19. 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 60 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 September 30, 2018
Net interest income (expense)	$	111,804	$	29,639	$	(185)	$	141,258
Provision for loan and lease losses		(1,760)		(2,700)		—		(4,460)
Net interest income (expense) after provision for loan and lease losses		110,044		26,939		(185)		136,798

Noninterest income		22,676		17,801		6,928		47,405
Noninterest expense		(58,069)		(19,731)		(15,347)		(93,147)
Income (loss) before (provision) benefit for income taxes		74,651		25,009		(8,604)		91,056

(Provision) benefit for income taxes		(19,450)		(6,435)		2,217		(23,668)
Net income (loss)	$	55,201	$	18,574	$	(6,387)	$	67,388
Total assets as of September 30, 2018	$	6,884,429	$	6,020,137	$	7,079,272	$	19,983,838


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Nine Months Ended September 30, 2018
Net interest income	$	332,731	$	86,320	$	3,282	$	422,333
Provision for loan and lease losses		(6,484)		(9,946)		—		(16,430)
Net interest income after provision for loan and lease losses		326,247		76,374		3,282		405,903

Noninterest income		67,566		59,264		19,072		145,902
Noninterest expense		(170,114)		(60,575)		(44,910)		(275,599)
Income (loss) before (provision) benefit for income taxes		223,699		75,063		(22,556)		276,206

(Provision) benefit for income taxes		(58,291)		(19,329)		5,813		(71,807)
Net income (loss)	$	165,408	$	55,734	$	(16,743)	$	204,399
Total assets as of September 30, 2018	$	6,884,429	$	6,020,137	$	7,079,272	$	19,983,838


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other(2)		Total
Three Months Ended September 30, 2017
Net interest income (expense)	$	108,885	$	28,448	$	(4,014)	$	133,319
Provision for loan and lease losses		(1,663)		(2,837)		—		(4,500)
Net interest income (expense) after provision for loan and lease losses		107,222		25,611		(4,014)		128,819

Noninterest income(1)		22,587		17,521		9,556		49,664
Noninterest expense(1)		(53,607)		(16,641)		(14,536)		(84,784)
Income (loss) before (provision) benefit for income taxes		76,202		26,491		(8,994)		93,699

(Provision) benefit for income taxes		(28,756)		(9,993)		3,413		(35,336)
Net income (loss)	$	47,446	$	16,498	$	(5,581)	$	58,363
Total assets as of September 30, 2017	$	6,868,484	$	5,421,428	$	8,275,715	$	20,565,627

⁽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 September 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $0.7 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.

⁽²⁾

Includes a $2.7 million gain on the sale of bank properties.


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other(2)		Total
Nine Months Ended September 30, 2017
Net interest income (expense)	$	321,498	$	83,707	$	(11,287)	$	393,918
Provision for loan and lease losses		(4,952)		(8,448)		—		(13,400)
Net interest income (expense) after provision for loan and lease losses		316,546		75,259		(11,287)		380,518

Noninterest income(1)		68,587		56,552		26,142		151,281
Noninterest expense(1)		(165,015)		(49,988)		(42,701)		(257,704)
Income (loss) before (provision) benefit for income taxes		220,118		81,823		(27,846)		274,095

(Provision) benefit for income taxes		(81,974)		(30,436)		10,313		(102,097)
Net income (loss)	$	138,144	$	51,387	$	(17,533)	$	171,998
Total assets as of September 30, 2017	$	6,868,484	$	5,421,428	$	8,275,715	$	20,565,627

⁽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 nine months ended September 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $3.3 million and both noninterest income and noninterest expense for Treasury and Other were understated by $1.2 million. See “Note 1. Organization and Basis of Presentation” for more information.

⁽²⁾

Includes a $2.7 million gain on the sale of bank properties.