Community banks in the Bluegrass state that don't want competitors as their correspondents are turning to Kentucky Independent Bank.

In the past year, the Frankfort-based bankers' bank has increased its customer roster by 37%, to 99 banks. And the past 18 months have brought the first out-of-state customers, in Ohio, West Virginia, Tennessee, and Indiana.

"I think the increasing out-of-state ownership of banks has forced banks away from the traditional correspondent banks," said William L. Fallon, president and chief executive of the Independent Bank. "Now they come to us."

Indeed, Kentucky Independent attributes some of it success to providing its customers - community banks that average about $65 million of assets - with more than just loan participations and check-clearing services.

"Stability," said Jon A. Lawson, president and chief executive of the $42 million-asset Bank of Ohio County in Dundee and a founding director of the bankers' bank. "I think that's what we've created for community banks."

Kentucky Independent, which is changing its name to the Bankers' Bank of Kentucky in two weeks, has excelled in its seven years of existence on the notion that community banks need a safe haven for the their correspondent needs in the midst of a wildly changing banking environment.

That philosophy is now starting to pay dividends. Last year, the bank achieved record net income, earning $111,000, or 20% more than the preceding year, Mr. Fallon said.

To date, the bank has not lost a single dollar on charged-off loans, nor has it had a loan go more than 15 days past due, he said.

Beyond this impressive track record, the Independent Bank appeals to community banks that don't want to give competitors their correspondent business. Mr. Lawson's bank, for example, had been doing business with the former Liberty National Bank of Louisville, when Liberty bought a bank within its market area.

"That was not a liveable situation for us to be in," he said.

Since all its customers are banks, a bankers' bank cannot possibly compete with them. In the case of the Kentucky Independent Bank, its customers are also its owners. To do business with Independent Bank, a customer bank first must buy at least $20,000 of its stock.

No customer, however, can buy any more than 5% of Independent, which is therefore "takeover proof," Mr. Fallon said.

Independent does not issue dividends. Its earnings come primarily from the buying and selling of loans, from data processing such as check clearing, and from processing federal funds.

The bankers' bank has "been a godsend for us," said Robert W. Zapp, president of four-year-old Bank of Boone County in Florence. "They make us appear much larger than we are."

Mr. Zapp uses the bank almost exclusively for its loan participations. The relationship allows Mr. Zapp to do deals in the $2 million to $5 million range on a regular basis, he said.

The first bankers' bank was started in Minnesota in 1975. The total number today stands at 16, and efforts are reportedly underway in California and North Carolina to start new ones.

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