Business Segments

The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company. The Company has identified three operating segments for purposes of management reporting: (1) Retail Banking; (2) Commercial Banking; and (3) Other. These three business segments meet the criteria of an operating segment: the segment engages in business activities from which it earns revenues and incurs expenses; its operating results are regularly reviewed by the Company’s chief operating decision makers to render decisions about resources to be allocated to the segments and assess its performance; and discrete financial information is available.

The Retail Banking segment focuses primarily on deposit operations through the Bank’s branch network. The Commercial Banking segment primarily generates commercial loans and deposits through domestic commercial lending offices located in the U.S. and foreign commercial lending offices in China and Hong Kong. Furthermore, the Commercial Banking segment offers a wide variety of international finance, trade finance, and cash management services and products. The remaining centralized functions, including treasury activities of the Company and eliminations of inter-segment amounts have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments.

Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain operating and administrative costs and the provision for credit losses. Net interest income is allocated based on the Company’s internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense directly attributable to a segment is assigned to the related business segment. Indirect costs, including technology-related costs and corporate overhead, are allocated based on that segment’s estimated usage using factors including, but not limited to, full-time equivalent employees, net interest margin, and loan and deposit volume. The provision for credit losses is based on charge-offs for the period as well as an allocation of the remaining consolidated provision expense based on the average loan balances for each segment during the period.

The Company’s internal funds transfer pricing process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to provide a reasonable and consistent basis for the measurement of its business segments’ net interest margins and profitability. The Company’s internal funds transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. The Company’s internal reporting process utilizes a full-allocation methodology. Under this methodology, corporate expenses and expenses incurred by the Other segment are allocated to the Retail Banking and Commercial Banking segments, except certain treasury-related expenses and an insignificant amount of other residual unallocated expenses.

In reporting segment net income prior to the fourth quarter of 2017, the Company applied the consolidated effective tax rate to all of its business segments, and allocated the amortization of tax credit and other investments, along with the tax benefit, from the Other segment to the Retail Banking and Commercial Banking segments. In the fourth quarter of 2017, the Company changed its methodology to measure the after-tax income of the Retail Banking and Commercial Banking segments using the applicable statutory tax rates, with the Other segment receiving the residual tax expense or benefit to arrive at the consolidated effective tax rate. With this change, the tax benefit and amortization of tax credit and other investments, which had both previously been allocated to each segment, are now only allocated to the Other segment. The Company has also allocated indirect costs to noninterest expense by segment for management reporting. In addition, operating segment income, which had previously been presented on a before-tax basis only, has been revised to be presented on both a before and an after-tax basis.

Changes in the Company’s management structure and allocation or reporting methodologies may result in changes in the measurement of operating segment results. For comparability, results for prior year periods are generally reclassified for such changes, unless it is deemed not practicable to do so.

The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three and nine months ended September 30, 2018 and 2017:




($ in thousands)	Retail Banking			Commercial Banking			Other			Total
Three Months Ended September 30, 2018
Interest income	$	120,449		$	271,760		$	29,976		$	422,185
Charge for funds used	(65,499		)	(139,986		)	(10,158		)	(215,643		)
Interest spread on funds used	54,950			131,774			19,818			206,542
Interest expense	(41,207		)	(13,808		)	(18,450		)	(73,465		)
Credit on funds provided	168,529			31,804			15,310			215,643
Interest spread on funds provided (used)	127,322			17,996			(3,140		)	142,178
Net interest income before provision for credit losses	$	182,272		$	149,770		$	16,678		$	348,720
Provision for credit losses	$	705		$	9,837		$	—		$	10,542
Noninterest income	$	13,137		$	27,861		$	5,504		$	46,502
Noninterest expense	$	87,341		$	53,233		$	39,241		$	179,815
Segment income (loss) before income taxes	$	107,363		$	114,561		$	(17,059	)	$	204,865
Segment net income	$	76,732		$	81,969		$	12,601		$	171,302
As of September 30, 2018:
Segment assets	$	10,194,291		$	22,930,768		$	5,948,047		$	39,073,106




($ in thousands)	Retail Banking			Commercial Banking			Other			Total
Three Months Ended September 30, 2017
Interest income	$	93,714		$	218,397		$	27,799		$	339,910
Charge for funds used	(37,979		)	(87,071		)	(7,589		)	(132,639		)
Interest spread on funds used	55,735			131,326			20,210			207,271
Interest expense	(20,090		)	(5,943		)	(10,722		)	(36,755		)
Credit on funds provided	111,812			12,770			8,057			132,639
Interest spread on funds provided (used)	91,722			6,827			(2,665		)	95,884
Net interest income before provision for credit losses	$	147,457		$	138,153		$	17,545		$	303,155
Provision for credit losses	$	2,058		$	10,938		$	—		$	12,996
Noninterest income	$	16,068		$	30,316		$	3,086		$	49,470
Noninterest expense	$	80,614		$	46,977		$	36,754		$	164,345
Segment income (loss) before income taxes	$	80,853		$	110,554		$	(16,123	)	$	175,284
Segment net income	$	47,541		$	65,311		$	19,808		$	132,660
As of September 30, 2017:
Segment assets	$	8,877,186		$	21,216,848		$	6,213,932		$	36,307,966




($ in thousands)	Retail Banking			Commercial Banking			Other			Total
Nine Months Ended September 30, 2018
Interest income	$	335,967		$	772,904		$	85,498		$	1,194,369
Charge for funds used	(171,687		)	(378,134		)	(45,159		)	(594,980		)
Interest spread on funds used	164,280			394,770			40,339			599,389
Interest expense	(98,138		)	(34,622		)	(44,517		)	(177,277		)
Credit on funds provided	472,426			87,980			34,574			594,980
Interest spread on funds provided (used)	374,288			53,358			(9,943		)	417,703
Net interest income before provision for credit losses	$	538,568		$	448,128		$	30,396		$	1,017,092
Provision for credit losses	$	7,212		$	39,084		$	—		$	46,296
Noninterest income	$	72,170		$	86,043		$	11,001		$	169,214
Noninterest expense	$	255,453		$	174,959		$	95,957		$	526,369
Segment income (loss) before income taxes	$	348,073		$	320,128		$	(54,560	)	$	613,641
Segment net income	$	249,196		$	229,541		$	51,946		$	530,683
As of September 30, 2018:
Segment assets	$	10,194,291		$	22,930,768		$	5,948,047		$	39,073,106




($ in thousands)	Retail Banking			Commercial Banking			Other			Total
Nine Months Ended September 30, 2017
Interest income	$	263,491		$	616,689		$	85,174		$	965,354
Charge for funds used	(98,856		)	(229,330		)	(50,273		)	(378,459		)
Interest spread on funds used	164,635			387,359			34,901			586,895
Interest expense	(54,650		)	(16,225		)	(29,111		)	(99,986		)
Credit on funds provided	320,452			37,436			20,571			378,459
Interest spread on funds provided (used)	265,802			21,211			(8,540		)	278,473
Net interest income before provision for credit losses	$	430,437		$	408,570		$	26,361		$	865,368
Provision for credit losses	$	1,772		$	28,977		$	—		$	30,749
Noninterest income	$	43,273		$	82,634		$	86,635		$	212,542
Noninterest expense	$	233,408		$	145,901		$	106,879		$	486,188
Segment income before income taxes	$	238,530		$	316,326		$	6,117		$	560,973
Segment net income	$	140,255		$	186,873		$	93,598		$	420,726
As of September 30, 2017:
Segment assets	$	8,877,186		$	21,216,848		$	6,213,932		$	36,307,966