Phelps County Bank's prices are high, its product line is not the most extensive, and yet it dominates its market. The secret? Turning each employee into a problem solver for customers -- and into a keen observer of the bottom line

The other day my bank sent me its catalog. I am not making this up. It was a glossy, full-color booklet trumpeting all the "products" (as the banking industry likes to say) and services I could sign up for: Home-equity credit. International personal banking. Mutual funds. On and on for nearly 60 pages. Little yellow sunbursts ("New!" "Special value!") left the impression that I could probably get it all at a bargain -- and that I'd better send in my order right away.

I have a modest suggestion for the people who run my bank, in case they ever ask me, which they haven't.

Folks, forget the glitz. Forget all the different kinds of accounts (four checking, two savings, five "packages") you describe in your catalog. Nobody can tell them apart anyway. Trash the little yellow sunbursts. Trash all the other marketing hype. Instead, take better care of me and all the other customers.

As things stand, I'm likely to go into my branch and find a line six deep, one teller window open, and two other tellers chatting behind "Next Window Please" signs. If I phone for information about refinancing my mortgage, I'm lucky to get a call back a week later. My friend Peggy patronizes the same bank and one day brought in a check for 200 English pounds. The hapless teller first asked what a pound was. Then -- because there was no key for pound on her keypad -- she grumpily asked Peggy if she could just record it as 200 dollars. I remember when people used to refer to their banker, as in, "I'll ask my banker about that." Peggy and I don't have a banker. We have a marketing organization staffed by people who don't know one kind of currency from another.

In light of all that, what I'd like to do is pick up Phelps County Bank, an institution currently headquartered in Rolla, Mo., and move it, intact, to my hometown. Then I could do business with the friendliest, most service-oriented bank I've ever seen. I know, this plan may not be entirely realistic. So I'd at least like other bankers -- and other businesspeople -- to understand how PCB, as it's known, takes care of its customers, and to see how that approach has brought the little bank startling growth and prosperity, and to appreciate the fact that PCB's two chief competitors, both affiliated with big bank holding companies and bearing those holding companies' well-known names, have dropped to number two and number three in town while PCB has taken over as top banana.

As they say, there's a lesson here. Maybe a lot of lessons, because it turns out that PCB chief executive Emma Lou Brent had to build a different kind of company before her bank was capable of delivering the level of service that has made it so successful.

* * *

Rolla, Mo., sits in the foothills of the Ozarks, a two-hour drive from St. Louis southwest along Interstate 44. It's a modest-size community, pure middle America, set apart from a thousand similar towns only by its lovely surroundings and a University of Missouri campus. Its economy isn't exactly booming, but neither is it depressed. There's a little farming. The university generates some business, as does a modest stream of tourists and retirees. The bank's catchment area -- including Rolla, the neighboring town of St. James, and the surrounding countryside -- is home to some 35,000. PCB's main office sits on the corner of Eighth and Pine streets, downtown. The building was once a hotel, though by the time the bank was founded, in 1963, it had degenerated into a flophouse. Today it has been reborn, with plush carpets and dark wooden paneling, as befits a thriving financial institution. Thirty-six of PCB's 55 employees work here. The rest staff three other facilities: a branch in St. James, a drive-in bank on the outskirts of Rolla, and a tiny office on the university campus.

The service on which the bank stakes both its reputation and its bottom line makes itself felt in a dozen different ways, routine and not so routine.

The lobby opens five minutes before 9 a.m. and closes five minutes after 3 p.m. -- there are no disgruntled customers peering in and looking angrily at their watches. If people knock on the door after closing, customer-service reps have been trained to invite them into a secure room and ask how they can help. Reps have the authority to resolve most customers' complaints on the spot. Mr. Jones is upset because he lost track of his checkbook balance and now doesn't want to pay the overdraft charge? A rep like Patti Douglas might refund the amount if she thinks it was an honest mistake. Or she might propose splitting it with him.

At the windows, Melanie Boyda and other tellers learn basics that escape tellers at banks like mine. "When you hear the door open, look up," recites Boyda. "If you see somebody looking around, lost, help them. Acknowledge customers. Let them know you know they're there." Tellers, too, can resolve many customer complaints -- unless there's a line, in which case they refer them to a customer-service rep. PCB's customer-service creed, displayed on easels in the lobbies and the loan department, reminds tellers (and everyone else) of their commitments. No keeping customers waiting while you finish paperwork. No using "the computer" or "policy" as a reason for not doing something.

In the loan department, lending officers typically sit down with prospective borrowers for most of an hour, just to get to know them, before even beginning on the loan application. The bank's newspaper ads carry lending officers' home phone numbers, as do the officers' business cards. Customers are encouraged to call nights or weekends on urgent matters. House calls of that sort go in both directions. The day I visit, Adolph Mueller at the St. James branch reports closing a recent $150,000 loan -- in the evening, at the customers' home. "They both work, and they have three children," explains Mueller matter-of-factly. "So it's a convenience for them."

Service is partly a matter of systems, and PCB monitors its service by sending surveys to new borrowers (after three months) and customers opening new accounts (after six). The surveys alert the bank to bottlenecks ("Would you say that the waiting time, if any, at the bank is acceptable?") and to unmet customer needs (an automated teller machine at the drive-in facility). Service is also a matter of innovation, and PCB employees are forever coming up with new ideas. Patti Douglas, the customer-service rep, has developed a detailed proposal for a program aimed at seniors. Peggy Laun, an assistant in the loan department, has been investigating the possibility of offering electronic tax filing.

But service is also a matter of day-in-and-day-out culture, of people going out of their way to be helpful. Managers know that and make it a point to reinforce behavior that reflects the culture. "Remember when Mary tracked down that guy's Veterans' Administration check that hadn't come in yet?" asks Bonita Prock, senior vice-president in charge of operations, as she and three other managers sit around reminiscing. "She called around and got everything straightened out for him. She even called the telephone company because they were going to cut him off. And Patti -- a customer came in that had been duped by somebody over the phone. Before she was done she had talked to the Better Business Bureau in California and gotten those people their money."

Last spring the bank sponsored a promotion dubbed the "You Bet We Can Can-can," with graphics complete with caricatures of staffers doing the cancan, and advertised it all over Rolla. Tell us a story of employees who went out of their way to help you, the bank asked customers. Each month, we'll pick one. The winners -- customer and employee -- will each get dinner for two.

At banks like my own, such a request would be a joke. When PCB tried it, literally hundreds of responses poured in. A flower-shop owner, short of cash to pay for the repair of a critical piece of cooling equipment, called the bank while the angry repairman waited; Jody Sanders, a PCB loan officer, hand-delivered a small loan to cover the expense. At church one Sunday, an apparel retailer mentioned to Alice Malone, a customer-service rep, that she was having trouble with her credit-card imprinter. "When I got to the bank Monday, there was a new imprinter waiting for me," the retailer reported. A professor at the university got his mortgage approved by PCB before he had even moved to Rolla. Later, he wrote, the bank went to bat for him against an insurance company that had canceled his policy but tried to get its automatic monthly payment anyway.

PCB builds its very mission around that kind of service -- "Always give customers more than they expect," preaches CEO Brent -- and spares no expense in the pursuit of it. But the business logic is unassailable because service is the one essential ingredient of PCB's profitability. The bank's prices are high. Its interest rate on residential mortgages, for example, may be as much as a full percentage point above the competition's. And its product line isn't the most extensive in town. (Other banks offer items such as mutual funds.) So top-quality service is the only way PCB can keep customers coming in the door.

As for how you build a company capable of delivering that level of service -- well, that's something it took Emma Lou Brent several years to learn.

Brent, known to all as Emmy, was born in 1938 on an Arkansas cotton farm. College wasn't in the cards. She married a man who became a high school chemistry teacher; they had two children. As the kids reached school age, in the late 1960s, she looked around for work -- something that would allow her time for Scouts and other after-school activities. Phelps County Bank hired her as a part-time relief teller. Soon she was filling in for a variety of employees, staying after work when necessary, learning on the job during the day, studying banking manuals at night. When her children reached junior high she went full-time, taking on more responsibility every year. In 1976 the principal owner, Don Castleman, asked her to become executive vice-president. Six years later he named her CEO.

Maybe because of that up-from-the-bottom history, Brent is an unusual, almost paradoxical, figure. On the one hand, she exhibits confidence bordering on fearlessness, leading her employees to regard her with something close to awe. "She's an aggressive, self-taught, gutsy woman," says one, "and she has led this bank to success." On the other hand, she has a healthy respect for what she doesn't know. She'll tell you of the time she forgot to pay the bank's tax bill, just because she assumed it was due the same day as individual taxes. She remembers learning to say, "I'll get back to you," when the Federal Reserve called with a question she couldn't answer. She felt she'd never succeed unless she attracted smart people to work with her.

In the early 1980s, of course, running a small bank was a daunting-enough prospect for anyone. "I kept hearing that community banks were not going to be a thing of the future," Brent recalls, the clipped syllables and soft twang of her speech reflecting her roots in the region. "By the year 1995 or 2000, people said, we'd have a banking system like the Canadians' -- seven or eight large banks. Banks in places like Rolla would be franchises." She doesn't add, though she might have, that a version of that prediction came true for Rolla's two other commercial banks. Both changed hands during the decade. Both now carry the names of huge statewide bank holding companies, Boatmen's and Mercantile.

Characteristically, Brent had a plan. "I visualized what I thought the community bank of the future would need to look like. It would need to have a whole staff of knowledgeable, intelligent bankers to work with people." Banking wasn't just taking money and making loans -- big banks could do that well enough. It was helping people manage their lives, their assets, their businesses. It was providing hands-on personal service, the kind that would let a customer speak proudly of "my banker." Granted, that would be a tall order. The bank would need to attract, keep, and motivate first-rate, customer-oriented people, and somehow build up that culture of service. A second tall order: making money with the plan. Good people don't come cheap. Personal service is costly because it's time-consuming. The bank's prices could be a little higher than the competition's -- but in Rolla, Mo., they couldn't be a whole lot higher. To make money with its costly approach, PCB would have to operate with unparalleled bottom-line efficiency.

Brent began with some straightforward moves, the stuff of sound banking and good management. She cleaned up the loan portfolio, taking some losses and tightening up on delinquency. She revamped lending procedures, emphasizing the ability to repay a loan more than the collateral behind it. ("It never did make sense to me to lend $50,000 on a $200,000 farm if the customer couldn't pay back the $50,000.") She let go a couple of people who didn't share her outlook; she hired people who did. She continually updated the bank's computer system.

But she also took three less-conventional steps, not so much because she had a grand strategy in mind as because they seemed, intuitively, like good ideas. As it turned out, they were the seeds of a company that could realize her vision.

While looking for some sort of profit-sharing or retirement plan -- "to let people know their work was appreciated," she says, and to encourage them to stay with PCB -- she heard about employee stock ownership plans, or ESOPs. An ESOP was an appealing device: it could provide employees with a retirement benefit, and it could give Castleman, who owned most of the stock, some liquidity. Brent established a small plan, and the plan bought a little stock. Over time she began to see other possibilities in the ESOP. Maybe ownership would give employees a reason for taking that extra step with customers. And in an industry in which companies were changing hands regularly, employee ownership offered a degree of job security that would surely attract the best people. Bit by bit, the ESOP began buying Castleman out (although he remains chairman).

Figuring her employees would need training if they were to be "knowledgeable, intelligent bankers," Brent brought in Dale Carnegie instructors and arranged for the American Institute of Banking to offer her employees classes in banking principles. She set up seminars in sales techniques and in problem solving. To make sure everyone was familiar with the services PCB offered, she designed a yearlong in-house training program, in which each department prepared a session for the others. The program culminated in a mock "Jeopardy" game with six employee teams competing and an electric scoreboard tallying the answers. (See "Turning Education into a Game," Managing People, September 1992, [Article link].)

Remembering her own days as a teller -- and her frustration when management ignored her ideas -- Brent began involving the bank's employees in decisions. At first it was mostly informal. But in 1987, when she mapped out PCB's first formal goal-setting meeting, she invited not just managers or the board but the whole staff. ("I said, 'You've gotta be kidding!" recalls an employee who had recently joined PCB from another bank. "At the other place, the executives would get their computers and leave. Then they'd come back and say, 'This is our plan.") The goal-setting meetings became regular annual events. Meanwhile, Brent created an ideas program she called the ESOP Challenge. Employees with ideas for improvements of any sort -- new products, process improvements, whatever -- could write them up and present them to top management. The best idea each month would win its author $100. The best of the year brought a trip for two worth $1,500.

By 1991 -- nine years after she took over as CEO -- those seeds were taking root, and Brent figured it was time to take notice of the "new" PCB. So that fall the bank threw itself a banquet dubbed the Old Settlers Dinner. The managers put on a skit -- Brent played Thomas Jefferson, others played Ben Franklin and John Adams -- celebrating PCB's independence and declaring war on "megabank" competitors. The upstart's weapon: its commitment to service. The revolutionaries unveiled a "customer-service creed" drafted earlier by a committee of employees and hand-lettered on parchmentlike paper. Everyone signed it. "Each of us has the authority and the responsibility to do what we feel necessary to solve a customer's problem," read one of the document's many declarations. "We are owners of our bank, and customers expect owners to solve problems."

It was a symbolic statement, of course. But there was a distinct reality behind it. Gradually, almost without anyone's realizing the extent of the change, PCB was becoming an unusual kind of company. What made the difference was how Brent's three initiatives evolved over time -- and how they turned out to fit so neatly, hand in well-matched glove, with her vision of a service-oriented business.

* * *

Where ownership was concerned, Brent's problem was making it real -- not just words on paper but something that employees felt and acted on. Thousands of companies have ESOPs, after all, thanks in part to the tax breaks the plans offer. But a retirement plan with a few shares of stock doesn't magically transform employees into owners, and it doesn't keep them on the payroll when another company offers $50 more a week. For Brent's strategy to work, people had to stay at PCB, building up relationships with customers. And they had to care about the level of service the bank offered those customers.

For a while, PCB's ESOP fell into the who-cares category. "The attitude was, It's just a piece of paper and it doesn't mean anything," says operations VP Prock. Even Brent got tired of trying to persuade her staff members that they were really part owners of the bank. "There was a short period of time when I just let it die," she admits. "It was too hard to convince people."

What overcame everyone's skepticism was -- no surprise -- money.

An ESOP is actually a trust, legally separate from the bank itself. PCB's, a so-called leveraged plan, works like this: The ESOP borrows money to buy stock from Castleman. PCB contributes so much to the ESOP each year, and the ESOP pays down its debt. As it does so, it allocates shares to individuals' accounts.

One way to make this one-step-removed ownership seem real, Brent had read, was to contribute sizable amounts to the ESOP, thus hurrying along the process of debt reduction and stock allocation. In 1986 the bank contributed $50,000 to the ESOP. By 1989, however, the yearly contribution was up to $250,000, and in the past couple of years it has been higher still. Soon big numbers were appearing on individual employees' statements. When a couple of long-timers retired, taking their cash with them, the skeptics watched in amazement. "They saw a couple hundred thousand dollars going out -- and they knew only two people had left," says Prock. "It made them realize it's real money."

Real indeed. Right now the ESOP owns virtually all the bank's stock. (It bought the last batch of Castleman's shares last June.) Seven people have ESOP balances in six figures. Many more have balances between $50,000 and $100,000. In another 10 years, the ESOP will have paid for and allocated all its shares -- and the bank, presumably, will have continued to grow, thus boosting its share value. At that point an account worth $50,000 today -- about the average -- should be worth close to $200,000. For comparison, a typical three-bedroom home in Rolla sells for perhaps $60,000.

PCB enthusiastically broadcasts its employee ownership. Ads and other marketing materials trumpet it. Business cards announce "employee owner" instead of the employee's title. Employees elect a seven-person ESOP committee and send representatives to national employee-ownership conferences. The committee publishes a newsletter called "PCB ESOP Pride."

What lend substance to all the hoopla, however, are the economic underpinnings. Every spring, the bank holds a shareholders' dinner. There's entertainment, good food, maybe a speech or two. But the highlight of the evening, by common consent, is when Brent passes out the sealed envelopes showing individual ESOP balances and projections for the future.

It's a family affair, with spouses as interested as employees. "I barely got to look at mine," says Patti Douglas, grinning as she thinks back on her first dinner. "My husband had it ripped out of my hand!" When they both looked at the numbers, it hit them. "That's when it really came home to me, full-fledged," she adds. "Gee whiz. I'm an owner of that bank."

Asked to elaborate, Douglas turns reflective. "If you're just an employee, you know no matter how hard you beat your head against the wall, they may or may not notice. You may or may not get a raise. You may or may not get a promotion. Here, all that gets put aside. Anything that I can do for this bank to improve it, to bring in new customers, to increase the bottom line, I benefit from."

Douglas isn't thinking of leaving anytime soon. Aside from the occasional employee who leaves to start a family or accompany a spouse on a move, turnover at the bank is virtually zero.

* * *

Training presented Brent with a different kind of problem. On the one hand, delivering first-rate service requires no more than a positive attitude and job-specific skills, like knowing what to do when a customer wants to deposit English pounds. Ownership, combined with the banking and business-skill training employees were receiving, thus went far toward producing those intelligent, knowledgeable bankers. On the other hand, service is by definition costly. And unless all the employees were paying as much attention to the bottom line as they were to customers, PCB would service itself right out of existence.

So about a year ago Brent embarked on a program to teach all employees how their bank makes money, and hence what they can do to boost profits and control costs.

New employees get what amounts to basic training -- a chart titled "How We Make Each Dollar and How It Is Spent," complete with real figures for the last seven years. Brent walks them through it as part of their orientation, pointing out essential figures. ("It's easy to see that your biggest income producer is your loan portfolio.")

Others have begun more advanced training in the financials. PCB's seven customer-service reps, for example, recently spent part of every Thursday's meeting calculating by hand item after item on the bank's so-called monitoring report. "We could pull them off the computer, but this way we really understand where the numbers come from," one rep explains. The report, a compilation of nearly two dozen ratios used in the industry, provides a detailed snapshot of the bank's performance as a business.

An incentive-compensation plan pays annual bonuses based on six or eight key numbers. The purpose isn't so much to reward or retain people; the ESOP does that, as do salary levels that are 20% to 30% above market rates. Rather, it's to focus attention month by month on crucial variables such as loan delinquency. (A nice touch: the plan was introduced late in 1992, ostensibly for implementation -- and first bonus -- in 1993. Then management surprised the employees by paying 1992 bonuses anyway.)

Thanks to all the training, people learn to keep a hawkeye on key figures -- and to take action if they're headed the wrong way. "We watch deposit totals," says Boyda, the teller. "If they're down, maybe we need to cross-sell a little more." Tellers also watch their overtime hours, knowing that too much overtime cuts into earnings. Customer-service reps, such as Douglas, get monthly reports detailing the accounts they have opened and closed and how much those accounts earned the bank. "If I see that one of my customers has closed an account," she says, "I'll get on the phone and ask if there was anything wrong. We don't want to lose a customer due to dissatisfaction."

PCB makes money by attending to a hundred such details. Traveler's checks and other reimbursables go out for payment immediately. If they don't, says Bonita Prock, someone's likely to holler. ("Do you realize that the $30,000 you could have shipped cost us x dollars a day?") Customer-service reps learn to be generous in refunding service charges to disgruntled customers -- but not too generous, because the refunds will reduce the "noninterest income" line of the income statement. "We've gone to the point of breaking down the loans by facility, breaking down the vaults by facility, so each facility can track itself, see where it is and how it compares," explains Prock.

The signs of PCB's success show up in the reports, provided throughout the banking industry, that compare an individual bank with banks of a similar size and situation. In a recent one, PCB's so-called peer banks had per capita personnel costs of $27,340. That was 21% lower than PCB's costs of $34,810, which included payments to the ESOP. Yet PCB's return on assets was 23% higher than that of its peers.

* * *

Brent began her experiments with employee involvement in modest-enough fashion, through steps such as inviting everyone to the annual planning meetings. But corporate culture is a dynamic entity -- and when fundamentals such as ownership and employees' understanding of the business change, so too does the nature of involvement. Consider PCB's main suggestion program.

Last July Patti Douglas's entry in the monthly competition was her proposal for a seniors program. Hire a program director, she recommended, and develop a comprehensive marketing program to appeal to elderly customers. Offer special checking and savings accounts. Sponsor meetings and seminars to help seniors with financial planning. Set up an advisory board of over-65 people to serve as "ambassadors" in the community. Behind the 12-page proposal lay nearly two years' worth of research. Douglas had dug up demographic statistics. She had compiled information about what every other financial institution in the area offered seniors. She tracked PCB's experience with its existing elderly customers. She costed out her proposal and projected its impact on the bank's bottom line. The week before it was due, she estimates, she spent 27 off-the-clock hours getting it ready.

Douglas's proposal -- it won both a monthly and an annual award -- was unusual in its level of detail. It was not so unusual in its level of sophistication. Sandy Karr (in loans) and Stella Ravenscraft (in bookkeeping) researched and designed the customer survey that the bank uses to evaluate its service levels. Peggy Laun investigated whether the bank should offer its customers electronic tax filing with the IRS.

Brent and other managers, of course, make the decisions about whether and when to implement the ideas. That doesn't mean the suggestions disappear into a managerial black hole. Proposals often come back to their originators for more research or for modification. The originators often become point people for research and development in the areas they've carved out. Laun, for instance, recommended against offering electronic filing with the IRS in her original proposal. The software, she had learned, was still pretty iffy. But she has since become the bank's clearinghouse for information on the subject and plans now to look at the possibilities once more.

The mechanisms of involvement have undergone an evolution of their own. For a while, PCB had an active committee known as the Problem Busters, charged with untangling bottlenecks and dealing with employee grievances. Over time Brent noticed a funny thing: the committee had less and less to do. Employees were learning to solve problems on their own. They let everyone else know what they had done through the bank's electronic-mail system. Today the Problem Busters mostly track the E-mail messages, watching for recurring issues and occasionally offering a helping hand.

It's hard to quantify exactly how all the innovations proposed and implemented by bank employees have paid off. But Brent keeps a little productivity chart that she likes to look at periodically. It measures the bank's costs and earnings per million dollars of assets per day.

In 1989 PCB's total overhead -- a figure that includes all personnel expenses -- came to $93 per million dollars of assets per day. Net income was $34. In the first six months of 1993, overhead had fallen to $90. Net income was up to $45.

* * *

The drawbacks of PCB's approach are few in number but not zero. Since the bank's employees are human, not every transaction results in a happy customer. ("There was a lady who was pretty unfriendly," reports a college-student customer contacted by Inc.) Yet the bank's very emphasis on service leads customers to expect near perfection. "The better we are in service, the better we constantly have to get," says Brent, shaking her head. "When a customer has been referred by someone, they're expecting first-class service from the minute they walk in." Like a manufacturer aiming for zero defects, PCB has little margin for error.

Then, too, not every employee is as gung ho about the ESOP and participatory management as, say, Patti Douglas or Peggy Laun is. Indeed, the system tends to squeeze out people who prefer a job that begins at 9 and ends at 5 and doesn't take too much thinking in between. That process isn't bloodless. Says Brent, "We had situations where employees wouldn't want to do something -- but wouldn't want the person next to them to do it, either, for fear they'd look bad." Nobody other than a couple of senior people was asked to leave, but many did: Brent estimates the bank had a 20% turnover in the two and a half years between early 1986 and late 1988. Even today, she adds, new employees can quickly feel lost or left behind. That's why the bank has recently implemented a "buddy system" to shepherd them along.

And yet, what struck me, the days I spent visiting PCB, was how much fun people seemed to have. Several employees mentioned getting together for pizza after work -- and racking up a video on the machine down in the lunchroom. The bank's newsletter reads like a high-spirited gossip sheet. ("EMMY BRENT had her whole family with her for her birthday & some birthday it was -- she ended up cooking. Haven't they heard of eating out?...The big news for SANDY KING concerns her son, Derik, who graduates in May with his M.D. degree....") And Bill Marshall, senior vice-president in charge of loans, told me how his staff gently informed him he'd have to answer the phones for half an hour every Thursday.

"One of the employees came to me and said, 'I've noticed we're all under a lot of stress. Everybody's up to here, and we're going as hard as we can go.' I had been up there saying how great things were -- our growth last month was great -- and here were th