The No-Regrets Expansion Plan

Three tips from Lake State on how to enter a new market.

Situated between the bustling city of Minneapolis and the lakeside town of Duluth, MN, sits the headquarters of Lake State Credit Union ($187.2M, Moose Lake, MN), a growing cooperative with six branches and 80 employees.

Chartered in 1939, this institution has spent the past three decades serving a growing swath of rural communities along the 150-mile stretch of Highway 35 that connects Minneapolis and Duluth.

“We advertise heavily with billboards along that route,” says CEO Tim Smith. “Our logo even mimics the interstate sign. We’ve had a stronghold on this section of the market for some time.”

Despite the credit union’s presence, the six counties in its field of membership only presented around 200,000 potential new members. So in 2013, Lake State converted from a federal to a state charter and expanded its field of membership to include two neighboring counties St. Louis County to the north and a portion of Washington County, which includes some suburbs of Minneapolis, to the south. By adding the two regions to its footprint, Lake State increased its potential membership base to 600,000 and expanded its opportunities.

“Lending had slowed in our rural markets, especially for real estate,” Smith says. “But things had already turned a corner in more urban areas and demand was much stronger.”

Within six months of its charter conversion, the credit union established its first new branch in more than two years at the Duluth Technology Village, a shared workspace that attracts entrepreneurs, tech startups, and other young companies. The Duluth market has been a driving force behind the 14.0% annual loan growth and 18.3% annual membership growth the credit union posted in third quarter 2014, according to Callahan & Associates.

How did Lake State ensure the expansion paid off? By following three principles.

1. Wait For The Right Opportunity, Not The Right Now Opportunity

“I’d worked in the Duluth market for years and our VP of commercial lending had more than 30 years experience there as well,”  Smith says. “We knew this market had potential; that’s why we focused there first.”

Yet finding the right location for a branch proved to be a complex decision. The credit union had to think about accessibility factors such as traffic flow and the availability of free parking items that aren’t as pressing in rural communities.

A number of commercial areas as well as several universities fit the bill, but the opportunity to connect with the Technology Village and its younger patrons solidified this location as the true front-runner.

“The goal of changing our demographics to include a larger Gen Y membership base was an important part of this decision,” Smith says.

2. Use A Scout, Not An Army

The two new counties offered growth, but they also required Lake State to adopt a more efficient philosophy to maximize its presence with the resources it had available.

“With our Duluth location, we unveiled a new technology-driven, 2,400-square-foot branch that is roughly one-third the size of the locations we were building before,” Smith says. “This approach has allowed us to enter that market fora few hundred thousand dollars instead of a couple million.”

The new branch uses digital signage and iPads to familiarize members with the credit union’s online and mobile offerings. And video teller units connect members with remote Member Service Specialists for transactions and immediate support.

Support staff works from the credit union’s central headquarters in Moose Lake. The only people physically on-site are a branch concierge, who greets members and walks them through how to use the video units, and a loan officer, who assists members with more complex needs such as an auto, mortgage, or commercial loan.

“Once people use the system, they almost never have an issue because they are still talking to a real person on the screen,” Smith says. “As we start to implement this technology, we’ll also look at expanding our hours of operation, potentially as high as 12 hours a day seven days a week if warranted.”

With a Duluth hub established, the credit union can infill other areas of its northern market using ATMs and stand-alone and drive-in versions of its video kiosks. The credit union will likely follow the same approach when it expands into Washington County and other territories.

3. Getting There Is Only Half The Battle

Lake State is no stranger to working across long distances. But even with a new remote staffing model, the credit union has been cautious not to stretch further or faster than it can effectively manage.

“Four years ago, when I joined the credit union, we operated as a branch management-driven organization where each facility stood on its own,” Smith says. “We have since transitioned to a more horizontal organization.”

To help create unity and constancy within the ranks, all employees now report to a shared department head in their specific area, regardless of the location in which they work.

And a core conversion in 2013 has improved not only the ability of members to connect with Lake State but also the ability of employees and departments to connect with one another.

By building on the advantages of the new Technology Village location, including frequent access to entrepreneurs and startups, Lake State employees in Duluth have been able to support several areas of the balance sheet.

For example, as of third quarter 2014, member business loans at Lake State have grown at roughly 10 times the average rate of asset-based peers year-over year, without any corresponding uptick in delinquency.

“If you know what your targets are as an organization and are willing to keep that focus long term, things will pay off in the end,” Smith says.

March 19, 2015

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