Diversify or face the consequences.
UMB Financial in Kansas City, Mo., learned that lesson the hard way last year. The $19 billion-asset company, which once touted a revenue model built heavily around its funds management business, took its lumps as its Scout Funds unit suffered from large outflows.
That prompted UMB to tighten up on expenses and rely more on revenue tied to its balance sheet. At March 31, net interest income accounted for more than half of all revenue, contrasting sharply with its 42% contribution a year earlier.
"When one thing isn't working, something else is," Mariner Kemper, UMB's chairman, president and chief executive, said during a recent interview. "We liked where we were, [with fees] driving performance. So it's not a desired outcome, but the diversity is great."
Kemper, along with Chief Financial Officer Mike Hagedorn, recently discussed UMB's changing revenue mix, while admitting that they had been overly optimistic about the prospects of a rising interest rate environment. Here is an edited transcript of the discussion.
What's going on with the Scout Funds business?
MARINER KEMPER: We're focused on building back to where we were. I can never predict exactly what's going to happen with flows, but it's starting to feel like that's moderated a bit. We don't expect Scout to contribute at the levels it was contributing a few years ago for some time. It's more about getting it to a point where we can focus on other things.
We're not feeling anything that the rest of the industry hasn't felt. The whole industry is [dealing with] outflows, so it's not something that's particularly unique to us.
What strategies are you using to boost fees?
KEMPER: The good news, on a linked quarter basis, noninterest income was up slightly. We're seeing bank card fees grow through our health card business. All of our other engines are starting to hit. Even with Scout not contributing at what it was, we're still at [about] 50% fees. It's still a strong part of our business.
What else are you doing to increase revenue?
MIKE HAGEDORN: The net interest margin has become a bigger [contributor] as we've been lending more, and the balance sheet is bigger. We completed a fairly large acquisition of Marquette Financial [in May 2015]. The yields on those loans, especially in the asset-based and factoring businesses, are better. That will alleviate some of the lost revenue related to Scout.
Within corporate trust, our business [with default workouts] is growing really fast. I don't know what that says about the economy, necessarily, but our ability to play in that space is growing considerably. The other part of the business that's growing is held-to-maturity [securities] for hospitals, higher ed, and health care-related entities. Those have fixed rates and longer terms.
Is most of the loan growth tied to Marquette?
HAGEDORN: Obviously, the growth metrics are being influenced by the acquisition — but even if you back that out, [first-quarter] organic growth on loans was 16% [from a year earlier]. That's strong.
KEMPER: We liked where we were, [with fees] driving performance. So it's not a desired outcome, but the diversity is great.
When Scout ran into trouble, analysts said it exposed inefficiencies at UMB. Is that a fair assessment?
KEMPER:You have to take the last decade in three phases for us. Up to the crisis, we were rebuilding our model for growth. Then you hit the crisis — our quality came through, and our investors and analysts liked our story even better.
The analyst community has short memories, which I think is unfair. Looking at our peer group, they're all coming off a floor [since the financial crisis]. Their growth rates are high [compared to UMB].
Then you had regulatory and compliance costs, and persistent low interest rates.
From a model perspective, we, unlike most banks, had half of our assets in fixed income. I had been managing our company for a raising rate environment, and I was committed to that. … I probably held onto that strategy longer than I should have. Most companies can operate with one or two headwinds without changing course, but when you have four of them hitting you at the same time, it necessitates change.
Are there any cost-cutting examples?
KEMPER: It's absolutely everything. We have a program in our company called "Bright Ideas" which started in the fourth quarter. We've had more than 200 ideas submitted from janitors, mailroom employees, everybody.
Two cool stories — some clerical folks recognized that for years we had not been passing on some fees. That didn't come from management — it came from the bottom up. And our mailroom associates uncovered some discrepancies and changes in the way the Postal Service was billing. So we changed one of our processes, and that equated to over $200,000 in savings.
It's reassessing open positions. It's reviewing conferences and subscriptions. I liken it to the problem that success drives — at the individual level, you start treating money like it is funny money, like it just comes from some pot somewhere. It's a challenge for organizations to stay entrepreneurial.
What are we missing about the UMB story?
KEMPER: We're proud of always doing what's right, and we're risk managers first. The thing we're ultimately proud of is that, as a public company, we can do what's right, and still deliver performance.
HAGEDORN: We understand that we have a responsibility to help repair the industry's reputation. We take that seriously.
In my 11 years [at UMB], we went from having less than $7 billion [in assets] to over $19 billion. You think about how that was done with Mariner as CEO, and in a nutshell I'd say that we out-localed the nationals, and we out-nationaled the locals. Our business model is hard to replicate.