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BankUnited, Inc. (BKU - Analyst Report) reported its third quarter 2012 earnings of 48 cents per share, marginally beating the Zacks Consensus Estimate of 44 cents. This also compares favorably with the year-ago earnings of 45 cents.

Better-than-expected results were primarily aided by augmented top line and lower operating expenses. Further, the company witnessed modest loan and deposit growth. Yet, during the quarter, mixed asset quality metrics as well as marginal decline in profitability and capital ratios were on the downside.

Net income for the reported quarter came in at $49.6 million as against $45.6 million in the year-ago period.

Performance Details

BankUnited’s total revenue was $196.0 million, marginally up from $195.9 million in the year-ago quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $167.0 million.

Net interest income surged 8.2% year over year to $139.4 million. The elevation was mainly attributable to higher interest income and lower interest expenses. Yet, net interest margin dipped 91 basis points (bps) from the prior-year quarter to 5.39%.

Non-interest income stood at $25.7 million, declining 21.6% from 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 mortgage insurance income. 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 $77.2 million, down 3.2% from $79.8 million in the year-ago quarter. The decline was mainly a result of lower aggregate other real estate owned (OREO) costs, reduced foreclosure expenses as well as lower professional fees. However, these were partly mitigated by higher employee compensation and benefits along with increased occupancy and equipment expenses and rise in deposit insurance costs.

Asset Quality

Asset quality witnessed mixed movements in the third quarter. The ratio of nonperforming loans to total loans dipped 8 bps year over year to 0.62%. Likewise, net charge offs decreased 37.6% year over year to $1.9 million. On the other hand, provision for loan losses increased substantially to $6.4 million from $1.3 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 $5.3 billion from $4.1 billion as of December 31, 2011. The augmentation largely came from increases in new loans, partly offset by reduced covered loans.

Total deposits for the quarter stood at $8.5 billion compared with $7.4 billion as of December 31, 2011. The increase was primarily due to the higher levels of demand deposits.

Profitability and Capital Ratios

BankUnited’s profitability and capital ratios exhibited a modestly cautious approach. As of September 30, 2012, tier 1 leverage ratio was 12.89% versus 13.06% as of December 31, 2011. Likewise, Tier 1 risk-based capital ratio was 34.31% compared with 41.62% as of December 31, 2011. Total risk-based capital ratio came in at 35.64% as against 42.89% as of December 31, 2011.  

The return on average assets was 1.56% in the reported quarter compared with 1.67% in the prior-year quarter. As of September 30, 2012, return on average stockholders' equity came in at 11.41% down from 12.13% as of September 30, 2011.

Peer Performance

Similar to BankUnited, KeyCorp’s (KEY - Analyst Report) third quarter earnings slightly outpaced the Zacks Consensus Estimate. Improved top line, continued improvement in credit quality and robust capital ratios were the primary highlights for the quarter. However, escalating operating expenses slightly subdued the results.

The third quarter earnings of SunTrust Banks Inc. (STI - Analyst Report) slightly lagged the Zacks Consensus Estimate. Though benefiting from the actions embarked upon during the reported quarter, overall results were not up to the mark. Total revenue (excluding certain non-recurring items) declined while operating expenses increased. Yet, stable asset quality and capital ratios as well as a slight improvement in loan and deposit balances were the tailwinds.

Our Viewpoint

We believe BankUnited’s extensive capital deployment activity makes it an attractive asset for yield-seeking investors. Further, the company continues to grow organically with the opening of new branches. 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 impact 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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