23. 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.

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, automobile loans and auto dealer financing, business 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 years indicated:


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other(1)		Total
Year Ended December 31, 2018
Net interest income	$	447,023	$	113,475	$	5,820	$	566,318
Provision for loan and lease losses		(8,753)		(13,427)		—		(22,180)
Net interest income after provision for loan and lease losses		438,270		100,048		5,820		544,138

Noninterest income		90,800		79,773		8,420		178,993
Noninterest expense		(225,879)		(80,766)		(58,308)		(364,953)
Income (loss) before (provision) benefit for income taxes		303,191		99,055		(44,068)		358,178

(Provision) benefit for income taxes		(77,872)		(25,164)		9,252		(93,784)
Net income (loss)	$	225,319	$	73,891	$	(34,816)	$	264,394
Total assets as of December 31, 2018	$	7,078,016	$	6,346,541	$	7,271,121	$	20,695,678

(1) Includes $24.1 million in OTTI write-downs.


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other(1)		Total
Year Ended December 31, 2017
Net interest income (expense)	$	430,379	$	111,109	$	(12,684)	$	528,804
Provision for loan and lease losses		(6,837)		(11,663)		—		(18,500)
Net interest income (expense) after provision for loan and lease losses		423,542		99,446		(12,684)		510,304

Noninterest income		90,702		74,236		40,667		205,605
Noninterest expense		(223,652)		(68,167)		(55,735)		(347,554)
Income (loss) before (provision) benefit for income taxes		290,592		105,515		(27,752)		368,355

(Provision) benefit for income taxes		(138,786)		(49,201)		3,314		(184,673)
Net income (loss)	$	151,806	$	56,314	$	(24,438)	$	183,682
Total assets as of December 31, 2017	$	7,003,724	$	5,462,370	$	8,083,367	$	20,549,461

(1) Includes $6.9 million gains on the sale of real estate.


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Year Ended December 31, 2016
Net interest income (expense)	$	415,964	$	115,455	$	(39,747)	$	491,672
Provision for loan and lease losses		(3,150)		(5,450)		—		(8,600)
Net interest income (expense) after provision for loan and lease losses		412,814		110,005		(39,747)		483,072

Noninterest income		91,583		73,264		61,190		226,037
Noninterest expense		(211,762)		(63,193)		(62,325)		(337,280)
Income (loss) before (provision) benefit for income taxes		292,635		120,076		(40,882)		371,829

(Provision) benefit for income taxes		(110,192)		(45,172)		13,713		(141,651)
Net income (loss)	$	182,443	$	74,904	$	(27,169)	$	230,178
Total assets as of December 31, 2016	$	6,963,701	$	4,680,512	$	8,017,616	$	19,661,829