First Hawaiian Bank’s earnings rose 4.1 percent in the third quarter, but the head of the state’s largest bank said the economic recovery still is "fragile" and that he expects earnings growth to slow in future quarters.

Don Horner, chairman and chief executive officer of First Hawaiian, said yesterday that despite an improving economy, loan demand remains sluggish because many business owners are taking a "wait-and-see" attitude.

"Our experience with our business customers is that they remain cautious given the uncertainties in the political and economic environments," Horner said. "So it appears that they’re going to remain in a wait-and-see mode until probably 2011. At that time we’re hopeful they will again invest in capital and hiring and increase inventories, but clearly we expect the sluggishness to continue through the fourth quarter."

First Hawaiian’s net income of $56.4 million last quarter was slightly ahead of the $54.1 million in the year-ago period. Its revenue of $165.9 million was flat with the same quarter a year ago.

"We’ve seen good growth in assets, but what’s happening is our revenue numbers are relatively flat because margin has continued to be reduced as the interest rate environment has changed," Horner said. "We’ve offset the margin reduction with asset growth in order to maintain revenue, and we’ve maintained profitability with productivity and expense reductions. Expenses through the first nine months versus the last nine months is down 6 percent."

First Hawaiian’s total assets increased 7.3 percent last quarter to $14.8 billion from $13.8 billion in the year-earlier period. Deposits increased 4.3 percent to $10.5 billion from $10 billion. And loans and leases grew 3.9 percent to $8.1 billion from $7.8 billion.

Despite the loan growth, Horner said the bank’s mortgage real estate activity of just more than $1 billion through the first nine months of this year was down 26.4 percent from a year earlier. During that same period, total mortgages that were funded in Hawaii were off 34.5 percent, Horner said.

He said, though, the bank’s business activity report that measures card spending throughout Hawaii indicates the economy is slowly improving. First Hawaiian has about 30 percent of the market for merchant card processing for 12 categories that include retail, restaurants, hotels, automobile sales, auto parts sales, transportation and leisure activities.

"Those sales have been increasing every quarter and year to date are up 7 percent over last year," Horner said. "And what’s pleasantly surprising is that they were up 10 percent in the third quarter from last year’s third quarter."

Horner said federal overdraft legislation that went into effect Aug. 15 will affect the bank’s non-interest income by 2 percent, or about $3.5 million, on an annualized basis. The law requires banks to obtain permission from their customers before enrolling them in plans that would impose overdraft fees on debit card and ATM transactions that are made without sufficient funds.

"Our bank doesn’t rely heavily on that fee income, but we’ve been able to offset that with an increased focus on client investment assets under management (up 7.2 percent year to date) and new product offerings," he said.

"We’ll have a new product at the end of the year that will be an annuity that will return nearly double the return of our CDs. In this environment, we’re trying to get a product that will help our savers."