Bank of Hawaii Corp.’s net income jumped 20.8 percent in the third quarter as loan repayment improved and it set aside only half as much for potential loan losses as it did in the year-earlier quarter.

Despite the profit gain, shares fell 5.5 percent yesterday because the earnings came in below analysts’ forecasts. Low interest rates also hurt profits and revenue was stagnant.

New Chief Executive Officer Peter Ho, who took over the reins on July 30 after Al Landon retired, said Hawaii’s economy is going to have to be "significantly better" before the bank sees meaningful growth in its loan portfolio, which declined 10.4 percent last quarter. Ho’s comments echoed the outlook for loan growth that First Hawaiian CEO Don Horner gave last week.

"Loan growth has been muted, to say the least," Ho said. "It’s really a function of demand in the marketplace."

The state’s second-largest bank in terms of assets posted earnings of $44.1 million, or 91 cents a share, compared with $36.5 million, or 76 cents a share, a year ago. The company’s earnings last quarter included a net gain of $2.9 million on the sale of the company’s Pacific Capital Funds to Scotland-based Aberdeen Asset Management and a gain of $900,000 from a payment it received in the quarter related to the sale of its retail insurance brokerage business to Island Insurance in 2009. Its core earnings, excluding one-time items, was 75 cents a share. Analysts’ consensus was for 79 cents a share.

Despite the increase in earnings, revenue slipped 2.4 percent to $161.8 million from $165.7 million.

The bank’s revenue from fees when customers overdraw on their accounts fell $2.3 million in the quarter. The drop was due to recent legislation that changed the rules for overdraft fees. Bankoh generates about $24 million a year in overdraft fees. Under the new law, banks must get customers to "opt in" to an overdraft protection plan before they can charge fees for overdrafts. So far, only 30 percent of Bankoh’s customers have signed up for the overdraft protection. Ho said the bank’s goal is 50 percent, which would mean that the bank could lose half of its overdraft revenue.

Bankoh’s stock fell $2.54 to $43.82 on the New York Stock Exchange.

"The quarter had more margin pressure than people were expecting," said senior research analyst Brett Rabatin, of Birmingham, Ala.-based Sterne Agee. "The outlook remains extremely challenging for revenue growth, in particular for companies that have more liquidity (a lot of cash in short-term instruments) and are core funded (have a lot of low-interest accounts). But everything is relative because the bank is still profitable and it’s a lot better than the industry."

Bankoh’s assets increased 4.2 percent to $12.7 billion from $12.2 billion while deposits rose 3.8 percent to $9.6 billion from $9.3 billion.

Loans and leases declined to $5.3 billion from $5.9 billion, but Ho said the bank is starting to see a resumption of normalized investments.

"Our pipeline in our commercial loan area looks better than it has in the last couple of years," Ho said. "Residential mortgage activity has been extremely strong. And consumer loan activity (installment, auto or home equity loans) is beginning to improve."

The bank set aside $13.4 million for loan losses last quarter compared with $15.9 million in the second quarter and $27.5 million in the third quarter of 2009.

Ho said Bankoh, which has 83 branches in its system, also plans to expand next year with a branch in metro Honolulu.

"Our eyes are set on several new locations on top of that," he said.

Separately, the bank maintained its quarterly dividend at 45 cents. It will be payable Dec. 14 to shareholders of record as of the close of business on Nov. 30.