Though many banking companies its size are struggling to expand earnings, UMB Financial Corp. in Kansas City, Mo., is coming off its best quarter in years and appears poised for a strong 2007.
More than half the company's income is generated from fees, clearly a plus while the yield curve remains persistently inverted. The $8 billion-asset UMB reported a 31% increase in earnings last quarter, to $17.3 million, and, at 41 cents, earnings per share exceeded the average of analysts' expectations by three cents, according to Thomson Financial.
"At this point in the banking cycle, they are a little bit more uniquely positioned to do well," said Peyton Green, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp.
But the yield curve will not stay inverted forever, and UMB, which for years has relied heavily on commercial lending and the fee-related business that comes with it to drive earnings, is working to build up its retail lending business. J. Mariner Kemper, UMB's chairman and chief executive officer, agreed that conditions favor UMB now, but he said it must diversify its portfolio because, inevitably, one type of lending "will peak while others hit a valley."
Under Mr. Kemper, who succeeded his brother, R. Crosby Kemper 3rd, as president and CEO in 2004, the company has been realigning its branch network in an effort to boost mortgage and home equity lending and to bring in more retail deposits. It has also been training employees to improve cross-selling of retail loans to commercial customers, and repackaging its products to offer better loan rates to existing customers.
Commercial loans still account for 61% of its total loans, but UMB is adding retail business. It said that its retail customer total grew 6% last year and that 37% more customers had home equity lines of credit.
One way it has expanded home equity lending was the offering of discounted rates to existing customers. Last year UMB's portfolio of home equity loans grew 45%, to nearly $216 million, according to SNL Financial LC.
In addition the company has opened nine branches in the past two years, closed 15, and sold nine. It has about 130 branches in seven states, fewer than before Mr. Kemper took over but arranged in what he called a stronger network overall.
"We may have had some in the wrong place," he said.
At Dec. 31, the average UMB branch had $45.4 million of deposits, up 24% from three years earlier. Loans per branch were $27.1 million, up 53% since the end of 2003. UMB has opened a branch in Denver and plans to open one this summer in Scottsdale, Ariz. Mr. Kemper said UMB would continue adding branches where it sees population growth in its current markets.
"There is no real magic to it," he said. "All we have to do is follow around King Supers and Safeways and Starbucks."
Mr. Kemper said commercial lending would remain an important part of its business and a continuing way to leverage fee income.
Many of UMB's commercial borrowers also use the company's wealth management, trust, investment, and succession-planning services. It also generates fees from such businesses as mutual fund processing and health savings accounts.
"We have an incredibly well balanced balance sheet," he said. "It gives us real strength when people are facing margin compression."
Indeed, though net interest margins have been declining at many banks, UMB reported a 9-basis-point increase in the first quarter from the year earlier, to 3.32%.
A report released by the Federal Deposit Insurance Corp. said the banking industry as a whole saw first-quarter earnings decline by 2.5% when compared to the year earlier and that 50.3% of institutions reported lower quarterly net income.
Even so, the company's return on assets and return on equity have lagged the industry's. Its net interest margin remains below that of other banks in the $1 billion- to $10 billion-asset class and its first-quarter return on assets of 0.79% and return on equity of 9.13% were both well below its peers' averages.
FTN Midwest's Mr. Green, said that UMB is on the right track, though. The company is making much better use of its retail branch network, he said, and Mariner Kemper, more than his predecessors, is committed to boosting profits and improving UMB's competitive standing.
Mr. Kemper, who was 31 when he became CEO, is the latest Kemper to run UMB, in a line that began with his great-grandfather, who founded the bank nearly a century ago, and includes his grandfather and father, each of whom ran the company for roughly four decades. Mariner's brother Alexander "Sandy" Kemper was CEO from July 1999 to March 2000, and Crosby was CEO from January 2001 to May 2004.
"I think probably, out of the three sons, Mariner has more of a passion about being in the banking business," Mr. Green said.
Looking ahead, Mr. Kemper said he plans to expand in UMB's current markets rather than spending on expansion into new ones.
"There is no reason to think about that with all the opportunities we have for market share gain right under our nose. Why go into a new town when you can do well where you are?" Mr. Kemper asked.
