Okinawa Financial Group, Inc.

The risk that the value of assets centered on loans (including off-balance-sheet assets) may decline or be lost due to deterioration in the economic environment or the financial condition of borrowers, resulting in losses. The Group recognizes credit risk as the most material risk it faces, and manages it by understanding the actual condition of counterparties through self-assessment and by measuring and managing the maximum potential loss using VaR (99% confidence interval). If this risk materializes, it may lead to deterioration in business performance and financial condition and a decrease in capital.

The Group is exposed to three types of market risk: interest rate risk arising from mismatches in interest rates and maturities between assets and liabilities, price fluctuation risk relating to securities and other holdings, and foreign exchange risk relating to foreign-currency-denominated assets and liabilities. Since the primary source of earnings is investing funds raised through deposits and borrowings into loans, bonds, equities, and other instruments, the Group's structure is directly exposed to market fluctuations. The materialization of these risks may lead to deterioration in business performance and financial condition and a decrease in capital.

The Group faces both funding liquidity risk, in which necessary funds cannot be secured due to deterioration in financial condition or other factors, and market liquidity risk, in which transactions are forced to be conducted under significantly unfavorable conditions compared to normal due to market disruption or other factors. As a financial institution, stability in funding and investment is fundamental to the continuity of operations, and a depletion of liquidity would directly lead to the occurrence of losses. The Group strives to enhance and strengthen its management framework by grasping the amount of risk using VaR.

In light of the increasing sophistication and complexity of cyberattacks in recent years, the Group has positioned cyberattacks as a top management risk. Although measures such as building backup systems, developing business continuity plans, and utilizing cloud services have been implemented, if a serious incident occurs, it may have a significant impact not only on business operations but also on customers. The Group is working to continuously strengthen its cybersecurity management framework.

Amid the requirement for strict management of personal information under the Act on the Protection of Personal Information and the Number Act, if a leakage, unauthorized use, or misuse of customer data occurs, it could directly impact business performance through loss of customer trust as well as compensation for economic and emotional damages. The Group makes every effort to prevent such incidents, but complete elimination remains difficult.

Given the importance of information systems in providing financial services, there is a risk of losses arising from unexpected system failures, malfunctions, or deficiencies. Although measures such as building backup systems, developing business continuity plans, and utilizing cloud services have been implemented, the impact on operations from system failures or cyberattacks cannot be completely eliminated.

The Group, centered on its subsidiary bank, is working to strengthen its framework for preventing money laundering, terrorist financing and proliferation financing, and other financial crimes. However, if the Group is used for financial crimes beyond the assumed scope, it may result in business suspension or unforeseen losses, and adversely affect business performance and financial condition. As a financial institution, amid continued strengthened supervision from regulatory authorities, the increasing cost of developing frameworks is also becoming a challenge.

Acts that violate laws and regulations or social norms, or inappropriate conduct that, while not codified in law, runs counter to social norms, may adversely affect customer protection, market integrity, fair competition, the public interest, and stakeholders. Against the backdrop of growing societal expectations of financial institutions, strict responses are required even for conduct that does not amount to a legal violation.

As a holding company, the Company's income is largely dependent on dividends and management guidance fees from its directly held bank subsidiary, and there is a possibility that dividends and other payments from the bank subsidiary may be restricted due to regulatory or contractual limitations. If the bank subsidiary is unable to record sufficient profit, there is a risk that it may become difficult for the Company to pay dividends to its shareholders.

If the number of infected officers and employees increases due to an outbreak of an infectious disease such as COVID-19 or a new strain of influenza, it may hinder business continuity. In addition, if the impact of an infectious disease spreads across the economy and markets as a whole, credit risk, market risk, and liquidity risk may increase and materialize, potentially affecting the Group's business performance.