Fukuoka Financial Group, Inc.

Non-performing loans may increase due to trends in the global and Japanese economies, fluctuations in real estate prices and stock prices, and deterioration in the business conditions of borrowers, potentially resulting in credit costs exceeding expectations. There is also a risk that deterioration in the business environment of specific industries or a decline in collateral value could necessitate additional provisions for bad debts, adversely affecting business performance and financial condition. As a countermeasure, the Group implements forward-looking provisioning, such as estimating default rates based on economic forecasts, and aims to conduct lending operations that are not affected by economic fluctuations.

If markets become disrupted due to domestic and overseas economic trends, political conditions, or geopolitical risks, and risk factors such as interest rates, foreign exchange, and equities fluctuate significantly, this may adversely affect the Group's business performance and financial condition. Based on the principles of Basel regulations (IRRBB), the Group has established a system to control the amount of interest rate risk within a certain proportion of capital; however, the risk remains that extreme market fluctuations could lead to expanded valuation losses and a shrinking portfolio due to loss processing.

If cyberattacks or system failures occur affecting online systems, ATMs, or information systems, this could disrupt settlement operations and lead to leakage of customer information or difficulty in maintaining business continuity. The Group operates the FFG Information Security Subcommittee (FFG-CSIRT) and works to strengthen its security management framework; however, if increasingly sophisticated cyberattacks result in the leakage of important information or the shutdown of critical systems, unexpected losses or a decline in trust could adversely affect business performance and financial condition. This is positioned as the top risk selected by the Board of Directors.

The rapid advancement of digital technology has led to a succession of new entrants into the banking business from platform operators and companies in other industries, creating a risk that the existing revenue base could be impaired. In the Kyushu region, expansion by other financial institutions and consolidation among local financial institutions are also anticipated; if the Group fails to secure a competitive advantage, its business strategies may not succeed, potentially adversely affecting business performance and financial condition. This is explicitly identified as a top risk: "Decline in competitiveness accompanying the rapid advancement of the digital society."

The Company and its banking subsidiaries are required to maintain a capital adequacy ratio at or above the domestic standard (4%), and if this standard is not met, the Commissioner of the Financial Services Agency may issue a business suspension order or other measures. Factors that could cause a decline include increased credit costs associated with the disposal of non-performing loans, inability to recover deferred tax assets, increased impairment losses due to declines in the market value of securities, changes in the risk asset portfolio, and changes in the standards for calculating the capital adequacy ratio.

Natural disasters such as heavy rains and typhoons in the Kyushu region may impair collateral value or cause business suspensions among client companies, leading to increased credit costs. There is also transition risk, whereby policy and regulatory tightening and market changes accompanying the shift to a decarbonized society could worsen the financial condition of client companies, increasing credit costs. If the gap between stakeholder expectations and the Group's initiatives widens, this could impair corporate value and adversely affect the stock price; this is positioned as a top risk.

In the Kyushu region, centered on Fukuoka, Kumamoto, and Nagasaki prefectures, which form the Group's core business base, population decline and aging may proceed faster than expected, leading to regional economic decline and an increase in business closures among clients, thereby shrinking the customer base. Changes in customer needs, such as the expanding share of online banks and the diversification of corporate fundraising methods, could also accelerate the shrinkage of the customer base. Deterioration of the regional economy could both hinder business expansion and increase credit risk, potentially adversely affecting business performance and financial condition.

Intensifying competition for human resources due to population decline and other factors may make it difficult to secure the quality and quantity of personnel needed, significantly affecting sustainable growth. In addition, a shortage of personnel with the skills necessary to execute business strategies may prevent the Group from recording revenue as planned, or may result in costs exceeding expectations. This is explicitly identified as a top risk: "Stagnation of sustainable growth due to human resource shortages."

If officers or employees violate laws and regulations, deviate from social norms, or engage in conduct that lacks a customer-oriented perspective, this could result in significant losses or a decline in trust. In addition, if deficiencies in the management framework for anti-money laundering and counter-terrorism financing result in the Group's products being misused for financial crimes, this could damage the Group's credibility. The Group positions compliance as an important management issue and strives to develop its framework and provide education and training; however, responding to increasingly sophisticated financial crimes remains a challenge.

Since its establishment in 2007, the Company has undergone repeated business integrations with Kumamoto Bank, Shinwa Bank, Juhachi-Shinwa Bank, and Fukuoka Chuo Bank; however, there is a risk that the expected integration synergies may not be fully realized due to failure to strengthen cooperative frameworks in business operations, unsuccessful business strategies, deterioration of customer relationships, decline in external credibility, or the occurrence of unexpected additional costs. In addition, as a holding company, the majority of the Company's income depends on dividends from its banking subsidiaries, and if the banking subsidiaries fail to record sufficient profits, it may become impossible to pay dividends to shareholders.