Business Segments

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury and Other. The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company. 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 credit 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. Previously reported results have been reclassified to conform to the current organizational reporting structure.

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. However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

The provision for credit losses reflects the actual net charge-offs of the business segments. This may be adjusted periodically for changes in the risk profile of the business segment. The amount of the consolidated provision for loan and lease losses is based on the methodology that we use to estimate our consolidated Allowance. The residual provision for credit losses to arrive at the consolidated provision for credit losses is included in Treasury and Other.

Implicit in noninterest income and expense are allocations from support units to business units. These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage.

The provision for income taxes is allocated to business segments using a 37% effective tax rate, with the exception of our Leasing business unit which is assigned its actual effective tax rate due to the unique relationship that income taxes have with their leasing products. The residual income tax expense or benefit to arrive at the consolidated effective tax rate is included in Treasury and Other.

Retail Banking

Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans, small business loans and leases, and credit cards. Deposit products include checking, savings, and time deposit accounts. Retail Banking also offers retail insurance products. Products and services from Retail Banking are delivered to customers through 74 branch locations and 468 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.

Commercial Banking

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products. Commercial lending and deposit products are offered to middle-market and large companies in Hawaii and the Pacific Islands. Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii. Commercial Banking also includes international banking and provides merchant services to its small business customers.

Investment Services

Investment Services includes private banking, trust services, investment management, and institutional investment advisory services. A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management. The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals. The investment management group manages portfolios utilizing a variety of investment products. Institutional client services offer investment advice to corporations, government entities, and foundations. This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.

Treasury and Other

Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign currency exchange business. This 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, and short and long-term borrowings. The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, and foreign exchange income related to customer-driven currency requests from merchants and island visitors. 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, Marketing, Human Resources, Finance, Credit and Risk Management, 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.

Selected business segment financial information as of and for the three and nine months ended September 30, 2013 and 2012 were as follows:



(dollars in thousands)	Retail Banking			Commercial Banking			Investment Services			Treasury and Other			Consolidated Total
Three Months Ended September 30, 2013
Net Interest Income	$	41,404		$	24,671		$	2,574		$	22,238		$	90,887
Provision for Credit Losses	1,629			(691		)	(19		)	(919		)	—
Net Interest Income After Provision for Credit Losses	39,775			25,362			2,593			23,157			90,887
Noninterest Income	21,785			6,411			14,348			2,582			45,126
Noninterest Expense	(50,150		)	(15,746		)	(13,590		)	(3,491		)	(82,977		)
Income Before Provision for Income Taxes	11,410			16,027			3,351			22,248			53,036
Provision for Income Taxes	(4,222		)	(5,501		)	(1,240		)	(4,369		)	(15,332		)
Net Income	$	7,188		$	10,526		$	2,111		$	17,879		$	37,704
Total Assets as of September 30, 2013	$	3,611,412		$	2,356,723		$	199,556		$	7,681,180		$	13,848,871

Three Months Ended September 30, 2012
Net Interest Income	$	44,139		$	25,803		$	3,010		$	20,680		$	93,632
Provision for Credit Losses	1,845			(348		)	(24		)	(1,473		)	—
Net Interest Income After Provision for Credit Losses	42,294			26,151			3,034			22,153			93,632
Noninterest Income	28,816			5,773			14,366			3,419			52,374
Noninterest Expense	(52,609		)	(15,397		)	(13,928		)	(2,944		)	(84,878		)
Income Before Provision for Income Taxes	18,501			16,527			3,472			22,628			61,128
Provision for Income Taxes	(6,846		)	(5,669		)	(1,285		)	(6,096		)	(19,896		)
Net Income	$	11,655		$	10,858		$	2,187		$	16,532		$	41,232
Total Assets as of September 30, 2012	$	3,675,639		$	2,091,517		$	192,250		$	7,423,019		$	13,382,425

Nine Months Ended September 30, 2013
Net Interest Income	$	122,442		$	73,528		$	7,938		$	62,879		$	266,787
Provision for Credit Losses	6,775			(1,501		)	(52		)	(5,222		)	—
Net Interest Income After Provision for Credit Losses	115,667			75,029			7,990			68,101			266,787
Noninterest Income	67,686			20,382			44,446			8,431			140,945
Noninterest Expense	(150,838		)	(47,957		)	(40,954		)	(8,796		)	(248,545		)
Income Before Provision for Income Taxes	32,515			47,454			11,482			67,736			159,187
Provision for Income Taxes	(12,030		)	(16,247		)	(4,248		)	(15,215		)	(47,740		)
Net Income	$	20,485		$	31,207		$	7,234		$	52,521		$	111,447
Total Assets as of September 30, 2013	$	3,611,412		$	2,356,723		$	199,556		$	7,681,180		$	13,848,871

Nine Months Ended September 30, 2012
Net Interest Income	$	133,530		$	77,974		$	9,493		$	65,964		$	286,961
Provision for Credit Losses	9,148			(798		)	265			(7,636		)	979
Net Interest Income After Provision for Credit Losses	124,382			78,772			9,228			73,600			285,982
Noninterest Income	76,232			20,402			42,107			8,563			147,304
Noninterest Expense	(154,883		)	(46,999		)	(42,105		)	(6,845		)	(250,832		)
Income Before Provision for Income Taxes	45,731			52,175			9,230			75,318			182,454
Provision for Income Taxes	(16,920		)	(13,936		)	(3,415		)	(22,394		)	(56,665		)
Net Income	$	28,811		$	38,239		$	5,815		$	52,924		$	125,789
Total Assets as of September 30, 2012	$	3,675,639		$	2,091,517		$	192,250		$	7,423,019		$	13,382,425