Expansion into or within the
State of Kentucky

M. Lynn Cooper 
President
Milynco Financial 
 

As a financial institution, where is the best area to expand into or within the state of Kentucky which will potentially yield the quickest growth in terms of deposits?
When a financial institution expands into new markets, they want to grow as quickly as possible to get to profitability and provide a reasonable return on their investment. 
Our expansion analysis evaluates and utilizes several key data points including the following:

·Market Deposit Base

·Market Deposit Growth

·Population and growth trends

·Bank and bank office concentration

·Market Economics

·Geographic location relative to primary routes of travel, airports, interstates, etc.

·Major employers

·University or education facilities and offerings

·Staffing

While there are several factors that are used to evaluate expansion possibilities, one of the key measurements is the deposit base and growth history of deposits, which is the primary focus of this article.
The FDIC recently released bank information relative to deposits as of June 30, 2018. The deposits are indicated by counties, state and institutions and are released only once a year at mid-year.  Loan information is not released by county, only by institution relative to call reports which are required to be submitted quarterly.
Most banks throughout Kentucky as well as the US have experienced much stronger loan demand which puts pressure on the growth of deposits for these institutions. 

The information summarized below is by each county in the state of Kentucky.
There are $81.8 Billion in bank deposits in the Commonwealth of Kentucky.  Of this amount, approximately one fourth of that money resides in the Louisville, Jefferson County market. Approximately 55% or $44.6 billion, of the state’s deposits reside in the top 10 counties shown.

The top 10 counties relative to their deposit totals are:
Jefferson (Louisville) / $20.5 billion
Fayette (Lexington) / $7.4 billion
Daviess (Owensboro) / $2.9 billion
Boone (Burlington/Florence) / $2.9 billion
Kenton (Covington) / $2.7 billion
Warren (Bowling Green) / $2.5 billion
Hardin (Elizabethtown) / $1.6 billion
Campbell (Newport/Alexandria) / $1.5 billion
McCracken (Paducah) / $1.5 billion
Pike (Pikeville) / $1.2 billion       

In order to ascertain specific “areas of growth”, we divided the state into sections indicated below. (See map)

North Central- Includes 11 counties, primarily Jefferson County (Louisville) and surrounding markets.
North- Includes 9 counties, primarily those markets on the KY side of the river below the Cincinnati area.
Central- Includes 13 counties, primarily Fayette County (Lexington) and surrounding markets.
West- I 65 West which totals 31 counties and includes both Owensboro and Bowling Green the 3^rd and 4^th largest cities in the state.
East- I 75 East which total 37 counties the largest of which includes the Pikeville area.
South Central- This includes 19 counties, with no major city in the market. The largest area is the Somerset, Pulaski County area.
 
Concentration of Deposits
Of the top areas in the state, the areas with the largest concentration of deposits ranked by size are indicated below. (See Graphic, Chart A)
North Central / $26.0 billion
West / $17.2 billion
Central / $14.3 billion
East / $10.2 billion
North / $ 8.0 billion
South Central / $6.0 billion

Chart A 

In the past year there were 37 counties out of a total 120 counties in the state, that had negative deposit growth.  This was more than likely due to the competitive nature of the larger community banks and their desire to attract new deposits to fund their loan growth. The greatest concentration of negative deposit growth was in the East with 16 of the 37 counties, nearly one half indicating a decline in deposits from 2017 to 2018.  The market with the fewest number of negative growth counties was the Central part of the state. They had only one county which showed negative growth.

As shown in the next chart, the Central or Lexington area market in the state has increased its share of growth and was first in both dollars and percentage increase.  North Central, including the Jefferson County market was the second largest in deposit growth while the North section was the second strongest in % growth. The West has shown strong growth as well by placing third in both dollars and percentage increase.  (See Graphic, Chart B)

Chart B 

One Year’s Growth
The following illustrates one year’s growth in dollars and percentages relative to the markets indicated. Total growth in the state was $2.5 billion for a total of 3.17% in the past 12 months.
                                              Total Growth                                     % Growth
Central                                  $624 million                                           4.56%
North Central                        $623 million                                           2.45%
West                                      $588 million                                           3.54%
North                                     $316 million                                           4.09%
East                                       $202 million                                           2.02%
South Central                       $157 million                                           2.68%
The number of banks in the State of Kentucky declined by 35 in the past 5 years and the number of offices dropped by 18.  With that said, the Lexington, Fayette County area has increased 3 banks to 29 in total and only declined 4 offices in that same time period.  The other major cities have either stayed flat or declined in the same period.
It becomes evident that in terms of deposit growth that the Lexington, Fayette County area offers substantial opportunities for growth relative to historical significance. If one uses the deposit base and growth analysis as the only resource for a strategic expansion decision, then one would be inclined to choose the larger metro areas as the easiest and quickest way to growth.  Since some metro areas are not attractive to some community banks, then those banks would be inclined to choose the West section or the North section of the delineated areas for solid opportunities of growth. However, keep in mind my beginning statement about not choosing to expand based upon one set of criteria.  Several factors should be considered before spending substantial dollars in expansion or De Novo opportunities.
Below is each county and their respective growth numbers (in thousands) relative to deposits from June 30, 2017 to June 30, 2018 in order from the largest to the least.  Source FDIC.