The Year in Review

In the first half of the year under review, Wakayama Bank’s business volume decreased in the face of drastic branch streamlining in preparation for the merger of Wakayama Bank with Kiyo Bank. The new Kiyo Bank (“the Bank”), formed in October 2006 as a result of the merger, concentrated on increasing loans to small and medium-sized enterprises (SMEs) and attracting deposits from SMEs, as well as on expanding fees and commissions. These steps were part of the Bank’s efforts under its first medium-term business plan, which was launched to coincide with the merger. As a result of these steps, loans and deposits both showed greater than projected increases, and commissions from the sale of investment trusts and other fees also grew steadily. Additionally, due to factors such as the gradual appearance of encouraging signs in the regional economy, total credit expenses decreased, partially owing to gains on the recovery of written-off loans (including recoveries of write-offs).
    As a result of these efforts, the Kiyo Financial Group (“the Group”) showed of total income of ¥85.7 billion (down ¥0.5 billion from the previous fiscal year) and total expenses of ¥74.0 billion (down ¥1.1 billion). Income before income taxes and minority interests of ¥11.7 billion (up ¥0.7 billion) and net income of ¥8.2 billion (up ¥4.8 billion) were recorded on a consolidated basis. Net income per share came to ¥12.46.
    Turning to performance by business segment, as a result of a variety of factors including those described above, the Group’s mainstay banking business segment recorded ordinary income of ¥74.0 billion (up ¥3.2 billion), ordinary expenses of ¥66.3 billion (down ¥3.8 billion) and ordinary profit of ¥7.6 billion (up ¥7.1 billion). Other businesses — which includes leasing, credit cards and computer-related business — registered ordinary income of ¥9.8 billion, ordinary expenses of ¥9.3 billion, and ordinary profit of ¥0.5 billion.

Deposits and Loans

Both the balance of deposits and the balance of loans and bills discounted decreased prior to October 2006, reflecting the fact that the former Wakayama Bank was facing drastic branch streamlining, but began to increase again after the merger. In the six months from the end of September 2006, deposits increased by ¥169.4 billion, and loans and bills discounted increased by ¥98.7 billion.

Deposits
The balance of deposits grew as a result of efforts after the merger to increase the number of customer contact points in the Bank’s main operating areas of Wakayama Prefecture and Osaka Prefecture.

Loans and Bills Discounted
The balance of loans and bills discounted began to increase after the merger, rising ¥62.0 billion from the previous year.

     The Bank also conducted sales campaigns for housing loans in Wakayama and Osaka Prefectures, and as a result, the balance of consumer loans rose by ¥13.2 billion from the previous year to ¥681.3 billion.

Capital Ratio

The Group’s capital ratio (domestic standard) rose 2.06 percentage points from the previous year to 11.58% on a consolidated basis, reflecting a year-on-year increase in equity capital of ¥40 billion (Tier I: ¥39.7 billion). This is largely attributable to the fact that the Group recorded net income for the year and received an injection of public funds.
    Kiyo Bank’s capital ratio (domestic standard) rose 2.03 percentage points to 10.62% on a nonconsolidated basis.

    Deferred tax assets of Kiyo Holdings decreased by ¥4.2 billion year-on-year on a consolidated basis. Deferred tax assets of Kiyo Bank decreased by ¥1.4 billion on a nonconsolidated basis.
    The ratio of deferred tax assets to Tier I capital is also falling steadily.

Non-Performing Loans (Loans Disclosed under the Financial Reconstruction Law)

With the aim of bringing the non-performing loan ratio down to less than 5% by the year ending March 2009, the Bank worked to accelerate the disposal of non-performing loans so as to bring the ratio down to the normal level. This included improving customers’ debtor categories through involvement in support for business reconstruction and management improvement.
    As a result of these efforts, the balance of non-performing loans decreased by ¥21.3 billion from the end of the previous year to ¥133.5 billion, and the non-performing loan ratio also dropped 1.20 percentage points to 6.19%.

Coverage of Non-Performing Loans
Out of total non-performing loans of ¥133.5 billion, the percentage covered by means such as collateral and allowances for possible loan losses was 91.5%.