Fee Income Aids BankUnited Earnings Beat - Analyst Blog

BankUnited, Inc.'s BKU first-quarter 2014 earnings per share of 53 cents surpassed the Zacks Consensus Estimate of 44 cents primarily on the back of growth in non-interest income. The reported figure also compared favorably with 47 cents earned in the prior-year quarter. Notably, the results included net gain on the sale of covered commercial and consumer loans as well as commercial other real estate owned (OREO).

Our quantitative model had also conclusively projected that BankUnited would beat the Zacks Consensus Estimate, as it had the right combination of two key components – a positive Earnings ESP and a Zacks Rank #2 (Buy).

Better-than-expected results were primarily attributable to growth in non-interest income and net interest income, partially offset by higher operating expenses. A continuous rise in loan and deposit balances was the tailwind. Profitability ratios and credit quality were mixed bags while capital ratios deteriorated in the quarter.

Net income for the quarter came in at $55.3 million, up 14.7% from $48.2 million in the year-ago period.

Performance Details

BankUnited's total revenue was $220.8 million, up 12.3% year over year. The rise was driven by increase in both interest income and non-interest income.

Net interest income (excluding provision for loan loses) increased 8.2% year over year to $166.5 million. However, net interest margin decreased 88 basis points (bps) from the prior-year quarter to 5.05%.

Non-interest income improved 50.0% from the prior-year quarter to $30.2 million. The rise was primarily due to gains from the sale of loans and increases in other non-interest income as well as service charges and fees. These were partly offset by net loss on indemnification asset and lower gain on investment securities available for sale.

Non-interest expense increased 23.8% year over year to $102.5 million. The rise mainly resulted from an increase in all the components, except foreclosure and other real estate owned expenditures, professional fees, telecommunications and data processing as well as other non-interest expense.

As of Mar 31, 2014, net loans were $9.9 billion, up 10.2% from $9.0 billion as of Mar 31, 2013. Total deposits were $11.1 billion, up 5.6% from $10.5 billion as of Mar 31, 2013.

Asset Quality

Asset quality was a mixed bag during the quarter. The ratio of total nonperforming loans to total loans was 0.30% as of Mar 31, 2014, down 9 bps from Dec 31, 2012.

Further, provision for loan losses declined 29.8% year over year to $8.4 million. However, net charge-offs to average loans was 0.35%, up 5 bps from 0.31% as of Dec 31, 2013.

Profitability and Capital Ratios

BankUnited's capital ratios deteriorated while profitability ratios were a mixed bag. As of Mar 31, 2014, Tier 1 leverage ratio was 12.12%, down from 12.42% as of Dec 31, 2013. Tier 1 risk-based capital ratio was 19.42% versus 21.06% as of Dec 31, 2013. Total risk-based capital ratio came in at 20.27% against 21.93% as of Dec 31, 2013.

The return on average assets came in at 1.46%, declining from 1.55% as of Mar 31, 2013. However, as of Mar 31, 2014, return on average stockholder equity came in at 11.41%, increasing from 10.67% as of Mar 31, 2013.

Our Viewpoint

Rising expenses and intensely competitive markets are expected to weigh upon the company's financials in the near term. However, given its steady balance sheet position, BankUnited is well poised to grow both organically and inorganically in the coming quarters.

Performance of Other Major Regional Banks

Among other major regional banks, KeyCorp. KEY, SunTrust Banks, Inc. STI and The Bank of New York Mellon Corp. BK surpassed the Zacks Consensus Estimate. While SunTrust benefited from prudent expense management and lower provisions, KeyCorp's results were driven by lower expenses, a decline in provision for loan and lease losses and higher fee income.

For BNY Mellon, results benefited from growth in net interest revenue and fee income, along with decreased operating expenses. However, lower benefit from provision acted as a dampener.