Bank of Queensland's investment in distribution outlets in untapped regional markets and its strategy of incremental takeovers of smaller rivals is paying off. The bank managed a strong increase in earnings in the year to September while holding its margin intact.The record $129.8 million net profit in the year to August 2007 was 40 per cent up on the previous year. The bank's preferred, and better measure - normalised cash profit after tax of  $106.1 million - was 22 per cent higher than the previous year. The normalised profit strips out the gain on sale of the credit card business to Citibank.In previous years the bank has sacrificed margin for growth but the net interest margin of 1.81 per cent was down only two basis points.The BOQ profit reflects only three weeks of the affect on its business of the credit crunch, though the bank is probably a beneficiary of this episode as mortgage managers and lenders dependent on securitisation lift interest rates and reduce sales.Loan approvals increased 30 per cent to $13 billion, or twice system growth. Retail deposits were up 33 per cent compared to system growth of nine per cent (these figures are affected by the acquisition of Pioneer Permanent Building Society at the end of 2006).Expenses rose 16 per cent from $248 million to $287 million but because of the strong revenue growth the bank's cost to income ratio fell from 65.8 to 62.6 per cent. The bank said a review of salaries across the bank to catch up with market rates of pay pushed employee costs up by about 12 per cent, though this was described as a one-off.The bank's return on equity rose from 14.6 per cent in 2006 to 15.4 per cent. On this profit measure BOQ is improving, but remains off the pace if the ROE of major banks, including St George Bank, is the benchmark.With retail deposits increasing by 33 per cent to $9.2 billion the bank was able to fund 56 per cent of its growth in loans from deposits. The bank attributed its strong deposit growth to the appeal of its internet-based savings account and the launch of business deposit products.The bank will top up its capital with an issue of $150 million of hybrids - non-cumulative preference shares that will pay fully franked dividends.Chief executive David Liddy put the bank's strong growth down to the success of its franchise system, its owner-managed branches. The bank converted 15 corporate branches to OMBs during the past year.Lending growth in those branches jumped from an average of four per cent in the six months before conversion to 23 per cent after conversion.Liddy said the bank was aiming to maintain lending and deposit growth at close to twice system growth and growth in cash earnings per share of 10 to 12 per cent.