To Our Shareholders

The following is a summary of the overall situation and performance of the Bank over the first half of fiscal 2001 (April 1 to September 30, 2001). During these six months under review, the Japanese economic situation further deteriorated. Although consumer spending remained much the same, exports and capital investments were dragged down by the sluggishness of both domestic and overseas economies, and the unemployment rate rose to an even higher level.

Meanwhile, the general economic situation in Okinawa Prefecture stagnated despite a recovery in some segments of the construction and tourism industries. Consumer spending remained sluggish except for new car sales and sales of air conditioners due to the hotter than usual summer. This pulled department store and supermarket sales down below the previous term’s level. In the construction industry, new housing starts were steady, mainly on the strength of demand for rental housing, and public works spending increased over the previous term. This led to some recovery in materials shipping, including cement and other construction materials, from the beginning of the summer period.

In the tourism sector, the number of visitors to the area rose in comparison with fiscal 2000, when numbers fell partly due to the hosting of the G8 Okinawa Summit, recovering to nearly the same levels as fiscal 1999. The latest figures indicate another sharp fall in the number of visitors to the prefecture, brought on by the general climate of unease prevailing since the events of September 11th, and there is some concern about possible trends from the latter half of fiscal 2001.

During the six months under review, the unemployment rate took a turn for the worse. Despite fewer corporate bankruptcies, total loan losses on bad debts increased due to a rise in large-scale bankruptcies. On the other hand, consumer prices settled at a level below the previous year.

In the financial sector, both deposits and loans at the 6 banks and credit associations in Okinawa Prefecture were steady, and the term-end balance rose over the previous term.

Amid this financial and economic environment, the Bank inaugurated the “Speed 2001” medium-term management plan in April 2001 and developed positive measures to enhance customer satisfaction. In May 2001, the Bank began to offer Internet and mobile banking services that enable customers to use their computers and mobile phones to check on their account balances, transfer funds, and make additional payments into their time deposits. In August 2001, the Bank also opened its third Mortgage Loan Center in Makiminato, Urasoe City. As a result of these openings, the Bank’s balance of mortgage loans rose 8.9% during the reporting period, helping us to achieve the highest growth among regional banks in the Kyushu-Okinawa area. In addition, due to the general recognition that “speed” is a new added value, the Bank has received a favorable reception for its two new loan products, which were first offered in the previous fiscal year. This term, we conducted a review of the two loans, expanding opportunities to recipients of the retail loan, through new business partnerships, and lowering the criteria for receiving or expanding financing through the business loan. Both loans continue to be among our major products.

In the area of management streamlining, on a non-consolidated basis, personnel expenses were reduced by ¥0.3 billion from the same period of the previous year, to ¥5.1 billion (US$43 million), by reducing staff by 174 and lowering employee bonuses. Under non-personnel expenses, the increased outlay for computer-related expenses was covered by a decrease in other non-personnel expenses, which remained roughly the same as the previous year, at ¥4.6 billion (US$39 million). During the 6-month term under review, one branch was made into a sub-branch, which gave the Bank a total number of 69 branches (including the Head Office marketing department), of which 9 are manned sub-branches, at the end of September 2001.

In an effort to both reduce costs and strengthen the development of our computer system, which is essential for offering more efficient financial services, the Bank has joined a computer system development project created by a group of regional banks outside of Okinawa led by Hachijuni Bank, which boasts computer system development capabilities on a par with the major banks. The other participating banks are Yamagata Bank, Kanto Bank, Awa Bank, Shinwa Bank, and Miyazaki Bank.

Turning to the earnings situation, as the prolonged recession, exacerbated by the psychological effects of September 11th, has heavily depressed the stock market, we were forced to apply impairment accounting to our stock holdings and investment trusts, posting one-time expenses in the amount of more than ¥1.4 billion.

As a result, net income for the reporting period came to ¥2.9 billion (US$25 million) on a consolidated basis, and ¥1.9 billion (US$16 million) on a non-consolidated basis.

The dividend payment for the reporting period was raised by ¥5 from the ¥15 paid at the end of the previous term, to ¥20. While constantly taking the financial environment into consideration, we intend to raise the level of the Bank’s retained earnings, repay borrowings of public funds as soon as possible, and do our best to maintain stable dividend payments.

The business environment of Japanese banks is undergoing rapid change with the merger and amalgamation of major financial institutions, the entry of players from other industries into the banking sector, the growing role of information technology, and the impending imposition from April this year of a cap on deposit insurance (insurance will be paid on principal in the amount of ¥10 million plus the interest on that ¥10 million). From a broader perspective, too, the situation is likely to remain difficult against the background of the continued sluggishness of the overall economy and the low level of land and stock prices.

Under our “Speed 21” medium-term management plan, we aim to focus the Bank’s management resources on its areas of core competence and implement bold reforms of our operational processes with the goal of securing a stable earnings base. Specifically, management efforts will be focused on the Bank’s principal business of extending loans. We will aim to speed up the process of loan execution by raising administrative efficiency and streamlining clerical processing. By so doing, we will be able to respond more precisely to customer needs and increase the volume of small-lot loan business, particularly retail loans. At the same time, we aim to become a bank that offers its customers the products and services they need as soon as they need them: a bank that people can fully rely on. To this end, we will actively direct our efforts into building a strong relationship of trust with our customers, including by offering enhanced service convenience through the use of information technology.

In spite of the severe business environment that we face at the moment, we are confident that the steady implementation by the whole staff of the Bank of measures under the “Speed 21” management plan will ensure the survival and prosperity of the Bank of the Ryukyus. We see the future role of the Bank as a financial institution crucial to the health and vitality of the regional economy and society as a whole.

We look forward to the continued support of our shareholders and all other stakeholders.

Business Performance (Consolidated Basis)

◆ Deposits

Liquid deposits and time deposits both increased during the six months under review to a combined interim term-end balance of ¥1,229.4 billion (US$10,297 million), up ¥19.1 billion. Partly owing to the continued low-interest environment, the balance of money in trust declined ¥18.3 billion during the half-term to stand at ¥128.2 billion (US$1,074 million). On a non-consolidated basis, the aggregate of banking and trust accounts grew by ¥400 million to ¥1,359.2 billion (US$11,384 million).

◆ Loans

Loans decreased during the six months under review despite growth in mortgage loans to individuals, owing to a decline in loans to corporate customers due to a slackening of demand for funds amid the country’s prolonged recession. As a result, loans and bills discounted as of the end of September stood at ¥1,008.6 billion (US$8,448 million), down ¥20.6 billion from the previous term-end, while loans of trust banking operations came to ¥86.3 billion (US$723 million), a decline of ¥10 billion. On a non-consolidated basis, the aggregated balance of loans and bills discounted and trust banking loans fell ¥31.7 billion during the six months, to ¥1,096.2 billion (US$9,182 million).

(In Okinawa, there is a seasonal pattern whereby demand for funds rises in the latter half of each fiscal year, mainly from the sugar refining industry and local government, whereas these loans are repaid from spring to summer. Because of this, the loan balance at the end of the reporting period was lower than the corresponding amount as of March 31, 2001, but higher by ¥13.9 billion on a non-consolidated basis, compared with the relevant balance at the end of the previous corresponding period.)

◆ Consumer Loans

(On a non-consolidated basis, including mortgage loans)

The Bank of the Ryukyus has been conducting an aggressive loan promotion campaign under the simple but effective slogan: “Ryugin for Loans.” Thanks to these marketing efforts, the Bank’s retail loans grew by 14.9% year-on-year, well above the 5.0% average growth for regional banks in Kyushu.

In mortgage loans, the Bank became the first financial institution in the prefecture to open a Home Loan Center in Naha in October 1999. Since that time, it has opened two additional centers throughout the region (located in Nakabu and Makiminato). As part of marketing efforts in the field of loans, we started a new service in which we offer home loan consultation on Sundays and national holidays. We also started a marketing campaign focusing on favorable interest rates, and launched a new unsecured mortgage refinancing loan product. These steps received high marks from customers, thanks to which the Bank’s loan growth rate was number one in the Kyushu-Okinawa region in percentage terms and number two in value terms.

◆ Securities & Foreign Currency Exchange

The balance of marketable securities rose ¥80.1 billion during the half-term under review, to ¥246.7 billion (US$2,067 million). The value of foreign exchange transactions during the same period fell $0.9 billion year on year, to $6.2 billion on a non-consolidated basis.

◆ Earnings

Japan’s lingering economic stagnation, exacerbated by the events of September 11, had a severe negative effect on the value of stocks worldwide. As a result, we were forced to apply one-time impairment accounting to stockholdings and investments in investment trusts, posting expenses in the amount of more than ¥1.4 billion. Accordingly, operating income came to ¥1.9 billion (US$16 million), with net income for the reporting period at ¥2.9 billion (US$25 billion). Interim dividends for the reporting period rose ¥5 to ¥20, compared with the previous term-end dividend of ¥15.

◆ Branches

The Bank changed the status of one branch to a sub-branch in the first half of the six months under review, bringing the branch total (including the Head Office marketing department) as of September 2001 to 69 (of which 9 are staffed sub-branches). The number of outside locations within the prefecture where the Bank’s ATM and cash dispenser services can be accessed also grew by six locations to 135, compared with 129 locations in September 2001. The addition of 2,700 ATM locations gained from participation in the E-net ATM network (convenience store ATMs) now brings the Bank’s total off-branch ATM and cash dispenser access points to 2,835 nationwide. Further, the ten E-net ATMs coordinated by the Bank of the Ryukyus within the prefecture give customers access to ATM services until 2 a.m. on weekdays (8 p.m. on weekends & national holidays).