The Golden Rule Approach to Sales and Service (GRASS) Stonier Graduate School of Banking Traditional Capstone March, 2015

Kelly Potes Senior Vice President ChoiceOne Bank

Table of Contents Executive Summary .............................................................................. 1 Introduction and Background ................................................................ 4 History ............................................................................................ 5 Location .......................................................................................... 5 Market Share .................................................................................. 6 Competition .................................................................................... 7 Financial Condition ...................................................................... 10 Business Model ............................................................................ 11 Strategy/Implementation ..................................................................... 14 GRASS ......................................................................................... 14 Why and How ............................................................................... 15 The Payoff .................................................................................... 21 Future Benefits ............................................................................. 22 Individual and Team Responsibilities .......................................... 23 Schedule for Change .................................................................... 26 Financial Impact .................................................................................. 27 GRASS Pro Forma ....................................................................... 28 Non-Financial Impact .......................................................................... 30 Conclusion ........................................................................................... 35 Bibliography ........................................................................................ 36

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Executive Summary Banking has significantly changed over the last 100 years. Increasing technology has especially changed the way clients utilize banking services. However, with the advent of technology to handle the processing of transactions and payments, the need for humans to provide advice has increased as the need for retirement, lending, risk management, legal, regulatory and tax issues have become more complex. It seems that clients have less time to deal with these complex issues and require a financial partner who can provide professional advice with a client’s best interests at heart. In order for a client to get the advice and service they desire, it takes a bank that has a vision of helping people succeed and a culture within the bank where employees seeks to serve others. One of the oldest examples in human history of service above self is the Golden Rule. The verse most sited as the Golden Rule is found in the Bible. Matthew 7:12 states: “Therefore, whatever you want men to do to you, do also for them…”.1 When an employee or client feels a bank has their best interests at heart, it creates trust with the institution. This trust, along with a belief the client is getting knowledgeable advice, creates loyalty. This loyalty translates into a client who does not seek advice from other sources and easily accepts the bank’s products and services as long as pricing seems fair. Because of this trust, the bank has more products and services per client, higher margins, and subsequently higher profit. Employee satisfaction is increased because there is a sense of purpose helping others and a positive work environment. The community benefits by having a local institution made up of

1

Thomas Nelson, Inc. The NKJV Study Bible, (Nashville, TN:Thomas Nelson, Inc.,1997,2007) Page 1

local employees seeking to help others within the community. Higher profits allow the bank to contribute both human capital and money to local community efforts. Shareholders own a bank that provides a valuable service and provides a superior monetary return to the shareholders. These results sound quite compelling; however, it does not come without a great amount of work and diligence. As mentioned earlier, there have been many technological changes that have made banking more efficient, but the financial knowledge of employees have not kept pace with the changes in our society. Employees who at one time merely processed simple transactions need to provide more complex recommendations to clients that enter the branch. Historically banks hired employees who were fast and accurate in processing transactions, were highly detailed and did not need to provide much in the way of advice. Now that technology can handle transactions more quickly and efficiently, the skill set for employees has changed towards more personal service and advice. Without vision or leadership, employees tend not to work as a cohesive unit, become more departmental, and a breakdown between client-facing employees and upper management results, with negative consequences. As companies become larger, this often happens. Due to the need for financial institutions to become larger because of regulatory and competitive forces, banks have a difficulty maintaining the desired vision and culture throughout the organization. ChoiceOne Bank (“the bank”) has noticed significant growth in the last eight years through mergers and organic growth. While the bank has performed well against its peers, it has recently noticed a decrease in loan yields greater than its peers. In order to reverse this trend and reinvigorate its culture, the bank needs to adopt a stronger service culture and more

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accountability of its employees. The new culture and service standard will be called the Golden Rule Approach to Sales and Service (or “GRASS”). GRASS will require 100% buy-in of senior management and support of up to 90% of all the employees to be effective. It will create the need of a committee called the GRASS Team to help motivate and create consistency amongst departments. The endeavor will be ongoing; however, a significant amount of work must be done to get the support needed for success. It must be radical and compelling for employees to perceive the change in culture and knowledge needed and for clients to perceive an improvement in service and advice. It is possible that up to 10% of current staff may opt out of the process and employment. The results of this change in culture should also provide extraordinary financial performance for the bank and its shareholders.

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Introduction and Background Why was ChoiceOne Bank formed? ChoiceOne Bank is actually the combination of three community banks that were each almost 100 years old before they merged. The oldest of these three banks was Sparta State Bank, but the reasons for their formation are the same. Why were the incorporators of Sparta State Bank so intent on starting the bank in 1898? It was undoubtedly because the people of the newly incorporated community wanted something better for their families and their new businesses. The close knit community that was emerging from a rural outpost in West Michigan to a small community expressed a need for housing, business expansion and agricultural development. The new bank was started by local business leaders who lived in Sparta and knew that in order for their families, friends and community to grow and succeed, they needed a bank to provide credit to finance the growth, as well as a safe place to put their hard-earned savings. They wanted to help their neighbors not only have access to credit but also provide financial advice to help the new town grow. This is essentially the same reason ChoiceOne exists today. How we do things and what we do have changed over time, but the main purpose of our business is to improve the lives of the people in our communities we serve. We can best serve the communities by playing a personal role, by having local employees interacting in the community, thus helping the individuals and businesses in their community, and by taking an active interest in their success and treating them as friends and neighbors.

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History As mentioned earlier, ChoiceOne was incorporated in 1898 as Sparta State Bank in Sparta, Michigan. Here is a brief history of the current ChoiceOne Bank. 1898 Sparta State Bank, Incorporated 1955 Sparta State Bank acquires Peoples State Bank of Sparta 1996 Sparta State Bank changes name to ChoiceOne Bank as it branches into the neighboring community of Cedar Springs. 2006 ChoiceOne Bank merges with Valley Ridge Bank. Valley Ridge Bank was previously known as Kent City Bank (incorporated 1904) and changed its name to Valley Ridge Bank (2006) when it purchased Grant State Bank (incorporated 1906).

Location ChoiceOne Bank is a state chartered bank located in West Michigan. ChoiceOne has 12 branch offices in 11 communities in the counties of Kent, Ottawa, Newaygo and Muskegon.

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Market Share ChoiceOne Bank has over 83% of the potential deposits in the communities of Sparta, Kent City and Grant. These are the communities in which the bank has been located for over 100 years. In the remaining communities, ChoiceOne Bank has a market penetration between 2% and 54% from branches that have been built in the last 18 years.

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ChoiceOne Bank

Market Sparta, MI Kent City, MI Coopersville, MI Grant, MI Rockford, MI Comstock Park, MI Ravenna, MI Cedar Springs, MI Newaygo, MI Muskegon, MI Fremont, MI Grand Rapids, MI White Cloud, MI Total

Company Total Active Branches 2014 3 1 1 1 1 1 1 1 1 1 1 0 0 13

Company Total Deposits 2014 ($000) 132,285 53,228 38,833 36,776 30,519 28,977 25,354 23,232 22,405 21,104 16,122 428,835

Company Total Deposit Market Share 2014 (%) 83.62 100.00 52.49 100.00 9.55 11.51 53.75 23.64 29.71 2.38 11.60 3.57

Company YoY Deposit Growth 2014 (%) (1.77) 15.82 3.17 14.25 20.39 6.93 1.00 27.75 (0.21) 18.86 (11.81) 5.97

Company 5-Year Deposit CAGR 2014 (%) (0.63) 7.98 12.87 5.33 10.74 15.04 6.27 10.84 4.91 5.36 7.13 4.92

Market Market Total Total Active Deposits Branches 2014 2014 ($000) 4 158,190 1 53,228 2 73,979 1 36,776 10 319,443 6 251,801 2 47,166 4 98,283 3 75,407 25 887,899 5 139,039 115 9,829,618 1 38,926 179 12,009,755

Market YoY Deposit Growth 2014 (%) 0.01 15.82 4.35 14.25 6.01 0.72 1.93 8.74 2.62 0.39 3.12 1.06 2.43 1.32

Source SNL Financial

Competition As can be seen by the following tables, ChoiceOne Bank competes against large national and regional banks as well as other community banks. The bank also competes against credit unions and other financial institutions such as insurance and investment companies.

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Market 5-Year Deposit CAGR 2014 (%) 0.34 7.98 7.62 5.33 3.51 3.02 2.86 4.41 2.75 (2.32) 1.35 5.20 (0.99) 4.28

Total Deposit Rank 2014 Kent, MI 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Regulatory Industry Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Savings Bank Bank Bank Bank Bank Bank

Muskegon, MI 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 Bank 10 Bank 11 Bank - Savings Bank

Total Active Branches 2014

Total Deposits 2014 ($000)

Total Deposit Market Share 2014 (%)

Institution Company Name

Institution State

Fifth Third Bank Wells Fargo Bank NA JPMorgan Chase Bank NA Huntington National Bank Mercantile Bank of Michigan Chemical Bank Macatawa Bank Comerica Bank Old National Bank PNC Bank NA Bank of America NA Northpointe Bank ChoiceOne Bank Independent Bank Flagstar Bank FSB

OH SD OH OH MI MI MI TX IN DE NC MI MI MI MI

41 1 29 25 6 12 12 9 4 14 8 1 7 10 7

3,108,871 1,759,544 1,620,708 1,514,137 900,070 714,491 458,544 413,298 379,001 375,932 288,987 275,702 268,241 237,563 205,054

23.88 13.51 12.45 11.63 6.91 5.49 3.52 3.17 2.91 2.89 2.22 2.12 2.06 1.82 1.58

United Bank of Michigan Grand River Bank Northern Trust Co. First National Bank of America First National Bank of Michigan Other Market Participants (7) Market Total

MI MI IL MI MI

6 1 1 1 1

190,717 107,322 64,030 39,369 32,031

1.46 0.82 0.49 0.30 0.25

4

65,671

0.50

200

13,019,283

100.00

Fifth Third Bank PNC Bank NA Comerica Bank Huntington National Bank Community Shores Bank Shelby State Bank ChoiceOne Bank JPMorgan Chase Bank NA Talmer West Bank Independent Bank FirstMerit Bank NA Flagstar Bank FSB

OH DE TX OH MI MI MI OH MI MI OH MI

8 8 5 5 3 3 2 2 1 1 1 0

353,825 333,172 212,528 164,620 163,431 52,915 46,458 31,607 26,108 18,574 5,946 -

25.11 23.64 15.08 11.68 11.60 3.76 3.30 2.24 1.85 1.32 0.42 -

39

1,409,184

100.00

Market Total

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Total Deposit Rank 2014

Regulatory Industry

Institution Company Name

Institution State

Total Active Branches 2014

Total Deposits 2014 ($000)

Total Deposit Market Share 2014 (%)

Newaygo, MI 1 2 3 4 5 6

Bank Bank Bank Bank Bank Bank

Independent Bank ChoiceOne Bank Huntington National Bank Fifth Third Bank Chemical Bank Shelby State Bank Market Total

MI MI OH OH MI MI

3 3 2 1 1 1 11

91,928 75,303 46,904 41,951 34,062 15,476 305,624

30.08 24.64 15.35 13.73 11.15 5.06 100.00

Ottawa, MI 1 2 3 4 5 6

Bank Bank Bank Bank Bank Bank

Fifth Third Bank Chemical Bank Macatawa Bank Huntington National Bank JPMorgan Chase Bank NA West Michigan Community Bank PNC Bank NA Flagstar Bank FSB

OH MI MI OH OH MI

14 11 16 11 7 5

755,126 747,515 696,290 587,043 275,078 188,941

19.78 19.58 18.24 15.38 7.21 4.95

DE MI

5 4

134,392 131,428

3.52 3.44

Comerica Bank Talmer West Bank Mercantile Bank of Michigan ChoiceOne Bank Community Shores Bank FirstMerit Bank NA Bank of America NA First Community Bank Market Total

TX MI MI MI MI OH NC MI

4 2 1 1 1 2 0 0 84

97,857 87,315 56,003 38,833 14,055 7,667 3,817,543

2.56 2.29 1.47 1.02 0.37 0.20 100.00

334

18,551,634

100.00

7 8 9 10 11 12 13 14 -

Bank Savings Bank Bank Bank Bank Bank Bank Bank Bank Bank

Grand Total Analysis current as of 1/24/2015 Source: SNL Financial

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Financial Condition ChoiceOne Bank is well capitalized and has performed relatively well over the last ten years due to its management of risk and pricing policies. As is shown below, the bank has performed better than its peers during the last four years on interest expense, net interest income and noninterest income, and total net income. The bank has generally performed more poorly in noninterest expense due to its relatively small branches. An area that is concerning is the trend of going from a higher-than-average interest income yield to a lower-than-average interest income yield compared to peers. Because ChoiceOne has focused on growing loans in the last few years, it seems to be competing more on price to attain growth. ChoiceOne Bank

9/30/2014

Earnings and Profitability Percent of Average Assets: Interest Income (TE)

BANK

12/31/2013

12/31/2012

12/31/2011

PG 3 3.97

PCT 35

BANK 3.93

PG 3 3.99

PCT 45

BANK 4.20

PG 3 4.23

PCT 47

BANK 4.56

PG 3 4.50

PCT 53

3.76

- Interest Expense Net Interest Income (TE)

0.22 3.54

0.43 3.53

16 51

0.28 3.65

0.50 3.49

18 63

0.51 3.69

0.66 3.56

31 59

0.73 3.83

0.90 3.60

33 66

+ Noninterest Income - Noninterest Expense - Provision: Loan & Lease Losses Pretax Operating Income (TE) + Realized Gains/Losses Sec Pretax Net Operating Income (TE) Net Operating Income Adjusted Net Operating Income Net Inc Attrib to Min Ints Net Income Adjusted Sub S Net Income

1.28 3.25

0.75 2.87 0.11

85 72 32

1.25 3.34 0.06

0.78 2.92 0.16

83 73 33

1.30 3.29 0.51

0.78 2.93 0.30

84 71 77

1.23 3.24 0.76

0.70 2.93 0.53

85 68 74

1.35

62

1.50

1.25

65

1.19

1.16

47

1.05

0.89

49

0.02 1.37

82 65

0.03 1.53

0.02 1.27

71 66

0.08 1.28

0.07 1.25

69 48

0.03 1.08

0.05 0.95

58 47

1.02 1.02

59 57

1.03 0.80

0.95 0.92

60 42

0.87 1.00

0.92 0.90

46 54

0.73 0.83

0.67 0.68

46 50

1.05 0.00 1.07 1.07

0.00 0.91 1.02

98 66 59

0.00 1.03 1.03

0.00 0.86 0.95

98 65 60

0.00 0.87 0.87

0.00 0.83 0.92

98 49 46

0.00 0.73 0.73

0.00 0.60 0.67

98 47 46

Int Inc (TE) to Avg Earn Assets

4.18

4.24

46

4.40

4.28

57

4.82

4.55

68

5.28

4.85

77

Int Expense to Avg Earn Assets

0.25

0.46

17

0.32

0.53

19

0.59

0.71

35

0.85

0.96

38

Net Int Inc-TE to Avg Earn Assets

3.77

63

4.08

3.73

73

4.24

3.83

75

4.43

3.88

82

3.93

0.16

46

0.45

0.29

75

0.61

0.51

67

1.01

0.80

67

34.01

70

5.02

17.79

34

4.14

11.81

40

2.55

7.50

39

0.03 1.54 0.05 1.59 1.07

Margin Analysis:

Loan & Lease Analysis: Net Loss to Average Total LN&LS Earnings Coverage of Net Losses (X)

0.07 31.98

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LN&LS Allowance to LN&LS Not HFS LN&LS Allowance to Net Losses (X) LN&LS Allowance to Total LN&LS Total LN&LS-90+ Days Past Due -Nonaccrual -Total Liquidity Net Non Core Fund Dep New $250M Net Loans & Leases to Assets Capitalization Tier One Leverage Capital Cash Dividends to Net Income Retained Earnings to Avg Total Equity Rest+Nonac+RE Acq to Eqcap+ALLL Growth Rates Total Assets Tier One Capital Net Loans & Leases

1.52

46

1.50

1.61

48

1.88

1.77

64

1.63

1.93

43

20.55

68

3.34

12.28

27

3.12

7.41

37

1.62

4.85

24

1.50

46

1.49

1.60

48

1.87

1.74

64

1.62

1.90

43

0.06

65

0.00

0.06

48

0.20

0.07

82

0.10

0.08

71

1.06 1.18

65 62

0.99 0.99

1.35 1.47

48 44

0.74 0.94

1.91 2.06

29 33

1.24 1.34

2.64 2.79

34 33

6.30

77

11.26

5.39

69

8.12

3.45

64

15.68

5.83

78

63.03

65.04

40

60.74

63.83

38

60.49

62.30

42

63.78

62.82

49

9.24 47.49

10.11

32

9.28

9.93

36

8.76

9.66

29

8.29

9.40

24

29.10 5.96

67 39

46.66 4.56

34.12 4.95

62 45

39.70 4.43

32.24 4.48

57 45

47.91 3.31

28.25 2.73

69 42

13.82

53

12.53

17.51

45

13.33

23.10

40

14.79

31.15

35

6.93

5.99

63

1.11

3.20

43

2.54

5.13

39

3.66

4.09

52

7.51 7.97

7.21 8.73

60 53

7.62 1.52

6.67 5.76

64 33

7.84 -2.75

6.45 3.64

62 27

6.29 0.75

5.81 -0.57

54 58

1.38

19.85 1.37 0.04 1.20 1.24

14.58

4.74 11.43

Average Total Assets Total Equity Capital

521,120 63,366

500,404 60,354

496,881 59,811

484,266 57,264

Net Income Number of banks in Peer Group

4,180 1,238

5,141 1,220

4,307 1,200

3,538 1,170

Source: UBPR Peer Group: Insured Commercial Banks between $300 million- $1.0 Billion

Business Model ChoiceOne Bank is owned by a holding company, ChoiceOne Financial Services, Inc., and is publicly traded under the symbol COFS. COFS is broadly held, mainly by local shareholders. There is no shareholder that owns more than 5% of the corporation. COFS is a thinly traded Over-the-Counter (OTC) common stock. ChoiceOne Bank also has an insurance subsidiary which provides investment services, life insurance and annuities to the bank’s clients.

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ChoiceOne Bank is a typical main street, community-type bank taking deposits from local business, municipalities and individuals and lending out those funds to community businesses and individuals. ChoiceOne employs approximately 160 team members, as measured in fulltime equivalents. ChoiceOne operates branch offices in the Michigan communities of Sparta, Comstock Park, Coopersville, Rockford, Cedar Springs, Kent City, Ravenna, Newaygo, Muskegon, Grant and Fremont. The branch offices are primarily located in small towns surrounded by agriculture. As a result, the bank has a significant amount (10%) of its loan portfolio in agricultural credits. The branch offices of Rockford, Comstock Park and Muskegon are not located in city centers but on the edge of larger metropolitan areas. ChoiceOne Bank has historically been fairly conservative in its underwriting of loans and has consistently performed above its peers in profitability. Even during the down turn of 2008–2009, the bank operated at a profit and continued to pay dividends to shareholders. The bank declined to take Troubled Asset Relief Program (TARP) funds during the banking crisis. The bank’s current business model is to be located primarily in smaller towns or the outskirts of a larger city on a travel route to the smaller towns served. The bank has concentrated its loan origination mainly on small to medium commercial loans as well as residential mortgages. The deposit generation of the bank has an equal concentration of retail, small to medium commercial and municipal public funds. The bank attempts to compete on service with its peers rather than price, but as noted earlier, there has been some recent attempts to compete on price in the commercial loan portfolio for growth. The bank recently decided to formulate a plan to service the entire Kent County area (pop. 602,622—2010 US Census) entering into the Grand Rapids,

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Michigan, marketplace (pop. 188,040—2010 US Census). This will be a bold move for ChoiceOne Financial Services, and it must be very intentional on how it will enter the city as ChoiceOne does not have the marketing budget to compete with the major banks in the market. The overall strategy for ChoiceOne Bank in 2015–2019 is to grow its assets and earnings by at least 10% per year, improve its operational efficiency, and further improve its culture to impact the experience of its employees, clients, communities and shareholders.

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Strategy/Implementation The strategy that will be employed to implement the change in culture needed must be bold and continuous. The change in culture will start with identifying the need within Senior Management and securing a 100% buy-in from this group. Next a small working group made up of Senior Management, marketing and human resources will determine if outside help is needed to develop and kick off this new endeavor. An, all employee, evening event will be scheduled to present the ideas to the entire organization at one time. Based upon feedback from this event, a team will be developed, the GRASS Team, made up of employees from each department of the bank. This new GRASS Team will have between 7-10 members. Once established, this group will act as a liaison between all employees and Senior Management. This team will also be charged with keeping the ideas behind GRASS fresh and motivating within the bank.

GRASS To retain the personal banking connection without morphing to an institutionalized conglomerate will require an implementation process in which the client feels ChoiceOne is a true partner in their financial success. This requires taking on the Golden Rule Approach to Sales and Service (GRASS). As mentioned earlier, this needs to be a radical approach in order to truly differentiate ChoiceOne from the competition. Essentially the bank needs to change its culture, so that it operates more as a cohesive unit, and increase the knowledge and skill level of its employees while at the same time provide superior service and advice to its clients.

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Why and How The Golden Rule tells us that we should step into the client’s, employees’, shareholder’s or community’s shoes and see through their eyes. It is also assumed to do what is morally right. For example, no one should be dishonest because that’s what he thinks his employer or client wants him to do. It also implies that by doing what is in the best interest of the person one is trying to help, one will be rewarded; however, that should not be the motive. The side effect of the Golden Rule is trust, which leads to loyalty. When you have a loyal customer or employee, they will rarely leave you, seek other alternatives, or speak badly of you. They will do just the opposite: they will become ambassadors for you. One must have honorable intentions because if a client thinks you are doing something for them in a quid pro quo or “you scratch my back, I’ll scratch yours” basis, then what we do merely becomes a transaction where little trust or loyalty is built. A person or business must always guard against the temptation to gain the confidence and trust of someone solely for monetary gain. When that happens, the whole attitude of the person serving changes and, in the end, will end up doing more damage to the relationship than if we had never tried to build that type of trust. It may take time to build trust through Golden Rule principles. There have been many conartists who have gained the trust of individuals only to take advantage of them. Many people are

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wise to such attempts, as they should be, so it may take time for people to know that this is the real thing. So a side effect of the Golden Rule is both psychological, in the feeling of wellbeing by helping someone, and monetary, as we are not competing on price. A loyal person is not quiet. As loyal employees and clients are added, they cannot help but tell others of their extraordinary experience. ChoiceOne needs to adopt a methodology that is true and unique to the organization and not just copy what has been suggested or done by others. By looking at the makeup of ChoiceOne’s employees, clients, shareholders and community, a vision which incorporates the Golden Rule and sense of family is the most compelling. In 2014, ChoiceOne employed the services of RoundPegg to measure the firm’s core values by surveying the employees. The results showed the company’s top four values as: 

Being Supportive. ChoiceOne employees enjoy assisting others and helping them achieve success.



Being People Oriented. Employees enjoy interacting with others and consider people before pragmatics.



Paying Attention to Detail. ChoiceOne employees tend to focus on specifics over generalities and ensure that communications are clear and detailed.



Taking Individual Responsibility. Employees tend to prefer environments where people hold themselves accountable to each of their individual responsibilities.

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These results indicate that a large majority of ChoiceOne employees are motivated to assist others on a deep level providing specific help and advice. ChoiceOne employees have a desire to take individual responsibility and hold each other accountable. This is a good environment to put in place the Golden Rule principles. As mentioned earlier, I call these Golden Rule principles the Golden Rule Approach to Sales and Service, or GRASS. Through GRASS the bank is trying to achieve: 

Employee satisfaction and motivation by having a sense of purpose.



A superior customer experience, where the client feels the bank is their financial partner with their best interests at heart.



Betterment within the communities we serve as the bank and its employees give of themselves, and the individual financial lives of the bank’s clients thrive because of their interactions with ChoiceOne.



Shareholder satisfaction of owning a company with a greater purpose. As our clients thrive and grow, so will the bank as it will no longer be competing in the market place on price.

The GRASS is in line with ChoiceOne’s current mission statement, which states: “ChoiceOne is an independent, community based company. Our goal is to mutually enhance the financial well being of our clients, communities, employees and shareholders. The ChoiceOne Team is dedicated to be THE resource for financial services and solutions.” I believe GRASS explains the why and how behind the bank’s mission statement. I think that deep down, all individuals want to do what is right. The GRASS defines what is right.

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In his book, Start with Why, How Great Leaders Inspire Everyone to Take Action, Simon Sinek describes what he calls the Golden Circle.2

With the Golden Circle, Mr. Sinek explains that truly successful leaders and their companies must think, act and communicate from the center of the circle outward. According to Mr. Sinek, “People don’t buy what you do; they buy why you do it”. 3 

Why: o Purpose, cause or belief. It is a vision or an idea. The Why is developed by a leader or small group.



How: o

Explains the difference and improvement made. Examples include a differentiating value proposition, proprietary process or unique selling proposition. The How is developed by senior management.

2

Simon Sinek, Start With Why, How Great Leaders Inspire Everyone to Take Action (London, England: Penguin Books, LTD, 2009) 3 IBID Page 18



What: o The products or services a company sells or the job functions within the system. The What is determined by broader bank management and performed by everyone in the company.

Mr. Sinek gives the example of Apple, Inc. He explains why Apple is different than other computer companies. Apple was started by two visionaries who wanted to challenge the way people perceived the world (Why), and they chose to do it by making computers (What). They thought the personal computer was the way for the little man to take on the corporate world. The personal computer would level the playing field and change the way the world operated. This is the manner in which they differentiated themselves from IBM, the big company for business. One must ask, “If this is such a better approach, why doesn’t everyone do it well?” The reason all banks or other companies do not operate in this manner is because it is difficult and takes continuous reinforcement. The reason it is difficult is because individuals typically default to what is most advantageous to them, and it takes more effort to look at it from the other person’s perspective. Roxanne Emmerich in her book, Thank God It’s Monday, How to Create a Workplace You and Your Customers Will Love, describes how a business can create an environment where employees look forward to coming to work because the culture is built on trust, integrity, accountability and fun4. Ms. Emmerich describes, much like Mr. Sinek, how the transformation must begin with a vision and must start with the employees. Ms. Emmerich recommends the vision have three elements: 4

Roxanne Emmerich, Thank God it’s Monday, How to Create a Workplace You and Your Customers Will Love (Upper Saddle River, NJ: FT Press, 2009) Page 19



The vision statement should be short, no more than 10 to 14 words and use power words like “always”, “every”, or some other way of declaring a result.



It should be visual. An example would be John F. Kennedy’s declaration to see a man on the moon; Bill Gates’ vision to see a computer on every desk.



A vision should declare the company’s intention to be of service to others. Note that Bill Gates’ company, Microsoft, didn’t make computers, they made the software that ran the computers. His vision was to make the world a better place.

The turning point, according to Ms. Emmerich, is when everyone sees it, gets it and buys into participating to make it happen. She indicates that not only the employees will notice the difference, but so will friends, family, clients, shareholders and community. This viral response to the vision will begin taking on a life of its own. However, to keep it going, it must be reinforced continuously. To get things going, management must be 100% committed. Ms. Emmerich also believes that there must be a defined beginning of the vision by having a major kick off. This kick off is an event where everyone in the company physically meets in one place without the distractions of work. It is a fun atmosphere with a lot of hoopla. The vision described creates the picture of a more fun and motivated workplace. Ms. Emmerich writes; “This is a time when a pact is made by everyone to a new way of doing business, holding each other accountable and helping each other, eliminating excuses and politics. They start becoming something they could never have been before—a family”5. Ms. Emmerich indicates that after this commitment is made, it needs to be reinforced daily with employee morning huddles and high fives. Also required is a team (our GRASS Team) made up 5

Roxanne Emmerich, Thank God it’s Monday, How to Create a Workplace You and Your Customers Will Love (Upper Saddle River, NJ: FT Press, 2009) Page 20

of 7 to 10 volunteers consisting of enthusiastic employees who are really good at getting things done. Each should come from varying positions and departments, with only one executive on the team. The charge of the team is to sustain and accelerate breakthroughs in performance according to an implementation formula. The team focuses on celebrating and documenting successes so that everyone can do more of what works and let go of what doesn’t. The charge of the team is also to help finalize a company’s sales and service standards and get everyone more engaged, consistent, and living the company’s vision and values. As can be seen, everything that matters to the success of the vision must be measured. Ms. Emmerich indicates that one of the best measures is the use of mystery shoppers and client surveys. After measurement, there must be honest feedback.

The Payoff With this process, the bank should expect to achieve its strategic goal of remaining independent by having a higher than peer level of earnings and continued growth. The strategic goals for the next three years for the bank are: 

Earnings growth rate of 14–15%



Return on Assets (ROA) above 1.20%



Asset growth rate above 10%

Specific goals for 2015 are as follows: 

Increase loan production 8% over 2014

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

Increase deposit balances 4.6%



Increase earnings by 15%



Concentrate loan and deposit growth on small to medium size business accounts



Add remainder of Kent County in our market area, focusing on Grand Rapids, MI

Future Benefits Obviously, ChoiceOne has very aggressive goals over the next three years. In order to achieve these results, maintain earnings, and enter a new market, the bank needs to concentrate on differentiating itself from the market, maintain margin, and not incur significantly more operating costs. This goal can only be accomplished by being better than the competition in sales and service so that the bank will not have to compete as much on price. Because of ChoiceOne’s relatively small size, it cannot sustain a media marketing budget that would be cost effective. The bank will have to rely more on word of mouth experiences. It will not get that word of mouth impact unless it is significantly better than the competition in serving clients. The bank could differentiate itself in the new big city market of Grand Rapids by offering the small town charm, yet professional image of community banking, to the big city. Small to medium size businesses in Grand Rapids are treated as such by the large national and regional banks. The small town charm of a community bank will definitely set ChoiceOne apart and would likely be received well amongst the smaller businesses in Grand Rapids.

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Individual and Team Responsibilities My role in this process will be quite significant. As a member of senior management, I must be the catalyst to convince senior management and the board of directors that this approach will have the best impact on meeting the bank’s vision and strategic goals. With the help of marketing and human resources, I must oversee the development of the curriculum, written materials and visual aids that will be used to communicate the GRASS methodology to the whole bank. I will need to not only gain the support of the board and senior management, but also key individual influencers throughout the bank (the GRASS Team). The GRASS Team will play the largest role throughout the whole process. Communication will need to be almost continuous in the beginning in order to change prior habits, routines and processes. Constant monitoring and feedback will be needed to adapt the communication to be most effective. I will be responsible for monitoring the results, as compared to our strategic plan, to identify success, areas of improvement and poor performance. The GRASS Team will need to be on the lookout for individuals who may want to subvert, kill the initiative, or dwell on the “this too shall pass” attitude, whereby individuals do not buy-in because of past initiative failures or inaction. The GRASS also requires everyone be on the top of their game, always looking to do the right thing. I don’t think we can underestimate how difficult it may be to change or dislodge, which in some cases may be lifelong attitudes of mediocrity. Just as in striving for success, we must do the right thing by seeking to bring those along who may be having a difficult time grasping the concepts of this approach. It is expected there may be some “falling away” of individuals who

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opt themselves out of the organization because they find the changes too difficult. The bank, of course, will make the attempt to invest in everyone. It is critical that new employees be interviewed and hired in accordance to the vision and culture the bank is creating through the GRASS process. The bank must ferret out, through the interview process, candidates who share goals of being of service to others and have the requisite knowledge or ability to quickly gain the knowledge needed to service the bank’s internal and external clients. The GRASS endeavor will be challenging to allow for both growth and premium pricing that can only be achieved by providing a higher level of service. It must be determined early on if there is the internal expertise to effectively implement this strategy or if help from an outside consultant is needed. The bank should be monitoring the results of all stakeholders. We can monitor the bank and shareholder results based upon our strategic growth and income goals. We can monitor our employee results based upon turnover, financial well being, overall favorable review, internal surveys and mystery shops. We can monitor our client results based upon turnover, loan loss, overdraft surveys and mystery shops. As was noted in the financial section, the bank compares very favorable in all cost of funds areas, but trails in yield on loans. It also shows that our trend over the last three years has gotten worse. If the bank can provide more value to its clients by being their most trusted financial advisor, it should be able to receive a higher yield on loans. This seems to be the bank’s biggest stumbling block to being a consistent top-tier bank when measured by ROA.

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If the bank can become THE leader in the area for service and advice, it will not only put ChoiceOne on a more firm footing to sustained earnings, it will increase the stock price which allows the bank to acquire other institutions and remain independent. This will allow the bank to grow by acquisition and also add value to the newly acquired organizations by replicating ChoiceOne’s success. Thus, the bank would grow both via acquisition and provide the scale to grow organically. As mentioned earlier, the current processes will need to be altered dramatically to achieve the new “Gold” standard of GRASS. As shown in the Schedule for Change, the bank would need to develop and get approval for the program in the first half of 2015 and begin the journey in the second half of the year. Adopting Mr. Sinek’s model, this GRASS process outlines the Why, How and What as follows: 

Why: By treating others as we would want to be treated, we build a better community.



How: Providing a purpose-filled work environment based on service to our employees and caring, expert financial advice to our clients.



What: This will be determined by the GRASS Team.

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Schedule for Change Date Requested or Trained

Date completed

Assigned To

INITIAL PLANNING AND PROJECT APPROVAL 5/1/2015 6/1/2015

Responsibility

6/30/2015

Select a Co-leader Fine tune vision with Co-leader Present vision to Sr Management

Kelly Kelly/Co-leader

7/15/2015

Senior Management to determine how we implement

Sr. Management

7/30/2015

Determine the need for outside help

Sr. Management

9/1/2015 9/15/2015 10/1/2015

If outside help needed get proposals Review proposals Select outside consultant

HR Sr. Management Sr. Management

11/1/2015 11/15/2015 11/15/2015 11/30/2015

Pick Kick-off Team Pick Date and Time of Kick-off Determine facility needs Review options and pick facility

HR Kick-Off Team Kick-Off Team Kick-Off Team

TBD TBD

Prepare schedule of events and topics Hold Kick-off

Kick-Off Team Kick-Off Team

Kelly/Co-leader

KICK-OFF

Pick person who's skills compliment mine that also has passion

Need 100% Buy in

Comments

GRASS TEAM

Comments Ask for volunteers for GRASS Team Review list of volunteers Pick GRASS Team

HR HR HR

TBD

Select Service Standards

GRASS Team

TBD

Determine how we communicate daily

GRASS /Marketing

Celebrations Accountability

GRASS Team Everyone

TBD TBD TBD

Comments

THE WHY

Comments

ONGOING

Comments

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Financial Impact The investment in this project is dependent on whether ChoiceOne uses an outside consultant to implement the new vision. The bank has spoken with Ms. Emmerich in the past as well as worked with other sales consultants. It is estimated the consultant cost alone could be as much as $150,000 yearly. The costs of the initial kick off would be $5,000 to $10,000. Quarterly celebrations would be $5,000 to $6,000 yearly. Employee training would run an additional $25,000 to $35,000 yearly. Added together, total yearly costs would run as much as $200,000 per year. There is relatively low risk in the investment as the costs could be eliminated if the new process was dropped due to lack of success. The return on investment (ROI) is quite compelling. As can be seen by the following GRASS Pro Forma, the most likely scenario indicates a ROI of 400% to 600% annually, or a $2.9 million increase in net income over three years. This growth is in line with the bank’s strategic plan and a return to its historical performance over peer in yield on interest earning assets. If the bank further improves its yield on interest earning assets and increases its growth of assets 5% over the strategic plan, the bank enjoys a ROI of 800% to1200% annually over three years. The total increase in net income over three years under the best case scenario is $6.0 million. Given current market multiples, the bank’s stock price would increase 25% under the most likely scenario and 39% under the best case scenario. Under the worst case scenario, it is assumed the growth rate and yield on assets would remain the same, and the bank’s performance would be reduced by the tax affected cost of the yearly investment of $200,000.

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GRASS Pro Forma ChoiceOne Bank (in thousands)

Year 1 Average Assets Average Earning Assets

521,120 503,936

573,232 554,330

Base Year 9/30/14 Annualized Interest Income 18,948 Interest Expense 1,165 Net Interest Income 17,783 Provision for Loan Loss 133 Net Int Inc after Prov LL 17,649 Non Interest Income 6,537 Non Interest Expense 16,664 Income Before Inc Tax 7,523 Income Tax 2,004 Net Income 5,519

Best Case 21,619 1,282 20,337 133 20,204 6,537 16,864 9,877 2,631 7,246

Return on Average Assets Increase/(decreased) return Investment

1.06%

521,120 503,936

547,176 529,133

Worst Case Most Likely 18,948 20,372 1,165 1,223 17,783 19,148 133 133 17,650 19,015 6,537 6,537 16,864 16,864 7,323 8,688 1,951 2,315 5,372 6,374

1.26% 1,727 200

1.03% -147 200

1.16% 855 200

863.67%

-73.27%

427.54%

573,232 554,330

630,555 609,763

573,232 554,330

601,894 582,046

Base Year 9/30/14 Annualized Interest Income 20,843 Interest Expense 1,282 Net Interest Income 19,561 Provision for Loan Loss 147 Net Int Inc after Prov LL 19,414 Non Interest Income 7,191 Non Interest Expense 18,330 Income Before Inc Tax 8,275 Income Tax 2,204

Best Case 24,330 1,410 22,920 133 22,786 6,537 18,530 10,793 2,875

Return on Investment (ROI)

Year 2 Average Assets Average Earning Assets

Worst Case Most Likely 20,843 22,933 1,282 1,346 19,561 21,587 147 133 19,415 21,454 7,191 6,537 18,550 18,530 8,055 9,461 2,146 2,520 Page 28

Net Income Return on Average Assets

6,071 1.06%

7,918 1.26%

5,909 1.03%

6,940 1.15%

Increase/(decreased) return Investment

1,848 200

-161 200

870 200

Return on Investment (ROI)

923.76%

-80.60%

434.88%

630,555 609,763

693,611 670,739

630,555 609,763

662,083 640,251

Base Year 9/30/14 Annualized Interest Income 22,927 Interest Expense 1,410 Net Interest Income 21,517 Provision for Loan Loss 161 Net Int Inc after Prov LL 21,356 Non Interest Income 7,910 Non Interest Expense 20,163 Income Before Inc Tax 9,102 Income Tax 2,425 Net Income 6,678

Best Case 27,836 1,417 26,419 133 26,286 6,537 20,363 12,460 3,319 9,140

Year 3 Average Assets Average Earning Assets

Return on Average Assets Increase/(decreased) return Investment Return on Investment (ROI)

1.06%

Worst Case Most Likely 22,927 26,250 1,410 1,480 21,517 24,770 161 133 21,356 24,637 7,910 6,537 20,405 20,363 8,861 10,811 2,360 2,880 6,500 7,931

1.32% 2,463 200

1.03% -177 200

1.20% 1,253 200

1231.43%

-88.66%

626.55%

Assumptions: Best Case indicates a 10% asset growth over Base Year, Asset Yield increase of 30 basis pts over 3 yrs Worst Case indicates a no change in growth or income due to change in vision Most Likely indicates a 5% asset growth over Base Year, Asset Yield increase of 25 basis pts over 3 yrs Yearly Investment Cost: Consultant 150K, Celebration 15K, Employee Training 35K

The investment is definitely worthwhile. The Pro Forma predicts the downside under the worst case scenario as limited loss, whereas the bank’s strategic growth and income goals are attained under the most likely scenario and actually exceeds the strategic goals by one year under the best case scenario.

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Non-Financial Impact The hurdles which ChoiceOne Bank will need to overcome cannot be understated. Because it is dealing with the trust and loyalty of people, which is something that is not easily won, the bank must EARN the trust and loyalty in order to succeed. The hurdles include: 

Getting 100% buy-in from senior management o Only by having management and the GRASS Team 100% onboard will these obstacles be overcome. One person in senior management who does not agree could sink the whole program.



Determining how to express the vision to the whole bank o It will take a great deal of work and change in order to create a work environment that is purpose filled. Also, technical expertise will be required so that all employees have the knowledge to deliver appropriate financial advice to its clients.



Fallout / Holding people accountable o The bank must get at least 85% of the employees to become advocates of the change in order for its clients to perceive a positive difference. The bank must also work with the 10% to 15% of employees expected to resist the change. ChoiceOne Bank has had a history, like most companies, of avoiding conflict and allowing substandard attitude and performance. This issue may be one of the most difficult areas to overcome, especially if it relates to longtime or upper management employees. The board of directors must also be in agreement as any loss of longtime employees may be questioned in the community.

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Both Mr. Sinek and Ms. Emmerich describe those individuals who, no matter what the encouragement, will not embrace the vision or new way of doing business. These individuals will either leave on their own or be asked to leave. This may seem harsh and uncomfortable to implement, but it is essential in order to build the desired cohesive team attitude needed to be successful. Ms. Emmerich describes how a conversation may go with an individual who actively resists the new way of doing business. A supervisor may say something to an employee that is resisting the change like this; “I’m so excited about where the team is going. I could be wrong, but my sense is that you don’t share the excitement, and that’s okay. If this isn’t your thing, you have to go and find your thing6.” This conversation should be done with kindness and care in the heart of the supervisor. 

Keeping the vision alive and growing o Continual effort must be expended to keep the vision going. All too often great ideas die because of a lack of forward movement. The GRASS Team is the key to keeping the vision alive long after the original leaders retire from the organization.

These are no small tasks that must be implemented in an already established culture and business environment.

6

Roxanne Emmerich, Thank God it’s Monday, How to Create a Workplace You and Your Customers Will Love (Upper Saddle River, NJ: FT Press, 2009) Page 31

Senior management and the GRASS Team members must hold each other accountable and call out anyone that appears to be acting contrary to or drifting away from the agreed upon vision. A continual commitment to staying current and increasing knowledge must be present within the bank. The bank has recently implemented a program called ChoiceU, which encourages employees to increase their skills. This structure can be used for in-house training. We also must send employees to outside training or bring in training that meets the new standards. The GRASS Team will be the pulse of the organization to measure employee buy-in through daily interactions with employees, clients, shareholders and community members. The GRASS Team will be tasked to give a monthly report to senior management on how things are going and reporting if the vision is still clear within the organization or seems to be getting fuzzy. The bank must insist upon a work/life balance that is in keeping with the idea of family above work. We have several salaried employees that voluntarily work more hours than expected, taking time away from family, friends and community. I have heard of one company that actually reduces or eliminates bonuses for salaried employees that work more than the prescribed hours. This company indicated that when they did this, it helped employees become more focused to get the most important work done, eliminating wasted time and improving family life of its employees. Another large impact will be the amount of conversation that will take place in the community and among clients about the difference they have noticed in the bank. This conversation will draw others who are curious to see if there really is a bank that cares about its employees, clients

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and community in such a selfless way. The growth should be exponential and show up in client surveys and account growth. ChoiceOne Bank needs to realize that it will not win over every client. Just as the vision will not resonate with all employees, it will not resonate with all clients or prospects. Some clients are truly looking for the lowest cost provider, and there is nothing that can be done short of reducing price to get them to bank with the institution. The bank must be resolute in staying true to its vision and resist the temptation to compete on price as a short-term fix. In Simon Sinek’s book described earlier, he warns against something he calls The Split.7

The Split describes what happens when a company is small, and ideas are fueled with passion that as time passes and the company grows and becomes more successful, the structure surrounding the vision breaks down and the passion fades. This is what makes the GRASS Team so important. As long as senior management and this Team regularly meet and agree on continuation and improvement, the vision will continue after the founding members retire. The

7

Simon Sinek, Start With Why, How Great Leaders Inspire Everyone to Take Action (London, England: Penguin Books, LTD, 2009) Page 33

board also must receive regular reports on the efforts of the GRASS Team and senior management so that it too looks for these qualities of teamwork and service above self when picking a new leader. As the results compound, the Bank will notice an increase in earnings over the foreseeable future, above its normal earnings as well as its peers. If this vision is fully integrated into the entire organization, the Bank will regularly be in the top ten percent of its peers and meet its strategic goals.

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Conclusion ChoiceOne Bank is at a crossroads. In order to remain independent and meet the needs of its employees, clients, community and shareholders, it must make a bold change in its culture and increase the knowledge and sales and service abilities of its employees. The Golden Rule Approach to Sales and Service (GRASS) implemented by a committed management group will provide that extraordinary experience for employees and clients. This approach will explain the why and how of what the bank does and provide greater clarity of purpose. The GRASS has a relative low cost of implementation but will provide for an exceptional return on investment. The non-financial impacts are what provide the extraordinary financial results. A purpose-filled career combined with expert financial advice to satisfied clients allows the shareholders to benefit from wider profit margins supplied by the GRASS method. By implementing this model, the employees, clients and shareholders will find that the GRASS is greener at ChoiceOne Bank!

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Bibliography Thomas Nelson, Inc. The NKJV Study Bible. Nashville, TN:Thomas Nelson, Inc.,1997,2007

Simon Sinek, Start With Why, How Great Leaders Inspire Everyone to Take Action. London, England: Penguin Books, LTD, 2009

Roxanne Emmerich, Thank God it’s Monday, How to Create a Workplace You and Your Customers Will Love.,Upper Saddle River, NJ: FT Press, 2009

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