Slow and Steady in Kansas City

For about a hundred years, the Kemper family has been running Commerce Bancshares Inc., now a $12.3 billion institution, with headquarters in Kansas City and St. Louis. And in all that time no one in the family has gotten a wild hair. No one has traded a pristine balance sheet for a fast buck; no one has been swept away by boom-and-bust lending; no one has overreached his grasp in defining the market area.

It’s not surprising then, that in today’s whiz-bang, high-tech world, Commerce has been trounced by the media for being stodgy and unprogressiveu00e2u20ac”despite the fact that even its competitors widely acknowledge that Commerce is a leader in soundness and integrity. Saddled with a tortoise-like image, why hasn’t anyone suggested the family take the company in another direction? This question evokes a spontaneous laugh from both Chairman and CEO David Kemper and his brother, Vice Chairman Jonathan Kemper. Neither has entertained such an idea.

And why should they? Commerce Bank was twice voted the safest bank in America by U.S. Banker. It boasted an average return on equity of about 15% over the last five years, an average return on assets of 1.45, and an average growth of close to half a billion a year. Success has been earned the old-fashioned way: When other banks were making quick money with risky loans to oil companies, real estate developers, and third-world countries, Commerce maintained a risk-averse strategy. And when those loans turned sour, Commerceu00e2u20ac”by and largeu00e2u20ac”continued to demostrate slow, steady growth. As Commerce’s executives like to say, for them, the cutting edge is a bit too close to the “bleeding edge.” And while the Kempers admit that there’s no romance in an honest banker, they firmly believe in not lending money for things they don’t understand.

The Kempers’ grass-roots notions about banking belie their real-world experience: Forty-nine-year-old David and 47-year-old Jonathan both graduated from Harvard University; Jonathan went on to receive his MBA from Harvard while David got his from Stanford. Both cut their financial teeth at large sophisticated financial institutions: David at Morgan Guaranty and Jonathan at Citibank as well as a stint at the Federal Reserve.

Yet despite having backgrounds that are decidely ivy league and slanted toward money-center mentality, the Kemper brothers have an unwavering focus on Commerce’s down-to-earth strategy. V. Raymond Stranghoener, the new president of Commerce Trust Co. and a fresh hire from Bank of America, says David Kemper often remarks, “Let’s remember what weight class we’re in.” Says Stranghoener: “They don’t do things with a lot of ballyhoo.”

David Kemper, a trim, mild-looking man in shirtsleeves with thinning blond hair, says their pragmatism is owed to their parents. “Our father is very smart, intellectual, and interested in culture. He is not pretentious. He is down to earth. He had a huge influence on my brother and me. We have a lot of pride in our industry, in our family, and what they have created.”

There is candor and ease among the staff that the company has painstakingly cultivated. The bank’s management is structured as a matrix and impromptu meetings are a part of the culture. Lines of communication are open as a means to discourage internal politics and encourage respect. “One thing that’s unique about our bank, one of the first things I noticed, is the access to decision makers,” says Kevin Barth, senior vice president in charge of commercial lending, who has been with the bank since 1984. Says David Kemper: “We like each other, so we work well together.”

Though warm and fuzzy on the inside, to the outside world, Commerce has shown a hard shell of remarkable resilience and success. Its third quarter earnings statement announced an increase of 4%u00e2u20ac”to $2.12 per share for the first nine months of 2001. Total earnings during the period amounted to $135.2 million compared to $132.4 million in 2000; net earnings were $45.5 million. Return on average assets was 1.56% and ROE was 15%.

As mergers consumed several independent banks in Kansas City and St. Louis in recent years, Commerce saw an opportunity to benefit within the communities it serves. While general policy decisions are made at the top levels, Commerce has tried to allow its 36 branches to operate like independent community banks as much as possible. Market managers in each of the 19 areas over four states must respond not only to directives from the corporate level but also to the individual bank presidents. Each market has autonomy with regard to issues like pricing and deal structuring and some autonomy with regard to the products it offers and delivery systems. David Kemper says with this structure, the community bank presidents have more of an opportunity, to be entrepreneurial rather than to become just another layer of management. Each bank president works with an advisory board from that community. Including the holding company board, Commerce has a whopping 36 boards comprising 400 directors.

Modeled to some degree after banks like Norwest and Fifth Third, this structure can be trickier to manage than that found in a more centralized bank, admits Stranghoener, who ran trust operations for Bank of America’s St. Louis region before taking the job at Commerce. “How you interact with your colleagues is a little different here,” he says. “There’s a local flavor on the sales and distribution side of the business, but a centralized process for other things. It makes managing a little tougher. Everything happens in all 19 locations. I’m getting used to it.”

Andrew C. Taylor, president and CEO of Enterprise Rent-A-Car and a director for the holding company, finds the culture “invigorating.”

“The Commerce culture commands inspired thinking and tough-mindedness,” says Taylor. “In a meeting, one gets the clear sense that there’s a unique combination of intellectual power, streetwise savvy, and long-term perspective all working simultaneously. Everyone is on their toes; meetings run at maximum firepower.”

Nearly every director represented on the holding company board comes from a private or family-owned company with an entrepreneurial bent. All board members are paid in stock, totaling approximately $600,000 to $700,000 in payouts annually. Taylor says aligning the directors’ interest with that of the stockholders gives the directors a better sense for Commerce’s mission and helps them appreciate the long view.

The structure of such a large institution must be carefully managed. Holding company directors have the sole responsibility for corporate governance. Individual bank board members serve in an advisory capacityu00e2u20ac”the eyes and ears of the communityu00e2u20ac”and are expected to lead community outreach programs. For example, the advisory board members were recently asked to nominate one member of their community deserving of community service recognition. When such a person is named, Commerce will donate money to a charity of choice and to the foundation of William T. Kemper (David and Jonathan’s great-grandfather).

Such programs exemplify the company’s emphasis on relationship building, something Commerce’s competitors acknowledge. Malcolm Aslin is president and chief operating officer of maverick Gold Banc Corp., a $2.8 billion institution in Kansas City, which concentrates on community banking with big-bank strength. Aslin worked for many years at UMB Bank in Kansas City and knows the Kempers’ institution well. “They are good people with high ethical standards,” he says, “…that has been a characteristic of the company for generations…”

Time commitment is also a requirement of Commerce staff. Commercial lending officers are expected to spend hours getting to know their customers, generally regional companies in manufacturing, distribution, and commercial real estate, to figure out who the principals are and precisely how they make their money. “A lot of bankers say ‘We want to do this deal’ or ‘We want to do that deal,’ ” says Kevin Barth, who heads up commercial lending for the company. “Our focus is on understanding people. It’s very expensive just to turn over customers. We want to know if this is someone we’re going to want to be doing business with, not someone just wanting to do this transaction. We don’t lose a lot of customers.”

What it comes down to is good, basic banking, says David Stumpf, an analyst at A.G. Edwards.

“The number-one differentiation [between Commerce and other banks] in my mind is still individual management execution,” he says. “Basic blocking and tackling and leadership, making the calls and avoiding the risks.”
Or as Charles (Chuck) G. Kim, Commerce’s executive vice president in charge of retail banking, puts it: “We don’t ever get a chance to be flashy.”

This may be more difficult for Kim, since he heads up the area where most banks are trying to stay on the cutting edge.

Kim is, himself, an early adopter of technology, and most of the racy technology products come out in the retail area: digital wallets, bill presentment, account aggregation, for instance. But, Kim says, a lot of people who bought digital wallets found them to be inconvenient. Commerce doesn’t spend money unless the investment will improve customer or shareholder value. Anyhow, he says, most of the pressure to jump on the bandwagon comes from the mediau00e2u20ac”not customers.

“David [Kemper] would say ‘I don’t really care if my name is on the TWA Dome (the St. Louis Rams football stadium). That’s a stupid expenditure of our money,’ ” Kim says. “If everybody else is buying a luxury suite, do we have to buy one so David can say he has one? No.”

By all accounts, Commerce is a lean operation and expects employees to wear several hats. Besides being chairman, David Kemper is also president and CEO. Jonathan Kemper is vice chairman of the holding company and CEO of Commerce Bank in Kansas City. In addition to his holding company duties, Barth is president and chief operating officer of Commerce Bank in Kansas City. And, as Kim points out, there aren’t a lot of people in backup positions.

“There’s no Chuck [Kim] in training,” he says. “Bench strength is not something we have a whole lot of here. To combat that, there are very good people in the next line of positions. If I got hit by a bus, there are a number of people who could step in and do aspects of my job.”

The slow economy has brought many challengesu00e2u20ac”especially for an already lean company. The company has an efficiency ratio of 58%, which, David Kemper notes, could be improved. Commerce will have to make a few staff reductions in light of the economy, but only a few.

“A lot of companies still want to manage to the bottom line. They cut back all these people,” says the David Kemper, bristling. “They feel they need to be Draconian in making reductions, then they have to reduce their business to the number of people they have left. We prefer expense management, credit management. We want to be sure we really work with customers to avoid losses. We’re trying to get the unit cost down, the item cost of processing per account.”

At the same time, the company will make investments that the board deems necessary. Most of the bank’s revenues are split between retail and commercial, with about 12% coming from money management. To boost money management operations, Commerce hired Stranghoener to head up the trust department and made considerable outlays in people, products, and technology.

“Private banking is a significant driver of fee income for the bank, and management has come through on commitments it made to me when I was hired,” Stranghoener says.

Admittedly, the company will rarely be first out of the gate on trendy technology, Barth says, but it has put a lot of thought into its technology investments, even taking on the role of technology developer at times. Commerce put in a browser technology intranet when other banks were moving from mainframe to client server technologies, Jonathan Kemper says. Now many other banks are moving to browser intranets, while Commerce saved millions of dollars by skipping the middle step. The company also developed a system of keeping track of commercial customers and prospective customers. Not only does the system track Commerce representatives’ calls on customers, it tracks what relationships they have with other banks, information on changes in the customers’ businesses, and more.

Says Stumpf: “Commerce is fairly progressive in technology, and its retail banking is not a stodgy throwback.” He also notes that its size helps keep it nimble. “They can afford to deploy technology and have sophisticated products and are still small enough [to] keep decision making local.”

Smarter, not larger, is what Commerce seems to be promoting, with its managers referring to its tech strategy as an “intelligent use of technology.” Board member James B. Hebenstreit, president of Bartlett & Co., a Springfield, Missouri grain company, says the board has played an important role in developing and supporting this philosophy. “As they have seen technological shifts and advances in their respective industries and companies, board members have provided critical input at the strategic level,” Hebenstreit says. “In the banking industry there are more traps; technologies that have cutting-edge sizzle can bring unintended consequences, or lack momentum, or simply be unproven. Intelligent use of technology compels the company to invest for a solid return. It’s not Commerce’s job to engage in distracting experiments; its job is to bring value to the next level in serving customers.”

Today, Commerce claims about 12% of the market share in its largest markets, Kansas City and St. Louis. That, notes David Kemper, leaves plenty of room for growth. And he and his brother have really only begun their tenure. It is only in the last four or five years, Jonathan Kemper says, that they have replaced their father’s executive team with one of their own as the older executives have retired.

James Kemper “made a point of “bringing us in at a time when we had the benefit of very strong people who helped us with the transition,” says Jonathan Kemper. “We had people celebrating 45 years with the bank. We came in young, but we had very strong people to help us.”

Going forward, the most pressing issue may be how they manage to keep their open, down-to-earth culture as the company expandsu00e2u20ac”a problem many thriving companies struggle with. “It’s always a worry,” David Kemper concedes.

“But it’s so embedded in our culture. In who we are. You can be a certain size and be large enough to have critical mass and still not be so big that you don’t know each other.”

Family values will likely play a role. Jonathan Kemper has a portrait of great-grandfather William T. Kemper in his office. When asked whether any quotes from his forebears still float around the office, the younger Kemper chuckles and says, “Oh, yes.” One is the comment about there being no romance in an honest banker. Another, spoken by his great-grandfather before the days of the Federal Deposit Insurance Corp., was this:

“When all the banks in the United States go down the drain, Commerce is going to be the last one.”
So far, so good.