Bank of Hawaii Corp. powered past analysts’ earnings estimates in the third quarter on the strength of a significantly improved credit portfolio, even as net income slipped 1.7 percent from the year-earlier period.

The state’s second-largest bank by assets posted earnings Monday of $43.3 million, or 92 cents a share, to top analysts’ consensus by 9 cents. Bankoh’s shares jumped $1.52, or 3.8 percent, to close at $41.88. The results were announced before the market opened.

In the third quarter of 2010, Bankoh had earnings of $44.1 million, or 91 cents a share.

Bankoh benefited last quarter from an 83.7 percent drop in its provision for credit losses and a 72 percent decline in net charge-offs.

"Credit was a big driver of bottom-line profitability in the quarter," said Peter Ho, Bankoh’s chairman, president and CEO. "Hawaii has been characterized to have a slowly improving economy, and we see some stability for sure. We’re increasingly seeing activity in the commercial market, so we feel pretty good."

Bankoh set aside just $2.2 million for potential loan losses last quarter compared with $13.4 million in the year-ago period, while it needed to charge off just $3.7 million in loans and leases versus $13.4 million in the third quarter of 2010.

Average commercial and industrial loans, basically lines of credit, rose 9 percent last quarter from a year ago while average commercial mortgages, which are business loans secured by real estate, gained 8 percent from the year-earlier period.

"The Hawaii economy certainly exceeded my expectations in terms of resiliency despite the concerns from the Japanese tsunami," said analyst Brett Rabatin of Birmingham, Ala.-based Sterne Agee. "Bank of Hawaii continues to execute well. It’s just a tough revenue growth environment for all banks right now."

The bank’s revenue — comprising net interest income and noninterest income — fell 8.7 percent last quarter to $147.6 million from $161.8 million in the year-ago period. Net interest income, the difference between what the bank pays depositors and what it brings in from loans, dipped 1.9 percent to $96.8 million from $98.6 million. Bankoh’s net interest margin decreased to 3.09 percent from 3.27 percent a year ago.

Noninterest income, which includes charges and fees, fell 19.4 percent to $50.9 million from $63.1 million. Noninterest income in the third quarter of 2010 included net securities gains of $7.9 million.

"Every quarter there’s some kind of challenge, and in this quarter and in the next few quarters, the challenge is revenue growth," Rabatin said. "It’s difficult given the low interest rates. It’s tough to reinvest cash in the securities portfolio with the low yields and make a decent spread. And the economy is not recovering fast enough to drive loan growth."

Bankoh Chief Financial Officer Kent Lucien said on the company’s conference call Monday that fees the bank collects from retailers for debit card transactions will be reduced by about $4 million in the fourth quarter from the third quarter due to the Durbin Amendment, which went into effect Oct. 1. The Durbin Amendment reduces by nearly 50 percent the average amount that all banks collect from so-called interchange or swipe fees.

Over the course of a year, Ho said Bankoh will see that fee income reduced by about $16 million.

"It’s tough for us to deal with because there’s not really a lot of direct expenses that go away (to offset the lost fee income)," Ho said. "When you think of the cost of an account, you’re talking about the cost of your branch personnel, the cost of managing the branches, the call center and online and local banking operations. Those costs are not easily scaled. You just can’t drop expenses there in line with the revenue we’ve lost through the Durbin Amendment, so I think it will be particularly challenging as we look at the revenue situation and how to make up for some of that lost revenue."

He said the bank is hoping to regain some of the lost revenue by adding features to its loan products, deposit products and financial services and charging more for those. Ho said the bank also hopes to raise revenue by making changes to its airline miles program for debit cards.

Bankoh, whose total assets rose 4.6 percent last quarter to $13.30 billion from $12.72 billion, trails only First Hawaiian Bank ($15.4 billion) in that category.

Total loans and leases edged up 0.7 percent to $5.35 billion from $5.31 billion, while total deposits gained 4.2 percent to $10.01 billion from $9.60 billion.

Bankoh also maintained its quarterly dividend at 45 cents a share. It will be payable Dec. 14 to shareholders of record at the close of business on Nov. 30.