Glacier Bancorp Earnings 2018-12-31

GBCI 10K Annual Report

Balance Sheet	Income Statement	Cash Flow

10-K 1 gbci-12312018x10k.htm FORM 10-K Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________________________

FORM 10-K

______________________________________________________________________

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 000-18911

______________________________________________________________________

GLACIER BANCORP, INC.

(Exact name of registrant as specified in its charter)

______________________________________________________________________



MONTANA	81-0519541
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

49 Commons Loop, Kalispell, Montana	59901
(Address of principal executive offices)	(Zip Code)

(406) 756-4200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Common Stock, $0.01 par value per share	NASDAQ Global Select Market
(Title of each class)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

The aggregate market value of the voting common equity held by non-affiliates at June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), was $3,255,486,651 (based on the average bid and asked price as quoted on the NASDAQ Global Select Market as of the close of business on that date).

The number of shares of registrant’s common stock outstanding on January 30, 2019 was 84,521,692. No preferred shares are issued or outstanding.

Document Incorporated by Reference

Portions of the 2019 Annual Meeting Proxy Statement dated on or about March 14, 2019 are incorporated by reference into Parts I and III of this Form 10-K.

TABLE OF CONTENTS



		Page
PART I

Item 1	Business	4
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	18
Item 2	Properties	19
Item 3	Legal Proceedings	19
Item 4	Mine Safety Disclosures	19

PART II

Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6	Selected Financial Data	22
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A	Quantitative and Qualitative Disclosure about Market Risk	61
Item 8	Financial Statements and Supplementary Data	62
	Reports of Independent Registered Public Accounting Firm	63
	Consolidated Statements of Financial Condition	66
	Consolidated Statements of Operations	67
	Consolidated Statements of Comprehensive Income	68
	Consolidated Statements of Changes in Stockholders' Equity	69
	Consolidated Statements of Cash Flows	70
	Notes to Consolidated Financial Statements	72
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	119
Item 9A	Controls and Procedures	119
Item 9B	Other Information	119

PART III

Item 10	Directors, Executive Officers and Corporate Governance	120
Item 11	Executive Compensation	120
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	120
Item 13	Certain Relationships and Related Transactions, and Director Independence	120
Item 14	Principal Accounting Fees and Services	120

PART IV

Item 15	Exhibits, Financial Statement Schedules	121
Item 16	Form 10-K Summary	121

SIGNATURES		122

ABBREVIATIONS/ACRONYMS



ALCO – Asset Liability Committee	FSB – Inter-Mountain Bancorp., Inc., and its subsidiary,
ALLL or allowance – allowance for loan and lease losses	First Security Bank
ASC – Accounting Standards Codification^TM	GAAP – accounting principles generally accepted in the
ASU – Accounting Standards Update	United States of America
ATM – automated teller machine	Ginnie Mae – Government National Mortgage Association
Bank – Glacier Bank	GLBA – Gramm-Leach-Bliley Financial Services
Basel III – third installment of the Basel Accords	Modernization Act of 1999
BHCA – Bank Holding Company Act of 1956, as amended	Interstate Act – Riegle-Neal Interstate Banking and Branching
Board – Glacier Bancorp, Inc.’s Board of Directors	Efficiency Act of 1994
bp or bps – basis point(s)	IRS – Internal Revenue Service
BSA – Bank Secrecy Act	LIBOR – London Interbank Offered Rate
CCP – Core Consolidation Project	LIHTC – Low-Income Housing Tax Credit
CDE – Certified Development Entity	NII – net interest income
CDFI Fund – Community Development Financial Institutions Fund	NMTC – New Markets Tax Credits
CEO – Chief Executive Officer	NOW – negotiable order of withdrawal
CECL – current expected credit losses	NRSRO – Nationally Recognized Statistical Rating Organizations
CFO – Chief Financial Officer	OCI – other comprehensive income
CFPB – Consumer Financial Protection Bureau	OREO – other real estate owned
Collegiate – Columbine Capital Corp. and its subsidiary,	Patriot Act – Uniting and Strengthening America by Providing Appropriate
Collegiate Peaks Bank	Tools Required to Intercept and Obstruct Terrorism Act of 2001
Company – Glacier Bancorp, Inc.	PCAOB – Public Company Accounting Oversight Board (United States)
COSO – Committee of Sponsoring Organizations of the	Proxy Statement – the 2018 Annual Meeting Proxy Statement
Treadway Commission	Repurchase agreements – securities sold under agreements
CRA – Community Reinvestment Act of 1977	to repurchase
Crapo Bill – Economic Growth, Regulatory Relief, and Consumer	S&P – Standard and Poor’s
Protection Act	SEC – United States Securities and Exchange Commission
DDA – demand deposit account	SERP – Supplemental Executive Retirement Plan
DIF – federal Deposit Insurance Fund	SOX Act – Sarbanes-Oxley Act of 2002
Dodd-Frank Act – Dodd-Frank Wall Street Reform and	Tax Act – The Tax Cuts and Jobs Act
Consumer Protection Act of 2010	TBA – to-be-announced
EVE – economic value of equity	TDR – troubled debt restructuring
Fannie Mae – Federal National Mortgage Association	VIE – variable interest entity
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
Final Rules – final rules implemented by the federal banking
agencies that amended regulatory risk-based capital rules
FNB – FNB Bancorp and its subsidiary, The First National Bank
of Layton
Foothills – TFB Bancorp, Inc. and its subsidiary,
The Foothills Bank
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation

PART I

Item 1. Business

General

Glacier Bancorp, Inc. (“Company”), headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation originally incorporated in 1990. The Company is a publicly-traded company and its common stock trades on the NASDAQ Global Select Market under the symbol GBCI. The Company provides commercial banking services from 167 locations in Montana, Idaho, Utah, Washington, Wyoming, Colorado, and Arizona through its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including: 1) retail banking; 2) business banking; 3) real estate, commercial, agriculture, consumer and municipal loans; and 4) mortgage origination services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities. For information regarding the Company’s lending, investment and funding activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company includes the parent holding company and the Bank. As of December 31, 2018, the Bank consists of fourteen bank divisions, a treasury division, an information technology division and a centralized mortgage division. The Bank divisions operate under separate names, management teams and advisory directors. and include the following:


•	Glacier Bank (Kalispell, Montana) with operations in Montana;


•	First Security Bank of Missoula (Missoula, Montana) with operations in Montana;


•	Valley Bank of Helena (Helena, Montana) with operations in Montana;


•	First Security Bank (Bozeman, Montana) with operations in Montana;


•	Western Security Bank (Billings, Montana) with operations in Montana;


•	First Bank of Montana (Lewistown, Montana) with operations in Montana;


•	Mountain West Bank (Coeur d’Alene, Idaho) with operations in Idaho, Utah and Washington;


•	Citizens Community Bank (Pocatello, Idaho) with operations in Idaho;


•	First Bank (Powell, Wyoming) with operations in Wyoming and Utah;


•	First State Bank (Wheatland, Wyoming) with operations in Wyoming;


•	North Cascades Bank (Chelan, Washington) with operations in Washington;


•	Bank of the San Juans (Durango, Colorado) with operations in Colorado;


•	Collegiate Peaks Bank (Buena Vista, Colorado) with operations in Colorado; and


•	The Foothills Bank (Yuma, Arizona) with operations in Arizona.

The treasury division includes the Bank’s investment portfolio and wholesale borrowings, the information technology division includes the Bank’s internal data processing, and the centralized mortgage division includes mortgage loan servicing and secondary market sales. The Company considers the Bank to be its sole operating segment.

The Bank has subsidiary interests in variable interest entities (“VIE”) for which the Bank has both the power to direct the VIE’s significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. These subsidiary interests are included in the Company’s consolidated financial statements. The Bank also has subsidiary interests in VIEs for which the Bank does not have a controlling financial interest and is not the primary beneficiary. These subsidiary interests are not included in the Company’s consolidated financial statements.

The parent holding company owns non-bank subsidiaries that have issued trust preferred securities as Tier 1 capital instruments. The trust subsidiaries are not included in the Company’s consolidated financial statements. The Company's investments in the trust subsidiaries are included in other assets on the Company's statements of financial condition.

As of December 31, 2018, the Company and its subsidiaries were not engaged in any operations in foreign countries.

Recent and Pending Acquisitions

The Company’s strategy is to profitably grow its business through internal growth and selective acquisitions. The Company continues to look for profitable expansion opportunities primarily in existing and new markets in the Rocky Mountain states. The Company has completed the following acquisitions during the last five years:



(Dollars in thousands)	Date	Total Assets		Gross Loans	Total Deposits
Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank (collectively, “FSB”)	February 28, 2018	$	1,109,684	627,767	877,586
Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank (collectively, “Collegiate”)	January 31, 2018	551,198		354,252	437,171
TFB Bancorp, Inc. and its subsidiary, The Foothills Bank (collectively, “Foothills”)	April 30, 2017	385,839		292,529	296,760
Treasure State Bank	August 31, 2016	76,165		51,875	58,364
Cañon Bank Corporation and its subsidiary, Cañon National Bank	October 31, 2015	270,121		159,759	237,326
Montana Community Banks, Inc. and its subsidiary, Community Bank	February 28, 2015	175,774		84,689	237,326
FNBR Holding Corporation and its subsidiary, First National Bank of the Rockies	August 31, 2014	349,167		137,488	309,641

On January 16, 2019, the Company announced the signing of a definitive agreement to acquire FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). FNB provides banking services to individuals and businesses throughout Utah with locations in Layton, Bountiful, Clearfield, and Draper. As of December 31, 2018, FNB had total assets of $335 million, gross loans of $247 million and total deposits of $286 million. The acquisition is subject to required regulatory approvals and other customary conditions of closing and is anticipated to take place in the second quarter of 2019. Upon closing of the transaction, the branches of FNB, along with the Bank’s four existing branches operating in Utah, will operate as a new division of the Bank.

See Notes 22 and 23 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding these acquisitions.

Market Area and Competition

The Company and the Bank have 167 locations, which consists of 149 branches and 18 loan or administration offices, in 63 counties within 7 states including Montana, Idaho, Utah, Washington, Wyoming, Colorado, and Arizona. The market area’s economic base primarily focuses on tourism, construction, mining, energy, manufacturing, agriculture, service industry, and health care. The tourism industry is highly influenced by national parks, ski resorts, significant lakes and rural scenic areas.

Commercial banking is a highly competitive business and operates in a rapidly changing environment. There are a large number of depository institutions including savings and loans, commercial banks, and credit unions in the markets in which the Company has locations. Competition is also increasing for deposit and lending services from internet-based competitors. Non-depository financial service institutions, primarily in the securities, insurance and retail industries, have also become competitors for retail savings, investment funds and lending activities. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits include the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours. The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of service.

The following table summarizes the Bank’s number of locations, the number of counties the Bank serves and the percentage of Federal Deposit Insurance Corporation (“FDIC”) insured deposits the Bank has in those counties for each of the seven states it operates in. Percentages of deposits are based on the FDIC summary of deposits survey as of June 30, 2018.



	Number of Locations	Number of Counties Served	Percent of Deposits
Montana	69	18	26	%
Idaho	28	9	7	%
Utah	4	3	11	%
Washington	14	7	2	%
Wyoming	17	8	24	%
Colorado	27	13	2	%
Arizona	8	5	1	%
	167	63

Employees

As of December 31, 2018, the Company and the Bank employed 2,723 persons, 2,525 of whom were employed full time and none of whom were represented by a collective bargaining group. The Company and the Bank provide their qualifying employees with a comprehensive benefit program, including health, dental and vision insurance, life and accident insurance, short- and long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-based compensation plan, deferred compensation plans, and a supplemental executive retirement plan. The Company considers its employee relations to be excellent. See Note 13 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for detailed information regarding employee benefit plans and eligibility requirements.

Board of Directors and Committees

The Company’s Board of Directors (“Board”) has the ultimate authority and responsibility for overseeing risk management at the Company. Some aspects of risk oversight are fulfilled at the Board level, and the Board delegates other aspects of its risk oversight function to its committees. The Board has established, among others, an Audit Committee, a Compensation Committee, a Nominating/Corporate Governance Committee, a Compliance Committee, and a Risk Oversight Committee. Additional information regarding Board committees is set forth under the heading “Meetings and Committees of the Board of Directors - Committee Membership” in the Company’s 2019 Annual Meeting Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.

Website Access

Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material with, or furnished it to, the United States Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the SEC’s website (www.sec.gov).

Supervision and Regulation

The Company and the Bank are subject to extensive regulation under federal and state laws. This section provides a general overview of the federal and state regulatory framework applicable to the Company and the Bank. In general, this regulatory framework is designed to protect depositors, the federal Deposit Insurance Fund (“DIF”), and the federal and state banking system as a whole, rather than specifically for the protection of shareholders. Note that this section is not intended to summarize all laws and regulations applicable to the Company and the Bank. Descriptions of statutory or regulatory provisions do not purport to be complete and are qualified by reference to those provisions.

These statutes and regulations, as well as related policies, continue to be subject to change by Congress, state legislatures, and federal and state regulators. Changes in statutes, regulations, or regulatory policies applicable to the Company and the Bank (including their interpretation or implementation) cannot be predicted and could have a material effect on the Company’s and the Bank’s business and operations. Numerous changes to the statutes, regulations, and regulatory policies applicable to the Company and the Bank have been made or proposed in recent years. Continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost of the Company’s and the Bank's business and operations.

The Company is subject to regulation and supervision by the Federal Reserve (as a bank holding company) and regulation by the State of Montana (as a Montana corporation). The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. The Bank is subject to regulation and supervision by the FDIC, the Montana Department of Administration's Banking and Financial Institutions Division, and, with respect to Bank branches outside of the State of Montana, the respective regulators in those states.

Federal Bank Holding Company Regulation

General. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”), due to its ownership of and control over the Bank. As a bank holding company, the Company is subject to regulation, supervision, and examination by the Federal Reserve. In general, the BHCA limits the business of a bank holding company to owning or controlling banks and engaging in, or retaining or acquiring shares in a company engaged in, other activities closely related to the business of banking. In addition, the Company must also file reports with and provide additional information to the Federal Reserve.

Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before: 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another bank or bank holding company; or 3) merging or consolidating with another bank holding company.

Holding Company Control of Non-banks. With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation, or order, have been identified as activities closely related to the business of banking or managing or controlling banks.

Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) further extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing transactions as covered transactions under the regulations. It also 1) expands the scope of covered transactions required to be collateralized; 2) requires collateral to be maintained at all times for covered transactions required to be collateralized; and 3) places limits on acceptable collateral. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payments of dividends, interest, and operational expenses.

Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by the Company or the Bank; or 2) an agreement by the customer to refrain from obtaining other services from a competitor.

Support of Bank Subsidiaries. Under Federal Reserve policy and the Dodd-Frank Act, the Company is required to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, capital and resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources or when it may not be in the Company's or its shareholders' best interests to do so. Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.

State Law Restrictions. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana corporate law. For example, Montana corporate law includes limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

Federal and State Regulation of the Bank

General. Deposits in the Bank are insured by the FDIC. The Bank is subject to primary supervision, periodic examination, and regulation of the FDIC and the Montana Department of Administration's Banking and Financial Institutions Division. These agencies have the authority to prohibit the Bank from engaging in what they believe constitutes unsafe or unsound banking practices. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions and impose safety and soundness standards. In addition to federal law and the laws of the State of Montana, with respect to the Bank's branches in Idaho, Utah, Washington, Wyoming, Colorado and Arizona, the Bank is also subject to the various laws and regulations governing its activities in those states.

Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers, including laws and regulations that impose certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collects loans, and provides other services. In recent years, examination and enforcement by federal and state banking agencies for non-compliance with consumer protection laws and regulations have increased and become more intense. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines, civil monetary penalties, criminal penalties, punitive damages, and the loss of certain contractual rights. The Bank has established a comprehensive compliance system to ensure consumer protection.

Community Reinvestment. The Community Reinvestment Act of 1977 (“CRA”) requires that, in connection with examinations of financial institutions within their jurisdiction, federal bank regulators evaluate the record of financial institutions in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility. In some cases, a bank's failure to comply with the CRA or CRA protests filed by interested parties during applicable comment periods can result in the denial or delay of such transactions. The Bank received a “satisfactory” rating in its most recent CRA examination.

Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. Extensions of credit 1) must be made on substantially the same terms (including interest rates and collateral) and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank; and 2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders and generally prohibit loans to senior officers other than for certain specified purposes.

Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the bank's federal supervisory agency; 2) as discussed above, places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and 3) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings, and stock valuation. In addition, each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information, and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may be required to submit a compliance plan, or be subject to regulatory sanctions, including restrictions on growth. The Bank has established comprehensive policies and risk management procedures to ensure the safety and soundness of the Bank.

Interstate Banking and Branching

The Dodd-Frank Act eliminated interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), and removed many restrictions on de novo interstate branching by state and federally chartered banks. Federal regulators have authority to approve applications by such banks to establish de novo branches in states other than the bank's home state if the host state's banks could establish a branch at the same location. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Dividends

A principal source of the Company’s cash is from dividends received from the Bank, which are subject to regulation and limitation. As a general rule, regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. For example, regulators have stated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice and that an institution should generally pay dividends only out of current operating earnings. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Under Montana law, the Bank may not declare a dividend greater than the previous two years' net earnings without providing notice to the Montana Department of Administration's Banking and Financial Institutions Division.

Rules adopted in accordance with the third installment of the Basel Accords (“Basel III”) also impose limitations on the Bank's ability to pay dividends. In general, these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer exceeds the minimum required capital ratio by at least 2.5 percent of risk-weighted assets.

The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies. In general, the policy statement expresses the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless the bank holding company’s earnings for the past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. A bank holding company's ability to pay dividends may also be restricted if a subsidiary bank becomes under-capitalized. These various regulatory policies may affect the Company's and the Bank's ability to pay dividends or otherwise engage in capital distributions.

The Dodd-Frank Act

General. The Dodd-Frank Act was signed into law in July 2010. The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of banks and bank holding companies, including the Bank and the Company. Some of the provisions of the Dodd-Frank Act that may impact the Company's and the Bank's business and operations are summarized below.

Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions. In August 2015, the SEC adopted a rule mandated by the Dodd-Frank Act that requires a public company to disclose the ratio of the compensation of its Chief Executive Officer (“CEO”) to the median compensation of its employees. This rule is intended to provide shareholders with information that they can use to evaluate a CEO’s compensation.

Prohibition Against Charter Conversions of Financial Institutions. The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the depository institution seeks prior approval from its primary regulator and complies with specified procedures to ensure compliance with the enforcement action.

Repeal of Demand Deposit Interest Prohibition. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

Consumer Financial Protection Bureau. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) and empowered it to exercise broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws. Because the Company's total consolidated assets exceed $10 billion, it is subject to the direct supervision of the CFPB. The CFPB has issued and continues to issue numerous regulations under which the Company and the Bank will continue to incur additional expense in connection with its ongoing compliance obligations. Significant recent CFPB developments that may affect operations and compliance costs include:


•	positions taken by the CFPB on fair lending, including applying the disparate impact theory which could make it more difficult for lenders to charge different rates or to apply different terms to loans to different customers;


•	the CFPB's final rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information shortcomings identified by the CFPB;


•	positions taken by the CFPB regarding the Electronic Fund Transfer Act and Regulation E, which require companies to obtain consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers; and


•	focused efforts on enforcing certain compliance obligations the CFPB deems a priority, such as automobile loan servicing, debt collection, mortgage origination and servicing, remittances, and fair lending, among others.

Stress Testing

In May 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Crapo Bill”), which is bipartisan legislation that rolls back certain provisions of the Dodd-Frank Act to provide regulatory relief to certain financial institutions. In relevant part, the Crapo Bill increased the asset threshold at which banks are subject to annual company-run stress tests from $10 billion to $250 billion. As a result, the Company is not currently subject to the Dodd-Frank Act stress testing requirements.

Interchange Fees

Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic transactions are "reasonable and proportional" to the costs incurred by issuers for processing such transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee, among other requirements. Because the Company's total consolidated assets exceed $10 billion, it is subject to this interchange fee cap. Effective July of 2019, the interchange fee cap is expected to have a $17 to $20 million (pre-tax) annual impact to the Company's earnings.

Capital Adequacy

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal regulatory agencies, which involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory guidelines. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. The capital requirements are intended to ensure that institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments and are applied separately to the Company and the Bank.

Federal regulations require insured depository institutions and bank holding companies to meet several minimum capital standards, including: 1) a common equity Tier 1 capital to risk-based assets ratio of 4.5 percent; 2) a Tier 1 capital to risk-based assets ratio of 6 percent; 3) a total capital to risk-based assets ratio of 8 percent; and 4) a 4 percent Tier 1 capital to total assets leverage ratio. These minimum capital requirements became effective in January 2015 and were the result of final rules implementing certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act ("Final Rules").

The Final Rules also require a new capital conservation buffer designed to absorb losses during periods of economic stress. Failure to comply with this buffer requirement may result in constraints on capital distributions (e.g., dividends, equity repurchases, and certain bonus compensation for executive officers). The Final Rules change the risk-weights of certain assets for purposes of the risk-based capital ratios and phase out certain instruments as qualifying capital.

The Final Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on an insured depository institution if its capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements to qualify as “well capitalized”: 1) a Tier 1 common equity capital ratio of at least 6.5 percent; 2) a Tier 1 capital ratio of at least 8 percent; 3) a total capital ratio of at least 10 percent; 4) a Tier 1 leverage ratio of at least 5 percent; and 5) not be subject to any order or written directive requiring a specific capital level. The FDIC’s rules (as amended by the Final Rules) contain other capital classification categories, such as “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” each of which are based on certain capital ratios. An institution may be downgraded to a category lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory examination rating.

The application of the Final Rules may result in lower returns on invested capital, require the raising of additional capital or require regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital conservation buffers. The imposition of liquidity requirements in connection with these rules could also cause the Bank to increase its holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding.

Regulatory Oversight and Examination

Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company. In general, the objectives of the Federal Reserve's inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries. The inspection type and frequency typically varies depending on asset size, complexity of the organization, and the bank holding company’s rating at its last inspection.

Examinations. Banks are subject to periodic examinations by their primary regulators. In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach. These examinations are extensive and cover the entire breadth of the operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $3 billion in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised institutions as frequently as deemed necessary based on the condition of the institution or as a result of certain triggering events. Because the Company's total consolidated assets exceed $10 billion, it is also subject to the direct supervision of the CFPB.

Commercial Real Estate Ratios. The federal banking regulators recently issued guidance reminding financial institutions to reexamine the existing regulations regarding concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The banking regulators are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flow from the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to a specified concentration level.

Corporate Governance and Accounting

The Sarbanes-Oxley Act of 2002 (“SOX Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. In general, the SOX Act 1) requires chief executive officers and chief financial officers to certify to the compliance of periodic reports filed with the SEC; 2) imposes specific and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting insider transactions and periodic disclosures by public companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert”; and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. As a publicly reporting company, the Company is subject to the requirements of the SOX Act and related rules and regulations issued by the SEC and NASDAQ.

Anti-Money Laundering and Anti-Terrorism

The Bank Secrecy Act (“BSA”) requires all financial institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your customer" documentation requirements.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”), intended to combat terrorism, was renewed with certain amendments in 2006. In relevant part, the Patriot Act 1) prohibits banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions to establish an anti-money laundering compliance program; and 4) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. Regulators are directed to consider a bank holding company’s and a bank’s effectiveness in combating money laundering when reviewing and ruling on applications under the BHCA and the Bank Merger Act. The Company and the Bank have established comprehensive compliance programs designed to comply with the requirements of the BSA and Patriot Act.

Financial Services Modernization

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) brought about significant changes to the laws affecting banks and bank holding companies. Generally, the GLBA 1) repeals historical restrictions on preventing banks from affiliating with securities firms; 2) provides a uniform framework for the activities of banks, savings institutions, and their holding companies; 3) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; 4) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. The Bank is subject to FDIC regulations implementing the privacy provisions of the GLBA. These regulations require a bank to disclose its privacy policy, including informing consumers of the bank's information sharing practices and their right to opt out of certain practices.

Deposit Insurance

FDIC Insured Deposits. The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments by the FDIC, which are designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act redefined the assessment base used for calculating deposit insurance assessments by requiring the FDIC to determine assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. In addition, the Dodd-Frank Act 1) raised the minimum designated reserve ratio (the FDIC is required to set the reserve ratio each year) of the DIF from 1.15 percent to 1.35 percent; 2) required that the DIF reserve ratio meet 1.35 percent by 2020; and 3) eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act made banks with $10 billion or more in total assets, such as the Bank, responsible for the increase from 1.15 percent to 1.35 percent. On September 30, 2018, the DIF reserve ratio reached 1.36 percent, ahead of the Dodd-Frank Act’s 2020 deadline to meet the 1.35 percent reserve ratio. As a result, certain institutions, such as the Bank, will receive credits for the portions of their regular assessments that contributed to growth in the reserve ratio between 1.15 percent and 1.35 percent, to be applied when the reserve ratio is at or above 1.38 percent. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF.

Safety and Soundness. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order, or any condition imposed by an agreement with the FDIC. Management is not aware of any existing circumstances that would result in termination of the Bank's deposit insurance.

Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased FDIC deposit insurance from $100,000 to $250,000 per depositor. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

Recent and Proposed Legislation

The economic and political environment of the past several years has led to a number of proposed legislative, governmental, and regulatory initiatives that may significantly impact the banking industry. Other regulatory initiatives by federal and state agencies may also significantly impact the Company's and the Bank’s business. The Company and the Bank cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on its operations, competitive situation, financial conditions, or results of operations. While recent history has demonstrated that new legislation or changes to existing laws or regulations typically result in a greater compliance burden (and therefore increase the general costs of doing business), the current administration has expressed an attempt to reduce these regulatory burdens.

Effects of Federal Government Monetary Policy

The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. Through its open market operations in U.S. government securities, control of the discount rate applicable to borrowings, establishment of reserve requirements against certain deposits, and control of the interest rate applicable to excess reserve balances and reverse repurchase agreements, the Federal Reserve influences the availability and cost of money and credit and, ultimately, a range of economic variables including employment, output, and the prices of goods and services. The nature and impact of future changes in monetary policies and their impact on the Company and the Bank cannot be predicted with certainty.

Heightened Requirements for Large Bank Holding Companies and Banks

As mentioned above, the Dodd-Frank Act imposed heightened requirements on large bank holding companies and banks, and the Crapo Bill has rolled back certain provisions of the Dodd-Frank Act. In particular, the Crapo Bill increased the asset threshold for certain rules that previously applied to bank holding companies and banks with at least $10 billion in total consolidated assets. As a result of the Crapo Bill, the Company is not currently subject to several of those heightened requirements (e.g., stress testing and a dedicated risk committee), but the Company will remain subject to other requirements of the Dodd-Frank Act left unaffected by the Crapo Bill, such as the requirement that the Company be examined, primarily by the CFPB, for compliance with federal consumer protection laws.

The Company has established a comprehensive compliance system to ensure compliance with these rules.

Item 1A. Risk Factors

The following is a discussion of what the Company believes are the most significant risks and uncertainties that may affect the Company’s business, financial condition and future results.

Economic conditions in the market areas the Bank serves may adversely impact its earnings and could increase the credit risk associated with its loan portfolio and the value of its investment portfolio.

Substantially all of the Bank’s loans are to businesses and individuals in Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona, and a softening of the economies in these market areas could have a material adverse effect on its business, financial condition, results of operations and prospects. Any future deterioration in economic conditions in the markets the Bank serves could result in the following consequences, any of which could have an adverse impact, which could be material, on the Company’s business, financial condition, results of operations and prospects:


•	loan delinquencies may increase;


•	problem assets and foreclosures may increase;


•	collateral for loans made may decline in value, in turn reducing customers’ borrowing power;


•	certain securities within the investment portfolio could become other-than-temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity;


•	low cost or non-interest bearing deposits may decrease; and


•	demand for loan and other products and services may decrease.

National and global economic and geopolitical conditions could adversely affect the Company’s future results of operations or market price of its stock.

The Company’s business is impacted by factors such as economic, political and market conditions, broad trends in industry and finance, changes in government monetary and fiscal policies, inflation, and financial market volatility, all of which are beyond the Company’s control. National and global economies are constantly in flux, as evidenced by recent market volatility resulting from, among other things, a relatively new United States presidential administration and new tax and economic policies associated therewith, the uncertain future relationship of the United Kingdom with the European Union (e.g., Brexit), and the ever-changing landscape of the energy and medical industries. Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a whole or in the Company’s markets could have an adverse effect, which could be material, on its business, financial condition, results of operations and prospects, and could cause the market price of the Company’s stock to decline.

The Company will be subject to heightened regulatory requirements related to its having exceeded $10 billion in assets.

The Company exceeded its total consolidated assets of $10 billion during the first quarter of 2018. The Dodd-Frank Act and its implementing regulations impose additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with specific sections of the Federal Reserve's prudential oversight requirements and annual stress testing requirements. The Durbin Amendment, which was passed as part of Dodd-Frank, instructed the Federal Reserve to establish rules limiting the amount of interchange fees that can be charged to merchants for debit card processing. The Federal Reserve's final rules contained several key pieces, including in relevant part an interchange fee cap, certain fraud prevention adjustments, and, most notably, an exemption from the interchange fee cap for small issuers. Issuers with less than $10 billion in total assets (as of the end of the previous calendar year) are exempt from the Federal Reserve's interchange fee cap. As soon as the Company's total assets exceeded $10 billion, the interchange fee cap of the Durbin Amendment negatively affects the interchange income the Bank receives from electronic payment transactions. The interchange fee cap becomes effective to the Company commencing in 2019.

In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to compliance with various federal consumer financial protection laws and regulations. As a fairly new agency with evolving regulations and practices, it is uncertain as to how the CFPB's examinations and regulatory authority may impact the Company's business.

A failure in or breach of the Bank’s operational or security systems, or those of the Bank’s third party service providers, including as a result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage the Company’s reputation, increase costs and cause losses.

The Bank’s operations rely heavily on the secure processing, storage and transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in the Bank’s online banking system, customer relationship management, general ledger, deposit and loan servicing, financial reporting and other systems. The security and integrity of the Bank’s systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets. The Bank cannot assure that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While the Bank has certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. The Bank may be required to expend significant additional resources in the future to modify and enhance its protective measures.

Additionally, the Bank faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, the Bank’s operational systems.

Any failures, interruptions or security breaches in the Bank’s information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose the Company to civil litigation, regulatory fines or losses not covered by insurance.

The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.

The Bank maintains an allowance for loan and lease losses (“ALLL” or “allowance”) in an amount that it believes is adequate to provide for losses in the loan portfolio. While the Bank strives to carefully manage and monitor credit quality and to identify loans that may become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as non-performing or potential problem loans. With respect to real estate loans and property taken in satisfaction of such loans (“other real estate owned” or “OREO”), the Bank can be required to recognize significant declines in the value of the underlying real estate collateral quite suddenly as values are updated through appraisals and evaluations (new or updated) performed in the normal course of monitoring the credit quality of the loans. There are many factors that can cause the value of real estate to decline, including declines in the general real estate market, changes in methodology applied by appraisers, and/or using a different appraiser than was used for the prior appraisal or evaluation. The Bank’s ability to recover on real estate loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining values, which increases the likelihood the Bank will suffer losses on defaulted loans beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the Bank’s provision for loan losses and ALLL. By closely monitoring credit quality, the Bank attempts to identify deteriorating loans before they become non-performing assets and adjust the ALLL accordingly. However, because future events are uncertain, and if difficult economic conditions occur, there may be loans that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary beyond the levels commensurate with any loan growth. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing loans, requiring an increase to the ALLL. Additionally, future significant additions to the ALLL may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or changes in the assumptions used in determining the ALLL. Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the Bank’s loan portfolio and the adequacy of the ALLL. These regulatory authorities may require the Bank to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from the Bank’s judgments. Any increase in the ALLL could have an adverse effect, which could be material, on the Company’s financial condition and results of operations.

The Bank has a high concentration of loans secured by real estate, so any future deterioration in the real estate markets could require material increases in the ALLL and adversely affect the Company’s financial condition and results of operations.

The Bank has a high degree of concentration in loans secured by real estate. Any future deterioration in the real estate markets could adversely impact borrowers’ ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the credit risk associated with the loan portfolio. The Bank’s ability to recover on these loans by selling or disposing of the underlying real estate collateral would be adversely impacted by any decline in real estate values, which increases the likelihood that the Bank will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the ALLL which would adversely affect the Company’s financial condition and results of operations.

Non-performing assets could increase, which could adversely affect the Company’s results of operations and financial condition.

The Bank may experience increases in non-performing assets in the future. Non-performing assets (which include OREO) adversely affect the Company’s financial condition and results of operations in various ways. The Bank does not record interest income on non-accrual loans or OREO, thereby adversely affecting its earnings. When the Bank takes collateral in foreclosures and similar proceedings, it is required to mark the related asset to the then fair value of the collateral, less estimated cost to sell, which may result in a charge-off of the value of the asset and lead the Bank to increase the provision for loan losses. An increase in the level of non-performing assets also increases the Bank’s risk profile and may impact the capital levels its regulators believe are appropriate in light of such risks. Further decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Bank’s control, could adversely affect the Company’s business, results of operations and financial condition, perhaps materially. In addition to the carrying costs to maintain OREO, the resolution of non-performing assets increases the Bank’s loan administration costs generally, and requires significant commitments of time from management and the Company’s directors, which reduces the time they have to focus on profitably growing the Company’s business.

The Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.

The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in charge-offs, which could have a material adverse impact on results of operations and financial condition.

Competition in the Bank’s market areas may limit future success.

Commercial banking is a highly competitive business and a consolidating industry. The Bank competes with other commercial banks, credit unions, finance, insurance and other non-depository companies operating in its market areas. The Bank is subject to substantial competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation and restriction as the Bank. Some of the Bank’s competitors have greater financial resources than the Bank. If the Bank is unable to effectively compete in its market areas, the Bank’s business, results of operations and prospects could be adversely affected.

Fluctuating interest rates can adversely affect profitability.

The Bank’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, investment securities and other interest earning assets and interest paid on deposits, borrowings, and other interest bearing liabilities. Because of the differences in maturities and repricing characteristics of interest earning assets and interest bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest earning assets and interest paid on interest bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Bank’s interest rate spread, and, in turn, profitability. The Bank seeks to manage its interest rate risk within well established policies and guidelines. Generally, the Bank seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Bank’s structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment. Over the course of 2017 and 2018, the Federal Reserve increased the federal funds target range in increments of 0.25 percent a total of seven times - three in 2017 and four in 2018 - to its current range of 2.25 to 2.50 percent. The Federal Reserve has stated it will be patient as it determines what future adjustments may be appropriate to foster maximum employment and price stability.

The Company may not be able to continue to grow organically or through acquisitions.

Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions become more challenging, the Company may be unable to grow organically or successfully complete or integrate potential future acquisitions. The Company has historically used its strong stock currency to complete acquisitions. Downturns in the stock market and the trading price of the Company’s stock could have an impact on future acquisitions. Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to regulatory review and approval.

Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.

During 2018 and in prior years, the Company has been active in acquisitions and may in the future engage in selected acquisitions of additional financial institutions. There are risks associated with any such acquisitions that could adversely affect profitability and other performance measures. These risks include, among other things, incorrectly assessing the asset quality of a financial institution being acquired, discovering compliance or regulatory issues after the acquisition, encountering greater than anticipated cost and use of management time associated with integrating acquired businesses into the Company’s operations, and being unable to profitably deploy funds acquired in an acquisition. The Company may not be able to continue to grow through acquisitions, and if it does, there is a risk of negative impacts of such acquisitions on the Company’s operating results and financial condition.

Acquisitions may also cause business disruptions that cause the Bank to lose customers or cause customers to remove their accounts from the Bank and move to competing financial institutions. Further, acquisitions may also disrupt the Bank's ongoing businesses or create inconsistencies in standards, controls, procedures, and policies that adversely affect relationships with employees, clients, customers, and depositors. The loss of key employees during acquisitions may also adversely affect the Company's business.

The Company anticipates that it might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of stock may have a dilutive effect on earnings per share, book value per share, or the percentage ownership of current shareholders. In acquisitions involving the use of cash as consideration, there will be an impact on the Company's capital position.

The Company’s business is heavily dependent on the services of members of the senior management team.

The Company believes its success to date has been substantially dependent on its executive management team. In addition, the Company’s unique model relies upon the Presidents of its separate Bank divisions, particularly in light of the Company’s decentralized management structure in which such Bank divisions have significant local decision-making authority. The unexpected loss of any of these persons could have an adverse effect on the Company’s business and future growth prospects.

The Company’s future performance will depend on its ability to respond to technological change.

The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products and services. Effective use of technology increase efficiency and enables financial institutions to better serve customers and to reduce costs. Many of the Company’s competitors have substantially greater resources to invest in technological improvements than the Company does. The Company’s future success will depend, to some degree, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in the Company’s operations. The Company may not be able to effectively implement new technology-driven products or services, or be successful in marketing these products and services. Additionally, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause services interruptions, transaction processing errors and system conversion delays and may cause the Company to fail to comply with applicable laws. There can be no assurance that the Company will be able to successfully manage the risks associated with increased dependency on technology.

A decline in the fair value of the Bank’s investment portfolio could adversely affect earnings and capital.

The fair value of the Bank’s debt securities could decline as a result of factors including changes in market interest rates, tax reform, credit quality and credit ratings, lack of market liquidity and other economic conditions. A debt security is impaired if the fair value of the security is less than the carrying value. When a security is impaired, the Bank determines whether the impairment is temporary or other-than-temporary. If an impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like amount. Any such impairment charge would have an adverse effect, which could be material, on the Company’s results of operations and financial condition, including its capital.

The size of the investment portfolio has declined over the past few years and represents 24 percent and 25 percent of total assets at December 31, 2018 and 2017, respectively. While the Bank believes that the terms of such investments have been kept relatively short, the Bank is subject to elevated interest rate risk exposure if rates were to increase sharply. Further, debt securities present a different type of asset quality risk than the loan portfolio. At December 31, 2018, the investment portfolio consisted of 90 percent available-for-sale and 10 percent held-to-maturity designated debt securities. While the Company believes a relatively conservative management approach has been applied to the investment portfolio, there is always potential loss exposure under changing economic conditions.

Interest rate swaps expose the Bank to certain risks, and may not be effective in mitigating exposure to changes in interest rates.

The Bank has entered into interest rate swap agreements with notional amounts totaling $260 million in order to manage a portion of the interest rate volatility risk. The Bank anticipates that it may enter into additional interest rate swaps. These swap agreements involve other risks, such as the risk that the counterparty may fail to honor its obligations under these arrangements, leaving the Bank vulnerable to interest rate movements. The Bank’s current interest rate swap agreements include bilateral collateral agreements whereby the net fair value position is collateralized by the party in a net liability position. The bilateral collateral agreements reduce the Bank’s counterparty risk exposure. There can be no assurance that these arrangements will be effective in reducing the Bank’s exposure to changes in interest rates.

If goodwill recorded in connection with acquisitions becomes additionally impaired, it could have an adverse impact on earnings and capital.

Accounting standards require the Company to account for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), goodwill is not amortized but rather is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. The Company's goodwill was not considered impaired as of December 31, 2018 and 2017; however, there can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be material. While a non-cash item, impairment of goodwill could have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, impairment of goodwill could subject the Company to regulatory limitations, including the ability to pay dividends on its common stock.

There can be no assurance the Company will be able to continue paying dividends on its common stock at recent levels.

The Company may not be able to continue paying quarterly dividends commensurate with recent levels given that the ability to pay dividends on the Company’s common stock depends on a variety of factors. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. This is heavily based on the Company’s earnings and capital levels which currently are strong. Current guidance from the Federal Reserve provides, among other things, that dividends per share should not exceed earnings per share measured over the previous four fiscal quarters. The Bank is also subject to Montana state law and cannot declare a dividend greater than the previous two years’ net earnings without providing notice to the state. As a result, future dividends will generally depend on the level of earnings at the Bank.

The Company and the Bank operate in a highly regulated environment and changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.

The Company and the Bank are subject to extensive regulation, supervision and examination by federal and state banking regulators. In addition, as a publicly-traded company, the Company is subject to regulation by the SEC. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on the Company and its operations. Changes in laws and regulations may also increase expenses by imposing additional fees or taxes or restrictions on operations. Additional legislation and regulations that could significantly affect powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to the Company’s reputation, all of which could adversely affect the Company’s business, financial condition or results of operations.

Regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. Existing and proposed federal and state laws and regulations restrict, limit and govern all aspects of the Company’s activities and may affect the ability to expand its business over time, may result in an increase in the Company’s compliance costs, and may affect its ability to attract and retain qualified executive officers and employees. Recently, these powers have been utilized more frequently due to the challenging national, regional and local economic conditions. The exercise of regulatory authority may have a negative impact on the Company’s financial condition and results of operations, including limiting the types of financial services and products the Company may offer or increasing the ability of non-banks to offer competing financial services and products. Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve.

The Company cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on the Company. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect the Company’s business, financial condition, results of operations, and the trading price of the Company’s common stock

Changes in accounting standards could materially impact the Company’s financial statements.

From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can materially impact how the Company records and report its financial condition and results of operations.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. The ASU introduces a new impairment model based on current expected credit losses (“CECL”) rather than incurred losses. The CECL model will apply to most debt instruments, including loan receivables and loan commitments.

Under the CECL model, the Company would recognize an impairment allowance equal to its current estimate of expected credit losses for financial instruments as of the end of the reporting period. Measuring expected credit losses will likely be a significant challenge for all entities, including the Company. Additionally, to estimate expected credit losses, the Company could incur one-time and recurring costs, some of which may be related to system changes and data collection. Further, the impairment allowance measured under a CECL model could differ materially from the impairment allowance measured under the Company’s incurred loss model. To initially apply the CECL amendments, for most debt instruments, the Company would record a cumulative-effect adjustment to its statement of financial condition as of the beginning of the first reporting period in which the guidance is effective (a modified retrospective approach). The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is effective.

On December 21, 2018, federal bank regulatory agencies approved a final rule, effective as of April 1, 2019, modifying their regulatory capital rules and providing an option to phase in over a three-year period the initial regulatory capital effects of the CECL methodology. The Company is currently evaluating the rule to determine if the phase-in option will be elected.

The FDIC has adopted a final rule to increase the federal Deposit Insurance Fund, including additional future premium increases and special assessments.

On March 15, 2016, the FDIC adopted a final rule to increase insurance premiums and has imposed special assessments to rebuild and maintain the DIF, and any additional future premium increases or special assessments could have a material adverse effect on the Company’s business, financial condition, and results of operations. Additional information regarding this matter is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”

The Dodd-Frank Act broadened the base for FDIC insurance assessments. In addition, the Dodd-Frank Act established 1.35 percent as the minimum DIF reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent (which is beyond what is required by law) and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35 percent by the statutory deadline of September 30, 2020. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for the increase from 1.15 percent to 1.35 percent. The increase is effective for banks in the first quarter following four consecutive quarters of total consolidated assets exceeding $10 billion. Since the Bank exceeded the $10 billion asset threshold in the first quarter of 2018, the increase in deposit insurance assessments to be paid by the Bank is expected to be effective in the first quarter of 2019.

The impact of Basel III is uncertain.

Basel III sets forth more robust global regulatory standards on capital adequacy, qualifying capital instruments, leverage ratios, market liquidity risk, and stress testing, which may be stricter than standards currently in place. The phase-in period for Basel III began on January 1, 2015 and will end on January 1, 2019. The implementation of these new standards could have an adverse impact on the Company’s financial position and future earnings due to, among other things, the increased Tier 1 capital ratio requirements being implemented. Additional information regarding Basel III is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”

The Company has various anti-takeover measures that could impede a takeover.

The Company’s articles of incorporation include certain provisions that could make it more difficult to acquire the Company by means of a tender offer, a proxy contest, merger or otherwise. These provisions include a requirement that any “Business Combination” (as defined in the articles of incorporation) be approved by at least 80 percent of the voting power of the then outstanding shares, unless it is either approved by the Company’s Board or certain price and procedural requirements are satisfied. In addition, the authorization of preferred stock, which is intended primarily as a financing tool and not as a defensive measure against takeovers, may potentially be used by management to make more difficult uninvited attempts to acquire control of the Company. These provisions may have the effect of lengthening the time required to acquire control of the Company through a tender offer, proxy contest or otherwise, and may deter any potentially unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company’s shareholders of opportunities to realize a premium for their common stock in the Company, even in circumstances where such action is favored by a majority of the Company’s shareholders.

The Company's business is subject to the risks of earthquakes, floods, fires, and other natural catastrophes.

With Bank branches located in Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona, the Company's business could be affected by a major natural catastrophe, such as a fire, flood, earthquake, or other natural disaster. The occurrence of any of these natural disasters may result in a prolonged interruption of the Company's business, which could have a material adverse effect on the Company's financial condition and operations.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The following schedule provides information on the Company’s 167 properties as of December 31, 2018:



(Dollars in thousands)	Properties Leased	Properties Owned	Net Book Value
Montana	8	61	$	125,012
Idaho	8	20	28,080
Utah	1	3	2,085
Washington	4	10	5,657
Wyoming	2	15	16,196
Colorado	2	25	28,669
Arizona	6	2	5,376
Total	31	136	$	211,075

The Company believes that all of its facilities are well maintained, generally adequate and suitable for the current operations of its business, as well as fully utilized. In the normal course of business, new locations and facility upgrades occur as needed.

For additional information regarding the Company’s premises and equipment and lease obligations, see Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

Item 3. Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

Item 4. Mine Safety Disclosures

Not Applicable

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters

and Issuer Purchases of Equity Securities

The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. As of December 31, 2018, there were approximately 1,725 shareholders of record for the Company’s common stock. The market range of high and low sales prices for the Company’s common stock for the periods indicated are shown below:



	2018			2017
	High		Low	High	Low
First quarter	$	41.24	36.72	38.17	31.70
Second quarter	41.47		35.77	37.41	31.56
Third quarter	46.28		38.37	38.18	31.38
Fourth quarter	47.67		36.84	41.23	35.50

The following table summarizes the Company’s dividends declared during the periods indicated:



	Years ended
	December 31, 2018		December 31, 2017
First quarter	$	0.23	0.21
Second quarter	0.26		0.21
Third quarter	0.26		0.21
Fourth quarter	0.26		0.21
Special	0.30		0.30
Total	$	1.31	1.14

Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations. Information regarding the regulation considerations is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”

Issuer Stock Purchases

The Company made no stock repurchases during 2018.

Stock Performance Graphs

The following graphs compare the yearly cumulative total return of the Company’s common stock over both a five-year and ten-year measurement period with the yearly cumulative total return on the stocks included in 1) the Russell 2000 Index; 2) the SNL Bank Index comprised of banks and bank holding companies with total assets between $5 billion and $10 billion (“SNL Bank $5B-$10B Index”); and 3) the KBW NASDAQ Regional Banking Index (“KBW Regional Banking Index”). Because the Company's total consolidated assets exceeded $10 billion during 2018, the SNL Bank $5B-$10B Index that had been used in the past has been replaced by the KBW Regional Banking Index going forward. The KBW Regional Banking Index is frequently used by investors when comparing the Company’s stock performance to that of similarly sized institutions in the Company’s region. Each of the cumulative total returns is computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.



	Period Ending
	12/31/13	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18
Glacier Bancorp, Inc.	100.00	95.53	94.90	135.02	152.82	157.52
Russell 2000 Index	100.00	104.89	100.26	121.63	139.44	124.09
SNL Bank $5B-$10B Index	100.00	103.01	117.34	168.11	167.48	151.57
KBW Regional Banking Index	100.00	102.42	108.48	150.80	153.45	126.59

Item 6. Selected Financial Data

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, this Annual Report on Form 10-K contains certain non-GAAP financial measures. The Company believes that providing these non-GAAP financial measures provides investors with information useful in understanding and comparing the Company’s financial performance, performance trends, and financial position. While the Company uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative to measurements required by GAAP. The following table provides a reconciliation of certain GAAP financial measures to non-GAAP financial measures.



	Year ended December 31, 2017
(Dollars in thousands, except per share data)	GAAP			Tax Act Adjustment		Non-GAAP
Federal and state income tax expense	$	64,625		(19,699	)	44,926
Net income	$	116,377		19,699		136,076
Basic earnings per share	$	1.50		0.25		1.75
Diluted earnings per share	$	1.50		0.25		1.75
Return on average assets	1.20		%	0.21	%	1.41	%
Return on average equity	9.80		%	1.66	%	11.46	%
Dividend payout ratio	76.00		%	(10.86	)%	65.14	%
Effective income tax rate	35.70		%	(10.88	)%	24.82	%

The reconciling item between the GAAP and non-GAAP financial measures was due to the one-time net tax expense of $19.7 million during the year ended December 31, 2017. The one-time net tax expense was driven by The Tax Cuts and Jobs Act (“Tax Act”) and the change in the federal marginal corporate income tax rate from 35 percent to 21 percent for 2018 and future years, which resulted in the revaluation of its deferred tax assets and deferred tax liabilities (“net deferred tax asset”). The Company believes the financial results are more comparable excluding the impact of the revaluation of the net deferred tax asset.

Basic earnings per share is calculated by dividing net income by average outstanding shares and diluted earnings per share is calculated by dividing net income by diluted average outstanding shares. The one-time net tax expense of $19.7 million was included in determining income for both the GAAP basic earnings per share and the GAAP diluted earnings per share. Conversely, the one-time net tax expense of $19.7 million was excluded in determining income for both the non-GAAP basic earnings per share and the non-GAAP diluted earnings per share. Average outstanding shares of 77,537,664 was used in the GAAP and non-GAAP basic earnings per share for the year ended December 31, 2017. Diluted average outstanding shares of 77,607,605 was used in the GAAP and non-GAAP diluted earnings per share for the year ended December 31, 2017.

The return on average assets ratio is calculated by dividing net income by average assets and the return on average equity ratio is calculated by dividing net income by average equity. The one-time net tax expense of $19.7 million was included in determining income for both the GAAP return on average assets and the GAAP return on average equity. Conversely, the one-time net tax expense of $19.7 million was excluded in determining income for both the non-GAAP return on average assets and the non-GAAP return on average equity. Average assets of $9.678 billion was used in the GAAP and non-GAAP return on average assets ratios for the year ended December 31, 2017. Average equity of $1.188 billion was used in the GAAP and non-GAAP return on average equity ratios for the year ended December 31, 2017.

The dividend payout ratio is calculated by dividing dividends declared per share by basic earnings per share. The non-GAAP dividend payout ratio uses the non-GAAP basic earnings per share for calculating the ratio.

The effective income tax rate is calculated by dividing federal and state income tax expense by income before income taxes. The non-GAAP effective income tax rate uses the non-GAAP federal and state income tax expense of $44.9 million for calculating the rate.

Selected Financial Data

The following financial data of the Company is derived from the Company’s historical audited financial statements and related notes. The information set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.



	December 31,										Compounded Annual Growth Rate
(Dollars in thousands, except per share data)	2018		2017		2016		2015		2014		1-Year		5-Year
Selected Statements of Financial Condition Information
Total assets	$12,115,484		$9,706,349		$9,450,600		$9,089,232		$8,306,507		24.8	%	7.8	%
Debt securities	2,869,578		2,426,556		3,101,151		3,312,832		2,908,425		18.3	%	(0.3	)%
Loans receivable, net	8,156,310		6,448,256		5,554,891		4,948,984		4,358,342		26.5	%	13.4	%
Allowance for loan and lease losses	(131,239)		(129,568)		(129,572)		(129,697)		(129,753)		1.3	%	0.2	%
Goodwill and intangibles	338,828		191,995		159,400		155,193		140,606		76.5	%	19.2	%
Deposits	9,493,767		7,579,747		7,372,279		6,945,008		6,345,212		25.3	%	8.4	%
Federal Home Loan Bank advances	440,175		353,995		251,749		394,131		296,944		24.3	%	8.2	%
Securities sold under agreements to repurchase and other borrowed funds	410,859		370,797		478,090		430,016		404,418		10.8	%	0.3	%
Stockholders’ equity	1,515,854		1,199,057		1,116,869		1,076,650		1,028,047		26.4	%	8.1	%
Equity per share	17.93		15.37		14.59		14.15		13.70		16.7	%	5.5	%
Equity as a percentage of total assets	12.51	%	12.35	%	11.82	%	11.85	%	12.38	%	1.3	%	0.2	%



	Years ended December 31,										Compounded Annual Growth Rate
(Dollars in thousands, except per share data)	2018		2017		2016		2015		2014		1-Year		5-Year
Summary Statements of Operations
Interest income	$	468,996	$	375,022	$	344,153	$	319,681	$	299,919	25.1	%	9.4	%
Interest expense	35,531		29,864		29,631		29,275		26,966		19.0	%	5.7	%
Net interest income	433,465		345,158		314,522		290,406		272,953		25.6	%	9.7	%
Provision for loan losses	9,953		10,824		2,333		2,284		1,912		(8.0	)%	39.1	%
Non-interest income	118,824		112,239		107,318		98,761		90,302		5.9	%	5.6	%
Non-interest expense	320,127		265,571		258,714		236,757		212,679		20.5	%	8.5	%
Income before income taxes	222,209		181,002		160,793		150,126		148,664		22.8	%	8.4	%
Federal and state income tax expense ¹	40,331		44,926		39,662		33,999		35,909		(10.2	)%	2.3	%
Net income ¹	$	181,878	$	136,076	$	121,131	$	116,127	$	112,755	33.7	%	10.0	%
Basic earnings per share ¹	$	2.18	$	1.75	$	1.59	$	1.54	$	1.51	24.6	%	7.6	%
Diluted earnings per share ¹	$	2.17	$	1.75	$	1.59	$	1.54	$	1.51	24.0	%	7.5	%
Dividends declared per share	$	1.31	$	1.14	$	1.10	$	1.05	$	0.98	14.9	%	6.0	%



	At or for the Years ended December 31,
(Dollars in thousands)	2018		2017		2016		2015		2014
Selected Ratios and Other Data
Return on average assets ¹	1.59	%	1.41	%	1.32	%	1.36	%	1.42	%
Return on average equity ¹	12.56	%	11.46	%	10.79	%	10.84	%	11.11	%
Dividend payout ratio ¹	60.09	%	65.14	%	69.18	%	68.18	%	64.90	%
Average equity to average asset ratio	12.67	%	12.27	%	12.27	%	12.52	%	12.81	%
Total capital (to risk-weighted assets)	14.70	%	15.64	%	16.38	%	17.17	%	18.93	%
Tier 1 capital (to risk-weighted assets)	13.37	%	14.39	%	15.12	%	15.91	%	17.67	%
Common Equity Tier 1 (to risk-weighted assets)	12.10	%	12.81	%	13.42	%	14.06	%	N/A
Tier 1 capital (to average assets)	11.35	%	11.90	%	11.90	%	12.01	%	12.45	%
Net interest margin on average earning assets (tax-equivalent)	4.21	%	4.12	%	4.02	%	4.00	%	3.98	%
Efficiency ratio ²	54.73	%	53.94	%	55.88	%	55.40	%	54.31	%
Allowance for loan and lease losses as a percent of loans	1.58	%	1.97	%	2.28	%	2.55	%	2.89	%
Allowance for loan and lease losses as a percent of nonperforming loans	266	%	255	%	257	%	244	%	209	%
Non-performing assets as a percentage of subsidiary assets	0.47	%	0.68	%	0.76	%	0.88	%	1.08	%
Non-performing assets	$56,750		65,179		71,385		80,079		89,900
Loans originated and acquired	$4,301,678		3,629,493		3,474,000		3,000,830		2,404,299
Number of full time equivalent employees	2,623		2,278		2,222		2,149		1,943
Number of locations	167		145		142		144		129

______________________________

¹ Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act for the year ended December 31, 2017. For additional information on the revaluation, see the “Non-GAAP Financial Measures” section.

² Non-interest expense before OREO expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items as a percentage of tax-equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, OREO income, and non-recurring income items.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about the Company’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates”, or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results (express or implied) or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:


•	the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;


•	changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System or the Federal Reserve Board, which could adversely affect the Company’s net interest income and profitability;


•	changes in the cost and scope of insurance from the FDIC and other third parties;


•	legislative or regulatory changes, including increased banking and consumer protection regulation that adversely affect the Company’s business, both generally and as a result of the Company exceeding $10 billion in total consolidated assets;


•	ability to complete pending or prospective future acquisitions;


•	costs or difficulties related to the completion and integration of acquisitions;


•	the goodwill the Company has recorded in connection with acquisitions could become impaired, which may have an adverse impact on earnings and capital;


•	reduced demand for banking products and services;


•	the reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability to obtain (and maintain) customers;


•	competition among financial institutions in the Company's markets may increase significantly;


•	the risks presented by continued public stock market volatility, which could adversely affect the market price of the Company’s common stock and the ability to raise additional capital or grow the Company through acquisitions;


•	the projected business and profitability of an expansion or the opening of a new branch could be lower than expected;


•	consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;


•	dependence on the CEO, the senior management team and the Presidents of Glacier Bank divisions;


•	material failure, potential interruption or breach in security of the Company’s systems and technological changes which could expose us to new risks (e.g., cybersecurity), fraud or system failures;


•	natural disasters, including fires, floods, earthquakes, and other unexpected events;


•	the Company’s success in managing risks involved in the foregoing; and


•	the effects of any reputational damage to the Company resulting from any of the foregoing.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in “Item 1A. Risk Factors.” Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). Given the described uncertainties and risks, the Company cannot guarantee its future performance or results of operations and you should not place undue reliance on these forward-looking statements. The Company does not undertake any obligation to publicly correct, revise, or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2018 COMPARED TO DECEMBER 31, 2017

Highlights and Overview

During the first quarter of 2018, the Company completed two bank acquisitions which increased the asset size of the Company approximately 15 percent. The first acquisition was Collegiate, a community bank based in Buena Vista, Colorado. Collegiate provides banking services to individuals and businesses in the Mountain and Front Range communities of Colorado with locations in Aurora, Buena Vista, Denver and Salida. Collegiate became the Company’s fourteenth bank division. The second acquisition was FSB, a community bank based in Bozeman, Montana. FSB provides banking services to individuals and businesses throughout Montana with locations in Bozeman, Belgrade, Big Sky, Choteau, Fairfield, Fort Benton, Three Forks, Vaughn and West Yellowstone. FSB became a new bank division headquartered in Bozeman and Big Sky Western Bank, the Bank’s existing Bozeman-based division combined with the FSB division. The agriculture-focused northern branches of FSB, located in the area known as the Golden Triangle, combined with the Bank’s First Bank of Montana division. On January 16, 2019, the Company announced the signing of a definitive agreement to acquire FNB, a community bank based in Layton, Utah. FNB provides banking services to individuals and business throughout Utah with locations in Layton, Bountiful, Clearfield and Draper. As of December 31, 2018, FNB had total assets of $335 million, gross loans of $247 million and total deposits of $286 million. See Notes 22 and 23 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding these acquisitions.

The Company successfully executed its strategy to stay below $10 billion in total assets as of December 31, 2017 to delay the impact of the Durbin Amendment for one additional year. The Durbin Amendment, which was passed as part of the Dodd-Frank Act, establishes limits on the amount of interchange fees that can be charged to merchants for debit card processing and will reduce the Company’s service charge fee income in the future. As part of its strategy, the Company sold $395 million in deposits through a third party vendor. The Company ended the year at $12.115 billion in assets, which was a 25 percent increase over the prior year. The increase was due to the Company bringing back the deposits that were sold, acquiring Collegiate and FSB and organic growth. The impact of the Durbin Amendment on interchange fees will impact the Company starting in July of 2019 and is estimated to decrease service charge fees by $17 to $20 million (pre-tax) on an annual basis.

The Company experienced a strong year for organic loan growth, which increased $728 million, or 11 percent, with the primary increases in the commercial loan portfolio. Excluding acquisitions, total core deposits increased $591 million, or 8 percent, during the current year, including an increase in non-interest bearing deposits of $218 million, or 9 percent, from the prior year. Tangible stockholders’ equity increased $170 million, or $1.02 per share, as a result of earnings retention and Company stock issued in connection with the current year acquisitions, all of which offset the increases in goodwill and intangibles from the acquisitions. The Company increased its total dividends declared from $1.14 per share during 2017 to $1.31 per share in 2018.

The Company continued to reduce its non-performing assets and ended the year at $56.8 million which was a decrease of $8.4 million or, 13 percent, from the prior year end. The allowance as a percentage of total loans as of December 31, 2018 was 1.58 percent, a decrease of 39 basis points (“bps”) from 1.97 percent at December 31, 2017. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the ALLL.

The Tax Act resulted in a decrease in the federal marginal corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19.7 million during the fourth quarter 2017 due to the Company’s revaluation of its net deferred tax asset. The Company experienced a significant tax expense reduction during 2018 which resulted in an effective income tax rate of 18 percent during 2018 compared to 25 percent in 2017, excluding the revaluation of the net deferred tax asset.

The Company had record net income for the year of $182 million, which was an increase of $45.8 million, or 34 percent, over the 2017 net income of $136 million, excluding the revaluation of the net deferred tax asset. Pre-tax income of $222 million for the current year was an increase of $41.2 million, or 23 percent over the prior year. Diluted earnings per share for the year was $2.17, an increase of $0.42 per share, or 24 percent, from 2017 diluted earnings per share of $1.75, excluding the revaluation of the net deferred tax asset. The improvement in net income for 2018 was due to the acquisitions, organic growth, the significant increase in commercial interest income, the decrease in tax expense and controlled operating expenses. For additional information on the revaluation of net deferred tax asset, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data.”

Looking forward, the Company’s future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality and growth, the impact and successful integration of acquisitions, and managing regulatory burden.

Financial Highlights



	At or for the Years ended
(Dollars in thousands, except per share data)	December 31, 2018			December 31, 2017
Operating results
Net income ¹	$	181,878		136,076
Basic earnings per share ¹	$	2.18		1.75
Diluted earnings per share ¹	$	2.17		1.75
Dividends declared per share	$	1.31		1.14
Market value per share
Closing	$	39.62		39.39
High	$	47.67		41.23
Low	$	35.77		31.38
Selected ratios and other data
Number of common stock shares outstanding	84,521,692			78,006,956
Average outstanding shares - basic	83,603,515			77,537,664
Average outstanding shares - diluted	83,677,185			77,607,605
Return on average assets (annualized) ¹	1.59		%	1.41	%
Return on average equity (annualized) ¹	12.56		%	11.46	%
Efficiency ratio	54.73		%	53.94	%
Dividend payout ratio ¹	60.09		%	65.14	%
Loan to deposit ratio	87.64		%	87.29	%
Number of full time equivalent employees	2,623			2,278
Number of locations	167			145
Number of ATMs	216			200

______________________________

¹ Excludes a one-time revaluation of the net deferred tax asset as a result of the Tax Act for the year ended December 31, 2017. For additional information on the revaluation, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data.”

Recent Acquisitions

The Company completed the following acquisitions during the last two years:


•	Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank


•	Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank


•	TFB Bancorp, Inc. and its subsidiary, The Foothills Bank

The business combinations were accounted for using the acquisition method with the results of operations included in the Company’s consolidated financial statements as of the acquisition dates. For additional information regarding acquisitions, see Note 22 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” The following table discloses the fair value of selected classifications of assets and liabilities acquired:



(Dollars in thousands)	FSB February 28, 2018		Collegiate January 31, 2018	Foothills April 30, 2017
Total assets	$	1,109,684	551,198	385,839
Debt securities	271,865		42,177	25,420
Loans receivable	627,767		354,252	292,529
Non-interest bearing deposits	301,468		170,022	97,527
Interest bearing deposits	576,118		267,149	199,233
Borrowings	36,880		12,509	22,800

Financial Condition Analysis

Assets

The following table summarizes the Company’s assets as of the dates indicated:



(Dollars in thousands)	December 31, 2018			December 31, 2017			$ Change			% Change
Cash and cash equivalents	$	203,790		$	200,004		$	3,786		2	%
Debt securities, available-for-sale	2,571,663			1,778,243			793,420			45	%
Debt securities, held-to-maturity	297,915			648,313			(350,398		)	(54	)%
Total debt securities	2,869,578			2,426,556			443,022			18	%
Loans receivable
Residential real estate	887,742			720,728			167,014			23	%
Commercial real estate	4,657,561			3,577,139			1,080,422			30	%
Other commercial	1,911,171			1,579,353			331,818			21	%
Home equity	544,688			457,918			86,770			19	%
Other consumer	286,387			242,686			43,701			18	%
Loans receivable	8,287,549			6,577,824			1,709,725			26	%
Allowance for loan and lease losses	(131,239		)	(129,568		)	(1,671		)	1	%
Loans receivable, net	8,156,310			6,448,256			1,708,054			26	%
Other assets	885,806			631,533			254,273			40	%
Total assets	$	12,115,484		$	9,706,349		$	2,409,135		25	%

The Company successfully executed its strategy to stay below $10 billion in total assets as of December 31, 2017 to delay the impact of the Durbin Amendment for one additional year. The Durbin Amendment, which was passed as part of Dodd-Frank Act, establishes limits on the amount of interchange fees that can be charged to merchants for debit card processing and will reduce the Company’s service charge fee income in the future. As a result, the Company’s annual service charge fee income is expected to decline by approximately $17 to $20 million (pre-tax) beginning July 2019. During the year, the Company surpassed $10 billion in total assets and ended the year at $12.115 billion, which was an increase of $2.409 billion, or 25 percent, from the prior year end, resulting from current year acquisitions along with organic growth.

Total debt securities of $2.870 billion at December 31, 2018 increased $443 million, or 18 percent, from the prior year end. Debt securities represented 24 percent of total assets at December 31, 2018 compared to 25 percent of total assets at December 31, 2017.

Excluding the $982 million of loans from the FSB and Collegiate acquisitions, the loan portfolio of $8.288 billion increased $728 million, or 11 percent, since December 31, 2017, with the largest increase in commercial real estate loans, which increased $463 million, or 13 percent.

Liabilities

The following table summarizes the Company’s liabilities as of the dates indicated:



(Dollars in thousands)	December 31, 2018		December 31, 2017		$ Change		% Change
Deposits
Non-interest bearing deposits	$	3,001,178	$	2,311,902	$	689,276	30	%
NOW and DDA accounts	2,391,307		1,695,246		696,061		41	%
Savings accounts	1,346,790		1,082,604		264,186		24	%
Money market deposit accounts	1,684,284		1,512,693		171,591		11	%
Certificate accounts	901,484		817,259		84,225		10	%
Core deposits, total	9,325,043		7,419,704		1,905,339		26	%
Wholesale deposits	168,724		160,043		8,681		5	%
Deposits, total	9,493,767		7,579,747		1,914,020		25	%
Securities sold under agreements to repurchase	396,151		362,573		33,578		9	%
Federal Home Loan Bank advances	440,175		353,995		86,180		24	%
Other borrowed funds	14,708		8,224		6,484		79	%
Subordinated debentures	134,051		126,135		7,916		6	%
Other liabilities	120,778		76,618		44,160		58	%
Total liabilities	$	10,599,630	$	8,507,292	$	2,092,338	25	%

The Company brought back $395 million of deposits during the first quarter of 2018 that were previously sold as part of its strategy to say below $10 billion in total assets through December 31, 2017. Excluding acquisitions, total core deposits increased $591 million, or 8 percent, during the current year, including an increase in non-interest bearing deposits of $218 million, or 9 percent, from the prior year.

Federal Home Loan Bank (“FHLB”) advances of $440 million at December 31, 2018 increased $86 million over the prior year end to assist in funding asset growth.

Stockholders’ Equity

The following table summarizes the stockholders’ equity balances as of the dates indicated:



(Dollars in thousands, except per share data)	December 31, 2018			December 31, 2017			$ Change			% Change
Common equity	$	1,525,281		$	1,201,036		$	324,245		27	%
Accumulated other comprehensive loss	(9,427		)	(1,979		)	(7,448		)	376	%
Total stockholders’ equity	1,515,854			1,199,057			316,797			26	%
Goodwill and core deposit intangible, net	(338,828		)	(191,995		)	(146,833		)	76	%
Tangible stockholders’ equity	$	1,177,026		$	1,007,062		$	169,964		17	%
Stockholders’ equity to total assets	12.51		%	12.35		%				1	%
Tangible stockholders’ equity to total tangible assets	9.99		%	10.58		%				(6	)%
Book value per common share	$	17.93		$	15.37		$	2.56		17	%
Tangible book value per common share	$	13.93		$	12.91		$	1.02		8	%

Tangible stockholders’ equity of $1.177 billion at December 31, 2018 increased $170 million over the prior year end which was the result of earnings retention and $181 million and $69.8 million of Company stock issued for the acquisitions of FSB and Collegiate, respectively. These increases more than offset the increase in goodwill and core deposit intangibles associated with the acquisitions and the decrease in accumulated other comprehensive income in 2018. Tangible book value per common share at year end increased $1.02 per share from a year ago.

Results of Operations

Income Summary

The following table summarizes income for the periods indicated:



	Years ended						$ Change			% Change
(Dollars in thousands)	December 31, 2018			December 31, 2017			$ Change			% Change
Net interest income
Interest income	$	468,996		$	375,022		$	93,974		25	%
Interest expense	35,531			29,864			5,667			19	%
Total net interest income	433,465			345,158			88,307			26	%
Non-interest income
Service charges and other fees	74,887			67,717			7,170			11	%
Miscellaneous loan fees and charges	6,805			4,360			2,445			56	%
Gain on sale of loans	27,134			30,439			(3,305		)	(11	)%
(Loss) gain on sale of investments	(1,113		)	(660		)	(453		)	69	%
Other income	11,111			10,383			728			7	%
Total non-interest income	118,824			112,239			6,585			6	%
Total income	$	552,289		$	457,397		$	94,892		21	%
Net interest margin (tax-equivalent)	4.21		%	4.12		%

Net Interest Income

Interest income of $469 million for 2018 increased $94.0 million, or 25 percent, from 2017 and was principally due to a $76.8 million increase in interest income from commercial loans. Interest expense of $35.5 million for the current year increased $5.7 million over the prior year same period. The Company has maintained stable funding costs through its focus on growing non-interest bearing deposits and continued pricing discipline. The total funding cost (including non-interest bearing deposits) for 2018 and 2017 was 36 basis points.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2018 was 4.21 percent, a 9 basis points increase from the net interest margin of 4.12 percent for 2017. Included in the current year net interest margin was a 14 basis points decrease compared to the prior year driven by the reduction in the federal marginal corporate income tax rate. The increase in the net interest margin from the prior year resulted from the remix of earning assets to higher yielding loans, increased yields on the loan portfolio, and stable funding costs.

Non-interest Income

Non-interest income of $119 million for the current year increased $6.6 million, or 6 percent, over the prior year. Service charges and other fees of $74.9 million for 2018 increased $7.2 million, or 11 percent, from the prior year as a result of the increased number of deposit accounts from organic growth and acquisitions. Miscellaneous loan fees and charges for 2018 increased $2.4 million, or 56 percent from the prior year as a result of the acquisitions and increased loan growth. Gain on sale of loans for the current year decreased $3.3 million, or 11 percent, from the prior year due to the decrease in purchase and refinance activity. Other income of $11.1 million, increased $728 thousand, or 7 percent, from the prior year with increases of $1.9 million from the sale of bank assets and a decrease of $2.1 million from the gain on sale of OREO.

Non-interest Expense

The following table summarizes non-interest expense for the periods indicated:



	Years ended				$ Change		% Change
(Dollars in thousands)	December 31, 2018		December 31, 2017		$ Change		% Change
Compensation and employee benefits	$	195,056	$	160,506	$	34,550	22	%
Occupancy and equipment	30,734		26,631		4,103		15	%
Advertising and promotions	9,566		8,405		1,161		14	%
Data processing	15,911		14,150		1,761		12	%
Other real estate owned	3,221		1,909		1,312		69	%
Regulatory assessments and insurance	5,075		4,431		644		15	%
Core deposit intangible amortization	6,270		2,494		3,776		151	%
Other expenses	54,294		47,045		7,249		15	%
Total non-interest expense	$	320,127	$	265,571	$	54,556	21	%

Total non-interest expense of $320 million for 2018 increased $54.6 million, or 21 percent, over the prior year. Compensation and employee benefits for 2018 increased $34.6 million, or 22 percent, from the same period last year primarily due to the increased number of employees from acquisitions. Occupancy and equipment expense for 2018 increased $4.1 million, or 15 percent from the prior year primarily as a result of increased costs from acquisitions. Data processing expense for the current year increased $1.8 million, or 12 percent, from the prior year as a result of increased costs from the acquisitions and organic growth. Current year other expenses of $54.3 million increased $7.2 million, or 15 percent, from the prior year due to an increase in acquisition-related expenses and increased costs from acquired banks and organic growth. Acquisition-related expenses were $6.6 million during 2018 compared to $2.1 million in 2017.

Efficiency Ratio

For 2018, the efficiency ratio was 54.73 percent, a 79 basis points increase over the prior year efficiency ratio of 53.94 percent. Applying the same 35 percent federal marginal corporate income tax rate that was in effect during the prior year, the efficiency ratio would be 53.77 percent for 2018, or 17 basis points lower than 2017.

Provision for Loan Losses

The following table summarizes the provision for loan losses, net charge-offs and select ratios relating to the provision for loan losses for the previous eight quarters:



(Dollars in thousands)	Provision for Loan Losses		Net Charge-Offs		ALLL as a Percent of Loans		Accruing Loans 30-89 Days Past Due as a Percent of Loans		Non-Performing Assets to Total Sub-sidiary Assets
Fourth quarter 2018	$	1,246	$	2,542	1.58	%	0.41	%	0.47	%
Third quarter 2018	3,194		2,223		1.63	%	0.31	%	0.61	%
Second quarter 2018	4,718		762		1.66	%	0.50	%	0.71	%
First quarter 2018	795		2,755		1.66	%	0.59	%	0.64	%
Fourth quarter 2017	2,886		2,894		1.97	%	0.57	%	0.68	%
Third quarter 2017	3,327		3,628		1.99	%	0.45	%	0.67	%
Second quarter 2017	3,013		2,362		2.05	%	0.49	%	0.70	%
First quarter 2017	1,598		1,944		2.20	%	0.67	%	0.75	%

The provision for loan losses was $10.0 million for 2018, a decrease of $871 thousand from 2017 provision for loan loss of $10.8 million. Net charge-offs during the 2018 were $8.3 million compared to $10.8 million during 2017. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of the loan loss provision.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF THE RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016

Income Summary

The following table summarizes income for the periods indicated:



	Years ended						$ Change			% Change
(Dollars in thousands)	December 31, 2017			December 31, 2016			$ Change			% Change
Net interest income
Interest income	$	375,022		$	344,153		$	30,869		9	%
Interest expense	29,864			29,631			233			1	%
Total net interest income	345,158			314,522			30,636			10	%
Non-interest income
Service charges and other fees	67,717			62,405			5,312			9	%
Miscellaneous loan fees and charges	4,360			4,613			(253		)	(5	)%
Gain on sale of loans	30,439			33,606			(3,167		)	(9	)%
Loss on sale of investments	(660		)	(1,463		)	803			(55	)%
Other income	10,383			8,157			2,226			27	%
Total non-interest income	112,239			107,318			4,921			5	%
	$	457,397		$	421,840		$	35,557		8	%
Net interest margin (tax-equivalent)	4.12		%	4.02		%

Net Interest Income

Interest income for 2017 increased $30.9 million, or 9 percent, from the prior year and was attributable to a $38.4 million increase in income from commercial loans which more than offset the decrease of $8.4 million in interest income on investments.

Interest expense of $29.9 million for 2017 increased $233 thousand over the prior year. Interest expense on deposits decreased $1.6 million, or 9 percent, and was due to the decrease in wholesale deposits. Interest expense on securities sold under agreements to repurchase (“repurchase agreements”), FHLB advances, and subordinated debt increased $1.8 million, or 16 percent, over the prior year and was primarily driven by the increase in interest rates. The total funding cost (including non-interest bearing deposits) for 2017 was 36 basis points compared to 37 basis points for 2016.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2017 was 4.12 percent, a 10 basis point increase from the net interest margin of 4.02 percent for 2016. The increase in the net interest margin was primarily attributable to a shift in earning assets to higher yielding loans. Additionally, there was an increase in yields on earning assets combined with a continued growth in low cost deposits during the current year.

Non-interest Income

Non-interest income of $112.2 million for 2017 increased $4.9 million, or 5 percent, over the prior year. Service charges and other fees of $67.7 million for 2017 increased $5.3 million, or 9 percent, from the prior year as a result of an increased number of deposit accounts. The gain on sale of loans of $30.4 million for 2017 decreased $3.2 million, or 9 percent, from the prior year which was due to a lower volume of refinanced and purchased mortgages. Other income of $10.4 million for 2017 increased $2.2 million, or 27 percent, over the prior year and was the result of an increase on gain on sale of OREO.

Non-interest Expense

The following table summarizes non-interest expense for the periods indicated:



	Years ended				$ Change			% Change
(Dollars in thousands)	December 31, 2017		December 31, 2016		$ Change			% Change
Compensation and employee benefits	$	160,506	$	151,697	$	8,809		6	%
Occupancy and equipment	26,631		25,979		652			3	%
Advertising and promotions	8,405		8,433		(28		)	—	%
Data processing	14,150		14,390		(240		)	(2	)%
Other real estate owned	1,909		2,895		(986		)	(34	)%
Regulatory assessments and insurance	4,431		4,780		(349		)	(7	)%
Core deposit intangible amortization	2,494		2,970		(476		)	(16	)%
Other expenses	47,045		47,570		(525		)	(1	)%
Total non-interest expense	$	265,571	$	258,714	$	6,857		3	%

During 2016, the Company consolidated its Bank divisions’ individual core database systems into a single core database and re-issued debit cards with chip technology (the Core Consolidation Project or “CCP”). Expenses related to CCP were $4.3 million during 2016. Excluding CCP expenses, non-interest expense for 2017 increased $11.2 million, or 4 percent, over the prior year. Compensation and employee benefits for 2017 increased $8.8 million, or 6 percent, from the prior year due to salary increases and the increased number of employees from the acquired banks. Occupancy and equipment expense increased $652 thousand, or 3 percent from the prior year as a result of increased costs from acquisitions. Data processing expense decreased $240 thousand, or 2 percent, from the prior year as a result of decreased costs associated with CCP. Other expenses for 2017 of $47.0 million decreased $525 thousand, or 1 percent, from the prior year and was principally driven by decreased costs associated with CCP.

Efficiency Ratio

The efficiency ratio of 53.94 percent for 2017 decreased 194 basis points from the prior year efficiency ratio of 55.88 percent which resulted from the increase in net interest income largely due to higher interest income on commercial loans.

Provision for Loan Losses

The provision for loan losses was $10.8 million for 2017, an increase of $8.5 million from the same period in the prior year. Net charge-offs during 2017 were $10.8 million compared to $2.5 million during 2016.

ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Activity

The Company’s investment securities primarily consist of debt securities classified as available-for-sale or held-to-maturity. Non-marketable equity securities primarily consist of capital stock issued by the FHLB of Des Moines and are carried at cost less impairment.

Debt Securities

On November 30, 2018, the Company early adopted FASB ASU 2017-12, Derivatives and Hedging, and in doing so redesignated state and local government securities with a carrying value of $270,331,000, from held-to-maturity classification to available-for-sale classification. The Company considers the available-for-sale classification of these debt securities to be appropriate since it no longer had the intent to hold them to maturity. Debt securities classified as available-for-sale are carried at estimated fair value and debt securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale debt securities are reflected as an adjustment to other comprehensive income (“OCI”). The Company’s debt securities are summarized below:



	December 31, 2018				December 31, 2017				December 31, 2016				December 31, 2015				December 31, 2014
(Dollars in thousands)	Carrying Amount		Percent		Carrying Amount		Percent		Carrying Amount		Percent		Carrying Amount		Percent		Carrying Amount		Percent
Available-for-sale
U.S. government and federal agency	$	23,649	1	%	$	31,127	1	%	$	39,407	1	%	$	47,451	1	%	$	44	—	%
U.S. government sponsored enterprises	120,208		4	%	19,091		1	%	19,570		1	%	93,167		3	%	21,945		1	%
State and local governments	852,250		30	%	629,501		26	%	786,373		25	%	885,019		27	%	997,969		34	%
Corporate bonds	290,817		10	%	216,762		9	%	471,951		15	%	384,163		12	%	314,854		11	%
Residential mortgage-backed securities	792,915		28	%	779,283		32	%	1,007,515		33	%	1,198,549		36	%	1,049,575		36	%
Commercial mortgage-backed securities	491,824		17	%	102,479		4	%	100,661		3	%	2,411		—	%	3,041		—	%
Total available-for-sale	2,571,663		90	%	1,778,243		73	%	2,425,477		78	%	2,610,760		79

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$44.91	85	$3,800

10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-24	Earnings, Exhibits
8-K	2019-01-16	Regulation FD, Other Events, Exhibits
8-K	2018-10-18	Earnings, Exhibits
8-K	2018-07-19	Earnings, Exhibits
8-K	2018-06-27	Officers, Regulation FD, Exhibits
8-K	2018-04-19	Earnings, Exhibits
8-K	2018-03-05	Officers
8-K	2018-02-28	Other Events, Exhibits
8-K	2018-01-31	Other Events, Exhibits
8-K	2018-01-25	Earnings, Exhibits

CBSH	Commerce Bancshares
PB	Prosperity Bancshares
ONB	Old National Bancorp
FFBC	First Financial Bancorp
CAC	Camden National
MCBC	Macatawa Bank
AMNB	American National Bankshares
ATLO	AMES National
TRCB	Two River Bancorp
HFBC	Hopfed Bancorp

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