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BankUnited, Inc. (BKU) reported first-quarter 2013 earnings of 47 cents per share, marginally beating the Zacks Consensus Estimate of 45 cents. However, this compares unfavorably with the year-ago earnings of 49 cents.

Better-than-expected results were primarily aided by growth in net interest income and a decline in operating expenses, partially offset by lower fee revenues. Further, growth in loan and deposit balances as well as strong capital and profitability ratios were the tailwinds. However, deterioration in credit quality was the downside.

Net income for the reported quarter came in at $48.2 million, down 4.2% from $50.3 million in the year-ago period. Net income in the prior-year quarter included $5.3 million of bargain purchase gain related to the acquisition of Herald National Bank.

Performance Details

BankUnited’s total revenue reached $194.2 million, declining 6.0% from $206.7 million in the year-ago quarter. However, total revenue surpassed the Zacks Consensus Estimate of $180.0 million.

Net interest income surged 11.6% year over year to $153.8 million. The elevation was mainly attributable to higher interest income and lower interest expenses. However, net interest margin decreased 16 basis points (bps) from the prior-year quarter to 5.93%.

Non-interest income stood at $17.8 million, plunging 51.0% from the prior-year quarter. The fall was primarily due to amortization of Federal Deposit Insurance Corporation (:FDIC) indemnification asset and net loss on indemnification asset along with reduced FDIC reimbursement of costs of resolution of covered assets. These were partly offset by higher gain on sale of investment securities available for sale and rise in income from resolution of covered assets.

Non-interest expense was $80.5 million, down 4.3% from the prior-year quarter. The decrease was mainly a result of lower employee compensation and benefits and impairment of other real estate owned costs. However, these were partially offset by higher occupancy and equipment expenses, deposit insurance costs, professional fees along with other expenses.

Asset Quality

Asset quality deteriorated during the quarter. The ratio of total nonperforming loans to total loans increased 12 bps year over year to 0.74%. Likewise, net charge offs to average loans surged 56 bps year over year to 0.73%.

Further, provision for loan losses increased 36.5% from the prior-year quarter to $12.0 million.

Loans and Deposits

As of Mar 31, 2013, total loans, net of discount and deferred fees and costs, stood at $5.8 billion, up 3.6% from $5.6 billion as of Dec 31, 2012. The augmentation largely came from increases in new loans, partly offset by reduced covered loans.

Total deposits were $8.7 billion, up 2.4% from $8.5 billion as of Dec 31, 2012. The increase was primarily due to the higher levels of demand deposits as well as savings and money market deposits.

Profitability and Capital Ratios

BankUnited’s capital ratios were a mixed bag. As of Mar 31, 2013, tier 1 leverage ratio was 13.64%, up from 13.16% as of Dec 31, 2012. However, Tier 1 risk-based capital ratio was 31.14%, down from 33.60% as of Dec 31, 2012. Total risk-based capital ratio came in at 32.35%, dipping from 34.88% as of Dec 31, 2012.

Though profitability ratios remained strong, there was a slight deterioration. The return on average assets was 1.55%, decreasing from 1.74% as of Dec 31, 2012. As of Mar 31, 2013, return on average stockholder equity came in at 10.67%, declining from 12.76% as of Dec 31, 2012.

Performance of Other Major Regional Banks

M&T Bank Corporation (MTB) and Comerica Incorporated (CMA) reported better-than-expected first-quarter earnings. For M&T Bank, earnings were primarily aided by reduced provision for credit losses, partially offset by rise in expenses and declining top line. Comerica’s results reflected reduced expenses, partly offset by a decline in revenues.

Nevertheless, U.S. Bancorp (USB) was aided by reduced non-interest expenses and a lower provision for credit losses, as the company’s first-quarter earnings were in line with the Zacks Consensus Estimate.

Our Viewpoint

BankUnited is comfortably placed to grow through organic and inorganic means on account of strong liquidity levels. Further, robust capital deployment plans will prove accretive to its overall growth going forward. However, escalating expenses, compressed net interest margin, exposure to perilous residential loans and competitive markets will likely weigh down its financials in the near to mid term.

BankUnited currently retains a Zacks Rank #3 (Hold).