UMB's Fee Revenue Providing Flexibility for Pricing, Selecting Loans

UMB Bank's Mike Hagedorn believes he has an advantage over other lenders, and he is looking for ways to press it.

Hagedorn, president and chief executive of the Kansas City, Mo., lender, has the unusual luxury of a diverse, and healthy, revenue stream. Noninterest income makes up about 60% of total revenue at UMB Financial, the $16.3 billion-asset bank's parent, leaving the bank to focus on what has historically been its strength: Lending to safe, high-quality commercial borrowers.

Such strong fee revenue, plus a low-cost deposit base, lets UMB expand its loan portfolio by competing on price. Loan growth has been strong, up about 9% in the third quarter from a year earlier, while its net interest margin — which has historically been on the low side — ticked down 8 basis points, to 2.53%.

Hagedorn's challenge is to figure out how to keep this strategy from getting stale. That means constantly finding new sources of cheap deposits and new markets to lend in.

On the deposit side, UMB has found new sources of funds through its health care savings-account and private banking businesses. While the bank has not been a player in the M&A market in recent years, management has hinted that it may be ready to jump back in.

Hagedorn spoke with American Banker this week about UMB's strategy and where it may go next. Here is an edited excerpt.

UMB is unusual in that more than half its fee revenue comes from fee-based businesses. What does that give you flexibility to do as a bank?

MIKE HAGEDORN: It allows us to stay focused on high credit quality. One of the things we talk a lot about at UMB is being diversified. Having that diversity of revenue allows us to have sustainable earnings across different economic environments.

Does having such strong fee revenue help you avoid stretching on loan terms?

Correct. If you were to look back historically at UMB's net interest margin, it wasn't one of the highest in the market even prior to 2008. If you're competing for the highest-quality credit on the market, by definition it's going to be on the lower end of the pricing spectrum.

It gets back to the business model. If [credit quality] is what's important to you, how do you supplement lower yields on your loan book? You do that with the diversity that fee businesses bring to your revenue streams.

You also have an unusually low cost of funds, at around 9 basis points. How have you managed to maintain such low deposit costs?

Being a midsize bank, having various different sources of deposits is very important to us. As an example, $1 billion of our deposits come from private banking. That didn't exist 10 years ago. Health care now is $900 million dollars in funding. Our retail side is up to $3.2 billion, and more importantly, our commercial deposits, which are generally noninterest bearing, make up 40% of the funding.

The important thing is to have diversity and sustainability in your funding sources because that gives you a competitive advantage on the earning asset side as you price loans. That allows us to be very competitive on loan pricing because we have this relatively lower cost of funds.

UMB has bought more than 20 companies over the last decade, but it's been several years since the last bank deal. How do you view the market for bank M&A?

UMB is a strategic buyer. We're looking for cultural fit, financial fit, a footprint that either augments what we already have or that we believe would fit into our business model. So what's important for us here is to make sure that these acquisitions drive long-term value for us.

We've been clear that we'd like to play in the bank-acquisition space, and we believe that consolidation is going to pick up in the not-too-distant future. But institutions that would meet our definition of a strategic fit are few and far between.

We have several markets where we have a relatively low market share, and those are places where we would seriously look at an acquisition. I think anywhere we currently do business would make a lot of sense for us — the Midwest, with a bias toward south and west.