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Tickers in this Article: BKU, MTB, KEY
BankUnited, Inc. (BKU) reported its second quarter 2012 earnings of 48 cents per share, beating both the Zacks Consensus Estimate and year-ago earnings by 4 cents. The improvement came on the back of lower operating expenses and increased net interest income, partially offset by reduced non-interest income.

Net income for the reported quarter came in at $48.9 million as against $44.0 million in the year-ago period.

Performance in Detail

BankUnited's total revenue was $199.6 million, down 2.6% from $205.0 million in the year-ago quarter. However, revenue surpassed the Zacks Consensus Estimate of $168.0 million by 18.8%.

Net interest income jumped 24.3% year over year to $145.8 million. The surge was mainly attributable to higher interest income and lower interest expenses. However, net interest margin dipped 17 basis points from the prior-year quarter to 5.82%.

Non-interest income stood at $21.7 million, declining 59.0% from $52.9 million in the prior-year quarter. The fall was primarily due to lower accretion of discount on the Federal Deposit Insurance Corporation (FDIC) indemnification asset along with reduced FDIC reimbursement of costs of resolution of covered assets and lower income from investment services. These were partly offset by higher income from resolution of covered assets, increased service charges and fees along with a gain on sale of investment securities.

Non-interest expense was $83.0 million, down 13.4% from $95.9 million in the prior-year quarter. The decline was mainly a result of lower aggregate other real estate owned (OREO) costs, reduced foreclosure expenses as well as lower deposit insurance costs. However, these were partly mitigated by higher employee compensation and benefits along with increased occupancy and equipment expenses.

Asset Quality

Asset quality witnessed mixed movements in the quarter. The ratio of nonperforming loans to total loans dipped to 0.57% from 0.89% in the prior-year quarter. On the other hand, net charge offs increased 13.6% year over year to $3.7 million and provision for loan losses was $2.7 million compared with a credit provision of $2.9 million in the year-ago quarter. The hike in provision reflected the company's new loan originations.

Loans and Deposits

BankUnited's total loans, net of discount and deferred fees and costs, in the reported quarter increased to $5.1 billion from $4.1 billion as of December 31, 2011. The augmentation largely came from increases in new loans, which included loans from the acquisition of Herald National Bank, partly offset by reduced covered loans.

Total deposits for the quarter expanded 11.7% to $8.2 billion from $7.4 billion as of December 31, 2011. The increase was primarily due to the higher levels of demand deposits including non-interest-bearing and interest bearing deposits.

Profitability and Capital Ratios

BankUnited's profitability and capital ratios exhibited a modestly cautious approach. As of June 30, 2012, tier 1 leverage ratio was 12.83% versus 13.06% as of December 31, 2011. Likewise, Tier 1 risk-based capital ratio was 34.82% compared with 41.62% as of December 31, 2011. Total risk-based capital ratio came in at 36.19% as against 42.89% as of December 31, 2011.  

The return on average assets was 1.59% in the reported quarter compared with 1.64% in the prior-year quarter. As of June 30, 2012, return on average stockholders' equity came in at 11.76% down from 12.17% as of June 30, 2011.

Peer Performance

The second-quarter earnings of KeyCorp (KEY) - one of the peers of BankUnited - exceeded the Zacks Consensus Estimate. The improvement came on the back of stable non-interest income, enhanced credit quality and robust capital ratios. However, dwindling net interest income and rising operating expenses slightly subdued the results

Likewise, M&T Bank Corporation's (MTB) second-quarter 2012 earnings topped the Zacks Consensus Estimate. The results were aided by increased net interest and non-interest income as well as lower operating expenses. Mortgage banking revenues posted a decent rise in the quarter. Moreover, improved capital ratios reflected the company's strong capital position. However, the mixed credit metrics were the dampeners.

Our Viewpoint

We believe that BankUnited's extensive capital deployment program makes it an attractive asset for yield-seeking investors. Recently, the company hiked its quarterly dividend by 21% and also completed the acquisition of Herald National Bank. Moreover, we are quite impressed with the company's decent top-line growth as well as continuously falling operating expenses.

Nevertheless, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company's financials in the subsequent quarters.

BankUnited currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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