By many accounts, UMB Financial Chairman and Chief Executive Mariner Kemper had a tough year.
The $18.5 billion-asset company badly missed Wall Street estimates last quarter, due in part to outflows and a sharp decline in fees at its Scout Investments unit. In response, the Kansas City, Mo., company launched an ambitious cost-cutting effort that includes staff reductions.
UMB's turnaround isn't expected to take place overnight. For that reason, Kemper makes American Banker's list of Community Bankers to Watch in the year ahead.
Some factors are largely out of UMB's control. Weak conditions in the equity markets have put pressure on the company's investment advisory business; its international fund, in particular, has taken a big hit.
The primary reason of UMB's recent woes – earnings fell 37% in the third quarter from a year earlier – has been its high-cost business model, industry observers said. Declines in fee income left the bottom line exposed, making cost-cutting an imperative.
UMB plans to lower its efficiency ratio to 70%; that figure stood at 80% at Sept. 30.
Kemper "has a lot on his plate," said Chris McGratty, an analyst at Keefe, Bruyette & Woods. "They don't have the cost discipline that some of their peers do."
Kemper recently discussed 2016's challenges in a wide-ranging Q&A. Here is an edited transcript.
Besides cost-cutting, what else will it help UMB's efficiency ratio?
MARINER KEMPER: This is a milestone that we feel comfortable we can accomplish, but it's not necessarily the end game. We certainly can't fully realize our operational excellence without interest rates rising. Nearly half of our earning assets are in the investment portfolio.We're focused on putting more of our earning assets into loans and we've been successful in doing that and will continue to do so.
Was the departure of Peter deSilva, UMB's president and chief operating officer, tied to the efficiency effort?
No, Peter's resignation was not related to our efficiency initiative. The timing of the announcement was less than ideal, but with the holidays, yearend activities, etc., it made sense to announce his departure in early November. Peter has been a great friend and a strong partner, and I value the advice and support he's given me over the last 11 years.
Does UMB plan to fill deSilva's post next year?
No. I assumed the president title and the CEOs of our asset management and servicing lines of business will report directly to me. [They] have decades of industry and UMB experience and lead strong teams.
Health Care Services has been moved to report to Mike Hagedorn, CEO of UMB Bank. The operational part of Peter's job — IT, operations, properties — will be led by Kevin Macke, a 14-year UMB veteran with extensive financial and operational experience. We've got a lot of depth and experience within the company, and I'm proud to recognize that talent and promote from within.
Fee income from Scout Funds has fallen in the past year. Do you expect that trend to continue?
Revenue at Scout has been impacted by net outflows over the past several quarters, primarily in the International Fund, and by the resulting shift in asset mix. Our fixed-income strategies — which carry lower margins — have comprised a greater percentage of total assets under management. Outflows from the International Fund could be slowing given many of the bigger investors have made their decision to leave, or stay, but there are no guarantees.
The continued focus is on performance in all of our strategies and leveraging our distribution channels. There are a lot of good things going on at Scout.
While we can't predict the exact timing for improved revenue, we would expect improved performance over time to impact net flows and ultimately lead to increased revenue. This sequence will be impacted by the timing of inflows as average assets under management drive revenue.
UMB completed its purchase of Marquette Financial in May. Is UMB looking for more acquisitions? If so, what are you targeting?
We have an active M&A team and are always looking for opportunities that are a strategic, financial and cultural fit for our business. We would be interested in bank acquisitions if the right one comes along. Our top priorities are growing areas where we currently have a smaller market share — Dallas/Fort Worth, Phoenix, Denver and St. Louis.
What is UMB's exposure to the energy sector? Have oil prices affected the loan book?
Energy-related loans made up approximately 3.5% of our portfolio at [Sept. 30]. These credits are largely in the midstream and servicing sectors, generally no "wildcatting" or similar customers. The lion's share of the loans is in Texas, with the rest in Colorado and Oklahoma. Energy-related loans have not had a material impact on UMB's credit quality metrics.
What else should the industry know about UMB's 2016 plans?
We're going to continue doing what we've been doing from a business perspective for the last 103 years. We're not waiting for rates to come up. That's not a strategy, so we're operating like rates are going to continue to be flat for the foreseeable future. We're a growth company; we have industry-leading deposit and loan growth and we're focused on making sure that we put more of that momentum to the bottom line.