UMB's Kemper Proves Boring Is Better: Best In Class

KANSAS CITY ( TheStreet) -- J. Mariner Kemper is something of an enigma to the banking world, but his careful approach may exemplify what it takes to maintain profits over the long haul.

The 36-year-old chairman and CEO of UMB Financial ( UMBF) seemed like a stick in the mud to the rest of the industry during subprime's halcyon days because of his risk-averse nature and focus on slow and steady growth.

This conservative business strategy, however, belies Mariner's creative flare and drive for success. When asked why he doesn't use his first name, he answers simply: "Because John's boring."

Mariner is the sixth in a line of Kempers involved in the top ranks of the company, starting with his great-great grandfather, William Thornton Kemper, who acquired a controlling stake in UMB's predecessor in 1913. William Thornton made the Kemper name a dominant force in the Midwest, having been a big investor in Commerce Bancshares ( CBSH) 10 years prior, and David Kemper, Mariner's cousin, is president and CEO of that Kansas City competitor today. See timeline:
Kemper Timeline
chart

Kemper was determined to be an artist when he was younger, having dabbled in ceramics during his time at the University of Puget Sound in Tacoma, Wash. He's also an avid runner who competes in half-marathons and splits his time between Kansas City, where UMB is based, and Denver, where his wife and two children reside.

When his two brothers stepped down for "personal" reasons in May 2004, Kemper was deemed best to lead UMB. He has spent most of the past two decades working at the bank, initially verifying employment records for credit card applications at the age of 16. He revamped its Colorado affiliate, building it out from the ground up. ("They made him work," says Peter Sorrentino, portfolio manager at Huntington Funds. "They didn't just say here are the keys - you drive it now.")

Since taking the helm, Kemper has worked to transform UMB from a regional bank into a financial-services provider with an assortment of products. He has kept a tight rein on credit risk, despite pressure from investors, and even the regulators examining UMB's books.

"When we would do our analyst calls -- or for that matter, when the regulators would come in and, say , 'How come you're not using your capital more aggressively? How come you're not doing the subprime thing more aggressively? How come you're not doing this? How come you're not doing that? Like everybody else,'" Kemper recalls, "We'd just stick to our guns every time and say, 'This is our profile. This is what we do. You can either buy our stock or sell our stock.'"

UMB appeared to be underperforming during the subprime boom, but Kemper's determinacy ultimately paid off. Since his appointment as CEO, UMB's earnings have more than doubled on asset growth of just 19%. In 2008, the pinnacle of the financial crisis, the Kansas City, Mo.-based bank posted 32% earnings growth. Net charge-offs represented just 0.28% of its loan book vs. an average rate of about 1.8% for U.S. thrifts and banks.

When asked for a suggestion for the best CEO of a small-cap bank, Sorrentino thought immediately of Kemper.

"In boom times, it looked like they were eating stupid cookies because their portfolio wasn't growing as much," Sorrentino explains. "But they ... just did it right the whole way through the crisis; they have a big asset management arm; they're very smart on credit."

Sorrentino has held UMB stock in his portfolio for years. Its performance hasn't been as breathtaking as more troubled companies this year, but neither did the stock plunge quite as precipitously during the broad equities sell-off from the fall of 2008 through early March of this year. Its shares have traded in a range of $33.65 to $60 over the past 52 weeks, with a market cap of $1.64 billion as of Monday's close at $40.36.

"They didn't go down nearly as much as the bad guys, and therefore they haven't bounced nearly as much either," says Roger Young, a portfolio manager who focuses on bank stocks at Miller/Howard Investments.

"We're not a stock for a trader," Kemper adds. "You won't see the swings in our earnings; you're going to see stable growth."

Indeed, while Kemper was popping proverbial champagne over UMB's tried-and-true stability last year, hundreds of other banks, including Bank of America ( BAC), Citigroup ( C), JPMorgan Chase ( JPM), Wells Fargo ( WFC), Goldman Sachs ( GS) and Morgan Stanley ( MS), required trillions of dollars in federal assistance through various programs. Not to mention the high-profile names that bulked up on subprime, most notably Bear Stearns, Washington Mutual and Lehman Brothers, and simply collapsed.

And while not having accepted any government support is a Kemper point of pride, UMB is still paying the price. A raft of bank failures across the country has depleted the Federal Deposit Insurance Corp.'s reserves, and led to hefty "special assessment" fees for all banks, regardless of size, bailout, earnings or non-performing asset statistics.

Largely as a result of $4.6 million in added regulatory costs, UMB's second-quarter earnings dropped 20%. While other bank CEOs cite the weak economy, delinquent loans, or repaying bailout funds as their biggest grief, Kemper calls this his "greatest frustration" in the post-crisis world.

"Why have myself and my team and those before me done what we've done for all these years and there's no reward or benefit to operating a sound organization?" Kemper asks. "That's been very, very frustrating to us, to have to pay these premiums that we've been paying when we've been doing all the right things."

Nonetheless, morale remains high at UMB, simply because of bragging rights. Kemper places as high a priority on the satisfaction of his employees as he does that of his customers. One of his key expansion strategies is hiring top talent away from struggling competitors. His deputies scrutinize pools of potential employees to make sure they fit UMB's culture, while Kemper spends a good deal of time budgeting out the resources to "pay up" for that top talent.

"Having the best people in the business, bar none, is what will drive our success," says Kemper. "It's not technology; it's not strategy; it's people. If you've got the right people, you're going to build the right strategy; if you've got the right people, you're going to make the right technology decisions. And you're going to have the right go-to-market strategy."

Kemper also holds a quarterly meeting with 10 to 15 employees who are hand-picked from all levels of the organization to "ask them what's on their mind." He and President Peter deSilva - a former top gun at Fidelity who has helped expand UMB's asset-management division - also embark on a two-week "Road Show" to engage employees throughout UMB's footprint, talk to them about what's going on at the company, and ask questions.

Beyond campaigning against what he calls "regulatory creep" and rallying the troops behind his strategies, Kemper is also looking for expansion opportunities within the bank's Midwestern footprint. He scans the FDIC's list of acquirable bank assets often, but says there are few deals he could embark upon with a clear conscience. Most of them would increase UMB's risk profile.

Kemper is especially focused on increasing the range of services that UMB offers -- with the addition of health-care card processing, a small insurance agency, and the expansion of its fund-management business, into back-office services for hedge funds. Kemper also sees big breaks ahead for UMB's trust services business, which can provide escrow, custody and underwriting services to public infrastructure projects over the coming years.

"We believe in the coming years we're going to have a government-led economy, and we think that the corporate trust business is going to give us a leg up," says Kemper.

Despite all the expansion, Kemper is staying close to home - a value passed down from his grandfather, R. Crosby Kemper, who often told Kemper's father, R. Crosby Jr., to "row close to shore." In other words, never lose sight of the sand when wading out into a sea of risk.

"The Street, the investor population, believed that we ... could leverage our earnings streams more, if we had taken the same risks as the rest of the industry," says Kemper. "I'm thrilled to be able to stand up and say: Those strategies worked for us! We didn't erase 20 years of earnings by taking three years of risks."

-- Written by Lauren Tara LaCapra in New York.

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