18. Reportable Operating Segments

The Company’s operations are organized into three business segments – Retail Banking, Commercial Banking, and Treasury and Other. These segments reflect how discrete financial information is currently evaluated by the chief operating decision maker and how performance is assessed and resources allocated. The Company’s internal management process measures the performance of these business segments. This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for loan and lease losses, and capital. This process is dynamic and requires certain allocations based on judgment and other subjective factors. Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.

The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions. Funds transfer pricing also serves to transfer interest rate risk to Treasury.

The Company allocates the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios.

Noninterest income and expense includes allocations from support units to the business segments. These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage. Income tax expense is allocated to each business segment based on the consolidated effective income tax rate for the period shown.

Business Segments

Retail Banking

Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings, and time deposit accounts. Retail Banking also offers wealth management services. Products and services from Retail Banking are delivered to customers through 61 banking locations throughout the State of Hawaii, Guam, and Saipan.

Commercial Banking

Commercial Banking offers products that include corporate banking, residential and commercial real estate loans, commercial lease financing, auto dealer financing, deposit products and credit cards. Commercial lending and deposit products are offered primarily to middle-market and large companies locally, nationally, and internationally.

Treasury and Other

Treasury consists of corporate asset and liability management activities including interest rate risk management. The segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer-driven currency requests from merchants and island visitors and management of bank-owned properties. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.

Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing, and Corporate and Regulatory Administration) provide a wide-range of support to the Company’s other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

The following tables present selected business segment financial information for the periods indicated.


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Three Months Ended June 30, 2018
Net interest income	$	111,273	$	28,802	$	1,328	$	141,403
Provision for loan and lease losses		(2,376)		(3,644)		—		(6,020)
Net interest income after provision for loan and lease losses		108,897		25,158		1,328		135,383

Noninterest income		22,158		21,463		6,176		49,797
Noninterest expense		(55,584)		(21,196)		(15,085)		(91,865)
Income (loss) before (provision) benefit for income taxes		75,471		25,425		(7,581)		93,315

(Provision) benefit for income taxes		(19,634)		(6,566)		1,938		(24,262)
Net income (loss)	$	55,837	$	18,859	$	(5,643)	$	69,053


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Six Months Ended June 30, 2018
Net interest income	$	220,927	$	56,681	$	3,467	$	281,075
Provision for loan and lease losses		(4,724)		(7,246)		—		(11,970)
Net interest income after provision for loan and lease losses		216,203		49,435		3,467		269,105

Noninterest income		44,890		41,463		12,144		98,497
Noninterest expense		(112,045)		(40,844)		(29,563)		(182,452)
Income (loss) before (provision) benefit for income taxes		149,048		50,054		(13,952)		185,150

(Provision) benefit for income taxes		(38,841)		(12,894)		3,596		(48,139)
Net income (loss)	$	110,207	$	37,160	$	(10,356)	$	137,011


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Three Months Ended June 30, 2017
Net interest income (expense)	$	106,912	$	27,726	$	(3,384)	$	131,254
Provision for loan and lease losses		(1,626)		(2,774)		—		(4,400)
Net interest income (expense) after provision for loan and lease losses		105,286		24,952		(3,384)		126,854

Noninterest income(1)		22,381		20,197		7,980		50,558
Noninterest expense(1)		(56,168)		(17,034)		(13,727)		(86,929)
Income (loss) before (provision) benefit for income taxes		71,499		28,115		(9,131)		90,483

(Provision) benefit for income taxes		(26,485)		(10,409)		3,306		(33,588)
Net income (loss)	$	45,014	$	17,706	$	(5,825)	$	56,895

⁽¹⁾

Certain prior period noninterest income and noninterest expense amounts have been revised from the amounts previously reported to conform to the current year’s presentations. For the three months ended June 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $1.3 million and both noninterest income and noninterest expense for Treasury and Other were understated by $0.4 million. See “Note 1. Organization and Basis of Presentation” for more information.


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Six Months Ended June 30, 2017
Net interest income (expense)	$	212,613	$	55,259	$	(7,273)	$	260,599
Provision for loan and lease losses		(3,289)		(5,611)		—		(8,900)
Net interest income (expense) after provision for loan and lease losses		209,324		49,648		(7,273)		251,699

Noninterest income(1)		46,000		39,031		16,586		101,617
Noninterest expense(1)		(111,408)		(33,347)		(28,165)		(172,920)
Income (loss) before (provision) benefit for income taxes		143,916		55,332		(18,852)		180,396

(Provision) benefit for income taxes		(53,218)		(20,443)		6,900		(66,761)
Net income (loss)	$	90,698	$	34,889	$	(11,952)	$	113,635

⁽¹⁾

Certain prior period noninterest income and noninterest expense amounts have been revised from the amounts previously reported to conform to the current year’s presentations. For the six months ended June 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $2.5 million and both noninterest income and noninterest expense for Treasury and Other were understated by $0.8 million. See “Note 1. Organization and Basis of Presentation” for more information.