BUSINESS OPERATING SEGMENTS

The Company is managed by its Chief Executive Officer on a segment basis. The Company’s two business operating segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has one or more segment heads who report directly to the Chief Executive Officer. The Chief Executive Officer has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the Chief Executive Officer.

Reportable Segments

Segment results are determined based upon the Company’s management reporting system, which assigns balance sheet and statement of operations items to each of the business segments. The process is designed around the Company’s organizational and management structure and accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below:

Consumer Banking

The Consumer Banking segment focuses on retail customers and small businesses with annual revenues of up to $25 million. It offers traditional banking products and services, including checking, savings, home loans, education loans, credit cards, business loans, and unsecured product finance and personal loans in addition to financial management services. It also operates an indirect auto financing business, providing financing for both new and used vehicles through auto dealerships. The segment’s distribution channels include a branch network, ATMs and a work force of experienced specialists ranging from financial consultants, mortgage loan officers and business banking officers to private bankers. The Company’s Consumer Banking value proposition is based on providing simple, easy to understand product offerings and a convenient banking experience with a more personalized approach.

Commercial Banking

The Commercial Banking segment primarily targets companies with annual revenues from $25 million to $2.5 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, commercial cards, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on middle-market companies, large corporations and institutions and has dedicated teams with industry expertise in government banking, not-for-profit, healthcare, technology, professionals, oil and gas, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segment’s business development efforts are predominantly focused in the Company’s footprint, some of its specialized industry businesses also operate selectively on a national basis (such as healthcare, asset finance and franchise finance). A key component of Commercial Banking’s growth strategy is to bring ideas to clients that help their businesses thrive, and in doing so, expand the loan portfolio and ancillary product sales.

Non-segment Operations

Other

Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loans and leases placed in runoff in the third quarter of 2016), and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense. In addition to non-segment operations, Other includes goodwill and any associated goodwill impairment charges. For impairment testing purposes, the Company allocates goodwill to its Consumer Banking and Commercial Banking reporting units.



	As of and for the Three Months Ended September 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$776		$380		($8	)		$1,148
Noninterest income	258		140		18			416
Total revenue	1,034		520		10			1,564
Noninterest expense	686		202		22			910
Profit (loss) before provision for credit losses	348		318		(12		)	654
Provision for credit losses	71		14		(7		)	78
Income (loss) before income tax expense (benefit)	277		304		(5		)	576
Income tax expense (benefit)	70		70		(7		)	133
Net income		$207		$234		$2			$443
Total average assets		$62,974		$52,871		$39,779			$155,624



	As of and for the Three Months Ended September 30, 2017
(in millions)	Consumer Banking		Commercial Banking		Other		Consolidated
Net interest income		$674		$354		$34		$1,062
Noninterest income	227		136		18		381
Total revenue	901		490		52		1,443
Noninterest expense	648		195		15		858
Profit before provision for credit losses	253		295		37		585
Provision for credit losses	65		—		7		72
Income before income tax expense	188		295		30		513
Income tax expense	66		94		5		165
Net income		$122		$201		$25		$348
Total average assets		$60,012		$49,833		$40,167		$150,012



	As of and for the Nine Months Ended September 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$2,268		$1,113		($21	)		$3,360
Noninterest income	708		405		62			1,175
Total revenue	2,976		1,518		41			4,535
Noninterest expense	2,000		610		58			2,668
Profit (loss) before provision for credit losses	976		908		(17		)	1,867
Provision for credit losses	209		19		13			241
Income (loss) before income tax expense (benefit)	767		889		(30		)	1,626
Income tax expense (benefit)	193		203		(26		)	370
Net income (loss)		$574		$686		($4	)		$1,256
Total average assets		$61,857		$51,820		$39,805			$153,482



	As of and for the Nine Months Ended September 30, 2017
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$1,969		$1,044		$80			$3,093
Noninterest income	676		400		54			1,130
Total revenue	2,645		1,444		134			4,223
Noninterest expense	1,939		577		60			2,576
Profit before provision for credit losses	706		867		74			1,647
Provision for credit losses	189		20		29			238
Income before income tax expense (benefit)	517		847		45			1,409
Income tax expense (benefit)	182		279		(38		)	423
Net income		$335		$568		$83			$986
Total average assets		$59,310		$49,604		$40,649			$149,563

Management accounting practices utilized by the Company as the basis of presentation for segment results include the following:

FTP adjustments

The Company utilizes an FTP system to eliminate the effect of interest rate risk from the segments’ net interest income because such risk is centrally managed within the Treasury function. The FTP system credits (or charges) the segments with the economic value of the funds created (or used) by the segments. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The sum of the interest income/expense and FTP charges/credits for each segment is its designated net interest income. The variance between the Company’s cumulative FTP charges and cumulative FTP credits is offset in Other. The Company periodically evaluates and refines its methodologies used to measure financial performance of its business operating segments. In the first quarter of 2018, the Company enhanced its assumptions for the liquidity and deposit component within its FTP methodology. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.

Provision for credit losses allocations

Provision for credit losses is allocated to each business segment based on actual net charge-offs recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments’ net charge-offs is reflected in Other.

Income tax allocations

Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.

Expense allocations

Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services.

Substantially all revenues generated and long-lived assets held by the Company’s business segments are derived from clients that reside in the United States. Neither business segment earns revenue from a single external customer that represents ten percent or more of the Company’s total revenues.