Wednesday, August 4, 2004

Ky. bank's CEO aims to expand

By Jeff McKinney
Enquirer staff writer

Bank of Kentucky Financial Corp.
Headquarters: Crestview Hills
Chief executive: Robert Zapp
Primary business: Parent of Bank of Kentucky, which offers banking services to consumers and business from 26 branches in Boone, Kenton, Campbell and Grant counties.
Employees: 264
Market/ticker: Over-the-Counter Bulletin Board, ticker BKYF.
Stock performance: 52-week high/low: $30.15 (May 18)/$26.25 (Tuesday).
Revenue: $35.6 million in 2003, up from $27.4 million in 2002.
Profits: $9.36 million, or $1.57 a share, in 2003, up from $8.45 million, or $1.42 a share, in 2002
Sources: Bank of Kentucky; Bloomberg News
CRESTVIEW HILLS - Robert Zapp has driven to Lexington five times and Louisville three times in the past several months.

Twenty-one months after his Bank of Kentucky Financial Corp. paid $15 million to buy most of the operations of the defunct Peoples Bank of Northern Kentucky, Zapp is looking for a fresh acquisition.

Zapp, president and chief executive of the Bank of Kentucky's parent, says he's looking in Lexington and Louisville because he wants to expand beyond the bank's 26 branches in Boone, Kenton, Campbell and Grant counties.

He said there are several community banks in either city that fit the criteria the Bank of Kentucky would be looking for in acquisition candidates.

"We like Louisville and Lexington because they are fast-growing markets, with Louisville being the fastest-growing in the state," he said. "Both of those markets have a sizeable number of community banks that have done well, so they embrace what we're all about.

"We just think that we could compete well in those areas with the model that we have here," he said.

Zapp also plans to add two more branches in Campbell County to boost the bank's presence there.

And though he emphasized that the Bank of Kentucky does not have to do deals to keep growing, Zapp said acquisitions could help it achieve some lofty profitability levels quicker than just organically growing the current franchise.

"I would love to do a deal tomorrow, but we're not feeling any pressure to do a deal," he said.

The bank may want to expand to other Kentucky cities because it already shares market dominance in Northern Kentucky with Cincinnati-based Fifth Third, said John Adams, senior vice president and branch manager at Robert W. Baird in Cincinnati.

Based on the latest data available from the Federal Deposit Insurance Corp., Fifth Third Bank of Northern Kentucky had deposits of $1.09 billion and a deposit market share of 25.8 percent in Boone, Kenton and Campbell counties as of June 30, 2003.

Bank of Kentucky had deposits of about $662 million and a deposit market share of 15.6 percent in the same area.

"By moving into those markets, they could attract new customers, add deposits and increase fee income by cross-selling services," Adams said.

Earnings growth

The Bank of Kentucky might be ready to do a deal to regain the profitability levels it achieved in recent years, said Robert Clark, a senior research analyst at SNL Financial in Charlottesville, Va.

He said the Bank of Kentucky's profits have slowed the past coupled of years, posting a 23 percent rise in 2002 and 10 percent increase in 2003. It most recently posted a 4 percent gain in second-quarter profits.

"It seems like it would be difficult for them to get the same type of earnings growth without an acquisition," he said.

Clark also said the bank's stock is strong enough to allow it to do a deal, even though it closed at a 52-week low Tuesday of $26.25, down 50 cents. He said the bank traded at a multiple of 17.6 times earnings for the last 12 months.

"Based on their pricing multiples, they have the capacity to acquire several community banks in their region," Clark said.

The Golden Triangle

It's not likely the Bank of Kentucky will look across the river into Ohio to grow, at least for now. It wants to remain focused on expanding to the south in what Zapp describes as the "Golden Triangle" - Northern Kentucky, Lexington and Louisville.

In Kentucky, Zapp said, the candidates could be banks or thrifts with assets up to $400 million, just less than half the size of his $833 million-asset bank.

Zapp said his goals are to make Bank of Kentucky a higher-performing bank, with return on assets of 1.75 percent and return on equity of 18 percent to 20 percent - levels that would make any bank among the industry's best performers.

During this year's second quarter, Bank of Kentucky reported return on assets of 1.27 percent and return on equity of 15 percent.

Zapp said his bank reached the higher levels for years before the Peoples Bank deal, but those number have slipped a bit because of expenses tied to that purchase.

The Bank of Kentucky was able to buy eight branches, $162 million in deposits and $140 million in loans from Peoples Bank, which was forced to sell its operations in 2002 because of ties to former home builder Bill Erpenbeck.

Erpenbeck and two others have been sentenced to federal prison after they pleaded guilty to bank fraud and admitted diverting $34 million in home sale proceeds to company accounts at Peoples and U.S. Bank. Two Peoples executives also have pleaded guilty for their roles in the scandal.

A big acquisition might prompt the bank to issue more shares, which would increase the liquidity of its shares, Zapp said. That might help the bank get listed on the Nasdaq Stock Exchange. The Bank of Kentucky is now traded on the Over-the-Counter Bulletin Board.

Zapp says as larger regional banks continue to stray away from buying smaller community banks, Bank of Kentucky will have more opportunity to buy smaller banks.

He also said the stronger that the bank performs, the less likely it is that it will be acquired.

"Our strategy is not to sell," he said.


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