American Savings Bank’s earnings fell 26.7 percent in the second quarter amid lower merchant fees and reduced mortgage income.

The subsidiary of Hawaiian Electric Industries Inc. said Wednesday it had net income of $11.7 million compared with $15.9 million in the second quarter of 2013.

Total loans, though, rose 8.4 percent to $4.3 billion from $3.96 billion on the strength of increases in residential; home equity lending; commercial and industrial, such as business loans; and commercial real estate, such as developments and office buildings. Deposits gained 5.8 percent to $4.52 billion from $4.28 billion.

"We saw broad-based growth across the loan portfolio and at a slightly faster rate than we anticipated going into the year," said Rich Wacker, president and chief executive officer of the state’s third-largest bank. "We feel good about the quarter because we look at the ongoing business and what we’re doing on a day-to-day basis — making loans to customers and building our deposit base — and both of those areas are running better than we expected at the start of the year."

But those increases were tempered by a 27.9 percent drop in non-interest income to $13.8 million from $19.2 million in the year-earlier quarter. That disparity should diminish during the final six months of 2014 as the year-over-year comparisons level out, Wacker said.

About $2.3 million of the $5.4 million decrease in second-quarter non-interest income was due to the Durbin Amendment, a federal law that puts a cap on the "swipe" fees that banks charge to merchants every time a customer pays with a debit card.

During the second quarter of 2013, American Savings earned an average of 49 cents per electronic debit transaction. Now it is getting only 21 cents to 24 cents per transaction under that October 2011 law, which was designed to lower costs for merchants and, subsequently, customers.

The Durbin Amendment applies to financial institutions and their affiliates that have $10 billion or more in assets, and even though American Savings has roughly half that amount in assets, it went into effect for the bank on July 1, 2013, because parent company HEI Industries Inc. finished 2012 with more than $10 billion in assets. The third quarter of this year will be an apples-to-apples comparison with the third quarter of 2013, so the bank’s swipe fee income should rise due to higher volume, Wacker said.

In addition to the lower swipe fees, American Savings’ non-interest income declined because the bank took in $1.8 million less in mortgage income from the year-earlier quarter. The reduction of mortgage income is indicative of what is happening industrywide due to lower refinancing volumes and fewer sales of mortgages into the secondary market.

"The re-fi market is flat now so I don’t think you’re going to see a meaningful increase in mortgage banking income," Wacker said. "Most of the mortgage business today is new sales and there is not enough inventory to drive that up. The re-fi business was largely accomplished over the last several years where people who could re-fi, did re-fi."

Finally, the bank didn’t sell any securities last quarter that would bolster non-interest income after registering a $1.2 million securities gain in the year-earlier quarter.

American Savings’ net income also was lower because the bank set aside $1 million for potential loan losses. In the year-earlier quarter, the bank released $959,000 from its loan-loss reserve and returned to its income statement after agreeing to sell its credit card portfolio.

Despite taking the loan-loss provision, the bank’s nonperforming assets — loans overdue by 90 days or more — improved, with its ratio of nonperforming assets to total loans outstanding coming in at 1.05 percent compared with 1.56 percent in the year-earlier quarter.

American Savings’ net interest margin — the spread between lending rates and deposit rates — fell to 3.55 percent from 3.79 percent in the year-earlier quarter primarily due to lower yields on interest-earning assets. Net interest income slipped 0.5 percent to $44.1 million from $44.4 million.

Total assets rose 6.9 percent to $5.42 billion from $5.07 billion.

HEI, which will release its full earnings on Aug. 11, saw its stock slip 31 cents to $23.87 on Wednesday before American Savings’ results were announced after the close of the market.