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The Bank of Kentucky Financial Corporation (NASDAQ:BKYF) is a bank holding company dominant in the Kentucky and Cincinnati geographic markets. The bank holds $1.7 billion in assets on its balance sheet and is continuously expanding its services provided to customers. A regional focus allows it to establish strong relationships with local customers and businesses, enhancing the safety and effectiveness of lending. During the third quarter the bank recorded an increase in net income available to common shareholders by 5% from the same period last year. During times of increased government regulations on the banking industry, Bank of Kentucky's stable operations seem poised for future success.

The location of its headquarters in Crestview Hills, Kentucky, has played a large role in continued expansion. Cincinnati's Northern Kentucky suburbs have had high population growth and Crestview Hills has the highest per-capita income in the state of Kentucky outside of the Louisville/Jefferson County suburbs. Boone Country, located not far from Crestview Hills, has experienced a 38% population growth over the past decade. Bank of Kentucky's geographic location is creating an expansion of its market.

The bank operates through thirty three different locations and fifty five ATMs. It has a reputation for maintaining strong customer relationships to whom various services are provided. President and CEO Robert Zapp stated during the earnings call, "[We] have focused on expanding existing customer relationships by selling investment services and additional bank products and services." Bank of Kentucky is looking to further expand the variety of services it provides, increasing its sources of revenue.

The bank has a 23% market share of total deposits in the Northern Kentucky market and this shows its success in the region against larger banks like J.P Morgan Chase (NYSE:JPM), PNC Financial (NYSE:PNC), Fifth Third (NASDAQ:FITB), Huntington (NASDAQ:HBAN) and KeyCorp (NYSE:KEY). Deposits have shown steady yearly growth, more than doubling since 2002. During the third quarter they continued this trend, increasing 7.5% from the same period last year. Bank of Kentucky's balance sheet is increasing in size as more deposits are coming in, creating strong lending opportunities.


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Source: Morningstar Direct

By providing superior services and maintaining strong customer relationships, the bank has been able to earn net interest margin above that of its competitors. Though market interest rates are at record lows, it reported net interest margin of 3.64%, a decrease of only 19 basis points from third quarter of 2011. Net interest margins at similarly structured regional banks Farmers Capital Bank Corporation (NASDAQ:FFKT) and Fifth Third Bancorp were 3.13% and 3.56% during the quarter.


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Sources: Quarterly Reports from Fifth Third, Farmers Capital and Bank of Kentucky

Increased earnings available to shareholders during the third quarter resulted from a 14% decrease from loan losses ($350,000) and 100% decrease in preferred stock dividends ($261,000) compared to Q3 2011. The decrease from loan losses can be credited to decreased trends of poor performing loans from a year ago. The $261,000 savings from not paying out preferred stock dividends is because of the bank repurchased $17 million of "Series A Preferred Stock", which was issued to the U.S. Treasury during the Troubled Asset Relief Program following the financial crisis. Common shareholders will now receive a larger cut of net income because of this buy back. We were surprised that BKYF took $34M in TARP in 2009 in the first place considering that the bank was profitable and its credit losses in 2009 as a percentage of assets was smaller than money center banks like J.P. Morgan Chase and PNC Financial and the superregional banks headquartered in big Ohio cities like Fifth Third (Cincinnati), Huntington (Columbus) and KeyCorp . We like to refer to Fifth Third, Huntington and KeyCorp as the I-71 Triplets of Ohio Banking since Cincinnati, Columbus and Cleveland are connected by Interstate 71.


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Source: Morningstar Direct

In September, the Bank of Kentucky Financial Corporation announced that it would begin to distribute dividends on a quarterly basis rather than semi-annually as it has historically done. This will take effect in the fourth quarter if a dividend is declared. The bank announced a $0.32 per share dividend during September, an increase of 14% ($.04) from the same period last year.


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Source: Yahoo Finance

Over the past ten years, semi-annual dividends have constantly increased. This shows management's focus on sharing Bank of Kentucky's success with its shareholders. The bank is expanding its range of services provided and client base, generating expectations of continued growth in future years. Though bank profits are suffering due to low market interest rates, Bank of Kentucky is positioning itself well for future success.

Source: Bank Of Kentucky Is Banking On Deposit Growth From The Cincinnati Suburbs

Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.