Business Segments

9 Months Ended

Sep. 30, 2012

Business Segments

Business Segments

Note 8. 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 lossesis 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, installment loans, and small business loans and leases. Deposit products include checking, savings, and time deposit accounts. Retail Banking also offers retail life insurance products. Products and services from Retail Banking are delivered to customers through 66 Hawaii branch locations, 495 ATMsthroughout 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. Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii. Commercial Banking also includes international banking and operations at the Bank's 11 branches in the Pacific Islands and also 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 and creates 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 September30, 2012 and 2011 were as follows:

	Retail			Commercial			Investment			Treasury			Consolidated
(dollars in thousands)	Banking			Banking			Services			and Other			Total
Three Months Ended September30, 2012
Net Interest Income	$	38,530		$	30,811		$	3,607		$	20,684		$	93,632
Provision for Credit Losses	1,677			(180		)	(24		)	(1,473		)	-
Net Interest Income After Provision for Credit Losses	36,853			30,991			3,631			22,157			93,632
Noninterest Income	24,918			8,687			15,350			3,419			52,374
Noninterest Expense	(45,454		)	(22,120		)	(14,519		)	(2,785		)	(84,878		)
Income Before Provision for Income Taxes	16,317			17,558			4,462			22,791			61,128
Provision for Income Taxes	(6,038		)	(6,051		)	(1,651		)	(6,156		)	(19,896		)
Net Income	$	10,279		$	11,507		$	2,811		$	16,635		$	41,232
Total Assets as of September30, 2012	$	3,242,817		$	2,397,307		$	321,273		$	7,421,028		$	13,382,425
Three Months Ended September30, 2011
Net Interest Income	$	43,334		$	33,935		$	3,698		$	15,799		$	96,766
Provision for Credit Losses	4,477			(935		)	205			(1,567		)	2,180
Net Interest Income After Provision for Credit Losses	38,857			34,870			3,493			17,366			94,586
Noninterest Income	24,677			9,426			15,971			789			50,863
Noninterest Expense	(45,026		)	(22,626		)	(14,615		)	(1,688		)	(83,955		)
Income Before Provision for Income Taxes	18,508			21,670			4,849			16,467			61,494
Provision for Income Taxes	(6,848		)	(7,468		)	(1,794		)	(2,078		)	(18,188		)
Net Income	$	11,660		$	14,202		$	3,055		$	14,389		$	43,306
Total Assets as of September30, 2011	$	3,050,418		$	2,249,890		$	212,914		$	7,791,536		$	13,304,758
Nine Months Ended September30, 2012
Net Interest Income	$	117,179		$	93,069		$	10,738		$	65,975		$	286,961
Provision for Credit Losses	9,041			(691		)	265			(7,636		)	979
Net Interest Income After Provision for Credit Losses	108,138			93,760			10,473			73,611			285,982
Noninterest Income	65,443			28,816			44,482			8,563			147,304
Noninterest Expense	(133,758		)	(67,247		)	(43,524		)	(6,303		)	(250,832		)
Income Before Provision for Income Taxes	39,823			55,329			11,431			75,871			182,454
Provision for Income Taxes	(14,735		)	(15,103		)	(4,229		)	(22,598		)	(56,665		)
Net Income	$	25,088		$	40,226		$	7,202		$	53,273		$	125,789
Total Assets as of September30, 2012	$	3,242,817		$	2,397,307		$	321,273		$	7,421,028		$	13,382,425
Nine Months Ended September30, 2011
Net Interest Income	$	131,648		$	103,624		$	11,353		$	47,337		$	293,962
Provision for Credit Losses	15,105			(726		)	65			(3,973		)	10,471
Net Interest Income After Provision for Credit Losses	116,543			104,350			11,288			51,310			283,491
Noninterest Income	66,494			28,224			46,256			13,274			154,248
Noninterest Expense	(141,114		)	(71,363		)	(45,062		)	(6,272		)	(263,811		)
Income Before Provision for Income Taxes	41,923			61,211			12,482			58,312			173,928
Provision for Income Taxes	(15,512		)	(21,215		)	(4,618		)	(11,769		)	(53,114		)
Net Income	$	26,411		$	39,996		$	7,864		$	46,543		$	120,814
Total Assets as of September30, 2011	$	3,050,418		$	2,249,890		$	212,914		$	7,791,536		$	13,304,758