Message from the President

We herewith present a report on the business performance of the Bank for the first half (April 1 – Sept. 30) of fiscal 2006, together with the Bank’s settlement of accounts for the six-month period.

　Isao Oshiro

　President

The business environment in the financial sector

The Japanese economy maintained its upward trend during the first half of fiscal 2006 in spite of a flattening out in the growth of consumer spending toward the end of the six-month period. The economy was supported by an improvement in corporate earnings, which led to increased capital investment, and an improvement was also seen in employment conditions.

　The economic situation in Okinawa Prefecture also continued on the improvement path, in spite of a decline in public spending on construction projects, which was partially offset by active business in the private-sector construction field. In addition, the economy was supported by firm consumer spending resulting from the continued popularity of Okinawa as a tourist destination. Average wages improved during the six-month period, and the number of corporate bankruptcies remained low.

Business Performance

Amid these circumstances, the management and staff of the Bank of the Ryukyus continued to work to achieve steady progress under the Bank’s Leap2005 medium-term management plan.

　Fiscal 2006 was the second year of this medium-term plan, and the management goals were to expand opportunities for generating profits, and to strengthen the Bank’s financial position. To this end, we actively entered a number of new business fields and deployed various measures to raise our name recognition among hitherto untapped potential customer categories.

　In May 2006 we became the first regional bank in Okinawa Prefecture to engage in the new business field of testamentary trusts and property succession management services, and in June we began collaborative operations with Lombard Odier Darier Hentsch Japan, a member of one of the largest private bankers in the world. These are some of the ways in which the Bank of the Ryukyus is reorganizing itself to offer a diverse range of sophisticated asset management services.

　Following our signing of a collaboration agreement with the Chambers of Commerce and Industry of the cities of Naha and Okinawa, in May we signed an agreement with the Okinawa Prefecture Federation of Chambers of Commerce and Industry. Then, in September we signed an agreement with the Okinawa Association of Small and Medium-Sized Enterprises under which we give preferential treatment to members of the Association, such as with regard to interest rates charged on loan products. The agreement will allow us to increase business transactions with SMEs so as to expand our customer base.

　In July 2006 we set up a Mortgage Loan Center in Tokyo to meet the needs of customers planning to move to Okinawa Prefecture from elsewhere in Japan.

Tasks Ahead

Thanks to the vigorous state of the corporate sector, which is having a knock-on effect on the household sector, the Japanese economy as a whole is expected to continue growing, driven mainly by domestic private-sector demand.

　Within Okinawa Prefecture, the healthy state of the tourism industry, in addition to improving employment conditions and other factors, should keep the prefectural economy on the growth track. Financial institutions will face increasingly severe competition, partly as a result of the entry into the local market of major money center banks from outside the prefecture.

　 In these circumstances, we at the Bank of the Ryukyus worked to strengthen our financial position through the issuance of subordinated bonds and preferred shares, and in October 2006 we repaid ￥34 billion out of the total of ￥40 billion in public funds that we had borrowed in 1999. This constitutes great progress in addressing the urgent issue of repayment of public funds, and will allow the Bank to speedily and aggressively address the issue of effectively meeting customer needs for increasingly diverse and more sophisticated financial products and services.

　At the Bank of the Ryukyus, we intend to steadily implement our objectives under the current medium-term management plan, contributing to the revitalization of the regional economy through the smooth provision of funds to corporate customers and through our problem-solving proposal-based marketing. In these ways, we will fully earn the trust of our customers – both actual and potential – and become a bank that people can rely on wholeheartedly.

November 2006