Business Segments

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services and Private Banking, and Treasury and Other. The Company’s internal management accounting process measures the performance of these business segments. This process, which is not necessarily comparable with the process used by 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 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. 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.

Noninterest income and expense includes 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 income tax rate. However, the provision for income taxes for our Leasing business unit (included in the Commercial Banking segment) and Auto Leasing portfolio and Pacific Century Life Insurance business unit (both included in the Retail Banking segment) are assigned their actual effective income tax rates due to the unique relationship that income taxes have with their products. The residual income tax expense or benefit to arrive at the consolidated effective income 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 some types of consumer insurance products. Products and services from Retail Banking are delivered to customers through 69 branch locations and 388 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. In addition, Commercial Banking offers deposit products to government entities in Hawaii. 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 customers.

Investment Services and Private Banking

Investment Services and Private Banking includes private banking and international client banking services, 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 groups assist 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, 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, 2017 and 2016 were as follows:



(dollars in thousands)	Retail Banking			Commercial Banking			Investment Services and Private Banking			Treasury and Other			Consolidated Total
Three Months Ended September 30, 2017
Net Interest Income	$	67,128		$	43,438		$	7,321		$	(1,570	)	$	116,317
Provision for Credit Losses	3,512			(35		)	(5		)	528			4,000
Net Interest Income After Provision for Credit Losses	63,616			43,473			7,326			(2,098		)	112,317
Noninterest Income	21,287			5,137			13,593			2,393			42,410
Noninterest Expense	(51,507		)	(17,721		)	(14,925		)	(4,445		)	(88,598		)
Income Before Provision for Income Taxes	33,396			30,889			5,994			(4,150		)	66,129
Provision for Income Taxes	(11,908		)	(10,891		)	(2,218		)	4,769			(20,248		)
Net Income	$	21,488		$	19,998		$	3,776		$	619		$	45,881
Total Assets as of September 30, 2017	$	5,758,799		$	3,695,606		$	305,015		$	7,508,882		$	17,268,302

Three Months Ended September 30, 2016
Net Interest Income	$	61,747		$	38,613		$	6,029		$	(2,477	)	$	103,912
Provision for Credit Losses	2,574			(168		)	(7		)	101			2,500
Net Interest Income After Provision for Credit Losses	59,173			38,781			6,036			(2,578		)	101,412
Noninterest Income	24,786			6,977			13,662			2,689			48,114
Noninterest Expense	(51,892		)	(17,449		)	(14,579		)	(3,612		)	(87,532		)
Income Before Provision for Income Taxes	32,067			28,309			5,119			(3,501		)	61,994
Provision for Income Taxes	(11,329		)	(10,073		)	(1,894		)	4,795			(18,501		)
Net Income	$	20,738		$	18,236		$	3,225		$	1,294		$	43,493
Total Assets as of September 30, 2016	$	5,206,442		$	3,428,424		$	290,207		$	7,089,570		$	16,014,643

Nine Months Ended September 30, 2017
Net Interest Income	$	198,633		$	127,106		$	20,685		$	(7,956	)	$	338,468
Provision for Credit Losses	10,413			(355		)	(16		)	2,608			12,650
Net Interest Income After Provision for Credit Losses	188,220			127,461			20,701			(10,564		)	325,818
Noninterest Income	64,132			16,451			43,389			19,590			143,562
Noninterest Expense	(155,786		)	(54,483		)	(45,692		)	(9,394		)	(265,355		)
Income Before Provision for Income Taxes	96,566			89,429			18,398			(368		)	204,025
Provision for Income Taxes	(34,323		)	(31,472		)	(6,807		)	10,296			(62,306		)
Net Income	$	62,243		$	57,957		$	11,591		$	9,928		$	141,719
Total Assets as of September 30, 2017	$	5,758,799		$	3,695,606		$	305,015		$	7,508,882		$	17,268,302

Nine Months Ended September 30, 2016
Net Interest Income	$	179,798		$	115,112		$	18,518		$	(2,942	)	$	310,486
Provision for Credit Losses	7,415			(7,052		)	(18		)	1,155			1,500
Net Interest Income After Provision for Credit Losses	172,383			122,164			18,536			(4,097		)	308,986
Noninterest Income	67,364			21,015			43,632			18,829			150,840
Noninterest Expense	(155,391		)	(52,479		)	(44,786		)	(8,333		)	(260,989		)
Income Before Provision for Income Taxes	84,356			90,700			17,382			6,399			198,837
Provision for Income Taxes	(29,958		)	(32,337		)	(6,431		)	7,837			(60,889		)
Net Income	$	54,398		$	58,363		$	10,951		$	14,236		$	137,948
Total Assets as of September 30, 2016	$	5,206,442		$	3,428,424		$	290,207		$	7,089,570		$	16,014,643