Business Environment

In Okinawa, economic activity was generally brisk during the reporting period, although construction and related sectors failed to recover.  Visitors to Okinawa exceeded 5million for the first time ever.  Consumer spending was strong, partly the result of the unusually hot summer, and also thanks to favorable new car sales.  A pickup in the economy was evidenced by the improved employment situation and the decline in the number of bankruptcies.  Prices, however, continued to edge lower.

Review of Operations

◆ Deposits − steady increase in balance

The term-end balance of deposits and trust account stood at ￥1,353.1billion (US$12,803million), up ￥5.6billion on a non-consolidated basis. Deposits from individuals declined as a result of active promotion of investment trusts and other assets in custody (see Assets in Custody). In contrast, deposits from corporations and local governments increased. Consequently, deposits, overall, remained steady.

◆ Loans to Individuals − increased as projected

The balance of loans to individuals rose ￥22.4 billion from the previous term-end to ￥374.8billion (US$3,546million). This rise was due to strong demand for our mortgage loan coupled with life insurance featuring a cancer clause. No other bank in Okinawa handle products with similar features.

◆ Assets in custody − showed a dramatic increase

The balance of assets in custody (investment trusts, pension insurance, and Japanese government bonds designed for individuals) stood at ￥54.4billion (US$514 million) at term-end, up 230% over the previous term-end. This increase is primarily the result of offering products tailored to meet the needs of our customers.

◆ Business profit on core banking operations

Business profit on core banking operations is the most prominent profit indicator for banks in Japan.  It represent net business profit (the total sum of profits on ordinary banking operations including deposits, loans and foreign exchange, as well as securities operations), after eliminating one-time factors.  In the banking industry, this indicator is commonly used as a profit indicator where other industries employ operating income.  For the reporting term, the Bank's business profit on core banking operations on a non-consolidated basis amounted to ￥14.3billion, up ￥0.1billion, marking a record high for the third consecutive term.

(Note)

Business profit on core banking operations = net business profit + provision to general reserve for possible loan losses - write-offs under the trust account  - gain (loss) on bond trading.

◆ Operating income and net income − third-highest net income

Operating income increased ￥2,487million to ￥7,016million (US$66million). This rise is attributable to increased revenue from commissions and fees resulting from the aggressive promotion of investment trusts, Japanese government bonds and other investment vehicles to individual investors for assets in custody.  Net income rose ￥183 million to ￥4,321millon (US$40million) on a non-consolidated basis − the third-highest net income in the Bank's history.

◆ Enhanced Business Efficiency

Personnel expenses declined ￥225million from the previous term to ￥9.7billion (US$91million). Non-personnel expenses increased by ￥122millon to ￥9,232millon.  Total expenses, including taxes decreased ￥84million to ￥19,920million (US$188 million), marking a steady improvement in business efficiency.

◆ Capital Ratio (at 10.40%, twice the domestic standard)

Capital ratio is one of the chief indicators designed to show the adequacy and soundness of the asset portfolio of a bank. The minimum requirement for this ratio (the domestic standard is applied) is 4% for banks operating domestically, as in the case of the Bank of the Ryukyus, and 8% for banks also operating overseas. As of March 31, 2004, the Bank had secured a capital ratio on a non-consolidated basis of 10.40% according to the domestic standard, which is more than twice the minimum requirement.

◆ Credit Rating –acquired A- rating

Credit ratings are awarded by credit rating agencies, as impartial third parties, on the occasion of the issuance of bonds and other investment instruments, to determine the likelihood of repayment of principal and interest.

The Japan Credit Rating Agency, Japan's leading credit rating agency, gave the Bank of the Rykuys an "A-" rating (a single A minus) for a long-term debenture.  This is the seventh-highest rating out of a total of 20.

Note: Credit ratings range from AAA to D, and are further subdivided into a total of 20 ratings (see chart) by the use of plus and minus signs for ratings from AA to B.

◆ NPL amounts reduced and ratio of bad debt to total claims

　(under the Financial Reconstruction Law) improved

Bad debt (claims subject to mandatory disclosure under the Financial Reconstruction Law) declined ￥23.1billion during the reporting term to ￥108.7billion (US$1,029million). This is largely the result of providing support for corporate revitalization for borrowers with poor performance, carried out primarily by the newly established team for the rehabilitation of corporate borrowers. The ratio of bad debt to total claims under the Law declined 2 percentage points, to 9.41%, marking a substantial improvement.

◆ Forecast for FY2004 −Net income of ￥5.7billion

For the current term ending March 31, 2005, we forecast net income of ￥5.7billion on a non-consolidated basis, on the premises of a continued expansion in financing, the pursuit of credit-risk-linked interest rates, further increases in the balance of assets in custody, and more efficient operations. Annual dividends will be ￥40 per ordinary share. We will make our best efforts to enhance retained earnings, taking into consideration the financial environment, and aim to achieve a swift repayment of public funds. At the same time, we will maintain a stable dividend payment policy for the foreseeable future.