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 2005, the six-month period to September 30, 2005.

　Isao Oshiro

　President

Operating Environment

In the first half of fiscal 2005, the Japanese economy gave signs of resuming year-on-year growth after a period of stagnation. Indications of a gradual recovery included increased capital investment ― fueled by improving corporate earnings ― and a slow upward trend in consumer spending.

　In Okinawa Prefecture, the situation become somewhat more difficult in the construction sector due to cutbacks in public works expenditure, but in the tourism industry Okinawa continued to be one of the destinations of choice. With consumer spending holding firm, amid other encouraging factors, the incipient recovery took a stronger hold over the prefectural economy, as evidenced especially by an improving trend in employment conditions and a general year-on-year decrease in the number of corporate bankruptcies.

Business Performance

Amid these circumstances, the Bank inaugurated its latest medium-term business plan from April 2005, under the name Leap2005. The core proposal contained in this plan is to offer optimal services transcending the traditional business category of “banking,” with the objective of solving the financial problems of our customers in the region. In this way, we will help pave the way for sustainable growth by our corporate customers, the Bank itself, and the regional economy as a whole.

　In fiscal 2005, the first year under the new plan, our management goals are: 1) to expand earnings opportunities, and 2) to achieve a sounder financial position. To these ends, we are placing priority on increasing loans to small and medium-sized enterprises (SMEs), offering a “one-stop service” for all finance-related needs, reducing the balance of non-performing loans subject to mandatory disclosure under the Financial Revitalization Law, and overseeing a smooth switchover to the use of a new computer system jointly developed with other regional banks.

　In June of 2005 we reorganized our Head Office departments ― newly creating the Finance Planning Department, the Direct Marketing Department, and the Financial Support Office within the Customer Management Support Department ― with the aim of maximizing our opportunities for the creation of new earnings generators.

　Additionally, to prepare for future changes in the business environment and for costs attendant on the rehabilitation of borrower companies, as well as create a business structure for the Bank that will assure us of stable business performance well into the future, in the first half of fiscal 2005 we made substantial additional provisions to the reserve for possible loan losses. As a result, the cost of bad debt disposal for the fiscal 2005 full term is projected to rise sharply over the previous term’s figure. This, however, will ensure that credit costs in fiscal 2006 and subsequent years remain at a reasonably low level.

Tasks Ahead

In view of the high level of corporate earnings and the gradual improvement in wage-earners’ incomes, the Japanese economy is judged to be on the road to recovery. In the financial sector, the managements of financial institutions are starting to adopt a more proactive and aggressive stance now that the prolonged period of virtually exclusive focus on bad debt disposal is coming to an end. Much is expected of regional financial institutions, including the Bank of the Ryukyus, in contributing to the economic revitalization of their respective communities by ensuring a smooth supply of funds to SMEs, among other methods.

　In recognition of this, in addition to its medium-term business plan, which sets out a new growth strategy, the Bank in August of 2005 announced a detailed plan for enhancing its relationship banking functions, which are vital to the success of businesses in its operating region. The core goal of this plan is to strengthen the Bank’s capabilities in the field of rehabilitation of corporate borrowers, in addition to making its services generally more convenient.

　By achieving steady progress in the concrete implementation of measures under the Bank’s medium-term business plan, as well as in the abovementioned detailed plan for enhancing its relationship banking functions in the economy of the region, the management hope to simultaneously help revitalize business activity in Okinawa Prefecture while improving the Bank’s profitability and building a sounder financial position. In this way, the Bank of the Ryukyus will become a more strongly competitive financial institution ― a trustworthy bank to which customers will be happy to entrust the management of their financial assets.

November 2005