The 77 Bank, Ltd.

There is a risk that securing investment funds will become difficult due to intensifying competition for deposits and a sharp rise in funding costs amid a rising interest rate environment. In addition, a sharp rise in long-term interest rates, a decline in stock market prices, or fluctuations in exchange rates could lead to a decrease in the valuation of held bonds, impairment of equities, and foreign exchange losses, potentially deteriorating business performance. The Bank has designated this as a top risk and regularly conducts stress tests to verify the impact on its financial position.

There is a risk that deterioration in the business conditions of counterparties will lead to an increase in non-performing loans, increasing credit-related expenses through additional provisions to general and specific allowances for doubtful accounts. In addition, an overall deterioration in economic conditions or a decline in land prices reducing collateral value may necessitate additional provisions for allowances for doubtful accounts. The Bank conducts asset assessments based on appropriate internal standards, but may find it difficult to respond to unexpected changes in the economic environment.

As a regional bank whose primary business base is Miyagi Prefecture, the Bank faces the risk that a deterioration in the regional economy could directly hinder business expansion and lead to an increase in non-performing loans. Furthermore, an accelerating outflow of younger generations and inherited deposits outside the region due to population decline and concentration in Tokyo could shrink the Bank's future revenue base and affect business continuity. Deterioration in the business conditions of specific industries or large borrowers could also be a factor increasing non-performing loans.

If computer systems stop or malfunction, or if information systems are destroyed or data is tampered with due to cyberattacks, large-scale business disruptions and leaks of customer information could occur, resulting in economic losses and reputational damage. System troubles or fraudulent transactions at third parties could also be a factor causing losses. The Bank has designated this as a top risk and is working to develop a management framework for system risk and third-party risk.

Insufficient compliance with laws and regulations, or handling that goes against customer-oriented business conduct, could lead to reputational damage and deteriorating business performance. Insufficient monitoring functions at headquarters could result in handling that goes against customer-oriented practices, and the Bank recognizes this as a top risk. While the Bank is working to develop and strengthen its systems, delays in organizational response could lead to the occurrence of damage.

Insufficient countermeasures against and compliance regarding money laundering, terrorist financing, proliferation financing, and financial crime could result in customer harm and a decline in social credibility, leading to economic losses and deteriorating business performance. The Bank recognizes this as an important management issue and is working to develop its systems, but positions the risk of delays or deficiencies in countermeasures becoming apparent as a top risk.

Against the backdrop of digital technology innovation and deregulation, competition transcending industry boundaries is intensifying, creating the risk that the Bank could lose its relative competitive advantage and see its earnings power decline. Failure to respond to changes in the competitive environment brought about by fintech companies and entrants from other industries could affect the Bank's business performance. The Bank recognizes this as a top risk and has incorporated its response into its short-term management plan.

Intensifying competition for recruitment and increased labor market fluidity could result in the outflow of talented personnel, hindering business operations. A shortage of human resources could lead to a decline in the quality of banking operations and delays in developing new businesses, potentially causing a decline in medium- to long-term competitiveness. The Bank strives to secure and develop talented personnel, but responding to structural changes in the labor market remains a challenge.

If the capital adequacy ratio falls below the domestic standard of 4% due to increased credit-related expenses or fluctuations in the value of the securities portfolio, there is a risk that the Bank could receive an order for partial suspension of operations from the Commissioner of the Financial Services Agency as a prompt corrective action. In addition, changes in the criteria for recognizing deferred tax assets or reviews of their recoverability could affect the capital adequacy ratio and business performance. The Bank strives for appropriate capital management, but may find it difficult to respond to sudden changes in the external environment.

There is a risk that a large-scale natural disaster, such as a major earthquake, occurring in and around Miyagi Prefecture, the Bank's primary business base, could damage the Bank Group and its business partners, leading to deteriorated business performance. Damage to facilities such as the head office, operations center, and branches, as well as to officers and employees, could make it difficult to carry out business operations, and disruption to business operations due to the spread of infectious disease is also envisioned. The Bank has designated this as a top risk and strives to respond through the development of business continuity plans (BCP) and other measures.