Why Is BankUnited (BKU) Down 5.9% Since the Last Earnings Report?

A month has gone by since the last earnings report for BankUnited, Inc. BKU. Shares have lost about 5.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

BankUnited Q1 Earnings Beat on Higher Revenues

BankUnited’s first-quarter 2017 earnings per share of $0.57 surpassed the Zacks Consensus Estimate by a penny. Moreover, the bottom line increased 11.8% from the year-ago-quarter.

Better-than-expected results were primarily driven by higher net revenue, partially offset by escalated expenses and substantially higher provisions. Notably, the company witnessed slowdown in loan and deposit growth while credit quality worsened.

Net income for the quarter increased 13.5% year over year to $62.3 million.

Revenue Growth Offsets Rise in Costs

Total net revenue for the quarter came in at $258.7 million, lagging the Zacks Consensus Estimate of $260.5 million. However, the reported figure was up 12.5% year over year.

Net interest income climbed 11.5% year over year to $230.6 million, led by higher interest income, partially offset by an increase in interest expenses.

However, net interest margin fell 13 basis points year over year to 3.70%. The origination of new loans at current market yields, lower than those on covered loans, was mainly responsible for this decline.

Non-interest income was $28.1 million, increasing 21.3% from the year-ago quarter. The rise was primarily driven by an increase in all fee income components. Notably, the quarter recorded a rise in net loss on FDIC indemnification.

Non-interest expenses were up 10.2% from the year-ago quarter to $156.6 million due to a rise in all the components, except occupancy and equipment, and telecommunications and data processing.

Credit Quality Deteriorates

As of Mar 31, 2017, the ratio of total nonperforming loans to total loans was 0.68%, down from 0.70% as of Dec 31, 2016. However, net charge-offs to average loans was 0.29%, up from 0.13% as of Dec 31, 2016.

Also, provision for loan losses for the quarter was $12.1 million, significantly up from $3.7 million in the prior-year quarter. The increase mainly reflected a jump in provision related to taxi medallion loans.

Solid Balance Sheet & Capital Ratios

As of Mar 31, 2017, net loans totaled $19.3 billion compared with $19.2 billion as of Dec 31, 2016. Further, total deposits amounted to $19.9 billion, up from $19.5 billion as of Dec 31, 2016.

As of Mar 31, 2017, Tier 1 leverage ratio was 8.7% while the Tier 1 risk-based capital ratio came in at 11.8%. Further, total risk-based capital ratio was 12.6% as of the same date.

Steady Profitability Ratios

As of Mar 31, 2017, quarterly return on average assets was 0.91%, on par with the prior-year quarter level. Also, return on average stockholders’ equity was 10.08%, up from 9.76% as of Mar 31, 2016.

Outlook

Management plans to achieve a deposit growth of $4 billion in 2017. This will likely include $3 billion of loans and $1 billion in bonds.

Also, management plans to grow loans and interest earning assets at the same rate as 2016. Loan growth is expected to be driven by strong growth in C&I and mortgage warehouse lending and a marginal rise in CRE portfolio.

Management believes that as the regulatory attitude towards commercial real estate normalizes, the company would be able to witness some improvement in its CRE portfolios particularly in the second half of 2017.

During the year, deposit growth is projected to exceed loan growth and the loan-to-deposit ratio is expected to be under 100%.

Management expects combined covered loans in 2017 to decline at a consistent pace and come in the range of $70-75 million per quarter.

Management is of the opinion that based on its most recent cash flow projections, the combined yield on the indemnification asset and the covered loans should be around 14.5% in 2017. Also, it believes that the amortization of the indemnification asset should decline in 2017.

The company expects to see continued growth in net interest income during the year.

However, due to the run-off of the covered loans, NIM is expected to remain pressurized in 2017 and come within the range of 3.40-3.60%, despite assuming two rate hikes in 2017.

Management expects the ALLL to gradually increase as a percentage of loans in 2017.

Due to seasonality in the portfolios, management expects net charge-off rate to increase gradually in 2017.

On the expense front, operating expenses are expected to grow at the high single-digit rate in 2017. Moreover, as the company continues to add to its deposit gathering teams and supplement its back office support around both the deposit and loan teams, most of this growth will be attributable to rise in compensation expenses.

Also, the company projects an effective tax rate to be in the range of 33–34% in 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter.

BankUnited, Inc. Price and Consensus

BankUnited, Inc. Price and Consensus | BankUnited, Inc. Quote

VGM Scores

At this time, BankUnited's stock has a poor score of 'F', on both growth and momentum front. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall,  the stock has an aggregate VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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