singapore 049513
Tel: +65-6438-5882

Associated Bank

Associated Banks (China)

Associated Bank

Standard Chartered Bank

Bank of China
Bank of Communications
Bank of Dalian

The Hongkong and Shanghai Banking Corporation(Covers 16 countries in Asia)(Covers countries and regions with over 80 group bases)
Associated Bank (Mexico)

Associated Bank (Taiwan)

Alliance Partner (China)

CTBC Financial Holding

Wuxi Municipal People’s Government

Shanghai
Representative
OfficeAssociated Banks (Korea)

Korea Exchange Bank
Korea Development BankBANCO NACIONAL
DE MÉXICO, S.A.,
INTEGRANTE DELGRUPO FINANCIERO
BANAMEX
Alliance Partners (Mexico)

Associated Banks (Vietnam)

Joint Stock Commercial Bank for Foreign
Trade of Vietnam
Joint Stock Commercial Bank for Investment
and Development of Vietnam (BIDV)State of Aguascalientes
State of Jalisco
State of GuanajuatoState of Nuevo León

Bangkok Representative Office
Associated Bank (Philippines)

Associated Bank

Metropolitan Bank and Trust Company

Bank of America, N.A.
(Covers Mexico)

Associated Bank (Indonesia)
Associated Banks (Thailand)

Bangkok Bank
Kasikorn Bank

PT. Bank Negara Indonesia (Persero) Tbk

Singapore Representative Office

Associated Bank (India)

Associated Bank

Associated Bank (Brazil)

State Bank of India

Credit Agricole Corporate & Investment Bank

Banco do Brasil(Covers Thailand, Vietnam and India)

HIROSHIMA BANK   ANNUAL REPORT 20181

Profile of Hiroshima Prefecture■ Characteristics of Hiroshima Prefecture
Hiroshima Prefecture, where the Bank’s operations are based, has an outstanding economic advantage within the ChugokuShikoku region of Japan, about 2.3% share on most major national economic indicators, and ranks roughly 11th among the
47 prefectures. Hiroshima Prefecture is a market with high growth potential.
National ranking and share

Hiroshima Prefecture compared with national averages
Actualfigure8,479

Land area
Regional

Economic

km2

102.9

2017/1

1,300

11/47

2.3

2017/1

11.2

12/47

2.2

FY2014

132

11/47

2.3

2016

9.9

10/47

3.3

2016

10.5

10/47

2.2

2014

3,145

6/47

—

FY2014

12.9

11/47

1.7

2018/3thousandNominal grossprefectural producttrillion yen

Total number of offices,
factories, etc.

thousand

Shipments ofmanufactured goods, etc.

trillion yen
trillion yen

Prefectural income
per capita

thousand yen

Balance of deposits

trillion yen

9.4

trillion yen

Prefectural income
per capita

2017/102.2

No. of households

Balance of loans

2.2

12/47

thousandFinancial

11/47

105.4

As of

2,857

Population

Wholesale andretail sales

Land area

National National
ranking share

11/47

1.9

2018/3

150

Population
105.0

100

50

Wholesaleandretail sales

No. ofhouseholds

0

106.3

102.6

Nominal grossprefectural product

Shipments ofmanufactured goods, etc.
154.7

102.7

Total number of offices,
factories, etc.
110.4

- National average - Hiroshima Prefecture
Note: 100 = national average
Source: Hirogin Research Institute■ Hiroshima Prefecture’s Economic Scale
The four local prefectures (Hiroshima, Okayama, Yamaguchi, and Ehime) served by Hiroshima Bank make up an economic
base that rivals Japan’s three metropolitan areas in terms of population and number of business establishments. Even byinternational comparison, the GDP of this economic base is nearly the same as Singapore.
Hiroshima Bank’s operating baseNominal GDP of the four local prefectures
Nominal GDP(Trillions of yen)

Share in Japan
(%)

Total

29.2

5.7

—

1

Hiroshima

11.2

2.2

100.0

2

Okayama

7.2

1.4

64.4

3

Yamaguchi

6.0

1.2

53.1

4

Ehime

4.8

0.9

42.3

Ranking

2. Okayama
1. Hiroshima
Hiroshima City

3. Yamaguchi

Prefecture name

Relative GDP(Hiroshima = 100)

4. Ehime(¥ trillion)
50

42.8

40
30

19.7

20
10
0

2

7.0

7.9

Myanmar

Sri Lanka

24.4

25.0

25.8

27.4

28.9

29.2

Portugal

GreecePakistan

Chile

Finland

Total

32.4

36.6

37.1

DenmarkSouth Africa

11.2

Hiroshima

Vietnam

HIROSHIMA BANK   ANNUAL REPORT 2018

Singapore

ThailandMessage from the President

Aiming to be
a comprehensive financial
services group that
continues to grow withlocal customers

Toshio Heya, President

I would like to sincerely thank all of our stakeholders for their understanding and support over the years for the
Hiroshima Bank.
On June 27, 2018, the Bank appointed Koji Ikeda as chairman and Toshio Heya as president.
As a reliable institution, first-call bank in dealings and trusted by customers, the Hiroshima Bank Group will gather
the collective capabilities of all officers and employees to help further develop the local community. Looking ahead, we
ask for your continued support.
The management environment encompassing regional financial institutions is one of unprecedented harshness
as the population and number of branches both decrease with the prolonged low interest environment in addition tointensified competition with different business sectors joining the industry.
Under such circumstances, in fiscal 2018, the second year of Mid-Term Management Plan 2017, Hiroshima Bank isaiming to be a comprehensive financial services group that continues to grow with local customers by further advancing
the structural reforms currently being implemented and providing high-value-added solutions responding to customers’
needs.
In particular, in asset management operations contributing to customers’ asset formation, the Bank will further
promote customer-oriented business operations by strengthening collaboration with Hirogin Securities.
Moreover, the Bank will continue to proactively engage in the FinTech field, enhancing customer convenience byleveraging new digital technologies.
Additionally, by undertaking workstyle reforms, the Bank is also enhancing individual labor productivity andpromoting the realization of a work-life balance, as well as aggressively promoting and advancing diversity bystrengthening initiatives to provide greater opportunities for women and recruiting specialized personnel.
Furthermore, we are striving to protect our customers through such initiatives as measures against money
laundering and prevention of billing fraud, as well as further enhancing value in the region through active involvement
in various CSR-related areas such as contributing to society and preserving the environment.
Fiscal 2018 marks the 140th anniversary of the founding of the Bank, and will be an important milestone for thestart of the next 10 years. We are deeply grateful for the continued support of the people of the region, and we remain
determined to contribute to the regional economy going forward and will make the Hiroshima Bank Group a high-value,
reliable banking group that is trusted by all of its stakeholders.
In the future, we look forward to the continued and even stronger support and cooperation of our stakeholders.

HIROSHIMA BANK   ANNUAL REPORT 20183

Summary of Business Performance in FY2017

In FY2017, although interest on loans increased for the first time in 10 years and expenses were reduced, core banking profit
declined ¥2.1 billion year on year to ¥32.3 billion as a result of the drop in net interest income mainly due to the decline ininterest and dividends on securities. In addition, despite a decline in credit costs and the posting of a gain on the reversalof provision for investment loss regarding shares of Hirogin Securities Co., Ltd., net income fell ¥2.9 billion year on year to¥27.0 billion.
On a consolidated basis, although gains on negative goodwill and others were booked in conjunction with Hirogin
Securities being converted into a wholly owned subsidiary on June 1, 2017, and due to the elimination of the gain on thereversal of provision for investment loss posted on a non-consolidated basis, profit attributable to owners of the parent fell
¥5.4 billion year on year to ¥25.8 billion, marking the fourth consecutive year of a high level of profit exceeding ¥25.0 billion.

[Non-Consolidated](¥ billion)
Result for FY2017

YoY change (Change rate)

Operating income
Net interest income
Of which, interest on loans
Net fees and commissions income
Core gross banking profit
Expenses
Core banking profit
Government bonds, etc., such as bond-related gains (losses)
Real banking profit
Of which, share and share-related gains (losses)
Of which, credit costs
Of which, gain on reversal of provision for investment loss
Of which, provision of reserve for reimbursement of deposits
Ordinary profit
Net income

122.4
68.2
61.0
17.8
86.1
53.7
32.3
(2.3)
29.9
6.3
0.2
4.9
4.1
37.9
27.0

(12.3) ( (9.2)%)
(3.2)
0.1
0.1
(3.0) ( (3.4)%)(1.0)(2.1) ( (6.2)%)
0.5(1.7) ( (5.3)%)
(8.1)
(2.5)
4.9
3.1
(5.3) ((12.1)%)(2.9) ( (9.9)%)[Consolidated]
Operating income
Ordinary profit
Profit attributable to owners of the parent

124.9
35.0
25.8

(13.3) ( (9.7)%)(10.0) ((22.2)%)(5.4) ((17.3)%)

Difference from theannouncement on November 9

(2.1)

(0.2)
(0.5)
(1.1)
0.4
(0.1)

Earnings
Core banking profit¥32.3

Net income¥27.0

billion(¥(2.1) billion)¥25.8

billion(¥(2.9) billion)(¥ billion)
39.8
40.0

(¥ billion)
30.0
30.0

34.4

Profit attributable to owners of the parent

32.3(¥(5.4) billion)

29.9
27.0

(¥ billion)
40.0

31.4

25.0

31.2

30.0

30.0

25.8

20.0
15.0

20.0

billion

20.0

10.0
10.0

10.0
5.0
0

4

FY2015FY2016FY2017

HIROSHIMA BANK   ANNUAL REPORT 2018

0

FY2015FY2016FY20170

FY2015FY2016FY2017

(As of March 31)(As of March 31)

Loans

ROE (Consolidated)

Compared with the end of FY2016, the loan balance expanded ¥247.2 billion (+4.4%) to ¥5,852.3 billion on growth inboth corporate loans and individual loans. The balance of corporate loans, etc., stood at ¥4,366.3 billion, an increase of¥178.7 billion (+4.3%) from the end of FY2016, as a result of efforts to uncover needs for financing through consultingbased financial products based on qualitative analysis, including Japan’s first ever loans with principal exemption in case ofearthquake, as well as the Hirogin health management support loan. Of this, the balance of loans to SMEs, on which wehave been focusing from the past, was ¥2,426.3 billion, an increase of ¥132.8 billion (+5.8%). The balance of individualloans increased ¥68.4 billion (+4.8%) compared to the end of FY2016 to ¥1,485.9 billion. This was due to the expansionof attractive new products and services, efforts to promote loans through promotion campaigns targeting each life stage, as
well as efforts to promote automobile, educational, housing and other consumer loans.

As an indicator of business efficiency, Hiroshima Bank’s
ROE remained in the 5.5–6.0% range, amid the steadyincrease in net assets.

Loan balance

Loans to SMEs

¥5,852.3

billion(+¥247.2 billion)(¥ billion)
6,000

5,267.2
3,925.3

5,605.1
4,187.6

ROE¥2,426.3

5.58

billion(+¥132.8 billion)(¥ billion)
2,500

5,852.3

2,194.1

4,366.3

2,293.5%((1.39) points)
(%)
8.00

2,426.3

2,000

7.09

6.97
5.58

6.00

4,000
1,500
4.00
1,000
2,000

1,341.9

1,417.5

1,485.9

2016

2017

2018

0

2.00

500

0

2016

2017

0

2018

2015

2016

2017

Corporate loans, etc.
Individual loans(As of March 31)(As of March 31)

Deposits

Capital adequacy ratio

The Bank’s balance of deposits and NCD stood at ¥7,459.3 billion, an increase of ¥150.8 billion (+2.1%) from the end of
FY2016, thanks to marketing activities tied to local communities. Of this, corporate deposits grew ¥49.1 billion (+2.2%) to¥2,291.1 billion, and individual deposits rose ¥76.4 billion (+1.6%) to ¥4,721.6 billion. Corporate and individual custodyassets increased by ¥267.7 billion (+3.0%) compared to the end of FY2016 to ¥9,070.6 billion, exceeding the ¥9,000 billion
mark at the end of the fiscal year for the first time. This was due to consulting-based marketing tailored to customers’
needs, based on a strengthening of collaboration with Hirogin Securities, amid efforts aimed at enhancing customer-oriented
operations (fiduciary duty).

The consolidated capital adequacy ratio was 11.07%, which
remains well above Japan’s domestic standard of 4%.

Deposits and NCD¥7,459.3

billion(+¥150.8 billion)(¥ billion)
8,000

7,024.5
2,154.5

7,308.5

7,459.3

2,242.0

2,291.1¥9,070.6

4,645.2

4,721.6

Consolidated capital adequacy ratio

billion(+¥267.7 billion)(¥ billion)
10,0008,505.5
8,000

6,000

4,491.2

Corporate and individual custody assets (including Hirogin Securities)

6,000

1,480.9
7,024.5

8,802.9

9,070.6

1,494.3

1,611.3

7,308.5

7,459.3

11.07

%

11.33

11.07

((0.03) point)

(%)
12.00

11.10

8.00

4,000
4,000
4.00
2,000

0

Domestic standard (Regulatory floor)

2,000

378.8

421.1

446.5

2016

2017

2018

Corporate deposits
Individual deposits
Public and finance institution deposits

0

2016

2017

2018

0

2016

2017

2018

Corporate and individual non-deposit products(including Hirogin Securities)
Deposits and NCD

HIROSHIMA BANK   ANNUAL REPORT 2018

5

Progress of Mid-Term Management Plan 2017Management strategies in Mid-Term Management Plan 2017
AssetsLiabilities
Banking business

Loans

UP

✓ Promote loans to local SMEs by providing
consulting services✓ Promote efficient sales of individual loans
led by the Head Office3

Deposits

Off-balance-sheet

UP

Non-deposits✓ Increase steady individual deposits

Expand volume through enhanced quality
Increase loan interest

Shift tonon-deposits

UP✓ Practice our fiduciary duty
✓ Promote efforts to contribute to stableasset building

Increase the balances of corporate and individual custody assets andasset management income

Change of the portfolio throughcontrollable risk-taking

Capital adequacy ratio

Asset management business(including business with Hirogin Securities)

Securities

2

DOWN

✓ Appropriate risk-taking according to themarket environment

Retained earnings

UP

Achieve the management objectives through key earning generators: income from high-value-added
banking business and non-interest income from asset management business

Regional development

4

Structural reform projects

5

Response to financial digitalization

6

Branch office strategies

7

1

Results of FY2017 (Summary)

6

1

We steadily executed management strategies and generally achieved the management objectives in the first year of the mid-term plan.

2

We enhanced asset management business, including collaboration between banking and securities businesses, achieving the targets
for the balances of corporate and individual custody assets.

3

We enhanced consulting sales through feasibility studies (qualitative analysis) to practice value-added sales.

4

We actively participated in local development, including structuring of private REITs.

5

We managed to secure personnel members by implementing the workstyle reform and reallocated them to promising markets.

6

We enhanced the system to make a speedy response and strengthened efforts for new payment methods.

7

We considered building new channels (including branch offices) to provide customers with optimal financial services, including
establishing innovative branch offices with a view to the next generation.

HIROSHIMA BANK   ANNUAL REPORT 2018

State of achievement of management objectives
We generally achieved the management objectives in the first fiscal year of the mid-term management plan. We did notachieve the target for the non-interest income ratio, mainly due to the fact that core gross banking profit exceeded ourforecast, but non-interest income reached our forecast. We will continue to steadily execute our strategies and will aim toachieve the management targets in FY2021, the final year of the mid-term management plan.
Profit attributable to owners of
the parent

Evaluation:

Consolidated ROE(%)(¥ billion)
40.0

8.0

Final year
¥30.0 billion
or more

30.0

6.0

25.8

23.1
20.0

5.1

2.0

+0.5%

+¥2.7 billion
0

FY2017FY2017(Mid-term management plan) (Result)

Evaluation:

Final year
¥10.0 trillion
or more(¥ billion)
12,000.0

9,063.7

3,000.0

Consolidated capital adequacy ratio
(%)

8.0

6.0

10.8

11.0

Final year
40%
or more

50.0

40.0

20.0

20.0

35.7

35.6

(¥30.7 billion)(¥32.4 billion)

Compared to the mid-term
management plan target−0.1%+¥24.3 billion

0

10.0

(%)

9,088.0

FY2017FY2017(Mid-term management plan) (Result)

FY2021(Forecast)Non-interest income ratio
Evaluation:(including income from Hirogin Securities)

Compared tothe mid-term
management
plan target

6,000.0

12.0

0FY2017FY2017(Mid-term management plan) (Result)

FY2021(Forecast)

Average balance of corporate andindividual custody assets

5.6

Final year
around6%Compared tothe mid-term
management
plan target

4.0

Compared tothe mid-term
management
plan target

10.0

9,000.0

Evaluation:

10.0

0

FY2021(Forecast)

FY2017FY2017(Mid-term management plan) (Result)

Evaluation:

Final year
10%or moreCompared tothe mid-term
management
plan target(non-interest income compared tothe plan +¥1.7 billion)

Adjusted overhead ratio

Evaluation:

(%)
80.0

67.6

62.5

60.0

40.0

+0.2%

FY2021(Forecast)

4.0
20.0

Final year

50–59%

Compared tothe mid-term
management
plan target

−5.1%

2.0

0

FY2017FY2017(Mid-term management plan) (Result)

FY2021(Forecast)

0

FY2017FY2017(Mid-term management plan) (Result)

FY2021(Forecast)

HIROSHIMA BANK   ANNUAL REPORT 20187

Enhancement of asset management business— Collaboration between banking and securities businesses —We have been enhancing our marketing capabilities to acquire financial instrument intermediary services accounts andincreased the number of joint branches to provide one-stop products and services to customers. Since converting Hirogin
Securities into a wholly owned subsidiary, we have been steadily increasing the balance of custody assets and the number ofactive financial instrument intermediary services accounts by offering products matching customers’ diverse needs.

Enhancement of the Bank/
Securities unified management

Hiroshima
Bank

Promotion of financial instrument
intermediary services

Hirogin
Securities

Wholly owned
subsidiary(June 1, 2017)(¥ billion)
1,200

1,000

Provide stable
management products

Provide active
management products(stocks, structured bonds,
etc.)

Hirogin Securities Balance of intermediary transactions
Hirogin Securities Balance of direct transactions
Number of active accounts for financial instrument intermediary services

904.9

869.0

613.7

643.7

800

600

73.7

87.6

540.0

556.1

1,069.8

719.1
141.9

400

Measures

Results (including estimates)

577.2

200

Strengthen sales power
to acquire new accounts
for financial instrument
intermediary services

The number of employees of
the Bank seconded to Hirogin
Securities 20 persons(April 1, 2017 to April 1, 2018)

Japan’s first
securities company affiliatedwith regional banks

Enhance measures to meetneeds for inheritance tax
savingIncrease the number ofjoint branches to provide
one-stop function

8

Hirogin Securities was certified
to conduct trust agreement
agency business andbank agency business(January 4, 2018)

Number of joint branches (total
number including booths)

3 (FY2016) ➾ 8 (FY2017)➾ 14 (Planned for FY2018)

HIROSHIMA BANK   ANNUAL REPORT 2018

* Term-end balance(fair value, billion yen)0

End of March 2016

Hirogin Securities
Net sales income
per salesperson

End of March 2017¥20.5 million

End of March 2018¥26.1 million(yoy +¥5.6 million)

Enhancement of asset management business— Business for senior customers —We entered into the trust business from this April in order to strengthen our efforts towards senior customers (including
business owners) based on inheritance and gifting needs. By establishing new points of contact with customers that we havenever worked with before, and cultivating deeper business relationships with these customers and the next generation, we willfurther promote business for seniors, and by practicing customer-oriented business operations, we aim to have a corporate andindividual custody asset balance of ¥9,360 billion and a non-interest income ratio of 35.8%.

Hiroshima Bank entered into the trust business(testamentary trust) (from April 2018)
NEW
Understandneeds• Pre-consultation• Inheritance consulting(Testators)

New points ofcontact

Accepttestamentarytrust• Prepare a will

(Testators)

Deepenrelationships
with testators

NEW

Number of contracts with senior customers(inheritance-related businesses)(Number of contracts)
2,000

NEW

InheritancestartsExecute a will
• Inheritors are
determined• Prepare an inventoryof assets• Collect and grant
assets• A will is disclosed• The executor of awill is employed(Beneficiaries)

1,963
81
103
336

1,600

1,262
1,200

1,008

(Beneficiaries)

Expand pointsof contact with
beneficiaries

800

Proposemanagementof inheritanceassets (second
inheritancetax saving
measures)400

0Deepen relationships with customers,
including the next generation

323
37
104
182

FY2014
Living trust

66
167

41
145
102

317

720

712

FY2015FY2016

Calendar year gift trust

1,443

FY2017

Testamentary trust

OthersIncrease in the average balance of corporate andindividual custody assets (including Hirogin Securities)(¥ billion)
12,00010,000

8,000

35.6%

35.8%

8,815.7

9,088.0(yoy +3.0%)

1,506.6

1,603.7(yoy +12.6%)

33.2%

9,360.024

18

7,309.1

7,484.3

7,540.0(yoy +0.9%)

2,000

0

30

1,820.0

6,000

4,000

(%)
36

12

6

FY2016
Real deposits + NCD
Non-interest income ratio

FY2017FY2018 (Prospect)

0

Corporate and individual non-deposit products(including Hirogin Securities)

* The

balance of Hirogin Securities’ non-deposit products is stated at fair value.

HIROSHIMA BANK   ANNUAL REPORT 20189

Enhancement of high-value-added banking business— Business loans —In addition to enhancing our lineup of products and services such as our unique consulting-type loans, we will build a branch
office support system utilizing specialized Head Office personnel and provide comprehensive solutions to address customers’
diverse needs. By doing so, we will increase the balance of loans to SMEs as well as income from investment banking business.

Mazda-related suppliers’ needs
Mazda Motor Corporation

Relevant suppliers✓ L aunch the next-generation
products from FY2018 (7thgeneration)➢ Establish and update facilities forthe next-generation products

Government support for SMEs
✓ The government developed a new economic policy package to aim
to realize a nominal GDP of ¥600 trillion.
✓ The next three years until 2020 have been set as a period of
intensive investments.
Productivity revolution➢ Build new plants and enhanceexisting plants in line with
Mazda’s advance to the U.S.

✓ E stablish a joint venture with
Toyota Motor Corporation andbuild a new plant in the U.S.
(2021)

Promote new capital investment

Subsidies/Tax breaks

Improve operation by introducing IT
Support for smooth business succession

Needs arise for funding, overseas advance andbusiness matching

Needs arise for capital
investment and businesssuccession

Ratio of absence of
successor in Hiroshima
Prefecture 73.4%(National average 66.5%)➾ 5th in Japan
Higher needs forbusiness succession
than other prefectures(Reference) Teikoku Databank, Ltd.

Develop a system to meet diverse needs
Products and services

Support system

Accumulate income from banking business(¥ billion)
3,000(¥ billion)
6

About 2,780.0✓ Our unique consulting-type loans• Loans with principal exemption in caseof earthquake• Loan system to support growing fields• Business succession support loan, etc.

✓ Business matching✓ Derivatives(hedge against foreign exchange
and interest rate risk)✓ Support for overseas advance+■ Relationship management byindustry■ Persons in charge of businessmatching■ Persons in charge of M&A■ Overseas representative offices■ Persons in charge of consultingwith corporate owners

52,238.4

4

3.83

3

2

1

FY2017 results: 735 cases

0

0.24
0.56

2.15

10

HIROSHIMA BANK   ANNUAL REPORT 2018

3.43
0.20
0.53

Income frominvestmentbanking business

2,500

2,000

1,500

1,000

2.02

500

0.43
0.45

0.32
0.36

FY2016FY2017

M&A
Derivatives

About 5.00

2,368.7

FY2021 (Forecast)

Corporate bonds, public bonds, etc.
Syndicated loans, etc.
Business matching, etc.
Balance of loans to SMEs

0

Enhancement of high-value-added banking business— Individual loans —We will aim to increase the balance of individual loans by introducing new products and constructing a promotion frameworkthat utilizes the Head Office function and does not require involvement by branch offices. We will also strive to wrap in customers
by providing companies and schools with employee and student identification IC cards that integrate daily-use functions andfinancial functions, and thereby differentiate ourselves from other banks.

Increase in the average balance ofindividual loans
Introduction of Flat 35(Security version)

Promotion of affiliated credit cards

Effective promotion led
by the Head Office withsophisticated EMB* support✓ Fixed rate is available for theentire period (up to 35 years)✓ Greater interest advantage thanthe existing Flat 35✓ Our interest risk and credit risk
are reduced by securitization

DM

SMS

TelemarketingChildren andstudents

Creditcards* Event-Based Marketing – Marketingreflecting changes in customer behavior

Child
cards

All-in-one card with ATM,
credit and card loan functions

1,500

1,445.0

1,200

379.1

32.1
39.0

1,518.9

47.1
41.1

409.8

1,590.0
59.0
43.0<Hirogin> Value One GoldJCB platinum card

PASPY

HIROCA

Transportation-related IC card

Local e-money card

Student
identification
IC cardStudent card withe-money function(¥ billion)
1,800

Seniorgeneration<Hirogin> Value One

IC ATM card

* Launched on May 7, 2018

First regional bank inwestern Japan

Working
generation

Employee identification
IC cardEmployee card with e-money
function

Considering
adding branded
debit cards(JCB/Visa)<Progress of promotion of affiliated cards>
15(Cards)
15,000439.0

1112,000(Affiliates)
15

12,310
12

900
9,000
600

994.8

1,020.991049.0
6,000

6

5

0

3,000

FY2016
Housing loans + Flat 35
Limited-purpose loans

FY2017
Apartment loans, etc.

6

4,864

300

3,031

3,793
3

FY2018 (Forecast)
Card loans02015/3
Number of issued cards

2016/32017/3

2018/30

Number of affiliates

HIROSHIMA BANK   ANNUAL REPORT 201811

Initiatives for the revitalization of the regional economy
By actively participating in redevelopment projects in Hiroshima, such as the Head Office reconstruction project scheduled forcompletion in 2021, and the origination of a private placement REIT, the first for a regional bank, we will proactively support
community development and contribute to the revitalization of the regional economy as a leader.

Major projects in Hiroshima City
Redevelopment of Hiroshima Station South
Exit Square
Futabanosato land readjustment project• Izumi Head Office building – Completed in Oct. 2013
• High-precision radiotherapy center – Completed in Oct. 2015
• Condominium…Completed in Jun. 2016
• Hiroshima TV Head Office building – Completed in Mar. 2018
• Hiroshima-higashi Police Station, etc. – Expected to open infall of 2018

Hiroshima St✓M ake use of former Hiroshima
Municipal Baseball Stadium✓ Make use of Central Park✓R
 elocate and rebuild the Chamber ofCommerce and Industry Building✓K amiya-cho redevelopment(rebuild San Mall)

Other projects(in Hiroshima Prefecture)✓P roject to utilize the former site ofHiroshima-nishi Airport✓C onstruction of a football stadium✓R edevelopment of the front areaof Fukuyama Station✓M ake use of the former site of the
Fukuyama municipal racetrack✓P rivatization of Hiroshima Airport,etc.

• Development of the Free Passage – Completed in Oct. 2017
• Development of the South Exit Square – Expected to completein 2020s• Change of the traffic system – Expected to complete in 2020s• Reconstruction of the station building – Expected to completein 2020s

Project for making use of the former siteof Hiroshima University headquarters• Sports club – Completed in Aug. 2016
• Hospital – Completed in Oct. 2016
• Apartment housing for students – Completed in Apr. 2017
• Condominium – Expected to complete in fall of 2020

Expected to start construction in January 2019
Expected to complete in January 2021

(Conceptual image of thecompleted new Head Officebuilding)

The Kamiya-cho and Hatchobori area of Hiroshima wasnominated as an urgent city revitalization development area
(February 2018)➾B eing designated (determined), the area will have special benefits✓R estrictions and limitations (use restriction and floor area
limitation) will be eased.
✓ S pecial taxation (tax reduction on registration and license
and acquisition of real estate, etc.)• Housing building and commercial
building – Completed in Jan. 2017
Commercial bldg.:
11 floors and 1 basement
Edion, medical facilities, etc.
Housing bldg.:
46 floors and 1 basement
Total number of condominium units: 480

BIG FRONT Hiroshima• East building (pachinko parlor) – Completed
in Mar. 2015
•East building (others) – Completed in May
2016•West building – Completed in Aug. 2016
West building:
52 floors and 2 underground
Bic Camera, Hotel Kawashima, etc.
Total number of condominium units: 514
East building:
10 floors and 1 basement
Pachinko parlor, car parks, etc.

Kamiya-cho/
Hatchobori
Aria

Hiroshima Bank Head Office
Reconstruction Project

EKICITY HIROSHIMA

Redevelopment of Hijiyama Park
• Renovate existing facilities(Manga library, Army cemetery, etc.) –Until Mar. 2019• Establish new facilities(Observation facility/Modern art museum, etc.) –From Apr. 2019

Origination of a private placement REIT

✓ Investment targets are real estate related to local redevelopment
and reconstruction projects✓ Our wholly owned subsidiary Hirogin REIT Management Co., Ltd.
gives investment instructions✓ As a leader of community development, the Bank takes initiatives
for regional redevelopment, contributing to development andrevitalization of the regional economyIt is expected that the population and the number ofhouseholds will increase, and the level of land prices andrent also will increase.
 he number of private urban development projects willT
probably increase.

Contribute to the improvement of regional productivity

Actively engaged in community developmentfrom the planning stage, contributing to therevitalization of the regional economy

12

HIROSHIMA BANK   ANNUAL REPORT 2018First
regional bank

Initiatives for structural reform
Through various structural reform initiatives, such as reforming sales promotion and reducing the labor burden at branch
offices, we are working to improve productivity and free up personnel members and time for sales promotion, as well as
reallocating personnel to promising markets and the Head Office. In addition, we will respond to financial digitalization andcreate new earnings opportunities.

Structural reform project name

OutlineEffects✓ Introduce sales-supporting devices (tablet)

Sales Promotion Reform Project✓ Integrate customer information and management tools
dispersed by business type✓ Receive applications for individual loans by tablet✓ Secure customer service time through intensive management ofactions and results

Individual Loan
Low Cost Operation

Managed to free up
180 personnel members(FY2017)✓ Receive applications for individual loans by tablet

Reallocated personnel✓ Centralize back-office work to the Head Office(April 2018)✓ Centralize housing loan refinance and apartment loan sales tothe Head Office✓ Thorough reduction

Project to Reduce the Labor Burden
at Branch OfficesReduce documents

Free upabout 130 personnel members

Reduce the use of seals or signatures
Reduce the vault(in total between FY2018 and FY2021)

Reduce manager’s tasks
Reduce the use of passbooks✓ Implement measures to reform workstyles at the headquarters,
taking advantage of the temporary Head Office

Head Office Reconstruction ProjectNon-territorial officeElectronic approval

Free up personnel members
by improving productivity(FY2018 to FY2021)

Internal mobile phones
Mobile PCs✓ Enhance functions of new channels (mobile application)

Response to Financial Digitalization✓ Diversification and sophistication of settlement functions✓ Respond to open API

Create new earnings opportunities✓ Enhance marketing

HIROSHIMA BANK   ANNUAL REPORT 201813

Initiatives for workstyle reform— Branch offices —We will free up time and personnel members to work with customers and deliver high-value-added services by introducing
the integrated marketing support system TomorrowNavi and ramping up the project to reduce the labor burden at branch
offices.

Increase customer service time through the sales promotion reform projectIntroduce integrated operation support system TomorrowNavi
Sales staff

Loan staff

Interview

Customer

Input➢ Unify the input system

TomorrowNavi
Customer information✓ Quantitative information✓ Qualitative information✓ Transaction information✓ Past information✓ Sales policies✓M anagement of prospective customers✓D ue-date control✓B ehavior management✓ P erformance management

Sales tools(per day)Build a system to free up
sales promotion time

Operation tools✓ Understanding needs✓ Qualitative analysis✓ Evaluation of own stock✓ FP tools✓ Inheritance-related

Customer
service time➢ Seamless collaboration of eachsystem, information and tools

Management tools✓ Intermediary service✓ Business loans✓ Financial products✓ Individual loans

Electronic contract isavailable.

1H FY2016

2H FY2017 (compared with 1H FY2016)CA:

About 200 minutes

About 270 minutes(+70 minutes)

AR:

About 240 minutes

About 280 minutes(+40 minutes)

Project to reduce the labor burden at branch offices(1) U se of tablets for transactions in the lobby
Customers are recommended to use a tablet for the transaction during
the waiting time(2) R educe the labor burden and manager’s tasks
Eliminate reception desks and guide customers in the lobby to theappropriate channel(3) Reduce the vault
Cash and passbooks, etc., stored in the vault
Manual management ➾ System management

To reduce about 520,000 work hours
in total a year by implementing the above measuresand other measures(between FY2018 and FY2021, compared with 2H FY2017)

The number of managers can be reduced by reducing the labor burden

14

HIROSHIMA BANK   ANNUAL REPORT 2018

Free up about

130 employees and relocate them (FY2018 to FY2021)

Initiatives for workstyle reform— Head Office —Taking advantage of the temporary Head Office relocation in February 2018, we are strengthening initiatives aimed at
improving productivity, including reducing existing documents by 80% through disposal and digitalization, introducing nonterritorial offices using mobile PCs as well as an electronic approval workflow.

Promote collaboration
beyond the border ofsections

Introduced thenon-territorial
office system

The pilot project
started in March 2018

Reduced storage
costs

Reduceddocuments

Introduced
internal mobile
phonesAugust 2017
Started disposal and digitalizationof existing documents

The pilot project started in
February 2018
230 phones (as of April 2018)

February 2018
Reduced existing
documents by 80%

Use time effectively andprovide high-value-added services

Introduced theelectronic
approval workflow

Full introduction
from April 2018

Dramatic
improvement ofdecision-making
speed

Introduced
mobile PCs

The pilot project
started inAugust 2017

Expanded gradually
to 189 PCs(as of April 2018)

Reduced printing costs
Numberof printed
sheets

FY2016FY2017

About 12.6
million sheets

About 11.4
million sheets(reduction
rate:
about 10%)50% reduction of printed sheets by
September 2018 (compared with themonthly average in FY2017)

HIROSHIMA BANK   ANNUAL REPORT 201815

Response to financial digitalization
In order to respond quickly to the rapid financial digitalization, we strengthened our internal framework, including integrating
the Head Office functions related to smartphone apps. We are also working to introduce customer service utilizing newtechnologies, such as starting to use payment apps and launching demo testing of advanced loan screening utilizing AI.

Strengthen the structure to make speedy responses

Start operation of payment application
Hirogin Pay B

Changes in the environment
surrounding the Bank

Compete with other industries✓ Progress of cashless payment✓ Diversified and sophisticatedpayment methods✓ Progress of open innovation(including disclosure of API, etc.)

Apple Pay
LINE
Rakuten✓ Targets are tax, public utility and mail-order

payments.

✓ Scan the bar code on a payment slip with asmartphone camera and the payer’s account isdebited simultaneously.
✓ Those payments are possible with a smartphone
anytime, anywhere and easily.

Urgent✓ Utilize mobile app✓ Initiatives for diversified and sophisticatedpayment methods✓ Develop new services and businesses according to
the changing environment

Demo testing of advanced loan screening utilizing AI(Second round)
Second-round target
First-round target
Changes in thebalance of accounts
Financial data

Other internal
information

Data from othercompanies

Commercial distribution information

Data from Teikoku
Databank, Ltd.

×

Default
information

Reorganized to create the Digital Innovation Office(February 2018)(Formerly the New Business Development Promotion Office)➢ Unified headquarters’ functions regarding the mobile
application, etc.
➢ Strengthened the organization (4 members (April 1, 2017)➾ 11 members (April 1, 2018))

16

HIROSHIMA BANK   ANNUAL REPORT 2018

➢ Aim to improve the accuracy of the business modeland enhance versatility➞ Consider structuring business loans in the futureBranch office strategies
In order to build channels that can provide optimal financial services to customers, we are reviewing branch office functions
based on market changes, deregulation, and other factors, and will aim to be a bank that can provide customers with
consultation services and transactions through any channel they prefer to use anytime, anywhere.
In addition, through collaboration with other sectors, we are promoting branch office innovation, including establishinginnovative branch offices with a view to the next generation incorporating advanced equipment and information
dissemination functions which will support regional development.

Review the branch office functions

Establish innovative branch offices with a view tothe next generation

Changes in the market(New) Hatchobori Branch* (from Dec. 19, 2017)✓ Decreasing number of visitors to branch offices reflecting the declining
population✓ Various non-face-to-face channels and changing customer needs in line withthe progress of ICT*/FinTech (*Information and Communication Technology)

In addition to enhanced consulting functions, the office has advanced featuresand functions with the use of ICT and an information dissemination functionthat contributes to regional development and regional benefits.
* Startram 1-2F, 16-11 Hatchobori, Naka-ku, Hiroshima

Deregulations (Banking Act)✓ Flexible business days and hours set up by each branch office✓ Joint office managed by multiple banks■ Foreign tourist information center
Setouchi Information Center @ HIROSHIMA BANK✓O perated by Setouchi Brand
Corporation Ltd.
✓ Introduce specific places where
tourists can discover the attractivenessof Setouchi✓A im to inspire tourists to extend theirstay and repeat visiting the Setouchiarea

The Bank aims to provide customers with
consultation services and transactions throughany channel they prefer to use anytime andanywhere.
■ Robot concierge Robopin

Review the branch office functions✓C ommunication robot developed by
Fujitsu Laboratories Ltd.
✓ It guides office procedures andprovides information on tourist
facilities in the surrounding area on
behalf of human employees✓V erify the scope of future banking
operations that may be performed byrobots (joint proof experiment with
Fujitsu Ltd.)➢ Enhance customer services by building a network of core branch offices
and small and compact branch offices➞ Review the form and functions of branch offices by reducing thelabor burden➞ Specify the roles of branch offices according to the characteristics ofthe market➞ Increase the number of joint offices with Hirogin Securities, focusing
on medium branch offices■ Large digital signage➢ F lexible branch office management reflecting deregulations➞ Flexible setting of business days and hours (realize both“strengthening of customer contacts and enhanced customer
services” and “efficiency” according to regional circumstances andcustomers’ needs)

Branch office

ATM

IB

Mobileapplication

Customer

Call center✓M esh LED display through which theother side is visible while displaying✓A ll windows have this display (First in
western Japan)

DM/SMSHIROSHIMA BANK   ANNUAL REPORT 201817

Initiatives for ESG
We have been proactively working to bolster corporate governance for some time now. Going forward, we will continue tostrengthen the governance of the entire Group, including the restructuring of Group companies.
Along with other initiatives to take the environment into consideration, we are utilizing loans for environment-friendly
companies, and we are introducing environmental technologies into the new Head Office building scheduled to open in 2021.
In addition, the Bank was selected as a stock in the MSCI Japan Empowering Women Index as a result of its initiatives topromote the active participation of women in the workplace.
The Hiroshima Bank Group aims to enhance corporate value on a long-term and continual basis through initiatives forthe environment, society and governance.
Efforts to enhance governanceRestructuring of Group companies

Strengthen thegovernance of theentire GroupStrengthen Group governanceJuly 2018
Hirogin Mortgage Services and Hirogin Business Support were merged.
➞ Hirogin Business Services
April 2018
Hirogin Lease and Hirogin Auto Lease were merged.
➞ Hirogin Lease (surviving company)

This raises their contribution awareness to improve the Bank’s mid- andlong-term performance and increase corporate value

June 2017
Introduced the stock compensation scheme (BIP trust)for directors and executive officers

June 2017
Hirogin Securities was acquired as a wholly owned subsidiary

June 2016
One external director was added ➞ External directors accounted for 30% of the Board of Directors* T hree among five Audit & Supervisory Board members were external Audit & Supervisory Board members

December 2015
The Compensation Committee and the Nomination
Advisory Committee were established.

Ensure the transparency and objectivity of the decision-making process regarding
compensation for and designation of external directors and executive officers

June 2015• One external director (woman) was appointed
Optimize the personnel structure/Speedy decision-making/Clarify management responsibility• Reduced the number of directors and the term to one year
• Review performance-linked compensation for directors Further enhance directors’ contribution awareness to improve the Bank’s performance and their morale• Review the executive officer system
Make clear separation between execution and management to strengthen functions

Efforts to consider environments
Loans for environment-friendly companies
Global environmental support system Eco Harmony
 haracteristicsC• Available for companies that have obtained ISO 14001 certification or EcoAction 21 certification, aiming to reduce the environmental load
• Available for the purchase of low-emission vehicles, the establishment ofclean energy facilities, and the purchase of carbon emission rights
Balance loan type: ¥1.9 billion
Private placement bond type: ¥6.1 billion (end of March 2018)

Eco-friendly new Head Office building with the use oflatest environmental technologies
Wind

Natural ventilation system

Heat

Use of underground heat
Natural control of blinds

Light

LED lighting

Water

Use of rainwater

Hirogin Solar power loan
 haracteristics
C•A vailable for users of the Feed-In Tariff Scheme for Renewable Energy•A vailable for up to 15 years of loan period
Balance: ¥9.2 billion (end of March 2018)(Conceptual image of the completed
new Head Office building)* Expected to complete in January 2021

Encourage female workers
Female managers and supervisors(Person)
200

10.8%
9.3%

150

126

(%)
12

170

148

9

✓ Introduced the remote work system (work-at-home) to some usersof the short-time work system✓ Strengthened support for the career advancement of users of thework-family balance support system, etc.

19

19
100

50

0

6

107

2017/4/1

The Bank was selected for the
MSCI Japan Empowering Women Index (WIN)129
3

2018/4/1

2022/4/1

Managers
Supervisors
Proportion of female managers and supervisors

18

HIROSHIMA BANK   ANNUAL REPORT 20180

➢ Select Japanese companies that have gender diversity
and can withstand the future labor shortage➢ It is invested in by the Government Pension Investment
Fund (GPIF)

Corporate Governance
Basic Approach to
Corporate Governance
The Bank’s management policy is to improve management
efficiency and transparency to receive high evaluation fromand build unshakable bonds of trust with our stakeholders,
including both customers and shareholders. To attainthis goal, we have positioned more stringent corporate
governance as a top management priority, and are working
to raise standards through a range of measures.

1. Outline of corporate governance structure
The Bank has adopted an Audit & Supervisory Board systemas part of its efforts to strengthen corporate governance forthe following reasons and purposes:• For responding promptly and accurately to changes
in the management environment and ensuring theappropriateness of the Bank’s business operations, it
is important to have a system in which internal Bank
directors, who have a wealth of expert knowledge andexperience in the banking business and bank management
and a deep understanding of the operation and executionof the Bank’s business, oversee as members of the Boardof Directors the management’s decision-making and theexecution of duties by the other directors;• Having the Audit & Supervisory Board whose members,
including external Audit & Supervisory Board members,
audit the execution of duties by the directors is effective
and serves as a management monitoring function; and• The highly independent external directors and external
Audit & Supervisory Board members provide theirsupervising and auditing functions in a fair and objective
manner from a neutral perspective and give appropriate
suggestions and advice on the execution of the duties by
the directors and on the status of the operation of internal
controls, thereby ensuring an adequate management
supervisory system.
The Bank’s Board of Directors consists of 10 members,
including three external directors, as of June 28, 2018.
The board convenes once a month, in principle, andis responsible for making management decisions andoverseeing business execution. The Bank has established theManagement Board under the Board of Directors as a bodyfor discussing and determining important matters relating tooverall management based on the basic policy determinedby the Board of Directors. The members of the committee
are the Chairman, President and directors in charge of therespective divisions, and the committee convenes once aweek, in principle. In addition, the Bank has established the
Directors’ Loan Evaluation Board as a body to discuss anddetermine important loan projects based on the basic policy
formulated by the Board of Directors. The members of thecommittee are the Chairman, President, Senior Managing
Directors, and directors in charge of the respective divisions,and the committee convenes once a week, in principle.
The Articles of Incorporation of the Bank prescribe that the
number of directors of the Bank does not exceed 15 andthat terms of office are for one year, to clarify management
responsibility and build a management framework to
respond rapidly to changes in the management environment.
The Bank has also introduced an executive officer
system. Under the supervision of the Board of Directors,
the system has duties executed by the President and Chief
Division Officers, as well as Chief Area Officers. The decisionmaking functions related to important management items
that directors should carry out and duties that directors andexecutive officers conduct in each role are divided, thereby
appropriately ensuring operations and enhancing sustainablecorporate value.
The external directors receive reports on the resultsof internal audits, Audit & Supervisory Board members’audits, and accounting audits as well as reports on the stateof internal control from the division in charge of internal
control during meetings of the Board of Directors as part oftheir roles of providing management supervisory functions
in a fair and objective manner from a neutral and external
perspective. In particular, the external directors receive
detailed explanations of the agendas for the meetings of theBoard of Directors and reporting materials in advance fromthe divisions in charge of internal audit and internal control,
respectively, and provide appropriate suggestions and advice
during such advanced explanation or meetings of the Boardof Directors, thereby endeavoring to raise the effectivenessof their management supervisory functions.
In addition, for the purpose of conducting
investigations, research, or discussions and coordination
about specific matters, the Bank has established various
other committees, including the Long-Term Management
Planning Committee, the Sales Strategy Committee, the
ALM Strategy Committee, the IT Strategy Committee, theComprehensive Risk Management Committee, the Strategic
Equity Holdings Verification Committee, the Compliance
Committee, the Award Reprimand Committee and the FD
HIROSHIMA BANK   ANNUAL REPORT 201819

Committee, whose members consist mainly of the directorsof an external director from a neutral standpoint and withand general managers in charge of the respective divisions.

fairness in places including Board of Directors meetings.

These committees convene periodically or as required

One of the Company’s external Audit & Supervisory Boardand make efforts to address major management issues

members uses their abundant experience as a lawyer, broad

and review cross-sectional measures and issues. Mattersknowledge and perceptive insight to offer objective opinions

agreed or discussed by the committees are submitted forand the like, fulfilling the responsibilities of an external Audit

deliberation or reported at the meetings of the Board of& Supervisory Board member from a neutral standpoint

Directors, Management Board, etc., thereby contributing

and with fairness in places including Board of Directors

to strengthening the Bank’s corporate governance andmeetings. The Bank appointed the other two external Audit

enhancing the soundness and appropriateness of its business& Supervisory Board members as it was judged that they

operations.

could be expected to use their abundant experience as a

The Audit & Supervisory Board consists of fivecertified public accountant and a company executive, andmembers, including three external Audit & Supervisory Board

their broad knowledge and perceptive insight to offer fairmembers, as of June 28, 2018. It convenes once a monthand objective opinions from a neutral standpoint in places

and as required. The Audit & Supervisory Board members

including Board of Directors meetings and the like, fulfilling

participate in meetings of the Board of Directors andthe responsibilities of external Audit & Supervisory Board

provide appropriate suggestions and advice on management

members.

decision-making. The Audit & Supervisory Board members,

The Bank has not stipulated original standards

including external Audit & Supervisory Board members,

regarding the appointment of external directors and external

are striving to implement efficient audits by maintaining

Audit & Supervisory Board members, but moves ahead withclose coordination with the division in charge of internal

appointing external directors and Audit & Supervisory Board

audits and accounting auditors through the active exchange

members with the objective of strengthening supervisoryof opinions and information and by attending audits ofand monitoring functions of management and has the policy

branches by the division in charge of internal audits andof using as a reference for the appointment of external

on-site audits by accounting auditors. In addition, thedirectors and external Audit & Supervisory Board members

Audit & Supervisory Board members receive reports on

the guidelines laid out for independent officers as stipulated

the progress of the tasks of developing sub-systems in theby the Tokyo Stock Exchange, Inc. The Bank has notified

internal control system and important matters that affect the

the Tokyo Stock Exchange that there is no risk of a conflict

effectiveness of the sub-systems from the division in chargeof interest between the three external directors and two ofof internal control, including the status of the response

the three external Audit & Supervisory Board members andto such matters, periodically or as required. The Audit &general shareholders and judged their appointments to be

Supervisory Board members are endeavoring to develop andappropriate.

strengthen the internal control system from their standpoint
as Audit & Supervisory Board members by requesting
explanations and providing suggestions and advice as
required on such occasions.
One of the Bank’s external directors has been a Bank ofJapan branch manager and worked as an executive manager
of a regional financial institution. The director is expected
to use that abundant experience, broad knowledge andperceptive insight to offer objective opinions and the like,fulfilling the responsibilities of an external director froma neutral standpoint and with fairness in places including
Board of Directors meetings. The other two external
directors have abundant experience in academia and as acompany manager. They are expected to use that abundant
experience, broad knowledge and perceptive insight to offer
objective opinions and the like, fulfilling the responsibilities
20

HIROSHIMA BANK   ANNUAL REPORT 2018

2. Status of internal audits, Audit & Supervisory
Board members’ audits and accounting audits
With respect to internal auditing, the Board of Directors is
engaged in building an effective internal audit framework
according to types and degree of each risk in order to realize
compliance. Based on internal audit regulations—whichwere formulated with the aim of contributing to sound andappropriate operations of the business—the internal audit
department (57 staff members as of the end of the fiscal
year under review), which is independent from the audited
departments, conducts internal audits on items related tocompliance, risk management and internal control associatedwith financial reporting, among other areas, for eachdepartment and branch, subsidiary, and affiliated company,as well as outsourced contractors. Specifically, these audits
are conducted by conforming to the basic internal audit

3. Status of the internal control system andthe risk management framework

plan established by the Board of Directors every half fiscal
year. The results of the audits are reported every month to

The Bank, based on a management vision of building

the Board of Directors. Also, the internal audit departmenta reliable Hiroshima Bank Group united by trusting

notifies the audited departments of the internal audit results

relations with the regional community and the five acts

in writing, requests improvement or recommends correction

comprising the Corporate Philosophy, aims at sound andregarding items necessary to be improved or corrected, andtransparent management to secure the sincere trust of all its

reports the status of these actions on a regular basis to thestakeholders, including customers, the regional community,

Board of Directors.

shareholders, the market and its employees.

Regarding Audit & Supervisory Board members’ audits,

In addition, the Bank is continuously working oneach Audit & Supervisory Board member conducts audits

strengthening its corporate governance and the internalon the status of duties executed by directors. Specificcontrol system, such as by appointing external directors whomeans include verifying attendance at the meetings of themeet the standards of independent officers stipulated by

Board of Directors and other important meetings, listening

Tokyo Stock Exchange, Inc.

to directors regarding the status of their performancein executing their duties, accessing important approval
documents and other documents, investigating the status ofoperations and assets of each department and branch, andmonitoring and verifying the status of the internal control
system. These audits are implemented based on Audit &Supervisory Board members’ audit standards establishedby the Audit & Supervisory Board, auditing standards
associated with the internal control system, the Audit &Supervisory Board members’ audit plan, which is formulated
every fiscal year, and division of duties. The results of theseaudits are reported to the Board of Directors every month,and in addition, Audit & Supervisory Board members
exchange views with the President on a regular basis toprovide appropriate suggestions, advice or requests, thereby
implementing effective audits.
One of the external Audit & Supervisory Board
members has qualifications as a certified public accountant
and is highly knowledgeable about financial affairs andaccounting.
Regarding accounting audits, KPMG AZSA LLC
conducts audits on financial statements as well as internal
control audits associated with financial reporting. As foraccounting audits, they are executed in a reciprocal mannerwith the internal audit department which is in charge ofaudit administration, such as by exchanging informationand opinions at meetings held regularly or as necessary or
conducting branch audits in the presence of the internal
audit department.

(1) S ystem for ensuring that actions taken by directors
and/or their agents are in keeping with laws andregulations and the Articles of Incorporation
The Bank has formulated Ethics Regulations, Service
Regulations and Compliance Regulations to clarify the codeof conduct and other standards expected of its employees.
At the same time, the Bank has positioned rigorouscompliance as one of its utmost management priorities,
and strives to ensure that its business activities are sincere
and in strict compliance with all relevant laws, regulations
and rules. In addition to legal compliance, the Bank has
established Customer Protection Management Regulations toserve as a guideline to secure a structure aimed at protecting
and enhancing convenience for customers. The Bank strives
to execute its business—such as providing information
to customers or responding to their requests for advice
or customers lodging a complaint—in a sincere and fairmanner from the customers’ perspective, with all employees
being fully aware of the Bank’s social responsibility andpublic mission. Along with these efforts, the Bank has
also formulated and officially announced its Policy for
Customer-Oriented Business Conduct to carry out business
management based on the interests of the customers. As arigorous and specific action plan for compliance with laws
and regulations and the protection of customers, the Boardof Directors approves an updated Compliance Program every
six months. In addition, for problems that may arise in ourefforts to comply with the law, cases where circumstances
prevent decisions from being reached at the department
level, or where reports or consultations are not properly
carried out, we have established a hotline system, allowing
employees to report or consult directly with the Compliance

HIROSHIMA BANK   ANNUAL REPORT 201821

Management Division and/or outside legal counsel.
Furthermore, through Ethics Regulations, the Bankhas built a structure that blocks all relations with anti-social(2) S ystem for the preservation and managementof information used by members of the Board of
Directors in the execution of their duties

elements. The basic policy of Ethics Regulations states that

The Bank’s rules for the Board of Directors stipulate thatthe Bank will prevent any and all connections to anti-social

minutes of board meetings be preserved for 10 years.

elements that might threaten the order and safety of civil

In addition, important information, such as minutes ofsociety, including transactions that involve offering financial

the Management Board and the Directors’ Loan Evaluation

services via other companies (such as consumer credit

Board, is also preserved and managed appropriately incompanies). In the unlikely event the Bank becomes a target

accordance with the Bank’s internal regulations.

of extortion, it will contact and coordinate with police
authorities, and employ all necessary legal measures to

Status of implementation

resolutely fight such demands.

Minutes of Board of Directors meetings have been preserved

Moreover, as part of Ethics Regulations, the Bankand managed appropriately as important information

makes every effort to disclose business information fully

concerning the directors and the execution of their duties.

and fairly and to ensure the transparency of its business

Other important pieces of information have also been

operations, so that management can reflect the opinions

preserved and managed appropriately by the relevantof a broad range of concerned parties. We have also

departments and branches.

established accounting regulations and internal regulations
on financial reports to ensure that we report financial
information in a timely and appropriate manner.
As for the Bank’s response to facilitating seamless
financial operations or responding to Guidelines on
Management Guarantees, it has formulated Basic Principles
and Regulations on Credit and Basic Policies on theManagement of Facilitating Seamless Financial Activities. Bysuch means, the Bank has a structure in place that enables
an appropriate response, such as offering funds to customers
in a seamless manner in addition to providing support for
management consultations and improvements.
Status of implementation
The Board of Directors receives various reports, such as
the compliance program execution report, to confirm thatbusiness operations are adhering closely and appropriately
to all management policy guidelines and regulations.
Where improvement is needed, we take the necessary steps
including improvements and corrections. To ensure rigorouscompliance with laws and regulations and uphold corporate
ethics, we have also established a Compliance Committee
to deliberate and review compliance-related matters andprevent the occurrence of legal violations.
The Bank has made arrangements so that all employees
are able to access the Compliance Manual, which gives
simple descriptions of Ethics Regulations and otherregulations mentioned above, as well as the Compliance
Committee and the hotline system. We also conduct study
sessions to discuss this manual, to ensure that all employees
are familiar with its contents.
22

HIROSHIMA BANK   ANNUAL REPORT 2018(3) S ystem for managing the danger of losses andother systems
To respond appropriately to various risks that surround its
operations, the Bank has formulated the Comprehensive
Risk Management Regulations and analyzes and accurately
gauges the overall magnitude of each risk it faces. In
doing so, the Bank strives to prevent the emergence orescalation of losses that could have a severe impact on
its management. Every six months, the Bank approves an
updated Comprehensive Risk Management Policy and strives
to exercise a suitable level of balanced risk management tomaintain its financial health and profitability.
The Bank is also appropriately managing its capital,
including its adherence to capital adequacy regulations as
set by Basel III, by establishing the Capital Management
Regulations with an aim of securing an adequate level ofcapital that is in line with the Bank’s risks and maintaining
sound management.
In addition, in the Emergency Management
Regulations, the Bank has set forth a Business Continuity
Plan (BCP) prioritizing the continuity of important operations
to ensure that it is able to respond appropriately toearthquakes or other natural disasters that might disrupt its
continuous operation.
Status of implementation
By receiving various reports including the comprehensive
risk management report, the Board of Directors has
confirmed that risks have been managed appropriately andthat the Bank has adequate capital for responding to risks.

Management Committee have been held as required to(5) E nsuring appropriate business operation by the
Bank and the Hiroshima Bank Group

monitor the risks as well as discuss and examine the Bank’s

To promote sound and smooth Group management in an

responses.

integrated way, the Bank has formulated the Group Company

At the same time, meetings of the Comprehensive Risk

Furthermore, the Bank has built an appropriate crisis

Operations and Management Regulations, clarifying Group

response framework by holding regular drills in preparation

firm operations and management policy as well as thefor disasters.

organizational structure of management and internal control
divisions.

(4) Ensuring efficiency in performance of duties by directors
The Bank has established a Management Board anda. System for reporting the execution of business duties byDirectors’ Loan Evaluation Board. The Board of Directors

the directors and officers of subsidiaries to the Bank

decides the Bank’s basic management policy and, basedGroup companies are reporting to and consulting withon this, delegates important decisions regarding thethe Bank on a regular basis, and as the need arises, inBank’s management in general to the Management Board.

accordance with the Group Company Operations and

Likewise, important loan assessments are delegated to theManagement Regulations, enabling the Bank to respond in

Directors’ Loan Evaluation Board.

an appropriate and timely manner.

To streamline the execution of business duties
approved by the Board of Directors, regulations have also
been developed to clarify the separation of duties and thedelegation of duties and authorities within the Bank.

b. R
 egulations and other systems for managing risks oflosses at subsidiaries
The Bank’s guidance and management of risk management
and crisis management activities at Group companies

Status of implementation

are conducted in accordance with the Comprehensive

The Management Board has made important decisions on

Risk Management Regulations and Crisis Management

management in general and the Directors’ Loan Evaluation

Regulations.

Board has made important loan assessments. In addition,
reports have been submitted to the Management Board
and Directors’ Loan Evaluation Board according to internalc. System for ensuring the efficient execution of duties by
the directors and officers of subsidiaries

regulations. In these ways, the Bank conducts efficient

The Bank’s guidance and management of business

operational management.

operations at Group companies are conducted as a

Business duties have been separated to ensure thatcoordinated operation between the administration

effective checks and balances are in place, with the Bank’s

departments and business departments of all Groupdivisions executing their respective duties in coordinationcompanies.

with one another.
At the same time, the Bank has established a system

d. S ystem for ensuring that the business duties executedof Chief Division Officers, as well as a system of Chiefby the directors, officers, and employees of subsidiaries

Area Officers. Under these systems, the Board of Directors

comply with laws and regulations and the Articles of

appoints directors and executive officers in charge ofIncorporation

planning and supervising the business operations of

The Bank’s guidance and administration regarding

respective divisions, and also executive officers who devotecompliance with laws and regulations at Group companies

themselves to specializing in managing the operation ofare conducted in accordance with the Compliancebranches in certain geographical areas. By clearly separating

Regulations.

the roles and responsibilities of the executive officers, thesystems enhance the sound and appropriate management of

Status of implementation

business operations and strengthen the earnings capability

The Board of Directors has established a Group Companyof the Bank.

Summit Meeting for discussion and reporting on important
items related to the overall management of Group
companies, receiving a report every six months on the stateof operations at Group companies and confirming the results
HIROSHIMA BANK   ANNUAL REPORT 201823

and status of each of these companies.
Divisions engaged in operational duties of Groupthe Compliance Management Division reports promptly to
the Audit & Supervisory Board members.

companies conduct operations for those Group companies
efficiently and provide guidance and management, while theb. S ystem enabling the directors, Audit & Supervisory Board

Bank also monitors and supervises operations and execution

members, executive officers and employees of Groupof operations of Group companies by dispatching directors,

subsidiaries, as well as those receiving reports therefrom,department heads, or others who are in charge of divisions

to report to the Audit & Supervisory Board members

overseeing respective Group companies, to serve as the

The Bank has established a Group-wide hotline system,

directors and auditors of those Group companies.

along with the rules for reporting acts in violation of laws

In addition, the Bank has built an appropriate

and regulations to the Audit & Supervisory Board members,

framework for operating and managing the Groupin its Group Company Operation and Managementcompanies. As a part of this framework, the Bank’s internal

Regulations. This system enables the Bank’s directors,

audit department conducts audits of the Group companies

officers and employees involved with Group companies

and reports the findings to the Bank’s Board of Directors.

to directly report and consult with the Bank’s ComplianceManagement Division and/or outside legal counsel in the(6) Matters related to personnel when an Audit &Supervisory Board member requests assigningpersonnel to assist their duties and mattersrelated to the independence of the personnel
from corporate directors, and matters concerning
ensuring the validity of instructions given to
the personnel by the Audit & Supervisory Board
memberevent of problems that may arise in the Group company’s

The Bank set up the Audit & Supervisory Board Office as an

for reporting it promptly to the Bank’s Audit & Supervisoryorganization aimed at assisting Audit & Supervisory Board

Board members.

efforts to comply with the law, cases where circumstances
prevent decisions from being reached at the Group company
level, or where reports or consultations are not properly
carried out. Furthermore, when such a situation is indeed
found to be in violation of laws and regulations, the headof the Compliance Management Division is held responsible

members and to be supervised directly by the Audit &Supervisory Board.

Status of implementation
Rules for reporting to the Audit & Supervisory Board

Status of implementation

members have been established in the Bank’s internal

Under the Bank’s Employment Regulations, the manager

regulations. Furthermore, each branch and departmentof the Audit & Supervisory Board Office follows the orders

provides necessary reports or explanations on the status ofof the Audit & Supervisory Board members to assist them

operations based on requests or demands by the Audit &in their duties. Moreover, the Bank’s Personnel & General

Supervisory Board members.

Affairs Division must consult the Audit & Supervisory Board
members on personnel matters regarding the manager ofthe Audit & Supervisory Board Office, including transfer,compensation and disciplinary action.

(8) S ystem for ensuring that people making
reports as described above are not subjected todisadvantageous treatment for having done so
The Bank has established rules for protecting people(7) System for reporting to Audit & Supervisory Board
members

reporting (or requesting consultation) on compliancea. System enabling the Bank’s director and employees

Compliance Regulations and Group Company Operation andto report to the Audit & Supervisory Board members

and other issues in its Service Employment Regulations,Management Regulations.

and other systems relating to reports to the Audit &Supervisory Board members

Status of implementation

The Bank has established rules for reporting to the Audit

The Bank has set forth the necessary provisions for& Supervisory Board members in its Service Employment

protecting the anonymity of people making reports

Regulations and Compliance Regulations. These rules

or requesting consultations and preventing theirstipulate that in the event of activities in violation of laws or

disadvantageous treatment, along with making theregulations, the Bank has built a system where the head ofprovisions public to all employees.

24

HIROSHIMA BANK   ANNUAL REPORT 2018

(9) Policy on the reimbursement of expenses andother financial obligations incurred by the Audit& Supervisory Board members in executing theirdutiesThe Bank’s policies on budgets submitted and expenses
incurred by the Audit & Supervisory Board members
in executing their duties are set out in the Head Office
Settlement Authorization Regulations.

Status of implementation
The Audit & Supervisory Board members have attended
important meetings such as those of the Board of Directors,
Management Board, and Directors’ Loan Evaluation Board.
They also have attended important meetings of committees
such as the Comprehensive Risk Management Committee.
Furthermore, the Audit & Supervisory Board members have
met regularly with the President to exchange informationand opinions related to key audit issues, and have actively

Status of implementation
In compliance with the Companies Act of Japan, each fiscal
year the Board of Directors hold discussions with the Audit& Supervisory Board members to form a budget for covering
the projected expenses for their activities. The Bank also
promptly reimburses the Audit & Supervisory Board members
for the expenses and other financial obligations they incur,or the prepayment invoices they submit, in executing theirduties.

exchanged information with the accounting auditor at
regular meetings. The Audit & Supervisory Board members
have also maintained a sound auditing environmentby holding regular meetings with other directors andemployees.
In addition, the Audit & Supervisory Board members
strive to conduct efficient audits and improve theeffectiveness of audits by coordinating closely with theinternal Audit Division by regularly exchanging opinions and(10) Other systems for assuring that audits are
performed effectively by the Audit & Supervisory
Board members

information with the division, while also attending auditsof branches by the internal Audit Division as needed andrequesting audit results.

The Bank’s Board of Directors Regulations and other internal
rules stipulate that the Board of Directors must request theattendance of Audit & Supervisory Board members when
they convene a meeting, and that the Audit & Supervisory
Board members are also entitled to attend the meetingsof the Management Board and Directors’ Loan Evaluation
Board.

Mechanism for overseeing business execution and management

General Meeting of Shareholders

Election/Dismissal
Election/
Dismissal

Audit & Supervisory Board
5 Audit & Supervisory Board members(Among these, 3 are external
Audit & Supervisory Board members)

Accounting auditor
KPMG AZSA LLC

Board of Directors
10 directors(Among these, 3 are external directors)

Management Board

Directors’ Loan
Evaluation Board* In addition to the above, 14 executive officers who do not concurrently serve as directors (as of June 28, 2018) are appointed by the Board of Directors to execute theirduties.

HIROSHIMA BANK   ANNUAL REPORT 201825

Risk Management System
In order to fully justify the trust of customers andshareholders, the Bank must be able to ensure appropriate
levels of earnings and stable operations, by dealing
appropriately with various kinds of risk its operations are
subject to, while remaining a soundly managed institution.
Based on our Comprehensive Risk Management
Regulations laid down by the Board of Directors, the Bank
decides on a detailed risk management policy for each fiscal
year, and manages all categories of risk on an integrated
basis.
For management of major categories of risk—credit,
market, liquidity and operational risk—we have dedicatedoffices. The Risk Management Division manages risk centrally
and comprehensively. To position us to deal appropriately
with the increasing diversification and complexity of risk,
we have established a Comprehensive Risk Management
Committee and carry out regular audits through the Audit
Division into the appropriateness and effectiveness of ourrisk management systems.
Under this risk management regime, we aim to ensure
sound, profitable banking operations, while striking an idealbalance between capital adequacy, risk management andearnings imperatives.

Comprehensive Risk Management
Comprehensive risk management is undertaken bymeasuring the various risks faced by the Bank using uniform
benchmarks such as value at risk (VaR) and then measuring
such risk against the Bank’s corporate strength.
We set ceilings (risk capital allocations) for riskmonitored assets in the categories of credit risk, market
risk, and operational risk, with dedicated offices controllingrisk-monitored assets. Centralized appraisal of risk-monitored
assets as a proportion of Bank capital is undertaken by the
Risk Management Division. We have also created a system
for risk management reports to be submitted regularly to
the Board of Directors, with implementation of appropriate
countermeasures.
In addition, we evaluate and review the adequacyof our capital ratio through periodic stress tests, whichclarify the possible impact on capital and earnings of losses
arising from risk that could not be evaluated using statisticalmethods.

Risk management framework (as of April 1, 2018)
Audit & Supervisory Board Office
Audit & Supervisory Board members (Audit & Supervisory Board)

Board of Directors

Management Board

Directors’ Loan Evaluation Board

Comprehensive Risk Management Committee

Compliance Committee

Risk Management Division (Overall risk management)

Risk Management Division
Credit risk

Market risk

Liquidity risk

Operational risk

Administrativerisk(Banking Operation
Management Div.)

System risk

Human risk

(Information Technology
Planning &Administrative Div.)(Personnel &General Affairs Div.)

Tangible
asset risk
(Personnel &General Affairs Div.)

Reputational risk

Legal risk

(Management
Planning Div.)(ComplianceManagement Div.)

Head Office, branches and the Hiroshima Bank Group

Audit Division

26

HIROSHIMA BANK   ANNUAL REPORT 2018

Risk Management System■ Credit risk
Credit risk is the risk of sustaining losses due to reduction
or loss in value of assets due to deteriorating credit
circumstances at a borrower.
Credit screening structure
For all major loans made by our branches, the Bank has inplace a system of rigorous credit-screening carried out by acredit-screening department, which is independent of themarketing department. In addition to establishing teams foreach sector, the credit-screening department has establisheddedicated teams to ensure sounder borrower finances andeffective corporate rehabilitation, and also offers support tomanagement trying to improve operations.
In approving a loan, the Bank not only follows the basic
principles and rules for credit extension laid down by the Boardof Directors, turning down any application that runs counterto the law or public morals, but also takes careful accountof profitability and public benefit, in addition to fund use,
repayment source, and guarantee and collateral arrangements.
In cases where customers apply for a review ofborrowing terms, the Bank will give a considered response
accounting for actual circumstances faced by the customer, inline with the Board of Directors’ basic policy for managementof funding facilitation. Appropriate and prompt credit
screening is carried out after joint appraisal of a customer’s
needs and concerns—and is not just based on a mechanical,
uniform judgment informed only by financial statements andother superficial statistics and industry-specific guidelines.
To strengthen and expand the credit screening system,
the Bank seeks to appraise the creditworthiness of a given
company through case-by-case credit management and takes
continuous measures to improve the credit-screening skills of
employees such as various kinds of training programs.
Risk-management using the borrower category system
We have introduced the borrower category system toclearly identify objective credit risk on loans we extend.
Based on financial and other data indicating the level ofcreditworthiness of the borrower, we have divided borrowers
into 12 grades, and continuously monitor changes in credit
risk. We then carry out credit risk quantification basedon these grades to assess credit risk on loan assets andmanagement risk capital allocations.
We also accumulate and organize the data necessaryfor quantification of credit risks, such as the default rate
within each grade and progress in asset recovery from
customers in default, combined with our highly sophisticatedquantification technologies, to obtain a still more detailed
picture of risk-monitored assets.
Bank’s own assessment
In parallel with the borrower category system, we conduct
strict checks into the soundness of loan assets through annual
assessment carried out by ourselves. Screening is carried out
by particular Bank branches in light of the financial situation

faced by the borrower, and the results are checked by thecredit-screening department of the Head Office. In addition,
the Risk Management Division extracts important informationand conducts a rigorous review of screening due process andaccuracy, and the Audit Division carries out the process audit.
Based on this in-house assessment, in cases where there is no
realistic prospect of asset recovery, provisions are made to thereserve for possible loan losses to cover the entire value of thesum at risk. This provision is then recorded as a loss for the fiscal
year under review. In this way, we ensure asset soundness.
■ Market risk
Market risk is the risk of incurring losses due to fluctuation ininterest rates, stock and bond prices and foreign exchange
rates, leading to changes in the market value of assets we hold.
The Bank seeks to stabilize earnings by controllinginterest rate and other market risk by expanding andstrengthening asset-liability management (ALM), including
not only securities holdings but also deposits and loans.
Findings of ALM analysis and simulations are incorporated
into annual management policy as a significant element inmanagement planning judgments.
In addition, we have created frameworks to ensurestable earnings through rigorous management of market risk,
enabling us to respond swiftly and appropriately to market
movements. We set limits on risk-monitored assets and lay
down hedging policy and reporting and consulting rules forwhen asset value falls. We monitor compliance with ceilings
and other limits through major measures such as total valueof positions, amount of risk-monitored assets and earnings
performance, as well as management on a daily basis.
In addition, accounting is rigorously based on a
holding-purpose category, using mark-to-market accounting
principles, that enables us to reflect changing market prices
appropriately and accurately in financial data.
Trading account risk
With regard to our trading accounts (for securities and offbalance-sheet transactions that involve short-term gains onsales or purchases and trading at the behest of customers), we
have special management mechanisms in place, since thesetransactions differ qualitatively from banking account transactions(involving deposits and loans, investment securities, and relatedtransactions). The Bank has set up designated trading accounts,
and is strengthening their management using transparent
accounting procedures based on mark-to-market principles.
For proprietary position dealing, we limit our position
by complying with strict rules in terms of position limits andloss-cutting measures. For positions and transactions onbehalf of customers, we follow a policy of square positions
by fully covering them through the interbank market.
■ Liquidity risk
Liquidity risk is the risk of losses arising from unforeseenfund outflows leading to a drying up of cash flow, and thenecessity of raising funds at higher rates than normal.
The Bank prepares for capital outflow under short-term
stress conditions by holding highly liquid assets such as
HIROSHIMA BANK   ANNUAL REPORT 201827

government bonds. Furthermore, to alleviate long-term
fund procurement risk, the Bank manages the stability gap
between loans with low liquidity and stable funding such as
deposits and long-term market funding.
Furthermore, we monitor liquidity risk, cash flow, andmatters that could affect cash flow, and have in place measures
to ensure a swift and appropriate response to unexpected events.

also established Hiroshima Bank CSIRT* as an organization
to respond rapidly in the event of a cyber attack, thereby
strengthening its security management stance.
Furthermore, to prepare for unexpected situations,cyber security incidents, and other events that can jeopardize
the stable operation of computer systems, the Bank has
formulated contingency plans and conducts regular drills.
* Computer Security Incident Response Team

■ Operational risk
Operational risk is the risk of losses arising due to failures inwork processes and employee activities, computer system
irregularities and the impact of external events.
To comprehensively and accurately manage operationalrisk, the Bank has divided such risk into a number ofsubcategories: administrative risk, system risk, human risk,
legal risk, tangible asset risk, and reputational risk. Such risk
is managed comprehensively.
Administrative risk
Administrative risk is the possibility of losses arisingfrom negligent processing by employees, accidents, orunauthorized activities.
Through various training programs, the Bank ensuresrigorous performance of administrative duties to highstandards of accuracy, speed, propriety and courtesy. It has
also compiled a procedure for administrative duties based on
the five principles of making a record of everything, keeping
a hard copy, self-responsibility, checking and confirming.
The Bank has a reporting system for relaying complaints
and opinions from customers and details of major clericalerrors and incidents. To better meet in-house regulations andensure deeper staff commitment, we analyze factors andtrends in matters raised in this feedback, and, where necessary,take effective countermeasures. In addition to proactively
using underlying data to prevent recurrence of clerical errors,
incidents and the like, we also identify and analyze potential
administrative risk and take preventative measures.
System risk
System risk is the possibility of a loss arising from the failure,malfunction, or unauthorized use of computer systems.
The Bank has established a basic security policy for due
protection of information assets and specific operating rules.
Their management is geared to the degree of importance of
information systems and of data.
Depending on their importance, IT systems use duplicatedcomputers, communication lines, power supplies and otheritems. For core systems, we have backup centers locatedin both Hiroshima and Fukuoka, operated jointly with the
Fukuoka Financial Group. We have taken measures to ensurethat we can stay in business even in cases of major disasters.
For critical customer information (data), we use strict
security controls, such as encryption and other measures, toprevent unauthorized external access and information leaks.
Moreover, in response to increasingly sophisticatedand serious cyber attacks, the Bank has made the issue amanagement priority and conducts constant informationcollection and analysis regarding attack trends. The Bank has
28

HIROSHIMA BANK   ANNUAL REPORT 2018

Human risk
Human risk is the risk of losses arising from a fall in employee
productivity or employee resignations, and employee acts
leading to a loss of public confidence in the Bank.
We seek to optimize personnel management throughemployee education, training and work guidance, by
ensuring appropriate personnel management based on job
description and personnel policy. We also have in place
preparations for dealing with pandemic influenza andother major disasters that could interrupt operations, withmeasures in place for each stage in the development of a
possible pandemic. By increasing key staff at our Head Office,we aim to create a framework for continuing operations.
Legal risk
Legal risk is the risk of sustaining losses due to penalties or legal
liabilities arising from legal violations or a breach of contract.
In addition to daily awareness-raising and training incompliance, we ensure appropriate management throughsteady implementation of legal checks and establishment of alegal consultation framework.
Tangible asset risk
Tangible asset risk is the risk of losses arising due todamage to tangible assets caused by disasters, illegal acts or
inappropriate asset management.
We keep full records on locations and status of movable
assets and real estate that we own, borrow or lend out, andhave in place management mechanisms for anticipateddamage caused by disaster, illegal behavior, etc.
Reputational risk
Reputational risk is the risk of losses arising due to a lossof confidence in the Bank on the part of customers andmarkets, as a result of the spreading of false information.
In addition to ensuring the highest standards oftransparency in disclosure, we seek to prevent reputationalrisk from arising by monitoring the Bank’s reputation.

Crisis Management System
In addition to the above risk management measures, wehave compiled a business continuity plan (BCP), a plan
to continue major operations on a priority basis in our
Emergency Management Regulations to deal properlywith risk in cases where earthquakes and other large-scale
natural disasters disrupt our services. In this way, we haveestablished our crisis management framework appropriately.

Financial Section

Consolidated Balance Sheets

For more details about the financial information contained inthis annual report, please refer to the financial informationthat has been made public on the Hiroshima Bank website.

http://www.hirogin.co.jp/eng/index.html

THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIESAs of March 31, 2017 and 2018
Millions of
U.S. dollars (Note 1)

Millions of yen

2017

2018

2018

ASSETSCash and due from banks (Notes 3, 4, 12 and 19)
Call loans and bills purchased (Note 19)
Financial receivables purchased (Notes 4 and 19)
Trading assets (Notes 3, 4 and 19)
Money held in trust (Notes 5 and 19)
Securities (Notes 3, 4, 7, 10 and 19)
Loans and bills discounted (Notes 6, 8 and 19)
Foreign exchanges
Other assets (Note 7)
Tangible fixed assets (Note 3)
Intangible fixed assets (Note 3)
Net defined benefit assets
Deferred tax assets (Notes 3 and 16)
Customers’ liabilities for acceptances and guarantees (Note 10)
Reserve for possible loan losses (Note 3)
Total assets¥1,253,275
17,396
7,091
9,145
156
1,761,462
5,605,677
7,890
57,76692,305
10,24946,078699
42,001(37,933)¥8,873,264¥1,511,177
18,521
7,424
5,847
8,256
1,382,716
5,861,796
7,741
88,94991,982
9,585
54,607735
38,237(35,429)¥9,052,152$14,224
174
70
55
78
13,01555,175
73
837
866
90
514
7
360
(333)
$85,205

LIABILITIES AND NET ASSETS
Liabilities:
Deposits (Notes 7 and 19)
Call money and bills sold (Note 19)
Payables under repurchase agreements
Deposits received for bonds lending/borrowing transactions (Notes 7 and 19)
Trading liabilities (Note 3)
Borrowed money (Notes 7, 9 and 19)
Foreign exchanges
Bonds (Note 19)
Due to trust account
Other liabilities
Net defined benefit liabilities
Reserve for retirement benefits of directors and corporate auditors (Note 3)
Reserve for reimbursement of deposits (Note 3)
Reserve for point loyalty programs (Note 3)
Reserve for stock payments (Note 3)
Reserve for loss related to Head Office rebuilding (Note 3)
Reserve under special laws (Note 3)
Deferred tax liabilities (Note 16)
Deferred tax liabilities for land revaluation reserve (Note 3)
Acceptances and guarantees
Total liabilities¥7,296,113
3,365
137,187
401,641
7,183
453,379
163
20,00022
42,914
38
27
1,461
125
—
1,095
—
5,790
13,61342,001
8,426,125¥7,441,054
50,000111,329
262,859
4,023
585,551224—
42
49,741
42
26
4,447
129
176
1,987
41
10,876
13,61338,237
8,574,404$70,040
471
1,048
2,474
38
5,512
2
—
1
468
0
0
42
1
2
19
0
102
128
360
80,708   54,573   54,573   51430,743
290,180(437)
375,060
39,492(512)
27,763
5,011
71,755322
447,138¥8,873,264

30,746
309,747(1,260)393,807
48,399(547)
27,763
8,016
83,632308
477,748¥9,052,152

289
2,916
(12)
3,707
456
(5)
261
75
787
3
4,497
$85,205

Net Assets (Notes 3 and 11):
Common stock:
Authorized – 1,000,000,000 shares
Issued – 312,633,171 shares
Capital surplus
Retained earnings
Common stock in treasury
Total stockholders’ equity
Net unrealized holding gains on securities available for saleNet deferred gains (losses) on hedging instruments, net of tax
Land revaluation and translation adjustments, net of tax (Note 3)
Remeasurements of defined benefit plans
Total accumulated other comprehensive income
Stock acquisition rights (Note 20)
Total net assets
Total liabilities and net assets
See notes to consolidated financial statements.

HIROSHIMA BANK   ANNUAL REPORT 201829

Consolidated Statements of Income
THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2017 and 2018
Millions of
U.S. dollars (Note 1)

Millions of yen

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
Expenses:
Interest expenses:
Interest on deposits
Interest on borrowings and rediscounts
Other interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses (Note 20)
Other expenses
Total expenses
Income before income taxes and others
Income taxes (Notes 3 and 16):
Provision for income taxes and others
Deferred income taxes
Net income
Profit attributable to owners of the parent

2017

2018

2018

¥ 61,190
18,253
1,135
28,907
10,817
17,967138,270¥ 61,786
13,945
1,340
31,732
4,525
15,774
129,105$  581
131
13
299
43
148
1,215

3,056
3,805
2,555
9,323
11,80957,3796,489
94,41943,850

2,865
3,779
2,890
9,518
4,691
61,1297,975
92,85036,255

27
36
27
90
44
575
75
874
341

13,704(1,061)
31,207¥ 31,207

10,696(250)
25,809¥ 25,809

101
(3)
243
$  243

Yen

Amounts per share of common stock (Note 12):
Net assets
Net income
Diluted net income
Cash dividends applicable to the year

¥1,431.67
100.04
99.92
11.00

U.S. dollars (Note 1)¥1,534.40
82.81
82.71
—

$14.440.78
0.78—

See notes to consolidated financial statements.
Note: T he Bank conducted a share consolidation of common shares at the ratio of 1 share for 2 shares on October 1, 2017. As a result, figures for cash dividends applicable tothe year for the year ended March 31, 2018 have been stated after including the impact of the share consolidation, and the total annual dividends were “—.”Consolidated Statements of Comprehensive Income
THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2017 and 2018
Millions of
U.S. dollars (Note 1)

Millions of yen

Net income
Other comprehensive income (Note 21):
Net unrealized holding gains (losses) on securities available for saleNet deferred gains (losses) on hedging instruments, net of tax
Remeasurements of defined benefit plans
Share of other comprehensive income of affiliated companies
accounted for by equity method
Comprehensive income (Note 21)
Attributable to (Note 21):Comprehensive income attributable to owners of the parent
See notes to consolidated financial statements.

30

HIROSHIMA BANK   ANNUAL REPORT 20182017
¥ 31,2072018¥25,8092018$243(26,309)
252
463

8,900
(34)
3,004

84
(0)
28

4
¥ 5,618

6¥37,686

0$355¥ 5,618¥37,686$355

Consolidated Statements of Changes in Net Assets
THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2017 and 2018
Millions of yen

2017
Stockholders’ equity
Item

Balance at the beginning ofcurrent period

Common stock

Capital surplus

Retained earnings

Common stock
in treasury

Total
stockholders’ equity¥54,573¥30,817¥265,811¥(982)¥350,220

Changes of items
during the period:
Dividends from surplus
Profit attributable to ownersof the parent(6,859)(6,859)31,207

31,207Purchase ofcommon stock in treasury
Disposal ofcommon stock in treasury(73)

Reversal ofland revaluation reserve

(7)

(7)

552

478

20

20

Net changes of items otherthan stockholders’ equity
Total changes of
items during the period
Balance at the end ofcurrent period

—

(73)

24,369545

24,840¥54,573¥30,743¥290,180¥(437)¥375,060

Millions of yen

2017
Accumulated other comprehensive income

Item

Balance at the beginning ofcurrent period

Net unrealized Net deferred gains Land revaluation
holding gains(losses) on hedging and translation(losses) on securities
instruments,
adjustments,
available for sale
net of tax
net of tax¥ 65,797¥(764)¥27,784

Remeasurementsof defined
benefit plans

Total accumulated
othercomprehensive
incomeStock acquisitionrightsTotal
net assets¥4,548¥ 97,365¥334¥447,919

Changes of items
during the period:
Dividends from surplus(6,859)Profit attributable to ownersof the parent

31,207Purchase ofcommon stock in treasury(7)

Disposal ofcommon stock in treasury

478

Reversal ofland revaluation reserve20

Net changes of items otherthan stockholders’ equity(26,304)

252

(20)

463

(25,609)(11)(25,621)

Total changes of
items during the period(26,304)

252

(20)

463

(25,609)

(11)

(780)

Balance at the end ofcurrent period¥ 39,492¥(512)¥27,763¥5,011¥ 71,755¥322¥447,138

HIROSHIMA BANK   ANNUAL REPORT 201831

Millions of yen

2018
Stockholders’ equity
Item

Balance at the beginning ofcurrent period

Common stock

Capital surplus

Retained earnings

Common stock
in treasury

Total
stockholders’ equity¥54,573¥30,743¥290,180¥  (437)¥375,060

Changes of items
during the period:
Dividends from surplus
Profit attributable to ownersof the parent(6,242)(6,242)25,80925,809Purchase ofcommon stock in treasury
Disposal ofcommon stock in treasury

2

(855)

(855)

32

35

Net changes of items otherthan stockholders’ equity
Total changes of
items during the period
Balance at the end ofcurrent period—

219,566(822)

18,746¥54,573¥30,746¥309,747¥(1,260)¥393,807

Millions of yen

2018
Accumulated other comprehensive income

Item

Balance at the beginning ofcurrent period

Net unrealized Net deferred gains Land revaluation
holding gains(losses) on hedging and translation(losses) on securities
instruments,
adjustments,
available for sale
net of tax
net of tax¥39,492¥(512)¥27,763

Remeasurementsof defined
benefit plans

Total accumulated
othercomprehensive
incomeStock acquisitionrightsTotal
net assets¥5,011¥71,755¥322¥447,138

Changes of items
during the period:
Dividends from surplus(6,242)

Profit attributable to ownersof the parent

25,809Purchase ofcommon stock in treasury(855)

Disposal ofcommon stock in treasury

35

Net changes of items otherthan stockholders’ equity
Total changes of
items during the period
Balance at the end ofcurrent period

32

8,906

(34)

—

3,004

11,877(14)

11,862

8,906

(34)

—

3,004

11,877(14)

30,609¥48,399¥(547)¥27,763¥8,016¥83,632¥308¥477,748

HIROSHIMA BANK   ANNUAL REPORT 2018

Millions of U.S. dollars

2018
Stockholders’ equity
Item

Balance at the beginning ofcurrent period

Common stock

Capital surplus

Retained earnings

Common stock
in treasury

Total
stockholders’ equity

$514

$289

$2,732$ (4)$3,531

Changes of items
during the period:
Dividends from surplus
Profit attributable to ownersof the parent

(59)

(59)

243

243

Purchase ofcommon stock in treasury
Disposal ofcommon stock in treasury

(8)

0

0

0

Net changes of items otherthan stockholders’ equity—

Total changes of
items during the period
Balance at the end ofcurrent period

(8)

$514

0

184

(8)

176

$289

$2,916$(12)$3,707

Millions of U.S. dollars

2018
Accumulated other comprehensive income

Item

Balance at the beginning ofcurrent period

Net unrealized Net deferred gains Land revaluation
holding gains on (losses) on hedging and translation
securities available
instruments,
adjustments,
for sale
net of tax
net of tax

$372

$(5)

$261

Remeasurementsof defined
benefit plans

Total accumulated
othercomprehensive
incomeStock acquisitionrightsTotal
net assets

$47

$675

$3

$4,209Changes of items
during the period:
Dividends from surplus(59)

Profit attributable to ownersof the parent

243

Purchase ofcommon stock in treasury(8)

Disposal ofcommon stock in treasury

0

Net changes of items otherthan stockholders’ equity
Total changes of
items during the period
Balance at the end ofcurrent period

84

(0)

—

28

112

(0)

112

84

(0)

—

28

112

(0)

288

$456

$(5)

$261

$75

$787

$3

$4,497

HIROSHIMA BANK   ANNUAL REPORT 201833

Consolidated Statements of Cash FlowsTHE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2017 and 2018
Millions of
U.S. dollars (Note 1)

Millions of yen

2017

2018

2018

¥   43,850
4,501
40
—
(225)
—
1,936
(4,414)
(2)
(14)
(34)
14
—
—
1,095
(80,579)
9,417(11,583)
99
3,138(3,049)(337,865)
193,345
89,048302,251(3,895)(6,897)(13,918)
133,561(575)(21)
88,307(9,590)—(16,089)
337,998(16,108)
321,890
365,741¥   36,255
6,610
31(4,196)(149)
2,123(2,504)(8,529)
4
(1)
2,985
3
176
(2)
892
(77,073)
9,534(3,981)130
3,369(3,159)(244,990)
185,386(40,444)
128,681285(1,458)
20,775(138,782)
148
60
83,171(9,776)(20,000)(27,331)(138,010)(14,415)(152,426)(116,170)$   341
62
0
(40)
(1)
20
(24)
(80)
0
(0)
28
0
2
(0)
8
(725)
90
(37)
1
32
(30)
(2,306)
1,745
(381)
1,211
3
(14)
196
(1,306)
1
1
783
(92)
(188)
(257)
(1,298)(136)(1,434)(1,093)

Cash flows from investing activities:
Purchases of securities
Proceeds from sales of securities
Proceeds from maturity of securities
Increase in money held in trust
Decrease in money held in trust
Purchases of tangible fixed assets
Purchases of intangible fixed assets
Proceeds from sales of tangible fixed assets
Payments for retirement of tangible fixed assets
Net cash provided by (used in) investing activities(786,813)
800,076
183,499(0)
33(5,964)(3,247)
52—
187,634(284,859)
249,618
420,335(0)
1,300(3,545)(2,037)0(9)
380,803(2,681)
2,349
3,956
(0)
12
(33)
(19)
0
(0)
3,584

Cash flows from financing activities:
Repayments of subordinated loans
Dividends paid
Purchases of treasury stock
Proceeds from sales of treasury stock
Payments of lease liabilities
Net cash provided by (used in) financing activities(10,000)(6,857)
(7)
377
(69)
(16,557)—(6,242)
(855)
0
(70)
(7,167)

—
(58)
(8)
0
(1)
(67)

46
536,865
708,294—¥1,245,160

2
257,466
1,245,160
53¥1,502,680

0
2,424
11,7200$14,144

Cash flows from operating activities:
Income before income taxes and others:
Depreciation of premises, equipment and others
Impairment losses of fixed assets
Gains on negative goodwill
Equity in earnings of affiliates
Loss on step acquisitions
Net change in reserve for possible loan losses
Decrease (increase) in net defined benefit asset
Increase (decrease) in net defined benefit liability
Net change in reserve for retirement benefits of directors and corporate auditors
Net change in reserve for reimbursement of deposits
Net change in reserve for point loyalty programs
Net change in reserve for stock payments
Net change in reserve under special laws
Net change in reserve for loss related to Head Office rebuilding
Interest income
Interest expense
Net losses on securities transactions
Net losses on dispositions of fixed assets
Net change in trading assets
Net change in trading liabilities
Net change in loans
Net change in deposits
Net change in negotiable certificates of deposit
Net change in borrowed money excluding subordinated loans
Net change in due from banks other than from the Bank of Japan
Net change in call loans and bills bought
Net change in call money and bills soldNet change in deposits received for bonds lending/borrowing transactions
Net change in foreign exchanges (assets)
Net change in foreign exchanges (liabilities)
Interest received
Interest paid
Net change due to issuance and redemption of bonds
Other – net
Subtotal
Income taxes paid
Total adjustments
Net cash provided by (used in) operating activities

Effect of foreign exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at the beginning of year
Increase in cash and cash equivalents from newly consolidated subsidiary
Cash and cash equivalents at the end of year (Note 12)
See notes to consolidated financial statements.

34

HIROSHIMA BANK   ANNUAL REPORT 2018

Notes to Consolidated Financial Statements
THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIESMarch 31, 2017 and 2018

1 Basis of presenting consolidated financial
statements
The accompanying consolidated financial statements of
The Hiroshima Bank, Ltd. (the “Bank”) and its consolidated
subsidiaries have been prepared in accordance with theprovisions set forth in the Japanese Financial Instruments andExchange Law and its related accounting regulations, andin conformity with accounting principles generally acceptedin Japan (“Japanese GAAP”), which are different in certain
respects as to application and disclosure requirements ofInternational Financial Reporting Standards.
The accompanying consolidated financial statements havebeen restructured and translated into English (with some
expanded descriptions) from the consolidated financial
statements of the Bank prepared in accordance withJapanese GAAP and filed with the appropriate Local Finance
Bureau of the Ministry of Finance as required by the Financial
Instruments and Exchange Law. Some supplementary
information included in the statutory Japanese language
consolidated financial statements, but not required forfair presentation, is not presented in the accompanying
consolidated financial statements.
The Bank maintains its accounting records in Japaneseyen, the currency in which the Bank is incorporated andoperates. In preparing the accompanying consolidated
financial statements and notes thereto, Japanese yen
figures less than one million yen have been rounded down
to the nearest million yen, except for per share data, in
accordance with the Financial Instruments and Exchange
Law and Enforcement Regulation concerning Banking Law
of Japan. Therefore, total or subtotal amounts shown in theaccompanying consolidated financial statements and notes
thereto do not necessarily agree with the sums of individual
amounts. The translations of the Japanese yen amounts
into U.S. dollars are included solely for the convenience ofreaders, using the prevailing exchange rate at March 31,
2018, which was ¥106.24 to U.S. $1.00. The conveniencetranslations should not be construed as representations that
the Japanese yen amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or
any other rate of exchange.

2 Principles of consolidation
The consolidated financial statements include the accounts of
the Bank and 8 subsidiaries. The Bank includes the accountsof several companies which are less than 50% owned in theaccompanying consolidated financial statements in the casethat the Bank has control over these companies throughcross-shareholdings, transfer of management, and provisionof debt guarantees and loans. All significant intercompany
balances and transactions have been eliminated.
Investments in 20% to 50% owned companies are carriedat cost adjusted for equity in undistributed earnings or losses
since acquisition (the equity method). The Bank also applies
the equity method for investments in certain companies which
are less than 20% owned in the case that the Bank is able toexercise significant influence over these companies.
The consolidated financial statements do not include theaccounts of a subsidiary because the total assets, total
income, net income, retained earnings and total accumulated
other comprehensive income of the subsidiary would not have
had a material effect on the consolidated financial statements.
Investment in the unconsolidated subsidiary was stated atcost. If the equity method of accounting had been applied
to the investments in the subsidiary, the effect on theaccompanying consolidated financial statements would not bematerial.
Consequently, the consolidated financial statements include
the account of the Bank and its subsidiaries and affiliatedcompanies (eight subsidiaries and two affiliated companies).
As of March 31, 2018, the fiscal year ending dates are March
31 for 8 subsidiaries.

3 Significant accounting policies
Trading assets and trading liabilities
The Bank adopted mark-to-market accounting for trading
assets and trading liabilities including securities, financial
receivables and financial derivatives for trading purposes.
Trading assets and trading liabilities are recorded on a
trade date basis, and revenues and expenses related to
trading securities transactions are also recorded on a tradedate basis. Securities and financial receivables for trading
purposes are stated at market or fair value at the balance
sheet date. Financial derivatives such as futures and option
transactions are stated at a deemed settlement amount at
the balance sheet date. Unrealized gains or losses incurredby the mark-to-market method are charged to income.

HIROSHIMA BANK   ANNUAL REPORT 201835

Securities
All companies are required to examine the intent of holding
each security and classify those securities as (a) securities
held for trading purposes (hereafter, “trading securities”),(b) debt securities intended to be held to maturity (hereafter,“held-to-maturity debt securities”), (c) equity securities
issued by subsidiaries and affiliated companies, and (d) for
all other securities that are not classified in any of the above
categories (hereafter, “available-for-sale securities”).
Trading securities are stated at fair market value. Gains andlosses realized on disposal and unrealized gains and losses
from market value fluctuations are recognized as gains orlosses in the period of the change. Held-to-maturity debt
securities are stated at amortized cost. Equity securities
issued by subsidiaries and affiliated companies which are notconsolidated or accounted for using the equity method arestated at moving-average cost. Available-for-sale securities
with available fair market values are stated at fair market
value. Unrealized gains and unrealized losses on thesesecurities are reported, net of applicable income taxes, asa separate component of net assets. Realized gains andlosses on sale of such securities are computed using movingaverage cost.
Securities available-for-sale for which fair value cannot be
reliably determined are carried at cost determined by themoving average method.
Debt securities with no available fair market value arestated at amortized cost, net of the amount considered notcollectible. Other securities with no available fair market value
are stated at moving-average cost.
If the market value of held-to-maturity debt securities, equity
securities issued by subsidiaries and affiliated companies
not consolidated or accounted for by the equity method,
and available-for-sale securities declines significantly, suchsecurities are stated at fair market value and the difference
between fair market value and the carrying amount isrecognized as loss in the period of the decline. If the fairmarket value of equity securities issued by unconsolidated
subsidiaries and affiliated companies not on the equity
method is not readily available, such securities should be
written down to net asset value with a corresponding charge
in the income statement in the event net asset value declines
significantly. In these cases, such fair market value or the net
asset value will be the carrying amount of the securities atthe beginning of the next year.

36

HIROSHIMA BANK   ANNUAL REPORT 2018

When market values of available-for-sale securities with fairmarket values decline by 50% or more of the acquisition
cost at the balance sheet date, the Bank writes down suchsecurities to the fair market values and records the related
write-downs as loss in its consolidated statements of income.
When market values of available-for-sale securities with fairmarket value decline by 30% or more but less than 50% of
the acquisition cost, write-downs to the fair market values
may be recognized for certain issuers based on evaluationof issuers’ debtor classification. The Bank devaluated the
securities other than securities held for trading purposes andrecognized a loss of ¥143 million (¥143 million for equity
securities) as for the year ended March 31, 2016.
Derivatives and hedge accounting
Companies are required to state derivative financial
instruments at fair value and to recognize changes in the fairvalue as gains or losses unless derivative financial instruments
are used for hedging purposes.
(1) Hedging against interest rate fluctuations
The Bank applies deferred hedge accounting pursuant to
the treatment regulated by “Treatment for Accounting and
Auditing of Application of Accounting Standard for Financial
Instruments in Banking Industry” (JICPA Industry Audit
Committee Report No. 24) to hedge transactions such as
interest rate swaps entered into to mitigate interest rate risk
arising from financial assets and liabilities. The Bank assessed
the hedge effectiveness by considering the adequacy ofoffsetting movement of the fair value by the changes ininterest rates through classifying the hedged items such asloans and borrowed money and the hedging transactions
such as interest rate swaps by their maturity.
With respect to hedging transactions to fix the cash flows,
hedging instruments (e.g. interest rate swaps) are designatedto hedged items collectively by interest rate indices andtenors in accordance with JICPA Industry Audit Committee
Report No. 24. Since material terms related to hedged items
and hedging instruments are substantially identical, andsuch hedging transactions are deemed highly effective, theassessment of effectiveness is based on the similarity of theterms.
(2) Hedging against foreign currency fluctuations
The Bank applies deferred hedge accounting to hedgetransactions such as currency swaps and foreign exchange
swaps entered into to mitigate foreign exchange risk arisingfrom foreign-currency-denominated financial assets andliabilities.

The Bank applies the hedge accounting pursuant to“Treatment of Accounting and Auditing Concerning
Accounting for Foreign Currency Transactions in Banking
Industry” (JICPA Industry Audit Committee Report No.
25) to currency swap transactions and foreign exchange
swap transactions for the purpose of funds lending andborrowing in different currencies. The Bank assesses thehedge effectiveness by confirming that the positions ofhedge instruments (currency swap and foreign exchange
swap transactions) do not exceed the corresponding foreigncurrency-denominated financial receivables and debts ashedged items.
(3) Exceptional treatment
For some assets and liabilities, the Bank defers recognitionof gains or losses resulting from changes in fair value ofderivative financial instruments until the related losses orgains on the hedged items are recognized. Also, if interest
rate swap contracts are used as a hedge and meet certain
hedging criteria, the net amount to be paid or received
under the interest rate swap contract is added to or
deducted from the interest on the assets or liabilities forwhich the swap contract was executed.
Tangible fixed assets (except for lease assets)
Tangible fixed assets except for land utilized for business
operations are stated at cost less accumulated depreciation.
Accumulated impairment losses are deducted fromacquisition costs.

Lease assets
Lease assets in “Tangible fixed assets” of the finance leases
other than those that transfer the ownership of leased
property to the lessees are computed under the straight-line
method over the lease term with zero residual value unlessresidual value is guaranteed by the corresponding lease
contracts.
Reserve for possible loan losses
For loans to insolvent customers who are undergoingbankruptcy or other collection proceedings or in a similar
financial condition, the reserve for possible loan losses isprovided in the full amount of such loans, excluding the
portion that is estimated to be recoverable due to available
security interests or guarantees.
For the unsecured and unguaranteed portions of loans tocustomers not presently in the above circumstances, but
for which there is a high probability of so becoming, thereserve for possible loan losses is provided for estimatedunrecoverable amounts determined after evaluating thecustomer’s overall financial conditions.
For other loans, the reserve for possible loan losses is provided
based on the Bank’s actual rate of loan losses in the past.
Consolidated subsidiaries provide the reserve for possible loan
losses mainly based on the actual rate of loan losses in thepast.

The Bank and its consolidated subsidiaries depreciate their
tangible fixed assets under the straight-line method overtheir estimated useful lives. Estimated useful lives of major
items are as follows:
Buildings:
22–50 years
Others:3–20 years

All branches and the credit supervision department evaluate
all loans in accordance with the self-assessment rule, andtheir evaluations are audited by the asset audit section, whichis independent from branches and the credit supervision
department, and the evaluations are revised as required basedon the audits.

Accumulated depreciation for tangible assets, recognized forthe fiscal years ended March 31, 2017 and 2018, amounted
to ¥48,238 million and ¥50,922 million ($479 million),
respectively.

Secured and guaranteed loans which are for insolvent
borrowers or in a similar financial condition are disclosed
based on the amount of loans net of amounts estimated not
to be collected through disposition of collateral or throughexecution of guarantees. Such amounts directly set off against
those loans at March 31, 2017 and 2018 were ¥15,289
million and ¥15,536 million ($146 million), respectively.

Intangible fixed assets (except for lease assets)
Intangible fixed assets are amortized using the straight-line
method. Software utilized by the Bank is amortized over theperiod in which it is expected to be utilized (mainly 5–10
years).

HIROSHIMA BANK   ANNUAL REPORT 201837

Employees’ severance and retirement benefits
The liabilities and expenses for severance and retirement
benefits were determined based on the amounts actuariallycalculated using certain assumptions.

Reserve for loss related to Head Office rebuilding
Reserve for loss related to Head Office rebuilding is provided
to cover estimated losses arising from the rebuilding of the
Head Office of the Bank.

The Bank and its consolidated subsidiaries provided
allowance for employees’ severance and retirement benefits
at March 31, 2017 and 2018 based on the estimatedamounts of projected benefit obligation and the fair valueof the plan assets at those dates. Actuarial gains and losses
were recognized in expenses using the straight-line method
over 14 years, which was not longer than the average ofthe estimated remaining service lives, commencing with thefollowing period.

Reserve under special laws
Reserve under special laws is provided for contingent
liabilities and provided for compensation for losses fromsecurities-related transactions or derivative transactions,pursuant to Article 46-5-1 of the Financial Instruments andExchange Act and Article 175 of the related cabinet order.

In calculating the projected benefit obligation, the straightline method is used to attribute the expected benefit
attributable to the respective fiscal year. Prior service costs
were recognized in the consolidated statements of income
as incurred.
Certain consolidated subsidiaries adopt the simplified
method for the calculation of net defined benefit liability andexpenses for severance and retirement benefits.
Reserve for retirement benefits of directors andAudit & Supervisory Board members
Reserve for retirement benefits of directors and Audit &Supervisory Board members is provided for in payment of
retirement benefits to directors, corporate auditors and otherexecutive officers, in the amount deemed accrued at the
fiscal year-end based on our internal regulations.

Foreign currency translation
The consolidated financial statements of the Bank are maintainedin Japanese yen. Assets and liabilities denominated in foreign
currencies are translated into Japanese yen at the exchange rates
prevailing at the balance sheet dates, etc.
Income taxes
Income taxes consist of corporation, enterprise andinhabitants taxes. The provision for income taxes iscomputed based on the pretax income of the Bank andeach of its consolidated subsidiaries with certain adjustments
required for consolidation and tax purposes. The asset andliability approach is used to recognize deferred tax assets andliabilities for loss carryforwards and the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Valuation allowances are recorded to reduce deferred tax
assets based on the assessment of the realizability of the tax
benefits.

Reserve for retirement of deposits
Reserve for retirement of deposits which were derecognized
as liabilities under certain conditions is provided for the
possible losses on the future claims of withdrawal.

Consumption tax
National and local consumption taxes of the Bank and its
consolidated domestic subsidiaries are accounted for using
the tax-excluded method.

Reserve for point loyalty programs
Reserve for point loyalty program is provided for theestimated expenses based on an estimate of the future
usage of points. Points are granted to credit card holders
through card usage under the point loyalty program which isdesigned to promote card usage.

Consolidated statements of cash flows andcash equivalents
In preparing the consolidated statements of cash flows, cash
and due from the Bank of Japan are considered to be cash
and cash equivalents.

Reserve for stock payments
Reserve for stock payments is provided for the Bank’s sharepayment to its directors, etc., based on the Director Share
Payment Regulations.

38

HIROSHIMA BANK   ANNUAL REPORT 2018

Amounts per share
Net assets per share is calculated by dividing net assets by
the number of common stocks outstanding at the year-end(excluding “treasury stock”).
Net income per share is calculated by dividing profit
attributable to owners of the parent by the average numberof shares of common stock outstanding during the year
(excluding “treasury stock”).
Cash dividends per share represent the actual amounts
declared as applicable to the respective years.

4 Securities(1) T rading account securities included in “Trading assets,”
certificates of deposit with banks included in “Cash anddue from banks,” and trust beneficiary rights included in“Financial receivables purchased,” which are separately
reported from “Securities” in the consolidated balance
sheets, are included in this section.
(2) T he following tables summarize acquisition costs, bookvalues and fair values of securities with available fairvalues as of March 31, 2017 and 2018:a) Trading securities:

Reclassifications
Certain amounts in the 2017 consolidated financial
statements have been reclassified to conform with the 2018presentation.
Additional information
Transactions vesting treasury stocks through the trust
The Bank has introduced the BIP (Board Incentive Plan) Trustaiming at improvement of the Bank’s mid- and long-term
performance as well as raising awareness of contributions toincreasing corporate value.

Millions of yen

Amount of net unrealized
gains (losses) includedin the consolidated
statements of income(2) T he Bank’s shares remaining in the trust
1. The shares of the Bank remaining in the trust are recorded
as treasury stock under net assets at the carrying value.
2. The carrying value of treasury stock remaining in the trustwas ¥847 million ($8 million) at March 31, 2018.
3. The number of shares of the Bank remaining in the trust
was 968 thousand at March 31, 2018.

2017

2018

2018

¥(4)

¥(2)

$(0)

b) Available-for-sale securities:
At March 31, 2017
Millions of yen

Acquisition
cost

Gross
unrealized
gain (loss)

Equity securities¥   94,579 ¥   42,217
Bonds:
1,007,469
997,200
National government bonds
736,618
731,170
Local government bonds
115,510
113,567
Bonds
155,339
152,462
Others95,44986,003
Subtotal
1,197,498 1,125,422¥ 52,362
10,268
5,448
1,943
2,876
9,445
72,076

Fair value exceeding cost:(1) Outline
This system grants specified points to directors, etc.,
depending on the Director Share Payment Regulations. The
Bank’s shares and cash in the amount of converted value ofsuch Bank’s shares equivalent to the number of such points
may be granted and paid through the trust at the time ofretirement. The Bank’s shares to be granted to directors are
acquired through the trust by the Bank.

Millions of
U.S. dollars

Book value

Fair value not exceeding cost:

Equity securities   18,919    22,568
Bonds:
132,850
134,160
National government bonds
49,85950,491
Local government bonds
23,94524,075
Bonds
59,04559,593
Others399,774
410,683
Subtotal
551,544567,412
Total¥1,749,043 ¥1,692,834(3,648)(1,310)
(631)
(130)
(547)
(10,909)(15,867)¥ 56,208

HIROSHIMA BANK   ANNUAL REPORT 201839

At March 31, 2018
Millions of yen

Acquisition
cost

Gross
unrealized
gain (loss)

Equity securities¥  119,558 ¥   45,888
Bonds:
701,291
694,738
National government bonds
445,288442,539
Local government bonds
96,23094,889Bonds
159,772
157,309
Others85,51380,938Subtotal
906,362821,565¥ 73,669
6,552
2,749
1,340
2,463
4,574
84,797

Fair value exceeding cost:

Book value

Fair value not exceeding cost:

Equity securities
13,885
16,396
Bonds:
121,400
121,862
National government bonds
40,982
41,103
Local government bonds
25,19325,259Bonds
55,22355,499Others332,639
345,354
Subtotal
467,925
483,613
Total¥1,374,288 ¥1,305,179(2,511)
(462)
(121)
(65)
(275)
(12,714)(15,688)¥ 69,109

Millions of U.S. dollars

Fair value exceeding cost:

Equity securities
Bonds:
National government bonds
Local government bonds
Bonds
OthersSubtotal

Book value

Acquisition
cost

Gross
unrealized
gain (loss)$ 1,125
6,601
4,191
906
1,504
805
8,531

$   432
6,539
4,165
893
1,481
762
7,733

$ 693
62
26
13
23
43
798

131
1,143
386
237
520
3,131
4,405
$12,936

154
1,147
387
238
522
3,251
4,552
$12,285

(23)
(4)
(1)
(1)
(2)
(120)
(147)
$ 651

Fair value not exceeding cost:

Equity securities
Bonds:
National government bonds
Local government bonds
Bonds
OthersSubtotal
Total

40

HIROSHIMA BANK   ANNUAL REPORT 2018(3) T otal sales of available-for-sale securities sold at March
31, 2017 and 2018 were as follows:
At March 31, 2017
Millions of yen

TypeProceeds
from sales

Total amount Total amountof gains onof losses on
sales
sales

Equity securities
Bonds:
National government bonds
Local government bonds
Bonds
OthersTotal¥  5,773
380,924
378,061—
2,863
398,878¥785,576¥ 4,400
3,760
3,758
—
2
15,965¥24,126¥   236
3,460
3,459
—
1
8,836
¥12,532

At March 31, 2018
Millions of yen

TypeProceeds
from sales

Equity securities¥  8,501
Bonds:
31,122National government bonds
25,870Local government bonds
3,910
Bonds
1,342
Others192,226
Total¥231,850

Total amount Total amountof gains onof losses on
sales
sales

¥2,019
227
215
9
2
6,580
¥8,827¥  154
10
—
8
1
4,632
¥4,797

Millions of U.S. dollars

Type

Equity securities
Bonds:
National government bonds
Local government bonds
Bonds
Others
Total

Proceeds
from sales$   80
293
243
37
13
1,809
$2,182

Total amount Total amountof gains onof losses on
sales
sales

$19
2
2
0
0
62
$83

$ 1
0
—
0
0
44
$45

5 Money held in trust(1) Money held in trust for trading purposes
There was no money held in trust for trading purposes for the years ended March 31, 2017 and 2018.
(2) Money held in trust classified as held-to-maturity
There was no money held in trust classified as held-to-maturity for the years ended March 31, 2017 and 2018.
(3) Other money held in trust
Millions of yen

Year ended March 31, 2017
Carrying amount

Fair
value

Net unrealized
gain (loss)

Unrealized
gain

Unrealized
loss

¥156

¥156

¥—

¥—

¥—

Other money held in trust

Millions of yen

Year ended March 31, 2018
Carrying amount

Fair
value

Net unrealized
gain (loss)

Unrealized
gain

Unrealized
loss¥8,256¥8,256¥—¥—¥—

Other money held in trust

Millions of U.S. dollars

Year ended March 31, 2018
Carrying amount

Fair
value

Net unrealized
gain (loss)

Unrealized
gain

Unrealized
loss

$78

$78

$—

$—

$—

Other money held in trust

Notes: 1. C onsolidated balance sheet amount is calculated using market prices at the fiscal year-end.
2. “Unrealized gain” and “Unrealized loss” are breakdowns of “Net unrealized gain (loss).”

6 Loans and bills discounted

7 Assets pledged(1) Doubtful loans of loans and bills discounted at March 31,2017 and 2018 were as follows:

At March 31, 2017 and 2018, the following assets were
pledged as collateral for certain liabilities of the Bank andsubsidiaries.

Millions of yen

2017

Non-accrual loans:
Loans to borrowers
under bankruptcy
proceedings
Other delinquent loans
Accrual loans past due
three months or more
Restructured loans,including loans to
supported companies

2018

Millions of
U.S. dollars

2018¥ 1,31353,917¥ 1,538
50,895

$ 14
479

2,027

2,876

27

Millions of yen

Securities
Other assets

2017

2018

2018

¥999,484
18¥848,175
1,600$7,98415

The collateral was pledged to secure:Millions of yen

12,626

13,923131

The Bank does not accrue interest on loans to borrowers
under bankruptcy proceedings and other delinquent loans,which are classified based on the results of self-assessment.
(2) Bills discounted are accounted for as financial transactionsin accordance with “Treatment for Accounting and
Auditing of Application of Accounting Standard for
Financial Instruments in Banking Industry” (JICPA Industry
Audit Committee Report No. 24). The Bank and its
consolidated banking subsidiaries have rights to sell or
pledge commercial bills discounted and foreign bills of
exchange purchased without restrictions, and their total
face amounts were ¥25,671 million and ¥27,359 million($258 million) at March 31, 2017 and 2018, respectively.

Millions of
U.S. dollars

Deposits
Payables under
repurchase agreements
Deposits received
for bonds lending/borrowing transactions
Borrowed money

Millions of
U.S. dollars

2017

2018

2018

¥  1,505¥  1,488$   14

137,187

111,329

1,048

401,641
422,684

262,859555,664

2,474
5,230

In addition, securities not included in the above schedules
were pledged as collateral for operating transactions, such as
exchange settlements. These securities amounted to ¥42,301
million and ¥5,013 million ($47 million) at March 31, 2017and 2018, respectively, and others amounted to ¥11,994
million and ¥48,888 million ($460 million) at March 31,2017 and 2018, respectively.

HIROSHIMA BANK   ANNUAL REPORT 201841

Security deposits, included in other assets, amounted to¥2,323 million and ¥2,567 million ($24 million) at March 31,2017 and 2018, respectively, deposits for financial instruments
amounted to ¥5,427 million and ¥8,703 million ($82 million)
at March 31, 2017 and 2018, respectively, and deposits for
futures trading amounted to ¥1,113 million and ¥1,115
million ($10 million) at March 31, 2017 and 2018, respectively.
Of the securities received as collateral under transactions
with repurchase agreement, those which the Bank holds
rights to dispose of by sale or provision of collateral at its
discretion amounted to ¥938 million and ¥21,070 million($198 million) at March 31, 2017 and 2018, respectively.
Bills rediscounted are accounted for as financial transactionsin accordance with “Treatment for Accounting and Auditingof Application of Accounting Standard for Financial
Instruments in Banking Industry” (JICPA Industry Audit
Committee Report No. 24), and the total face amountof commercial bills discounted and foreign exchanges
purchased that have been pledged were ¥4 million at March
31, 2017.

8 Commitment line
Commitment line contracts on overdrafts and loans are thecontracts, under which the Bank lends to customers up to
the prescribed limits in response to customers’ applicationof loan as long as there is no violation of any condition in
the contracts. The unused amount within the limits totaled¥1,679,803 million and ¥1,735,338 million ($16,334
million) relating to these contracts at March 31, 2017 and2018, respectively. Among them, the amounts of unused
commitment of which term of contracts is less than one
year or revocable at any time totaled ¥1,608,558 million and¥1,655,587 million ($15,583 million) as of March 31, 2017and 2018, respectively.
Since many of these commitments expire without being
drawn down, the unused amount does not necessarily
represent a future cash requirement. Most of thesecontracts have conditions that the Bank and its consolidated
subsidiaries can refuse customers’ applications for loans
or decrease the contract limits with proper reasons (e.g.,changes in financial situation, deterioration in customers’
creditworthiness). At the inception of contracts, theBank and its consolidated subsidiaries obtain real estate,securities, etc., as collateral if considered to be necessary.
Subsequently, the Bank and its consolidated subsidiaries
perform periodic review of the customers’ business results
based on internal rules, and take necessary measures toreconsider conditions in contracts and require additional
collateral and guarantees.
42

HIROSHIMA BANK   ANNUAL REPORT 2018

9 Borrowed money
Borrowed money including subordinated loans totaled¥15,000 million and ¥15,000 million ($141 million) at March
31, 2017 and 2018, respectively.

•• Privately placed bonds
The amount guaranteed by banking subsidiaries to privately
placed bonds (stipulated by Article 2-3 of the Financial
Instruments and Exchange Law) in “Securities” was ¥42,675
million and ¥39,647 million ($373 million) at March 31,2017 and 2018, respectively.

•• Net assets
Under the Company Law of Japan, the entire amount of
the issue price of shares is required to be accounted for as
capital, although a company may, by resolution of its Boardof Directors, account for an amount not exceeding one-halfof the issue price of the new shares as additional paid-in
capital, which is included in capital surplus.
The Banking Law of Japan provides that an amount equal toat least 20% of cash dividends and other cash appropriations
shall be appropriated and set aside as a legal earnings
reserve until the total amount of legal earnings reserve andadditional paid-in capital equals 100% of common stock.
The legal earnings reserve and additional paid-in capital may
be used to eliminate or reduce a deficit by resolution of thestockholders’ meeting or may be capitalized by resolution of
the Board of Directors. On condition that the total amountof legal earnings reserve and additional paid-in capitalremains being equal to or exceeding 100% of common
stock, they are available for distributions or certain otherpurposes by the resolution of the stockholders’ meeting.
Legal earnings reserve is included in retained earnings in theaccompanying financial statements.
The maximum amount that the Bank can distribute as
dividends is calculated based on the unconsolidated financial
statements of the Bank in accordance with the Company
Law of Japan.
In accordance with the customary practice in Japan, theappropriations are not accrued in the financial statements
for the period to which they relate, but are recorded in thesubsequent accounting period in which the stockholders’approval has been obtained. Retained earnings at March 31,2018 include the amount representing the year-end cash
dividend of ¥2,809 million ($26 million), ¥9.00 ($0.08) per
share, which was approved at the stockholders’ meeting
held on June 27, 2018.

•• Cash and cash equivalents•• Lease transactions

The reconciliation of cash and due from banks in the
consolidated balance sheets and cash and cash equivalentsin the consolidated statements of cash flows at March 31,2017 and 2018, was as follows:

Finance leases
Tangible fixed assets in lease assets mainly consisted ofbranches. The depreciation method of lease assets is shownin “3. Significant accounting policies.”

Millions of yen

2017

Cash and due from banks
Foreign currency deposits
with banks
Cash and cash equivalents

2018

Millions of
U.S. dollars

2018¥1,253,275 ¥1,511,177$14,224(8,115)(8,496)¥1,245,160 ¥1,502,680(80)$14,144

Significant non-money transactions
Hirogin Utsumiya Securities Co., Ltd. has been included in
the scope of consolidation as it became a wholly owned
subsidiary. The increased assets and liabilities due toconsolidation were as follows:
Millions of yen

Millions of
U.S. dollars

2018

2018

Current assets
Non-current assets
Total assets¥24,236611¥24,847

$228
6
$234

Current liabilities
Non-current liabilities
Total liabilities¥15,60743¥15,650

$147
0
$147

Finance leases other than those that transfer the ownershipof the leased property to the lessees which commenced infiscal years beginning prior to April 1, 2008 are accounted
for in a similar way to operating leases.
Operating leases
Future minimum lease payments on operating leases whichwere not cancelable at March 31, 2018 were as follows:
Millions of yen

Millions of
U.S. dollars

2018

2018

¥ 4
7
¥12

$0
0
$0

Due within 1 year
Due after 1 year
Total•• Derivative transactions
Derivative transactions to which hedge accounting is not applied
Contracted amount (including notional principal amount), fair value and unrealized gains or losses of financial derivatives at
March 31, 2017 and 2018 were as follows:
Interest related:Year ended March 31, 2017
Millions of yen

Contracted amountOver one year

Fair
value

Unrealized gains(losses)¥132,456
132,420—¥100,095
100,085—¥ 3,549(2,670)—¥ 3,549(2,670)
—

2,800
2,800

2,800
2,800

(8)
8

8
(5)

—
—
¥     ———
¥     ———
¥   878——¥   880

Type

Items not traded on exchanges

Interest rate swaps*:
Receive fixed, pay variable
Receive variable, pay fixed
Receive variable, pay variable
Interest rate options*:
Sell
Buy
Other contracts*:
Sell
Buy
Total

HIROSHIMA BANK   ANNUAL REPORT 201843

Year ended March 31, 2018
Millions of yen

Contracted amountOver one year

Fair
value

Unrealized gains(losses)¥100,356
100,342—¥90,390
90,390—¥ 2,738(1,961)—¥ 2,738(1,961)
—

2,533

2,533

(2)

10

2,533

2,533

2

(8)

—
—
¥       ——
—¥      ———
¥   777——¥   779

Type

Items not traded on exchanges

Interest rate swaps*:
Receive fixed, pay variable
Receive variable, pay fixed
Receive variable, pay variable
Interest rate options*:
Sell
Buy
Other contracts*:
Sell
Buy
Total

Millions of U.S. dollars

Contracted amountOver one year

Fair
value

Unrealized gains(losses)

$945
944
—

$851
851
—

$ 26
(19)
—

$ 26
(19)
—

24
24

24
24

(0)
0

0
(0)

—
—
$ —

—
—
$ —

—
—
$ 7

—
—
$ 7

Type

Items not traded on exchanges

Interest rate swaps*:
Receive fixed, pay variable
Receive variable, pay fixed
Receive variable, pay variable
Interest rate options*:
Sell
Buy
Other contracts*:
Sell
Buy
Total

Notes: 1. The unrealized gains or losses on interest rate swaps, interest rate options and other contracts are recognized in the consolidated statements of income.
2. F air value of transactions listed on exchanges is calculated using the closing prices on the Tokyo Financial Exchange and others. Fair value of OTC transactions is
calculated using the discounted present value method and option pricing models.

Currency related:Year ended March 31, 2017
Millions of yen

Contracted amountOver one year

Fair
value

Unrealized gains(losses)¥672,338¥357,692¥   164¥1,072

62,05459,674

8,902
8,868

596
(384)

596
(384)

169,862
169,862¥      —

56,42256,422¥      —

(4,439)4,439¥   377

904(383)¥1,805Type

Items not traded on exchanges

Currency swaps*
Forward foreign exchange contracts*:
Sell
Buy
Currency options*:
Sell
Buy
Total

Year ended March 31, 2018
Millions of yen

Contracted amountOver one year

Fair
value

Unrealized gains(losses)¥411,637¥257,397¥   129¥  20743,73343,723

6,479
6,130

1,278
(654)

1,278
(654)

145,553
145,553¥      —

65,82365,823¥      —

(4,305)
4,305¥   752

1,292
(592)
¥1,530Type

Items not traded on exchanges

44

Currency swaps*
Forward foreign exchange contracts*:
Sell
Buy
Currency options*:
Sell
Buy
Total

HIROSHIMA BANK   ANNUAL REPORT 2018

Millions of U.S. dollars

Contracted amountOver one year

Fair
value

Unrealized gains(losses)$3,875$2,423

$ 1

$ 2

412
412

61
58

12
(6)

12
(6)

1,370
1,370
$     —

620
620$     —

(41)
41
$ 7

12
(6)
$14

Type

Items not traded on exchanges

Currency swaps*
Forward foreign exchange contracts*:
Sell
Buy
Currency options*:
Sell
Buy
Total

Notes: 1. The unrealized gains or losses on currency swaps, forward foreign exchange contracts and currency options are recognized in the consolidated statements of income.
2. F air value is calculated using the discounted present value method and option pricing models.

Bond related:
There were no bond related transactions for the years ended March 31, 2017 and 2018.
Others:Year ended March 31, 2017
Millions of yen

Contracted amountType

Items not traded on exchanges

Earthquake derivative*:
Sell
Buy
Total

¥900
900
¥ —

Over one year

Fair
value

Unrealized gains(losses)

¥—
—
¥—

¥(10)
10
¥ —

¥—
—
¥—

Year ended March 31, 2018
Millions of yen

Contracted amountType

Items not traded on exchanges

Earthquake derivative*:
Sell
Buy
Total

¥4,5754,575¥     —

Over one year

Fair
value

Unrealized gains(losses)

¥—
—
¥—

¥(55)
55
¥ —

¥—
—
¥—

Millions of U.S. dollars

Contracted amountType

Items not traded on exchanges

Earthquake derivative*:
Sell
Buy
Total

$43
43
$—

Over one year

Fair
value

Unrealized gains(losses)

$—
—
$—

$ (1)
1
$—

$—
—
$—

* Transactions above that fair value are not readily determinable are stated at cost.

Derivative transactions to which hedge accounting is applied
The notional principal amount and fair value of financial derivatives at March 31, 2017 and 2018 were as follows:
Interest related:Year ended March 31, 2017
Millions of yen

Contracted amount
Method of hedge accounting

Type

Main hedged items

Deferral method

Interest rate swaps:
Receive fixed, pay variable
Receive variable, pay fixedInterest rate swaps:
Receive variable, pay fixed
Other contracts:
Buy
Total

Loans and bills discounted

Exceptional treatment
of interest rate swaps

Over one year

Fair value¥120,000
58,444¥120,000
43,916¥(113)(268)

99,647

93,187Note 31,000¥      —

1,000¥      —

Note 3¥(381)

Loans and bills discounted
Loans and bills discounted

HIROSHIMA BANK   ANNUAL REPORT 201845

Year ended March 31, 2018
Millions of yen

Contracted amount
Method of hedge accounting

Type

Main hedged items

Deferral method

Interest rate swaps:
Receive fixed, pay variable
Receive variable, pay fixedInterest rate swaps:
Receive variable, pay fixed
Other contracts:
Buy
Total

Loans and bills discounted

Exceptional treatment
of interest rate swaps

Over one year

Fair value¥ 70,000
111,831¥ 20,000
107,831

¥   0
(333)

101,918

75,580Note 31,000¥      —

1,000¥      —

Note 3¥(333)

Loans and bills discounted
Loans and bills discounted

Millions of U.S. dollars

Contracted amount
Method of hedge accounting

Type

Main hedged items

Deferral method

Interest rate swaps:
Receive fixed, pay variable
Receive variable, pay fixedInterest rate swaps:
Receive variable, pay fixed
Other contracts:
Buy
Total

Loans and bills discounted

Exceptional treatment
of interest rate swaps

Over one year

Fair value$  6591,053$  188
1,015

$0
(3)

959

711

Note 39$     —

9$     —

Note 3$(3)

Loans and bills discounted
Loans and bills discounted

Notes: 1. As for interest rate swaps shown above, deferred hedge accounting is applied in accordance with JICPA Industry Audit Committee Report No. 24.
2. F air value of transactions listed on exchanges is calculated using the closing prices on the Tokyo Financial Exchange and others. Fair value of OTC transactions is
calculated using the discounted present value method, option pricing models and prices obtained from the counterparty financial institutions.
3. Interest rate swaps which meet specific matching criteria are accounted for as a component of hedged loans and bills discounted. Therefore, the fair value of thoseinterest rate swaps is included in the fair value of loans and bills discounted in fair value information shown in “19. Financial instruments and related disclosures.”

Currency related:Year ended March 31, 2017
Millions of yen

Method of hedge
accounting

Deferral method

Contracted amountType

Currency swaps
Forward foreignexchange contracts
Total

Main hedged items

Loans and bills discounted
in foreign currencies, securities

Over one year

Fair value¥ 69,812¥69,747¥  544

123,350¥      ——
¥     —

1,124
¥1,669Year ended March 31, 2018
Millions of yen

Method of hedge
accounting

Deferral method

Contracted amountType

Currency swaps
Forward foreignexchange contracts
Total

Main hedged items

Loans and bills discounted
in foreign currencies, securities

Over one year

Fair value¥76,376¥65,752¥2,912

73,165¥      ——
¥      —

477
¥3,390Millions of U.S. dollars

Method of hedge
accounting

Deferral method

Contracted amountType

Currency swaps
Forward foreignexchange contracts
Total

Main hedged items

Loans and bills discounted
in foreign currencies, securities

Over one year

Fair value

$719

$619

$27

689
$ —

—
$ —

4
$32

Notes: 1. T he Bank has applied the deferred hedge accounting stipulated in “Accounting and Auditing Concerning Accounting for Foreign Currency Transactions in Banking
Industry” (JICPA Industry Audit Committee Report No. 25, July 29, 2002).
2. Fair value has been measured on the basis of the calculation of discounted or present value.

46

HIROSHIMA BANK   ANNUAL REPORT 2018•• Employees’ severance and retirement benefits

Severance and retirement benefit expenses

For the years ended March 31, 2017 and 2018
Change in projected benefit obligation
Millions of
U.S. dollars

Millions of yen

Projected benefit obligation,
beginning of the year
Service costs—benefits
earned during the year
Interest cost on projected
benefit obligation
Actuarial differences
incurred
Benefits paid
Other
Projected benefit
obligation at the endof the year

2017

2018

2018

¥46,434¥45,916

$432

1,187

1,180

11

22

21

0

1,129
(2,968)110

230(2,807)
111

2
(26)
1

¥45,916¥44,651$420

Service costs—benefits
earned during the year
Interest cost on projected
benefit obligation
Expected return on plan
assetsAmortization of actuarial
differences
Severance and retirement
benefit expenses calculated
by simplified method
Severance and retirement
benefit expenses

2017

2018

2018

¥ 1,187¥ 1,180

$ 11

22

21

0

(3,522)(3,678)

(35)

(3)

(347)

(3)

3

4

0

¥(2,312)¥(2,820)$(27)

Remeasurements of accumulated defined benefit plans
Millions of yen

Change in plan assets
Millions of
U.S. dollars

Millions of yen

Plan assets, beginning of
the year
Expected return on plan
assetsActuarial differences
incurredContribution by thebusiness owner
Benefits paid
Other
Plan assets at the end of
the year

2017

2018

2018

¥88,056¥91,956

$866

3,522

3,678

35

1,805

4,933

46

737
(2,272)107

737(2,194)
106

7
(21)
1

¥91,956¥99,217$934

The adjustment of the ending balances of projected
benefit obligation and plan assets to net defined
benefit liability and net defined benefit asset
Millions of
U.S. dollars

Millions of yen

2017

Funded projected benefit
obligation
Plan assets
Unfunded projected benefit
obligation
Net on consolidatedbalance sheets

2018

Actuarial differences¥ 45,877(91,956)(46,078)¥ 44,609(99,217)(54,607)

$ 420
(934)
(514)

38

42

0

¥(46,039)¥(54,565)$(514)
Millions of
U.S. dollars

2017

2018

2018

¥    38(46,078)¥    42(54,607)

$   0
(514)

¥(46,039)¥(54,565)$(514)

Millions of
U.S. dollars

2017

2018

2018

¥671

¥4,354$41

Remeasurements of defined benefit plans
Millions of yen

Unrecognized actuarial
differences

Millions of
U.S. dollars

2017

2018

2018

¥(7,263)¥(11,617)$(109)Classification of plan assets
Bonds
Securities
Cash and due from banks
Other
Plan assets at the end of the year

2017

2018

17.1%
67.9
0.1
14.9
100%

3.9%
70.7
0.1
25.3
100%

2017

2018

0.2%
4.0%

0.2%
4.0%
2.9%

Assumptions

2018

Millions of yen

Net defined benefit liability
Net defined benefit asset
Net on consolidatedbalance sheets

Millions of
U.S. dollars

Millions of yen

Discount rate
Rates of expected return on plan assets
Expected increase rate in salary

2.9%

Defined contribution pension plan
The amount required to be contributed by the Bank is ¥295
million and ¥296 million ($3 million) for the years ended
March 31, 2017 and 2018, respectively.

HIROSHIMA BANK   ANNUAL REPORT 201847

•• Income taxes•• Segment information

Income taxes in the consolidated statements of income
consist of corporation tax, inhabitant taxes and enterprisetax. The statutory tax rate was approximately 31% and 31%
as of March 31, 2017 and 2018.

Operations of the Bank and its consolidated subsidiaries
include appraisal of collateral premises and land, servicing
businesses and other businesses, in addition to banking
business. As such operations are immaterial, separate
segment information is not required to be disclosed for theyears ended March 31, 2017 and 2018.

Significant components of deferred tax assets as of March
31, 2017 and 2018 were as follows:
Millions of yen

2017

Deferred tax assets:
Reserve forpossible loan losses
Write-down of securities
Depreciation
Other
Subtotal deferred tax assets
Valuation allowance
Total deferred tax assets¥ 15,237
733
1,322
3,677
20,971(970)
20,001

Deferred tax liabilities:
Net defined benefit assets(7,678)Gain on securities
contributed to employee
retirement benefit trust(691)
Net unrealized holding
gains on securities
available for sale
(16,721)
Total deferred tax liabilities(25,092)
Net deferred tax assets¥ (5,090)

2018

Millions of
U.S. dollars

2018¥ 14,932
747
1,865
4,860
22,406(978)21,428

$ 141
7
18
46
211
(9)
202

(10,156)

(96)

(691)

(7)

(20,721)(31,569)¥(10,140)

(195)
(297)
$ (95)A reconciliation of the actual effective tax rate with thenormal effective statutory tax rate for the fiscal years ended
March 31, 2017 and 2018 were as follows:
Normal effective statutory tax rate
Reconciliation:
Change in valuation allowance
Permanently tax-exempt income
Gains on negative goodwill
Loss on step acquisitions
Dividend income offset of consolidated
subsidiaries
Other
Actual effective tax rate

48

2017

2018

31.0%

31.0%

(1.5)
(0.7)
—
—

(0.0)
(1.5)
(3.5)
1.8

0.2
(0.0)
28.8%

0.9
0.2
28.8%

HIROSHIMA BANK   ANNUAL REPORT 2018

Income by service
Millions of yen

Lending
Investment in securities
Fees and commissions
Other
Total

Millions of
U.S. dollars

2017

2018

2018

¥ 60,995
42,46428,907
5,897¥138,263¥ 61,427
24,331
31,732
7,418¥124,908$  578229
299
70$1,176•• Related party transactions
Not disclosed as immaterial•• Financial instruments and related disclosures(1) Policy for financial instruments
The Bank and its consolidated subsidiaries conduct financial
services such as financial instruments transactions, credit
guarantees, leasing and credit card services, with banking
as their core activity. Among these businesses, core banking
operations include fund procurement through deposit-taking
and fund management through loans and investment
security portfolios. The financial assets and liabilities of the
Bank are subject to Asset Liability Management (“ALM,”
comprehensive management of assets and liabilities) insuch a way as to prevent adverse impact from interest-rate,
foreign-exchange and market-value fluctuation.
(2) N ature and extent of risk arising from financial
instruments
Loans and bills discounted are primarily provided to domestic
institutional and individual customers, in which the Bank is
exposed to customers’ credit risk. Securities primarily consistof stocks, bonds and investment trusts held by the Bank forthe purposes of building and maintaining good relationships
with customers, sole investment objective and held-tomaturity investment objective.

They are exposed to risk of fluctuation in interest rates andprices in the bond/stock markets and in addition, credit
risk arising from downgrading of the issuer’s credit rating.
Borrowed money, bonds and commercial papers are exposed
to liquidity risk, the risk that the Bank is unable to meet its
obligations as they fall due.
The Bank enters into the following derivative transactions,such as currency swaps and forward foreign exchange
contracts to meet the financial needs of customers andinterest rate swaps for the purpose of optimizing ALM. As
part of optimizing ALM, the Bank uses hedge accounting,specifying derivatives such as interest rate swaps as hedging
instruments, and loans as hedged items.
(3) Risk management for financial instruments
Credit risk management
Credit risk is the risk of sustaining losses due to reduction
or loss of value of assets due to deteriorating credit
circumstances at a borrower.
(Credit screening system)
For all major loans made by branches, the Bank has inplace a system of rigorous credit-screening carried out by acredit-screening department, which is independent of thesales departments. In addition to establishing teams for eachsector, the credit-screening department has established a
dedicated team to ensure sounder borrower finances andeffective corporate rehabilitation, and also offers support tomanagement trying to improve operational management.
In evaluating a customer application for a loan, the Bank will
give a considered response, in line with “The Basic Principles
Prescribing Credit” set up by the Board of Directors, turning
down any application that runs counter to the law or public
morality and taking careful account of profitability andpublic benefit, in addition to fund use, repayment source,
and guarantee and collateral arrangements.
In cases where customers apply for a review of borrowing
terms, the Bank will give a considered response taking
account of actual circumstances faced by the customer, inline with “The Basic Principles for Facilitation of Finance” set
up by the Board of Directors. Appropriate and prompt credit
screening is carried out after joint appraisal of a customer’s
needs and concerns—and not just based on a mechanical,
uniform judgment informed only by financial statements andother superficial statistics and industry-specific guidelines.

To strengthen and expand the credit-screening system, theBank seeks to duly appraise the creditworthiness of a given
company through case-by-case credit management andtakes continuous measures to improve the credit-screening
skills of employees by various kinds of training program.
(Risk management using the credit rating system)
The Bank has introduced the credit rating system to give an
objective overview of credit risk on loans. Based on financial
and other data indicating the level of creditworthiness of theborrower, the Bank has divided borrowers into 12 grades,
and continuously monitors changes in credit risk. The Bank
then carries out credit risk quantification based on thesegrades, to assess credit risk on loan assets and set baseline
interest rates on loans.
The Bank also accumulates and organizes the datanecessary for quantification of credit risks, such as thedefault rate within each grade and extent of asset recovery
from customers in default, and uses a highly sophisticatedquantification technique to obtain a still more detailed
picture of risk-monitored assets.
(Self-assessment of assets)
In parallel with the credit rating system, the Bank conducts
strict checks into the soundness of loans and other assets
through annual assessment. Screening is carried out by
particular Bank branches in light of the financial situation
faced by the borrower, and the results are checked by
the credit-screening department of the Head Office. In
addition, the Risk Management Division extracts important
information and conducts a rigorous review of screening
due process and accuracy, and the Audit Division carries out
the process audit. Based on this self-assessment of assets, incases where there is no realistic prospect of asset recovery,
provisions are made to reserve for possible loan losses tocover the entire value of the sum at risk. This provision isthen recorded as a loss for the fiscal year under review. In
this way the Bank ensures asset soundness on a continuous
basis.

HIROSHIMA BANK   ANNUAL REPORT 201849

Market risk management( i ) Market risk management system
Market risk which is associated with change in the valueof financial instruments from fluctuations in interest rates,
securities prices, foreign exchange rates, and other marketrelated indices, has an effect on our financial performance.
The Bank controls market risk to stabilize earnings byendeavoring to improve and strengthen ALM.
Management of trading account risk
With regard to the trading accounts (for securities and offbalance-sheet transactions that target short-term gains on sales
or purchases, and trading at the behest of customers), theBank has special management mechanisms in place to guard
against risk, since these transactions differ qualitatively frombanking account transactions (involving deposits and loans,investment securities, and related transactions). The Bank has
set up designated trading accounts, and is strengthening their
management using transparent accounting procedures basedon fair value.
For proprietary position dealing, the Bank limits the position
by complying with strict rules in terms of position limits andloss-cutting measures. For positions and transactions on behalfof customers, the Bank follows a policy of square positions by
fully covering them through the interbank market.
(ii) Quantitative information relating to market risk(a) Financial products for trading purposes
The Bank holds securities and derivative transactions
including interest-rate and currency swaps for trading
purposes.
To measure the amount of market risk, the Bank adopts
VaR (Value at Risk) using the variance-covariance method(observation period: one year; confidence interval: 99.9%;
holding period: one day).

The total VaR as of March 31, 2018 was ¥54,186 million($510 million). Within liquid deposits, the Bank recognizes
interest risks related to deposits left in the Bank for long
periods without withdrawal, which are allocated each fiscal
period as core deposits.
(c) VaR adequacy
The relationship between the VaR calculated with the modeland actual gains and losses data is back-tested. The Bank
has confirmed that the calculating model used for thesemeasurements captures market risk with the necessary
degree of accuracy.
However, because VaR is a method of measuring theamount of market risk in terms of the probability of acertain event happening based on past statistical variation,
it cannot be used for assessing risk in a market environment
characterized by abnormal change.
Management of liquidity risks related to fundprocurement
Liquidity risk is the risk of incurring losses due to a decline in
cash flow or being obliged to procure funds at interest rates
that are markedly higher than usual due to an unexpected
outflow of cash.
The Bank has secured highly liquid assets such as
government bonds to prepare for cash outflows in timesof short-term stress. Moreover, to mitigate long-term fundprocurement risks, the Bank manages the gap between
low-liquidity loans and stable procurement.
The Bank has a structure to conduct liquidity measurements
and to secure available reserves over the net cumulative
outflow forecasted in an emergency situation.

As of March 31, 2018, the entire VaR of the Bank was ¥1
million ($0 million).

(4) Fair values of financial instruments
Fair values of financial instruments are based on quoted
price in active markets. If quoted price is not available, otherrational valuation techniques are used.

(b) Financial products held for other than trading purposes
The Bank holds various products such as loans, securities,
deposits, corporate bonds, and derivatives for other than
trading purposes.

Since the calculations of the reasonably calculated prices are
implemented under certain conditions and assumptions, theresult of calculations would differ if such calculations are
made under different conditions and assumptions.

To measure the amount of market risk associated with theseproducts, the Bank uses the VaR method using the variancecovariance method (observation period: one year; confidence
interval: 99.9%; holding period: six months for strategic
equity investments, three months for securities other thanstrategic equity investments, and one year for others).

50

HIROSHIMA BANK   ANNUAL REPORT 2018

Millions of yen

Fair values of financial instruments as of March 31, 2017 and2018 were as follows:
Millions of yen

Year ended March 31, 2017
Carrying
amountFair value

Difference(1) Cash and due from banks(2) C all loans andbills purchased(3) F inancial receivables
purchased(4) Trading assets*2
Securities held for
trading purposes(5) Money held in trust(6) Securities:
Securities held-to-maturity
Securities available-for-sale(7) Loans and bills discounted
Reserve for possible loan
losses*1
Net
Total assets¥1,253,275 ¥1,253,275¥        —(1) Deposits(2) N egotiable certificates ofdeposit(3) Call money and bills sold(4) P ayables under
repurchase agreements(5) D eposits received
for bonds lending/borrowing transactions(6) Borrowed money(7) Bonds
Total liabilities

17,396

17,396

—

7,091

7,091

—

919
156

919
156

—
—

—
1,745,883
5,605,677—
1,745,883——(34,915)
5,570,762 5,708,736¥8,595,484 ¥8,733,458

137,973¥137,973¥6,985,538 ¥6,986,113¥    574

310,574
3,365

310,572
3,365

(1)
—

137,187

137,187—

401,641
401,641
453,379454,281
20,00020,174¥8,311,687 ¥8,313,336

—
902
174
¥  1,649

Derivative instruments*1, 3:
Hedge accounting
is not applied¥    1,187
Hedge accounting is applied
1,287
Derivative instruments total¥    2,475¥    1,187
1,287¥    2,475

Year ended March 31, 2018
Carrying
amount(1) Cash and due from banks(2) C all loans andbills purchased(3) F inancial receivables
purchased(4) Trading assets*2
Securities held for
trading purposes(5) Money held in trust(6) Securities:
Securities held-to-maturity
Securities available-for-sale(7) Loans and bills discounted
Reserve for possible loan
losses*1
Net
Total assets(1) Deposits(2) N egotiable certificates ofdeposit(3) Call money and bills sold(4) P ayables under
repurchase agreements(5) D eposits received
for bonds lending/borrowing transactions(6) Borrowed money(7) Bonds
Total liabilities

Fair value

Difference¥1,511,177 ¥1,511,177¥        —18,521

18,521

—

7,424

7,424

—

917
8,256

917
8,256

—
—

—
1,371,648
5,861,796—
1,371,648——(32,737)
5,829,059 5,967,373¥8,747,005 ¥8,885,320

138,314¥138,314¥7,170,925 ¥7,171,400¥    475

270,129
50,000270,13150,0001—

111,329

111,329—

262,859
262,859585,551586,266——¥8,450,793 ¥8,451,986—
715—¥  1,192

Derivative instruments*1, 3:
Hedge accounting
is not applied¥    1,519 ¥    1,519
Hedge accounting is applied
3,056
3,056
Derivative instruments total¥    4,576 ¥    4,576¥        —        —¥        —¥        —
—¥        —HIROSHIMA BANK   ANNUAL REPORT 201851

Millions of U.S. dollars

Year ended March 31, 2018

(1) Cash and due from banks(2) C all loans andbills purchased(3) F inancial receivables
purchased(4) Trading assets*2
Securities held for
trading purposes(5) Money held in trust(6) Securities:
Securities held-to-maturity
Securities available-for-sale(7) Loans and bills discounted
Reserve for possible loan
losses*1
Net
Total assets

Carrying
amountFair value

Difference$14,224$14,224$     —

174

174

—

70

70

—

9
78

9
78

—
—

—
12,911
55,175—
12,911——(308)
54,867$82,333

56,168$83,634

1,301$1,301$67,497$67,502$    5

2,543
471

2,543
471

0
—

1,048

1,048

—

2,474
5,511
—
$79,544

2,474
5,518
—
$79,556—7—$   12Derivative instruments*1, 3:
Hedge accounting
is not applied$    14
Hedge accounting is applied
29
Derivative instruments total$    43$    1429$    43$     ——
$     —

(1) Deposits(2) N egotiable certificates ofdeposit(3) Call money and bills sold(4) P ayables under
repurchase agreements(5) D eposits received
for bonds lending/borrowing transactions(6) Borrowed money(7) Bonds
Total liabilities*1. The amounts only include the general reserve for possible loan losses and thespecific reserve for possible loan losses provided to “Loans and bills discounted.”Reserve for possible loan losses provided in “Derivative instruments” is directlydeducted from the carrying amounts due to immateriality.
*2. Derivative instruments are not included in trading assets.
*3. Derivative instruments recorded in “Trading assets,” “Liabilities,” “Other assets”
and “Other liabilities” are aggregated and shown herein. Assets and liabilities
attributable to the derivative contracts are totally offset and the net liability
position as a consequence of offsetting would be represented with brackets.

(Note 1) Valuation methodology for financial instruments
Assets(1) Cash and due from banks
The carrying amounts of due from banks with no maturities
approximate fair values because they have no maturity.
For due from banks with maturities, the carrying amounts
approximate fair value because most of them have shortmaturities.
(2) Call loans and bills purchased
The carrying amounts of call loans and bills purchased
approximate fair values because most of these instruments
have short maturities.

52

HIROSHIMA BANK   ANNUAL REPORT 2018

(3) Financial receivables purchased
Financial receivables purchased which have been divided
by priority such as subordinated and preferred interest andwhich have multiple owners are measured at the quoted
price from a third party. The carrying amounts of otherfinancial receivables purchased approximate fair values
because most of these instruments have short maturities.
(4) Trading assets
The fair values of securities held for trading purposes aremeasured at observable market prices or quoted price froma third party.
(5) Money held in trust
The fair values of money held in trust, which have an
external rating, are determined using the discounted cash
flow method. The fair values of other money held in trust
approximate fair values because most consists of deposits
with no maturities.
(6) Securities
The fair values of marketable equity securities are measured
at market prices. The fair values of bonds are measured atmarket prices or quoted price from a third party.
The fair values of investment trusts are measured at the
published benchmark price or quoted price from a third
party.
The value reasonably estimated for such bonds wascalculated by discounting the estimated future cash flows at
the rate derived from yields of Japanese government bonds.
The yields of Japanese government bonds and volatility are
major variables in pricing.
(7) Loans and bills discounted
The fair values of loans and bills discounted are determinedby discounting expected cash flows at the rates that would
be applied for the new same contract for each type of loan
product, interest, period of time and internal ratings-basedclassification.
For loans to obligors “legally bankrupt,” “virtually bankrupt”
and “possibly bankrupt,” since the reserve is provided basedon amounts expected to be collected through the disposalof collateral or execution of guarantees, the net carrying
amount as of the consolidated balance sheet date is thereasonable estimate of the fair value of those loans.
Loans with no maturities approximate fair values because
most are without concern of collectability.

Liabilities(1) Deposits, (2) Negotiable certificates of deposit
The fair values of demand deposits are recognized as thepayment at the date of the consolidated balance sheets. The
fair values of time deposits are determined by discounting
the contractual cash flows at the rates that would be applied
for the same, new contracts.
(3) Call money and bills sold, (4) Payables under
repurchase agreements, (5) Deposits received for bonds
lending/borrowing transactions
The carrying amounts of call money and bills sold, deposits
received for bonds lending/borrowing transactions
approximate fair values, because these instruments haveshort maturities.

(6) Borrowed money
The fair values of borrowed money are determined bydiscounting the contractual cash flows at the rate thatwould be applied for the same, new contracts. The
carrying amounts of borrowed money with short maturities
approximate fair values.
(7) Bonds
The fair values of bonds are measured at quoted price froma third party.
Derivative instruments
The fair values of derivative instruments are measured at themarket prices or determined using the discounted cash flow
method or option pricing models.

(Note 2) Financial instruments whose fair value cannot be reliably determined
Carrying amountMillions of yen

Equity securities without readily available market price*1, 2
Other
Total

Millions of
U.S. dollars

2017

2018

2018

¥13,881
1,697¥15,579¥ 6,753
4,315¥11,068

$ 64
41
$104

*1. Equity securities without readily available market prices are out of the scope of fair value disclosure because their fair value cannot be reliably determined.
*2. Impairment loss on equity securities without readily available market prices was ¥9 million and ¥1 million ($0 million) for the years ended March 31, 2017 and 2018,
respectively.

(Note 3) Maturity analysis for financial assets with contractual maturities
As of March 31, 2017
Millions of yen

Less than
1 yearDue from banks
Call loans and bills purchased
Financial receivables purchased
Money held in trust
Securities:
Held-to-maturity
Available-for-sale:
National government bonds
Local government bonds
Bonds
OthersLoans and bills discounted*
Total¥1,172,672
17,3967,091
156
417,455—
417,455
347,500
27,42011,77630,758622,789¥2,237,561

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 yearsMore than
10 years¥        ——
——455,551—455,551
307,100
51,39149,88547,173580,022¥1,035,573¥       ———
—319,935—
319,935
42,500—111,737
165,697
1,823,741¥2,143,676¥      ———
—126,254—
126,254
45,0009,490
18,89352,870730,208¥856,463¥      ———
—147,177—
147,177
25,000—13,028109,149
483,383¥630,561¥      ———
—94,272—
94,272—
48,6603,647
41,964676,365¥770,637

HIROSHIMA BANK   ANNUAL REPORT 201853

As of March 31, 2018
Millions of yen

Less than
1 yearDue from banks
Call loans and bills purchased
Financial receivables purchased
Money held in trust
Securities:
Held-to-maturity
Available-for-sale:
National government bonds
Local government bonds
Bonds
OthersLoans and bills discounted*
Total¥1,431,761
18,521
7,424
8,256
304,727—
304,727
245,000
18,47932,8838,365
679,833¥2,450,525

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 years¥      ———
—207,169—
207,169
77,10036,812
27,94765,309576,258¥783,427¥      ———
—120,151—
120,151
45,00010,36017,64847,142744,037¥864,188¥      ———
—46,474—
46,47410,00018,3507,293
10,830512,207¥558,681¥      ———
—90,217—
90,217—35,745
5,641
48,830689,815¥780,032

More than
10 years¥       ———
—376,228—
376,228
94,300—118,770
163,158
1,924,751¥2,300,980

Millions of U.S. dollars

Less than
1 yearDue from banks
Call loans and bills purchased
Financial receivables purchased
Money held in trust
Securities:
Held-to-maturity
Available-for-sale:
National government bonds
Local government bonds
Bonds
OthersLoans and bills discounted*
Total$13,477
174
70
78
2,868
—
2,868
2,306
174
309
79
6,399
$23,066

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 years$    —
—
—
—
1,950
—
1,950
726
346
263
615
5,424
$7,374$    —
—
—
—
1,131
—
1,131
424
97
166
444
7,003
$8,134$    —
—
—
—
438
—
438
94
173
69
102
4,821
$5,259$    —
—
—
—
849
—
849
—
336
53
460
6,493
$7,342More than
10 years$     —
—
—
—
3,541
—
3,541
888
—
1,118
1,536
18,117$21,658* Of loans and bills discounted, the portion whose timing of collection is unforeseeable, such as loans to “legally bankrupt” borrowers, loans to “virtually bankrupt” borrowers
and loans to “possibly bankrupt” borrowers amounting to ¥55,231 million and ¥52,433 million ($494 million), is not included in the above table as of March 31, 2017 and2018, respectively. Loans that do not have contractual maturity, amounting to ¥633,936 million and ¥682,459 million ($6,424 million), are not included either.

(Note 4) Maturity analysis for interest-bearing liabilities as of March 31, 2017 and 2018
As of March 31, 2017
Millions of yen

Less than
1 yearDeposits*
Negotiable certificates of deposit
Call money and bills soldPayables under repurchase agreements
Deposits received for bonds lending/borrowing transactions
Borrowed money
Bonds
Total

54

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 yearsMore than
10 years¥6,743,967
307,9393,365
137,187¥220,313
2,635——¥ 18,603———¥1,035———¥ 1,618———¥    ————

401,641
17,25720,000¥7,631,358—
112,810—¥335,759—
303,588—¥322,191—
1,977—¥3,013—
16,168—¥17,786—
1,577—¥1,577

HIROSHIMA BANK   ANNUAL REPORT 2018

As of March 31, 2018
Millions of yen

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 years

Less than
1 yearDeposits*
Negotiable certificates of deposit
Call money and bills soldPayables under repurchase agreements
Deposits received for bonds lending/borrowing transactions
Borrowed money
Bonds
Total

More than
10 years¥6,959,597
269,176
50,000111,329¥191,777953——¥ 17,201———¥  987———¥ 1,362———¥    ————

262,859
75,857—¥7,728,819—
309,046—¥501,776—
181,779—¥198,980—
1,551—¥2,539—16,080—¥17,442—
1,235—¥1,235

Millions of U.S. dollars

Less than
1 yearDeposits*
Negotiable certificates of deposit
Call money and bills soldPayables under repurchase agreements
Deposits received for bonds lending/borrowing transactions
Borrowed money
Bonds
Total

More thanMore thanMore thanMore than
1 year less than 3 years less than 5 years less than 7 years less than
3 years
5 years
7 years
10 yearsMore than
10 years$65,508
2,534
471
1,048

$1,8059——$  162
—
—
—

$ 9
—
—
—

$ 13
—
—
—

$—
—
—
—

2,474
714
—
$72,749—
2,909—$4,723—
1,711—$1,873

—
15
—
$24

—
151
—
$164

—
12
—
$12

* Deposits on demand are included in “Less than 1 year.”•• Stock optionsA) The Bank recorded stock option expenses in “General and administrative expenses” of ¥89 million and ¥20 million ($0million) for the years ended March 31, 2017 and 2018, respectively.
B) Outline of stock options, size and changes in the year ended March 31, 2018
(1) Outline of stock options
Stock options 2010

Stock options 2011

Stock options 2012

Persons to whom stock options are granted
Type and number of shares*
Date of rights granted
Condition for vesting
Eligible service period
Period for exercise of stock options

Directors of the Bank: 12
Common stock: 191,600
July 28, 2010
Not applicableNot applicable
From July 29, 2010
to July 28, 2040

Directors of the Bank: 11
Common stock: 179,150
July 27, 2011
Not applicableNot applicable
From July 28, 2011
to July 27, 2041

Directors of the Bank: 10
Common stock: 225,050
July 27, 2012
Not applicableNot applicable
From July 28, 2012
to July 27, 2042

Stock options 2013

Stock options 2014

Stock options 2015

Persons to whom stock options are granted
Type and number of shares*
Date of rights granted
Condition for vesting
Eligible service period
Period for exercise of stock options

Directors of the Bank: 10
Common stock: 133,700
July 25, 2013
Not applicableNot applicable
From July 26, 2013
to July 25, 2043

Directors of the Bank: 10
Common stock: 154,700
July 30, 2014
Not applicableNot applicable
From July 31, 2014
to July 30, 2044

Directors of the Bank: 8
Common stock: 82,500
July 31, 2015
Not applicableNot applicable
From August 1, 2015
to July 31, 2045

Persons to whom stock options are granted
Type and number of shares*
Date of rights granted
Condition for vesting
Eligible service period
Period for exercise of stock options

Directors of the Bank: 7
Common stock: 125,350
July 29, 2016
Not applicableNot applicable
From July 30, 2016
to July 29, 2046

Stock options 2016

* The table above presents the number of common stock converted from the stock options.

HIROSHIMA BANK   ANNUAL REPORT 201855

(2) Size and changes of stock options
a. Number of stock options for the year ended March 31, 2018
Stock options
2010

Non-vested:
Previous fiscal year-end outstanding
GrantedForfeited
VestedOutstanding on March 31, 2018
Vested:Previous fiscal year-end outstanding
VestedExercised
Forfeited
Exercisable

Stock options
2011

Stock options
2012

Stock options
2013

Stock options
2014

Stock options
2015

Stock options
2016

—
—
—
—
—

—
—
—
—
—

—
—
—
—
—

—
—
—
—
—

—
—
—
—
—

—
—
—
—
—

125,350——
125,350—

30,300———30,30032,100———32,10057,150———57,15046,350———46,35078,500—13,000—65,50063,550—8,800—
54,750—125,350
17,050—108,300

Note: T he figures have been stated taking into account the share consolidation of October 1, 2017 (ratio of 1 share for 2 shares).

b. Price information for the year ended March 31, 2018
Yen

U.S. dollars

Stock options 2010

Exercise price
Average exercise price
Fair value at the granted date¥    1
—
652

$ 0
—
6

Yen

U.S. dollars

Stock options 2011

Exercise price
Average exercise price
Fair value at the granted date¥    1
—
644

$ 0
—
6

Yen

U.S. dollars

Stock options 2012

Exercise price
Average exercise price
Fair value at the granted date¥    1
—
446

$ 0
—
4

Yen

U.S. dollars

Stock options 2013

Exercise price
Average exercise price
Fair value at the granted date¥    1
—
820

$ 0
—
8

Yen

U.S. dollars

Stock options 2014

Exercise price
Average exercise price
Fair value at the granted date¥    1
998
914

$ 0
9
9

Yen

U.S. dollars

Stock options 2015

Exercise price
Average exercise price
Fair value at the granted date¥    1
998
1,346

$ 0
9
13

Yen

U.S. dollars

Stock options 2016

Exercise price
Average exercise price
Fair value at the granted date¥    1
998
654

$ 0
9
6

Note: T he figures reflect the effect caused by the share consolidation of October 1,
2017 (ratio of 1 share for 2 shares).

56

HIROSHIMA BANK   ANNUAL REPORT 2018(3) M ethod of estimating number of stock options
vestedOnly the actual number of forfeited stock options is reflected
because it is difficult to reasonably estimate the number ofstock options that will be forfeited in the future.

•• Comprehensive income
Reclassification adjustments and the related tax effects concerning other comprehensive income for the years ended March 31,2017 and 2018 were as follows:
Millions of
U.S. dollars

Millions of yen

Net unrealized holding gains (losses) on securities available for sale:
The amount arising during the period
Reclassification adjustments
Before adjustments for tax effect
The amount of tax effectNet unrealized holding gains (losses) on securities available for saleNet deferred gains (losses) on hedging instruments, net of tax:
The amount arising during the period
Reclassification adjustments
Before adjustments for tax effect
The amount of tax effect
Net deferred gains (losses) on hedging instruments, net of tax
Remeasurements of defined benefit plans:
The amount arising during the period
Reclassification adjustments
Before adjustments for tax effect
The amount of tax effectRemeasurements of defined benefit plans
Share of other comprehensive income of affiliated companies accounted
for by equity method:
The amount arising during the period
Reclassification adjustments
Share of other comprehensive income of affiliated companies accounted
for by equity method
Total other comprehensive income•• Business combination
Change of an affiliated company accounted for by theequity method into a wholly owned subsidiary
Hirogin Utsumiya Securities Co., Ltd., an affiliated company
accounted for by the equity method, acquired common stock
in treasury on June 1, 2017 and became a wholly owned
subsidiary.
A) Outline of business combination(1) Name of the acquired company and its business
Hirogin Utsumiya Securities Co., Ltd., (Financial instruments
business)(2) Main reason for business combination
The Bank aims to strengthen cooperation with Hirogin
Utsumiya Securities Co., Ltd. and contribute valuable
financial instruments and services with consideration forprotection of customers’ interests and improve customers’
convenience, content and peace of mind.

2017

2018

2018

¥(29,804)(8,328)(38,132)
11,823(26,309)¥16,860(3,959)12,900(3,999)
8,900

$159
(37)
122
(38)
84

(925)
1,290
365
(113)
252

(1,708)
1,658
(50)
15
(34)

(16)
16
(0)
0
(0)

675
(3)
671
(208)
463

4,702
(347)
4,354
(1,349)
3,004

44
(3)
41
(13)
28

4
—

6
—

0
—

4
¥(25,589)

6¥11,8770$112(4) Legal form of business combination
Acquisition of common stock in treasury by the affiliatedcompany accounted for by the equity method(5) Name of the company after business combination
Hirogin Securities Co., Ltd.
(6) Percentage of voting rights acquired
Before acquisition: 50%
Acquisition percentage: 50%
After acquisition: 100%
(7) Main reason for decision to acquire the company
Bank aims to acquire majority of voting rights of theacquired company.
B) Period of business performances of the acquiredcompany to be included in the consolidated statementsof operations in the fiscal year ended March 31, 2018
From April 1, 2017 to March 31, 2018(3) Date of business combination
June 1, 2017 (April 1, 2017 deemed the acquisition date)

HIROSHIMA BANK   ANNUAL REPORT 201857

C) Acquisition cost of the acquired company(1) Acquisition cost of the acquired company
Fair value of Hirogin Utsumiya Securities Co., Ltd., as of theacquisition date: ¥5,000 million ($47 million)(2) Difference between the acquisition cost and thetotal amount of the acquisition cost
Loss on step acquisition ¥2,123 million ($20 million)D) Allocation of the acquisition cost(1) The amount of assets and liabilities assumed on theacceptance date of business combination
Millions of yen

Millions of
U.S. dollars

Current assets
Non-current assets
Total assets¥24,236611¥24,847

$228
6
$234

Current liabilities
Non-current liabilities
Total liabilities¥15,60743¥15,650

$147
0
$147

(2) The amount and cause of negative goodwilla. Negative goodwill¥4,196 million ($39 million)b. The reason for negative goodwill
Negative goodwill was incurred as net asset value in current
value exceeded the acquisition cost.

•• Significant subsequent events
Merger between consolidated subsidiaries
The Bank resolved the merger between Hirogin Mortgage
Service Co., Ltd. and Hirogin Business Support Co., Ltd. at
the Board of Directors meeting on April 27, 2018.
A) Outline of business combination(1) Name and business of combined companies
Name of combined company: Hirogin Mortgage Service Co.,Ltd.
Business of combined company: Investigation and evaluationof real estate collateral
Name of combined company: Hirogin Business Support Co.,Ltd.
Business of combined company: Consolidated accounting,printing and bookbinding business(2) Date of business combination
July 1, 2018(3) Legal form of business combination
Absorption-type merger in which Hirogin Mortgage Service
Co., Ltd. is the surviving company and Hirogin BusinessSupport Co., Ltd. is the absorbed company(4) Name of the company after business combination
Hirogin Business Service Co., Ltd.
(5) Others
This merger aims at efficiency of operations and further
strengthening of the group management.
B) Outline of accounting treatment
The transaction is treated as a common control transaction
pursuant to the Accounting Standard for Business
Combinations (ASBJ Statement No. 21, September 13,2013), as well as the Guidance on Accounting Standard
for Business Combinations and Accounting Standard forBusiness Divestitures (ASBJ Guidance No. 10, September 13,2013).

58

HIROSHIMA BANK   ANNUAL REPORT 2018

Non-Consolidated Balance Sheets
THE HIROSHIMA BANK, LTD.
As of March 31, 2017 and 2018
Millions of
U.S. dollars

Millions of yen

2017

2018

2018

ASSETSCash and due from banks
Call loans and bills purchased
Financial receivables purchased
Trading assets
Money held in trust
Securities
Loans and bills discounted
Foreign exchanges
Other assets
Tangible fixed assets
Intangible fixed assets
Prepaid pension cost
Customers’ liabilities for acceptances and guarantees
Reserve for possible loan losses
Reserve for investment losses
Total assets¥1,252,600
17,396
5,536
9,145
156
1,765,068
5,605,192
7,890
54,292
91,974
10,23538,81439,950(35,775)(4,901)¥8,857,577¥1,509,905
18,521
5,904
5,842
156
1,393,440
5,852,316
7,741
82,094
91,4739,420
42,98936,506(33,474)—¥9,022,839$14,212174
55
55
1
13,11655,086
73
773
861
89
405
344
(315)
—
$84,929

LIABILITIES AND NET ASSETS
Liabilities:
Deposits
Call money and bills soldPayables under repurchase agreements
Deposits received for bonds lending/borrowing transactions
Trading liabilities
Borrowed money
Foreign exchanges
Bonds
Due to trust account
Other liabilities
Reserve for reimbursement of deposits
Reserve for point loyalty programs
Reserve for stock payments
Reserve for loss related to Head Office rebuilding
Deferred tax liabilities
Deferred tax liabilities for land revaluation reserve
Acceptances and guarantees
Total liabilities¥7,308,542
3,365
137,187
401,641
7,183
453,379
163
20,00022
34,882
1,461
86
—
1,095
2,891
13,61339,9508,425,466¥7,459,316
50,000111,329
262,859
4,023
581,122224—
42
28,892
4,447
89
176
1,987
7,274
13,61336,506
8,561,905$70,212
471
1,048
2,474
38
5,470
2
—
0
272
42
1
2
19
68
128
343
80,590Net Assets:
Common stock:
Authorized – 1,000,000,000 shares
Issued – 312,633,171 shares
Capital surplus
Retained earnings
Common stock in treasury
Total stockholders’ equity
Net unrealized holding gains on securities available for saleNet deferred losses on hedging instruments, net of tax
Land revaluation reserve, net of tax
Total valuation and translation adjustments
Stock acquisition rights
Total net assets
Total liabilities and net assets   54,573
30,742
280,157(423)
365,050
39,486(512)
27,763
66,738322
432,110¥8,857,577   54,573
30,745300,948(1,246)
385,022
48,387(547)
27,76375,604308
460,934¥9,022,839   514
289
2,833
(12)
3,624
456
(5)
261
712
3
4,339
$84,929

HIROSHIMA BANK   ANNUAL REPORT 201859

Non-Consolidated Statements of Income
THE HIROSHIMA BANK, LTD.
Years ended March 31, 2017 and 2018
Millions of
U.S. dollars

Millions of yen

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
Expenses:
Interest expenses:
Interest on deposits
Interest on borrowings and rediscounts
Other interest expenses
Fees and commissions
Other operating expenses
General and administrative expenses
Other expenses
Total expenses
Income before income taxes and others
Income taxes:
Provision for income taxes and others
Deferred income taxes
Net income

2017

2018

2018

¥ 61,120
18,625
1,106
25,337
10,817
17,778
134,785¥ 61,410
15,0561,300
25,183
4,515
14,971
122,438$  578
142
12
237
43
141
1,153

3,058
3,805
2,551
9,717
11,80955,6296,217
92,78841,996

2,867
3,724
2,886
9,889
4,691
55,7405,505
85,304
37,134

27
35
27
93
44
525
52
803
350

13,074(1,067)¥ 29,989

9,700
399¥ 27,034

92
4$  254

Yen

Amounts per share of common stock:
Net assets
Net income
Diluted net income
Cash dividends applicable to the year

¥1,383.40
96.13
96.01
11.00

U.S. dollars¥1,480.24
86.74
86.63
—

$13.930.82
0.82—

Note: The Bank conducted a share consolidation of common shares at the ratio of 1 share for 2 shares on October 1, 2017. As a result, the figure for cash dividends applicableto the year for the year ended March 31, 2018 has been stated after including the impact of the share consolidation, and the total annual dividend was “—.”60

HIROSHIMA BANK   ANNUAL REPORT 2018

Corporate Information
Organization(As of July 1, 2018)

Secretariat Department
Compliance Management
DivisionManagement Planning
Division
Personnel &General Affairs Division
Risk Management Division
Banking Operation
Management Division
Information Technology Planning& Administration Division
Audit Division
Audit &
Supervisory
Board members(Audit & Supervisory
Board)

Audit &
Supervisory
Board Office

Banking Business Planning
Division
Chief Division
Officers

Eastern Area Headquarters
Corporate Planning Division

GeneralMeeting of
Shareholders

Credit Supervising Division
Board ofDirectors

Management
Board

Shipping Finance Division
Investment Banking DivisionInternational Business Division

Public Services Business Division
Asset Management Division
Retail Loan Division
Treasury & Investment DivisionTokyo Liaison Office

Chief Area
Officers

Branch areas / Branches

HIROSHIMA BANK   ANNUAL REPORT 201861

Board of Directors, Executive Officers andAudit & Supervisory Board Members

Stock Information(As of March 31, 2018)(As of June 28, 2018)

Directors
Chairman
Koji Ikeda
President
Toshio Heya
Director & Senior Managing Executive Officers Tohru Hirota
Yusou Araki
Director & Managing Executive Officers
Yasushi Kojiri
Katsuhiko Nakama
Akira Maeda
External Directors
Masahiro Sumikawa
Kaori Maeda
Satoshi Miura

Number of Shares Authorized

1,000,000 thousand

Number of Shares Issued

312,633 thousand

Number of Shareholders

17,481

Executive Officers
Hiroyuki Tsumasaki
Hiroshi Honkawa
Ikuo Kojiri
Masahiro Koike
Masataka Hatate
Atsuhiro Kunimura
Akira Ogi
Kimio Okano
Hiroyuki Higashiyama
Kazuo Kiyomune
Fumitsugu Kariyada
Hideki Toi
Koji Hakoda
Shinichi Fukamachi

Senior Managing Executive Officer
Managing Executive Officers

Executive Officers

Audit & Supervisory Board Members
Audit & Supervisory Board Members
External Audit & Supervisory Board Members

Hiroyuki Mizutani
Hitoshi Katayama
Yasutoshi Takei
Yoshinori Takahashi
Masako Yoshida

Major Shareholders(As of March 31, 2018)
Shareholders

Number of shares(Thousand)

Percentage of shares issued(%)

Japan Trustee Services Bank, Ltd. (Trust Account)

16,162

5.17

The Master Trust Bank of Japan, Ltd. (Trust Account)

9,532

3.05

Meiji Yasuda Life Insurance Company

9,504

3.04

Sompo Japan Nipponkoa Insurance Inc.

8,343

2.67

CP Chemical Incorporated

7,463

2.39

Nippon Life Insurance Company

6,042

1.93

Sumitomo Life Insurance Company

6,038

1.93

The Chugoku Electric Power Co., Inc.

6,004

1.92

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

5,794

1.85

Japan Trustee Services Bank, Ltd. (Trust Account 5)

5,563

1.78

62

HIROSHIMA BANK   ANNUAL REPORT 2018

Shareholder Incentive Plan
We have established shareholder incentives for shareholders to improve their satisfaction.
• Shareholders eligible for the Shareholder Incentive Plan
Eligible shareholders' reference
dateMarch 31 every year (hereafter, “the reference date")

Eligible shareholders

Shareholders who have more than 100 shares listed on the Bank's register of shareholders on the reference date

Operational period

From the beginning of July of the year containing the reference date to the end of June of the following year

• Content of the Shareholder Incentive Plan

Preferential tickets will be sent to the eligible shareholders.
One of the following four courses can be chosen for each preferential ticket.
Course name(1) Time deposit course

Course overview
For time deposits made for one year, the course applies an additional interest rate up to the first date of
maturity.

(2) Investment trust course(3) Inheritance-related service
course

The courses provide cashback of 20% of the accumulated fee (excluding tax, ¥20,000 maximum) on eachtransaction.

(4) Hirogin Securities-related
trading course* Information about the Shareholder Incentive Plan is provided in branches and on the Bank's website. For details, please ask at the counter.
* Please study the explanatory notes for each course before choosing it.
* Please be aware that the Shareholder Incentive Plan may include revisions to the incentive plan itself, including terminating the use of the plan due to changes in the businessenvironment and other factors, or have its contents changed.

We present tickets to the Hiroshima Museum of Art, a nonprofit organization, to our shareholders who make use of the Hirogin time
deposits we have established as shareholder incentives.
• Foundation Hiroshima Museum of Art■ Overview
The Hiroshima Museum of Art was established in November
1978 by Hiroshima Bank in commemoration of the 100th
anniversary of its foundation, as we move through history
together with the region. We hope that the museum can offer
spiritual repose to the people of Hiroshima, the city reduced toruins by the atomic bomb on August 6, 1945. To this end, we
have created a sanctuary of fragrant beauty around the themesof love and healing. We pray that it will also bring repose to
the victims of the bomb that has led to today’s Hiroshima, andpeace to Hiroshima City.

■ The collection
The art gallery exhibits some 80 works throughout the year,
comprising European modern art works centered on the French
Impressionists from the Romantics in the mid-19th century to
the Ecole de Paris school, including paintings by Degas, Monet,
Renoir, Van Gogh and Picasso, and Japanese modern art works
since the Meiji Period, including traditional-style nihonga works.

Address:	3-2 Motomachi, Naka-ku,
Hiroshima City (in Central Park) 730-0011, Japan
Opening Hours:	9:00 a.m.–5:00 p.m. (Last entry 4:30 p.m.)* Open until 7:00 p.m. on fridays during special exhibitions
Closed:	Mondays except during special exhibitions (or the following day if a public holiday
falls on Monday) and December 29–January 2
Note: The‌
museum is sometimes closed temporarily to change exhibitions.

HIROSHIMA BANK   ANNUAL REPORT 2018

63

HIROSHIMA BANKANNUAL REPORT 2018
THE HIROSHIMA BANK, LTD.

Printed in Japan