The low interest rate environment is cutting into Bank of Hawaii’s earnings.

Bankoh, the state’s second-largest bank, said Monday that net income declined 17.9 percent in the first quarter as reduced mortgage income, a lower net interest margin and seasonal expenses dragged down results.

Net income fell to $36 million, or 81 cents a share, from $43.8 million, or 95 cents a share, in the year-earlier quarter.

Analysts had forecast earnings per share of 87 cents, according to Thomson Financial.

Lower interest rates and lower mortgage income hurt earnings, said Peter Ho, chairman, president and CEO of Bank of Hawaii.

A boom in fourth-quarter 2012 refinance activity spurred by historically low mortgage rates helped Bankoh’s residential mortgage income swell to $11.3 million in the fourth quarter. But the first quarter, while still strong, according to Ho, experienced a slowdown in refinance activity that caused mortgage income to decline to $6.4 million.

Low rates continued to hurt Bankoh’s net interest margin — the spread between what it pays depositors and what it brings in from loans. Bankoh’s net interest margin dropped to 2.82 percent last quarter from 2.87 percent in the fourth quarter and 3.06 percent in the first quarter of 2012.

"Our operating results continue to be negatively impacted by the low rate environment," Ho said. "Our sense, however, is that the likelihood of extended lower rates will diminish in correlation with improved economic activity at the national level."

Bankoh’s stock reacted negatively to the earnings report and dropped $1.53, or 3.2 percent, to $46.55 on the New York Stock Exchange. The results were released before the market opened.

Nashville, Tenn.-based analyst Brett Raba­tin of brokerage firm Sterne Agee called it a "disappointing" quarter.

"In retrospect this may be the worst quarter for them this year," said Rabatin. "Essentially, they had some expense in the first quarter that were related to some of the mortgage production in the fourth quarter. … A lot of banks are missing on revenue but are able to beat on expenses, but that wasn’t the case here."

Bankoh’s overall non-interest expense of $84.4 million in the first quarter was up about $900,000 from $83.5 million in the fourth quarter.

"There weren’t as many bright spots this quarter as there has been in the past year, but credit quality continued to be very good," Raba­tin said. "They’re still performing well in this environment. I think the earnings this quarter is more a function of the difficult interest rate environment."

For the third consecutive quarter, Bankoh did not have to set aside any money for potential loan losses. In addition, its nonperforming assets — loans overdue by 90 days or more — fell to 0.66 percent at the end of the first quarter from 0.74 percent at the end of the first quarter of 2012.

Bankoh’s revenue — which consists of net interest income and non-interest income — declined 6.6 percent in the first quarter from a year ago. Net interest income dropped 9.6 percent to $88.6 million, and non-interest income, which includes service charges and fees, slipped 0.6 percent to $47.8 million.

Overall, total loans and leases were up 3.3 percent to $5.8 billion from $5.6 billion a year earlier but down from $5.9 billion in the fourth quarter.

Total assets slipped 1.7 percent to $13.5 billion from $13.8 billion a year ago.

Deposits increased 5.9 percent to $11.3 billion from $10.6 billion over the same period.