Message from the President

I would like to take this opportunity to thank all the Bank’s shareholders for their loyal support. Hereunder, I present a report on the business performance of the Bank of the Ryukyus for the first half of fiscal 2004, the six-month period to September 30, 2004.

Isao Oshiro

President

Operating Environment

An overall improvement was observed in the tone of the Japanese economy during the first half of fiscal 2004, highlighted by growth in exports and industrial production, an upturn in private-sector capital investment on the back of improving corporate earnings, and a slow but sure recovery in consumer spending.

In Okinawa Prefecture, negative factors included fairly severe conditions in the construction industry as a result of sluggish orders for both public works and housing starts. These were more than counterbalanced, however, by the continuing popularity of tourism to Okinawa, with the number of visitors maintaining a high level, as well as generally firm consumer spending in the prefecture. Taken overall, the Okinawan economy showed signs of a burgeoning recovery. This optimistic view is lent weight by the improving employment trend and the falloff in the number of corporate bankruptcies.

Buisiness Performance

Fiscal 2004 is the second year of our Quality 2003 two-year management plan, whose principal target is to secure a stable earnings foundation for the Bank. To this end, during the reporting period we placed the main focus of our efforts on: (1) increasing the total value of loans to corporate customers, (2) reducing the amount of non-performing loans on our books, and (3) providing an even more comprehensive range of financial services for retail banking customers.

Regarding our goal of increasing the total value of loans to corporate customers, although corporate demand for loans has been declining, by pursuing a variety of initiatives, we achieved an increase of \9,100 million in the net balance of loans outstanding to small and medium-sized companies (excluding irrecoverable loans written off) during the reporting six-month period. Initiatives taken included bolstering the support services provided to our marketing branches by the Loan Promotion Project Office, and conducting aggressive marketing campaigns for our unsecured loan products, making full use of our automated credit screening system.

Regarding the issue of non-performing loans, we were able to lower non-performing loans as a percentage of assets (principally loans) subject to mandatory disclosure under the Financial Revitalization Law by 0.73 percentage points, to 8.68% as of September 30, 2004. In July 2004 the Bank upgraded the status within its organizational hierarchy of the Management Support Office to that of a full-scale department. The number of staff assigned to the new department was increased accordingly. These steps were taken to strengthen the capabilities of the Bank’s specialists in overseeing the restructuring of borrowers’ operations, and thereby produce improved results in turning round the management of troubled companies. Improvements in the business performance of certain of our borrowers allowed us to upgrade their borrower categories, reducing the total value of non-performing loans.

With respect to our goal of providing an even more comprehensive range of financial services for retail banking customers, our active marketing of personal asset management plans bore fruit, in addition to which we succeeded in increasing sales of Japanese government bonds (JGBs), which are exclusively available to individuals. Thanks to these efforts, the aggregate balance of individuals’ funds in investment trusts, personal pension-type life insurance, and JGBs as of the end of the six-month reporting period came to \75,500 million. This was another better-than-expected result, following our strong showing in the previous term. The total balance of loans outstanding to individuals at the interim term-end stood at \384,800 million, a gain of \9,900 million compared with the end of fiscal 2003. A major factor in this success was the popularity of our special housing loan combined with a cancer insurance plan — the only such product available in Okinawa Prefecture.

Tasks Ahead

During the six-month reporting period, a wide variety of measures were taken on the marketing front in pursuit of the Bank’s principal target under its Quality 2003 two-year management plan — securing a stable earnings foundation. As a result, record-high levels were posted in both net profit on core banking operations and net income for the six-month period: these successes are evidence of the steady progress being made toward a substantial strengthening of our earning ability.

Meanwhile, despite signs of improvement in the nationwide economy, particularly in the business performance of large companies, the economy of Okinawa Prefecture — which is driven principally by small and medium-sized enterprises (SMEs) — has yet to embark on a real recovery.

In these circumstances, the management of the Bank of the Ryukyus will continue to pursue its targets under the current two-year management plan while also focusing efforts on ensuring the smooth provision of funds to SMEs — as set out in the plan announced in August 2003 for reinforcing the Bank’s relationship banking capabilities — and helping companies in difficulties revitalize their operations. By these means, we believe, we will be able to help re-energize the regional economy and revive the normal flow of funding for SMEs. This, in turn, will improve the Bank’s earnings and solidify its financial position by developing a sounder asset portfolio.

Customers, both corporate and individual, are projected to apply ever-more demanding criteria to their selection of financial institutions. To prepare for this more severely competitive business environment, the Bank of the Ryukyus plans not only to realize its goal of securing a stable earnings foundation, but also to transform itself into the sort of reliable bank — providing truly comprehensive financial services — to which customers will be happy to entrust the management of their funds and the handling of all other financial affairs. Toward this end, we aim to both meet quantitative targets and effect a tangible improvement in the quality of our services. In so doing, we will become a bank that enjoys the unswerving loyalty of its customers and plays an invaluable role in the regional economy.

November 2004