Bank of Hawaii Corp.’s $9 million settlement of an overdraft fee lawsuit and a large investment gain a year ago that wasn’t repeated dragged down profit by 24.5 percent last quarter.

The head of the state’s second-largest bank said Monday that earnings "handily" beat analysts’ estimates without the nonrecurring items and that increased deposits, modest loan growth and improved credit quality have the bank heading in the right direction.

"I’m very pleased with the operational direction of the company," said Peter Ho, Bank of Hawaii’s chairman, president and CEO. "Unfortunately, this quarter in particular, there was so much noise in the numbers with the $9 million settlement, and we’re (comparing results) with last quarter and the second quarter of a year ago, which had significant one-time securities gains."

The bank’s second-quarter earnings declined to $35.1 million, or 74 cents a share, from $46.6 million, or 96 cents a share, during the same period in 2010. Revenue fell 15 percent to $147 million from $172.8 million.

Analysts’ consensus estimate was for 78 cents a share. The bank’s earnings per share would have been 86 cents without the lawsuit settlement, according to Sterne Agee analyst Brett Rabatin.

The lawsuit settlement arose from claims that the bank improperly charged overdraft fees on debit card transactions by reordering transactions from highest dollar amount to lowest. The suit said this practice allowed the bank to deplete the customer’s available funds as quickly as possible while maximizing the number of overdraft fees. The bank changed its policy in January and now generally posts transactions from lowest dollar amount to highest.

While the lawsuit settlement hurt earnings, the bank benefited from a lower-than-normal tax rate of 29.1 percent last quarter compared with 34.4 percent a year ago.

Rabatin called the results "a solid quarter" from two perspectives.

"One, the profitability continued to be very solid despite a challenging environment, and secondly, credit quality continues to improve, and that’s something that’s going to have legs going forward," he said. "They had growth in the loan portfolio in this quarter (from the preceding quarter), which is pretty challenging in this environment."

Bank of Hawaii faced a stiff head wind in earnings last quarter because in the second quarter of 2010, it had a net gain of $15 million from the sale of investment securities. There were no investment securities sales last quarter.

Ho said the bank sold longer-term fixed-income government securities so that it could take the risk out of its balance sheet and replace them with shorter-term securities to protect against rising interest rates.

"That has the effect of making the investment portfolio more conservative from an interest rate risk standpoint," Ho said.

Total deposits rose 7 percent last quarter to $9.98 billion from $9.32 billion a year ago with consumer core deposits — checking and savings accounts — up 9 percent.

Assets grew 2.4 percent to $13.16 billion from $12.86 billion.

Loans and leases slipped 1.6 percent to $5.35 billion from $5.44 billion but inched up 0.5 percent from $5.33 billion in the first quarter of this year.

"On the lending front the trend is looking positive," Ho said. "We had good growth in commercial and residential bookings, and we’re also seeing more activity on the consumer side."

Last quarter, the bank wrote off $6 million in nonperforming loans, compared with $14.9 million in the year-earlier quarter, which reflects the improving Hawaii economy and asset quality of the loan portfolio. Nonperforming assets also decreased to $34.2 million last quarter from $43.2 million in the year-ago period.

Bank of Hawaii’s stock closed down 21 cents at $46.14 Monday on the New York Stock Exchange. The earnings report came out before the market opened.