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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 349 added, 241 removed, 441 unchanged (57% of the section changed)

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German American Bancorp, Inc.

(the "Company") is a Nasdaq-traded (symbol:

is a Nasdaq-traded (symbol:

GABC) financial holding company based in Jasper, Indiana.

The Company, through its banking subsidiary German American Bank, operates 75 banking offices in 20 contiguous southern Indiana counties, eight Kentucky counties and one county in Tennessee.

German American, through its banking subsidiary German American Bank, operates 73 banking offices in 20 contiguous southern Indiana counties and eight counties in Kentucky.

The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).

The Company was formed in 1982 as a bank holding company under the Bank Holding Company Act of 1956, as amended.

Effective September 24, 2019, the Company elected to be a “financial holding company” as permitted under the Gramm-Leach-Bliley Act of 1999, as amended.

As a financial holding company, the Company is generally permitted to engage in certain otherwise prohibited nonbanking activities and certain other broader securities, insurance, merchant banking and other activities that the Board of Governors of the Federal Reserve System (the “FRB”) has determined to be “financial in nature,” or are incidental or complementary to activities that are financial in nature, without prior approval from the FRB (subject to certain exceptions).

Upon becoming a financial holding company, the Company began operating GABC Risk Management, Inc., a wholly-owned subsidiary, as a pooled captive insurance company subsidiary to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

Throughout this Management’s Discussion and Analysis, as elsewhere in this Report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole.

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This Item 7, as well as the discussions in Item 1 (“Business”) entitled “Forward-Looking Statements and Associated Risks” and in Item 1A (“Risk Factors”) (which discussions are incorporated in this Item 7 by reference) list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any such forward-looking statements.

SIGNIFICANT BUSINESS DEVELOPMENTS RELATING TO COVID-19

Impact of COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern.

On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency.

The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

While quarantine and lock-down orders have been lifted and vaccination efforts are underway, COVID-19 has not yet been contained and commercial activity has not yet returned to the levels existing prior to the pandemic outbreak.

As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted.

Interest Rates

On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%.

This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020.

These reductions in interest rates and other effects of the COVID-19 outbreak are likely to negatively impact the Company’s net interest income and noninterest income.

The CARES Act and the Paycheck Protection Program

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”).

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted.

Among other things, this legislation amended the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion.

The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act.

For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years.

The vast majority of the Company's PPP loans have two-year maturities.

PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S.

On December 27, 2020, a $900 billion COVID-19 relief package, as passed by the U.S.

Congress, was signed into law as part of the 2021 Consolidated Appropriations Act (“CAA”).

In addition to providing direct stimulus payments to certain individuals, an increase in unemployment insurance benefits, an extension of the eviction moratorium, relief to the healthcare industry, and additional aid to various other businesses, the COVID-19-related provisions of the CAA also established an additional $284 billion in funding for the PPP through March 31, 2021.

The Company is also participating in this phase of the PPP.

During 2020, the Company originated loans totaling approximately $351.3 million in principal amount, on 3,070 PPP loan relationships, under this program.

The net processing fees related to the PPP, totaled approximately $12.0 million, and are being recognized over the life of the loans.

As a result of the forgiveness of PPP loans which began in the fourth quarter of 2020 for the Company, as of December 31, 2020, remaining PPP loans outstanding totaled $186.0 million with approximately $4.1 million of fees remaining deferred.

Paycheck Protection Program Liquidity Facility

To provide liquidity to small business lenders and the broader credit markets, to help stabilize the financial system, and to provide economic relief to small businesses nationwide, the Board of Governors of the Federal Reserve System (the "FRB") authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Liquidity Facility (the “PPPL Facility”), pursuant to the Federal Reserve Act.

Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions such as the Bank to fund loans guaranteed by the SBA under the PPP.

The Bank has until March 31, 2021 to access funds under the PPPL Facility, unless otherwise further extended by the FRB and the Department of the Treasury.

The Company is continuing to assess the PPPL Facility and whether it will utilize the facility as a source of liquidity for its PPP lending.

Loan Modifications and Troubled Debt Restructurings

On April 7, 2020, the FRB, the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the FRB and OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings.

Similarly, under the CARES Act, provisions were included that allow for loan modifications to not be classified as TDRs if certain criteria are met.

This TDR exemption, which was set to expire on December 31, 2020, was extended under the CAA to the earlier of (i) 60 days after the national emergency concerning the COVID-19 outbreak terminates, and (ii) January 1, 2022.

In response to requests from borrowers who have experienced pandemic-related business or personal cash flow interruptions, and in accordance with regulatory guidance, the Company has made short-term loan modifications involving both partial and full payment deferrals.

The table below shows the payment modifications that were still in effect as of December 31, 2020, with the majority of these credit relationships making full interest payments.

The outstanding loan balance subject to payment modifications as of December 31, 2020 was substantially reduced from the comparable balances as of June 30, 2020 and September 30, 2020.

% of Loan Category

(Excludes PPP Loans)

Type of Loans

(dollars in thousands) Number of Loans Outstanding Balance

As of 12/31/2020

As of 9/30/2020

Commercial & Industrial Loans 9 $ 4,311 0.8 % 1.2 %

Commercial Real Estate Loans 15 43,951 3.0 % 5.7 %

Agricultural Loans — — — % — %

Consumer Loans 9 80 n/m (1)

Residential Mortgage Loans 4 218 0.1 % 0.5 %

Total 37 $ 48,560 1.7 % 3.1 %

(1) n/m = not meaningful

Lending Exposure to Potentially Impacted Industry Segments

The Company tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure.

As a result of the COVID-19 pandemic, the Company identified loan segments that could represent a potentially higher level of credit risk, as many of these customers may have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders, travel restrictions, business limitations and shutdowns, and social distancing requirements.

At December 31, 2020, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments:

Industry Segment

(dollars in thousands) Number of Loans Outstanding Balance % of Total Loans (excludes PPP Loans) % of Industry Segment Under Deferral

Lodging / Hotels 48 $ 134,599 4.6 % 33.8 %

Student Housing 102 86,696 3.0 % — %

Retail Shopping / Strip Centers 64 91,456 3.1 % — %

Restaurants 175 46,891 1.6 % 1.2 %

Regulatory Capital

Current Expected Credit Loss (CECL) Model .

As discussed under Note 1 (Recently Adopted Accounting Guidance) in the Notes to the Consolidated Financial Statements in Item 1 of this Report, effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) No.

2016-13, “Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss model with an expected loss model referred to as the current expected credit loss (“CECL”) model.

On December 21, 2018, federal banking regulators issued a joint final rule to revise their regulatory capital rules to, among other things:

(i) address implementation of the CECL accounting standard under GAAP;

and (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects of adopting CECL.

However, in an action related to the CARES Act, federal banking regulators issued, on March 27, 2020, an interim final rule that allows banking organizations to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years.

This two-year delay is in addition to the three-year phase-in period discussed above.

The Company has elected to adopt the optional phase-in rules, which will largely delay the effects of CECL on its regulatory capital through December 31, 2021.

Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025.

Under the interim final rule, the amount of adjustments to regulatory capital that can be deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

Community Bank Leverage Ratio .

On April 6, 2020, federal banking regulators issued two interim final rules that make changes to the community bank leverage ratio (“CBLR”) framework and implementing certain directives of the CARES Act.

Under the existing CBLR framework, which became effective as of January 1, 2020, community banks and holding companies (which

would include the Bank and the Company) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework.

The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings.

The first of the April 2020 interim final rules provided that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework.

It also established a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

The second interim final rule provided a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.

It established a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains the two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

Under either framework, the Company and the Bank would be considered well-capitalized under the applicable guidelines.

PPP Loans and PPPL Facility .

On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program.

Specifically, the agencies clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

Additionally, in order to facilitate use of the PPPL Facility, the agencies further clarified that, for purposes of determining leverage ratios, a banking organization is permitted to exclude from total average assets PPP loans that have been pledged as collateral for a PPPL Facility.

MANAGEMENT OVERVIEW

Net income for the year ended December 31, 2020 totaled $62,210,000, or $2.34 per share, an increase of $2,988,000, or approximately 2% on a per share basis, from the year ended December 31, 2019 net income of $59,222,000, or $2.29 per share.

The Company adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) ("CECL") on January 1, 2020.

As a result, the Company recognized a one-time cumulative adjustment to the allowance for credit losses of $15.7 million.

The increase was primarily related to the Company's acquired loan portfolio which totaled approximately $851.1 million at the time of adoption.

Net income for the year ended December 31, 2019 totaled $59,222,000, or $2.29 per share, an increase of $12,693,000, or approximately 15% on a per share basis, from the year ended December 31, 2018 net income of $46,529,000, or $1.99 per share.

Net income for 2018 was positively impacted by lower federal income tax rates that became effective January 1, 2018, as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

The lower federal income tax rates had a positive impact of approximately $0.26 per share for the year ended December 31, 2018.

Net income for both 2018 and 2019 was impacted by merger and acquisition activity.

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As of the closing of the transaction, First Security had total assets of approximately $553.2 million, total loans of approximately $390.1 million, and total deposits of approximately $424.4 million.

The Company issued approximately 2.0 million shares of its common stock, and paid approximately $31.2 million in cash, in exchange for all of the issued and outstanding shares of common stock of First Security and in cancellation of all outstanding options to acquire First Security common stock.

The Company issued approximately 2.0 million shares of

its common stock, and paid approximately $31.2 million in cash, in exchange for all of the issued and outstanding shares of common stock of First Security and in cancellation of all outstanding options to acquire First Security common stock.

On May 18, 2018, German American Bank completed the acquisition of five branch locations of First Financial Bancorp (formerly branch locations of Mainsource Financial Group, Inc.

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The selection of and application of these policies involve estimates, judgments, and uncertainties that are subject to change.

The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, income tax expense, and the valuation of goodwill and other intangible assets.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date.

The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for credit losses, the valuation of securities available for sale, income tax expense, and the valuation of goodwill and other intangible assets.

Allowance for Credit Losses

The Company maintains an allowance for credit losses to cover the estimated expected credit losses over the expected contractual life of the loan portfolio.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

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Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

A provision for loan losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance.

Evaluations are conducted at least

quarterly and more often if deemed necessary.

A provision for credit losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance.

Evaluations are conducted at least quarterly and more often if deemed necessary.

The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The Company has an established process to determine the adequacy of the allowance for loan losses.

The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change.

The Company has an established process to determine the adequacy of the allowance for credit losses.

The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on individually analyzed loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, reasonable and supportable forecasts and other factors, all of which may be susceptible to significant change.

The allowance consists of two components of allocations, specific and general.

These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.

These two components represent the total allowance for credit losses deemed adequate to cover expected credit losses over the expected life of the loan portfolio.

Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function.

The need for specific reserves is considered for credits identified as impaired when:

The need for specific reserves is considered for credits when:

(a) the customer’s cash flow or net worth appears insufficient to repay the loan;

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or (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring.

Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired.

Specific allocations on impaired loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds.

Allocations are also applied to categories of loans not considered individually impaired but for which the rate of loss is expected to be greater than historical averages, including non-performing consumer or residential real estate loans.

Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.

General allocations are made for commercial and agricultural loans that are graded as substandard and special mention based on migration analysis techniques to determine historical average losses for similar types of loans.

The migration analysis factors are calculated using a transition matrix to determine the likelihood of a customer's asset quality rating migrating from its current rating to any other rating.

General allocations are also made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss.

General allocations of the allowance are primarily made based on historical averages for loan losses for these portfolios, judgmentally adjusted for economic, external and internal factors and portfolio trends.

Specific reserves on individually analyzed loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds.

Allocations are also applied to categories of loans not individually analyzed but for which the rate of loss is expected to be greater than other similar type loans, including non-performing consumer or residential real estate loans.

Such allocations are based on past loss experience, reasonable and supportable forecasts and information about specific borrower situations and estimated collateral values.

General allocations are made for commercial and agricultural loans that are graded as substandard and special mention, but are not individually analyzed for specific reserves as well as other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss.

General allocations of the allowance are primarily made based on historical averages for loan losses for these portfolios along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends.

Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio.

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and changes in experience, ability and depth of lending management and staff.

In setting our external and internal factors we also consider the overall level of the allowance for loan losses to total loans;

our allowance coverage as compared to similar size bank holding companies;

and regulatory requirements.

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes a minor unallocated component.

The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends.

Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model.

The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.

This standard became effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that reporting period.

ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

As of the beginning of the first reporting period in which the new standard is effective, the Company expects to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses, since this ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions.

The Company currently estimates an increase to the allowance for credit losses of approximately $12 million to $20 million upon adoption, which is primarily related to the Company's acquired loan portfolio.

This estimate and the ongoing impact of adopting this ASU are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the Company's loans and securities portfolios, and other management judgements.

The transition

adjustment to record the allowance for credit losses, which remains subject to further review and analysis by the Company's management team, may fall outside of the estimated increase based on material changes in these factors.

The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio.

Determining the appropriateness and adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.

Subsequent evaluations of the loan portfolio may result in significant changes in the allowance for credit losses in future periods.

Securities Valuation

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax.

The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value.

Equity securities that do not have readily determinable fair values are carried at cost.

Additionally, when securities are deemed to be other than temporarily impaired, a charge will be recorded through earnings;

therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results.

In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company intends to sell or believes it will be required to sell the securities prior to recovery.

As of December 31, 2019, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $21,780,000 and gross unrealized losses totaled approximately $1,805,000.

Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly.

For available-for-sale debt securities in an unrealized loss position, the Company assesses whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors.

If this assessment indicates that a credit loss exists, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

No allowance for credit losses for available-for-sale debt securities was needed at December 31, 2020.

Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses.

As of December 31, 2020, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $46,003,000 and gross unrealized losses totaled approximately $326,000 net of applicable taxes is included in other comprehensive income.

Equity securities that do not have readily determinable fair values are carried at cost, less impairment with observable price changes being recognized in earnings.

Income Tax Expense

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Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.

The Company has selected December 31 as the date to perform the annual impairment test.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Company has selected December 31 as the date to perform the annual impairment test.

Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.

No impairment to Goodwill was indicated based on year-end testing.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets.

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Net income for 2018 was positively impacted by lower federal income tax rates that became effective January 1, 2018, as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

The lower federal income tax rates had a positive impact of approximately $0.26 per share for the year ended December 31, 2018.

Net income for both 2018 and 2019 was impacted by merger and acquisition activity (see discussion above under "INTRODUCTION - Management Overview" for additional information).

The year ended December 31, 2019 included acquisition-related expenses of approximately $3,360,000 (approximately $2,594,000 or $0.10 per share, on an after tax basis).

The year ended December 31,

2018 included acquisition-related expenses of approximately $4,592,000 (approximately $3,526,000 or $0.15 per share, on an after tax basis).

NET INTEREST INCOME

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Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

During the year ended December 31, 2019, net interest income increased $30,615,000, or 27%, compared with the year ended December 31, 2018.

The increased level of net interest income during 2019 compared with 2018 was driven primarily by a higher level of average earning assets resulting from the previously discussed merger and acquisition activity and improvement in the tax equivalent net interest margin.

During the year ended December 31, 2020, net interest income totaled $155,243,000, representing an increase of $10,018,000, or 7%, from the year ended December 31, 2019 net interest income of $145,225,000.

The increased level of net interest income during 2020 compared with 2019 was largely attributable to a higher level of average earning assets resulting from acquisition of Citizens First on July 1, 2019, significant deposit growth during 2020 and participation in the PPP.

In addition, the recognition of fees related to PPP loans also contributed to higher levels of net interest income, but was partially mitigated by a lower level of accretion of discounts on acquired loans.

Fees recognized on PPP loans through net interest income during 2020 totaled $7,981,000.

Accretion of discounts on acquired loans totaled $5,769,000 during 2020 compared with $8,559,000 during 2019.

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets.

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The tax equivalent yield on earning assets totaled 4.07% during 2020 compared to 4.75% in 2019, while the cost of funds (expressed as a percentage of average earning assets) totaled 0.44% during 2020 compared to 0.83% in 2019.

Historically low market interest rates impacted the Company's net interest margin.

Lower market interest rates have negatively impacted earning asset yields during 2020, with these declines being partially mitigated by a lower cost of funds.

Also contributing to the lower net interest margin has been excess liquidity the Company has carried on the balance sheet that resulted from significant deposit growth during 2020 and somewhat muted loan growth.

The Company's net interest margin was impacted by fees recognized as a part of the PPP and accretion of loan discounts on acquired loans.

The fees recognized related to the PPP contributed approximately 18 basis points to the net interest margin in 2020.

Accretion of loan discounts on acquired loans contributed approximately 13 basis points to the net interest margin in 2020 and 23 basis points in 2019.

During the year ended December 31, 2019, net interest income increased $30,615,000, or 27%, compared with the year ended December 31, 2018.

The tax equivalent net interest margin for the year ended December 31, 2019 was 3.92% compared to 3.75% in 2018.

The tax equivalent yield on earning assets totaled 4.75% during 2019 compared to 4.36% in 2018, while the cost of funds totaled 0.83% during 2019 compared to 0.61% in 2018.

The improvement in the net interest margin during 2019 compared to 2018 was related to improved earning asset yields partially offset by an increased cost of funds largely related to higher short-term market interest rates during much of 2019 compared with 2018.

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Accretion of loan discounts and recoveries on acquired loans contributed approximately 23 basis points to the net interest margin during 2019 and 8 basis points in 2018.

Net interest income increased $14,701,000, or 15%, for the year ended December 31, 2018 compared with 2017.

The increased level of net interest income during 2018 compared with 2017 was driven primarily by a higher level of earning assets resulting from organic loan growth and merger and acquisition activity completed during 2018.

The tax equivalent net interest margin for the year ended December 31, 2018 was 3.75% compared to 3.76% in 2017.

The tax equivalent yield on earning assets totaled 4.36% during 2018 compared to 4.16% in 2017, while the cost of funds totaled 0.61% during 2018 compared to 0.40% in 2017.

The increased yield on earning assets and the increase in the cost of funds during 2018 were both impacted by increased short-term market interest rates.

Accretion of loan discounts on acquired loans contributed approximately 8 basis points to the net interest margin during 2018 compared with 9 basis points in 2017.

The lower federal income tax rates during 2018 had an approximately 9 basis point negative impact on the Company's net interest margin and earning asset yield.

The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years.

For tax-equivalent adjustments, an effective tax rate of 21% was used for 2019 and 2018 while an effective tax rate of 35% was used for 2017 (1) .

For tax-equivalent adjustments, an effective tax rate of 21% was used for all periods presented (1) .

Average Balance Sheet

1 unchanged sentence

Twelve Months Ended

December 31, 2019

Twelve Months Ended

December 31, 2018

Twelve Months Ended

December 31, 2020 Twelve Months Ended

December 31, 2019 Twelve Months Ended

December 31, 2018

Balance Income /

Expense Yield /

Rate Principal

Balance Income /

Expense Yield /

Rate Principal

Balance Income /

Expense Yield /

Federal Funds Sold and Other Short-term Investments $ 209,012 $ 382 0.18 % $ 27,166 $ 522 1.92 % $ 18,587 $ 308 1.65 %

Taxable 555,961 10,447 1.88 % 546,191 13,910 2.55 % 488,291 12,398 2.54 %

Non-taxable 420,294 15,040 3.58 % 305,266 12,096 3.96 % 280,070 11,341 4.05 %

Total Loans and Leases (2)

3,185,542 151,946 4.77 % 2,899,939 152,836 5.27 % 2,339,089 112,437 4.81 %

TOTAL INTEREST EARNING ASSETS 4,370,809 177,815 4.07 % 3,778,562 179,364 4.75 % 3,126,037 136,484 4.36 %

Other Assets 398,102 366,171 270,022

Allowance for Loan Losses (39,905) (16,198) (15,650)

TOTAL ASSETS $ 4,729,006 $ 4,128,535 $ 3,380,409

LIABILITIES AND SHAREHOLDERS’ EQUITY

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Increase / (Decrease) Due to (1)

Volume Rate Net Volume Rate Net

Interest Income:

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See the Company’s Average Balance Sheet above and the discussions under the headings "USES OF FUNDS," "SOURCES OF FUNDS," and “RISK MANAGEMENT – Liquidity and Interest Rate Risk Management” for further information on the Company’s net interest income, net interest margin, and interest rate sensitivity position.

PROVISION FOR LOAN LOSSES

The Company provides for loan losses through regular provisions to the allowance for loan losses.

The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses.

Provisions for loan losses totaled $5,325,000, $2,070,000, and $1,750,000 in 2019, 2018, and 2017, respectively.

During 2019, the provision for loan loss represented approximately 18 basis points of average loans on an annualized basis.

The increased level of provision during 2019 was largely related to an increased level of net charge-offs during 2019 compared with 2018.

PROVISION FOR CREDIT LOSSES

The Company provides for credit losses through regular provisions to the allowance for credit losses.

The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance.

During 2020, the provision for credit losses totaled $17,550,000 under the CECL methodology compared with a $5,325,000 provision for loan losses during 2019 under the incurred loss model and $2,070,000 during 2018.

During 2020, the provision for credit losses represented approximately 55 basis points of average loans.

The increased level of provision during 2020 compared with 2019 was primarily due to the developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the Company's CECL model.

The Company realized net charge-offs of $2,622,000 or 8 basis points of average loans outstanding during 2020.

The increase in net charge-offs during 2019 was primarily attributable to partial charge-offs on two adversely classified commercial lending relationship in the second half of 2019.

During 2018, the provision for loan loss represented approximately 9 basis points of average loans on an annualized basis.

During 2019, the provision for loan losses represented approximately 18 basis points of average loans.

The increased level of provision during 2019 was largely related to an increased level of net charge-offs during 2019 compared with 2018.

The Company realized net charge-offs of $4,870,000 or 17 basis points of average loans outstanding during 2019.

The increase in net charge-offs during 2018 was primarily attributable to a partial charge-off on a single commercial lending relationship in the first quarter of 2018 that was downgraded and largely reserved for during the fourth quarter of 2017.

The Company’s allowance for loan losses represented 0.53% of total loans at year-end 2019 compared with 0.58% of total loans at year-end 2018.

Under acquisition accounting, loans are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller.

The Company’s allowance for loan losses represented 0.73% of total non-acquired loans at year-end 2019 compared with 0.77% of total non-acquired loans at year-end 2018.

Provisions for loan losses in all periods were made at levels deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provisions for loan losses.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other qualitative factors.

Refer also to the sections entitled "CRITICAL

ACCOUNTING POLICIES AND ESTIMATES" and “RISK MANAGEMENT - Lending and Loan Administration” for further discussion of the provision and allowance for loan losses.

The increase in net charge-offs during 2019 was primarily attributable to partial charge-offs on two adversely classified commercial lending relationship in the second half of 2019.

The provision for credit losses made during 2020 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

Refer also to the sections entitled "CRITICAL ACCOUNTING POLICIES AND ESTIMATES" and “RISK MANAGEMENT - Lending and Loan Administration” for further discussion of the provision and allowance for credit losses.

NON-INTEREST INCOME

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Non-interest Income

(dollars in thousands)

Years Ended December 31,

% Change From

(dollars in thousands) Years Ended December 31, % Change From

2020 2019 2018 2019 2018

Trust and Investment Product Fees $ 8,005 $ 7,278 $ 6,680 10 % 9 %

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Other Operating Income 3,388 3,229 2,785 5 16

Subtotal 40,485 39,620 33,360 2 19

Net Gains on Sales of Loans 9,908 4,633 3,004 114 54

4 unchanged sentences

The increase in both years was primarily attributable to fees generated from increased assets under management in the Company's wealth management group.

Service charges on deposit accounts increased $1,674,000, or 24%, during 2019 compared with 2018.

Service charges on deposit accounts declined $1,384,000, or 16%, during 2020 compared with 2019.

The decline during 2020 compared with 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity, partially mitigated by the acquisition of Citizens First.

Service charges on deposit accounts increased $1,674,000, or 24%, during 2019 compared with 2018.

The increase during both 2019 and 2018 compared with prior periods was positively impacted by the acquisition activity completed during 2018 and 2019.

The increase during 2019 compared with 2018 was positively impacted by the acquisition activity completed during 2018 and 2019.

Insurance revenues were relatively unchanged comparing 2020 to 2019.

Insurance revenues increased $610,000, or 7%, during 2019 compared with 2018.

The increase during 2019 was attributable to increased commercial insurance revenue and personal insurance revenue as well as increased contingency revenue.

Insurance revenues increased $351,000, or 4%, during 2018 compared with 2017 primarily due to increased contingency revenue.

Contingency revenue totaled $1,375,000 in 2019 compared with $1,218,000 in 2018 and $992,000 in 2017.

Contingency revenue is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

Company owned life insurance revenue increased $302,000, or 15%, during 2020, compared with 2019.

The increase was largely related to death benefits received from life insurance policies.

Company owned life insurance revenue increased $762,000, or 61%, during 2019 compared with 2018.

The increase was largely related to death benefits received from life insurance policies during 2019 with additional increases resulting from the acquisitions completed during 2018 and 2019.

Company owned life insurance revenue declined $98,000, or 7%, during 2018 compared with 2017.

Interchange fees increased $1,079,000, or 11%, during 2020 compared to 2019.

The increase during 2019 was largely attributable to increased card utilization by customers and the acquisition activity completed during 2018 and 2019.

The increase during 2020 compared with 2019 was largely attributable to the acquisition of Citizens First and increased card utilization by customers.

Interchange fees increased $2,172,000, or 30%, during 2019 compared to 2018.

The increase during 2018 compared with 2017 was largely attributable to increased card utilization by customers, the acquisition activity completed during 2018 and to the adoption of the new revenue recognition standard effective January 1, 2018.

While the adoption of the standard did not have a significant impact on the Company's financial results, the recording of revenue gross versus net of certain expenses, in accordance with the standard, did result in the reclassification of some expenses associated with the interchange fee revenue during 2018.

The reclassification of this expense for 2018 totaled $1,244,000.

The increase during 2019 was largely attributable to increased card utilization by customers and the acquisition activity completed during 2018 and 2019.

Net gains on sales of loans increased $5,275,000, or 114%, during 2020 compared with 2019.

The increase in the net gain on sales of loans during 2019 compared with 2018 was largely attributable to the higher volume of loans sold.

Net gains on sales of loans declined $276,000, or 8%, during 2018 compared with 2017.

The decline in the net gain on sales of loans during 2018 compared with 2017 was largely attributable to lower pricing levels on loans sold.

The increase in the net gains on sales of loans during 2020 compared with 2019 was generally attributable to a higher sales volume and higher pricing levels on loans sold.

Net gains on sales of loans increased $1,629,000, or 54%, during 2019 compared with 2018.

The increase in the net gains on sales of loans during 2019 compared with 2018 was largely attributable to the higher volume of loans sold.

Loan sales for 2020, 2019, and 2018 totaled $316.4 million, $185.4 million, and $135.3 million, respectively.

During 2019, the Company realized net gains on the sale of securities of $1,248,000 related to the sale of approximately $81.4 million of securities.

During 2018, the Company realized net gains on the sale of securities of $706,000 related to the sale of approximately $90.3 million of securities.

During 2017, the Company realized net gains on the sale of securities of $596,000 related to the sale of approximately $48.3 million of securities.

The Company realized $4,081,000 in gains on sales of securities during 2020 compared with $1,248,000 during 2019 and $706,000 during 2018.

The sales of securities in all periods were done as part of shifts in the allocations within the securities portfolio.

NON-INTEREST EXPENSE

During 2020, non-interest expense totaled $117,123,000, an increase of $2,961,000, or 3%, compared with 2019.

During 2019, non-interest expense increased $20,609,000, or 22%, compared with 2018.

During 2018, non-interest expense increased of $15,750,000, or 20%, compared with 2017.

The level of non-interest expenses in both 2019 and 2018 was largely impacted by the inclusion of operating expenses related to the branch acquisition completed during the second quarter of 2018 and bank acquisitions completed in the fourth quarter of 2018 and third quarter of 2019.

The level of non-interest expenses in 2019 and 2018 was impacted by the inclusion of operating expenses related to the branch acquisition completed during the second quarter of 2018 and bank acquisitions completed in the fourth quarter of 2018 and third quarter of 2019.

Acquisition-related expenses of a non-recurring nature totaled $3,360,000 during 2019 and $4,592,000 during 2018.

Non-interest Expense

(dollars in thousands)

Years Ended December 31,

% Change From

(dollars in thousands) Years Ended December 31, % Change From

2020 2019 2018 2019 2018

Salaries and Employee Benefits $ 68,112 $ 63,885 $ 51,306 7 % 25 %

8 unchanged sentences

Salaries and benefits increased $4,227,000, or 7%, during 2020 compared with 2019.

The increase in salaries and benefits during 2020 compared with 2019 was largely attributable to an increased number of full-time equivalent employees during 2020.

Salaries and benefits increased $12,579,000, or 25%, during 2019 compared with 2018.

The increase during both 2019 and 2018 compared with prior periods was largely attributable to an increased number of full-time equivalent employees due primarily to the acquisition transactions completed during 2018 and 2019.

The increase during 2019 compared with 2018 was largely attributable to an increased number of full-time equivalent employees due primarily to the acquisition transactions completed during 2018 and 2019.

Occupancy, furniture and equipment expense increased $248,000, or 2%, during 2020 compared with 2019 and increased $2,899,000, or 27%, during 2019 compared with 2018.

The increase during both 2019 and 2018 compared to prior periods was primarily due to operating costs related to the acquisition activity during 2018 and 2019.

FDIC premiums declined $500,000, or 48%, during 2019 compared with 2018.

The decline in FDIC premiums is attributable to credits received from the FDIC in 2019.

The credits received were due to the reserve ratio of the deposit insurance fund exceeding the FDIC's targeted levels.

FDIC premiums increased $79,000, or 8%, during 2018 compared with 2017.

Data processing fees increased $985,000, or 14%, during 2019 compared with 2018 and increased $2,666,000, or 62%, during 2018 compared to 2017.

The increase during 2019 compared with 2018 was primarily due to operating costs related to the acquisition activity during 2018 and 2019.

FDIC premiums increased $207,000, or 39%, during 2020 compared with 2019 and declined $500,000, or 48%, during 2019 compared with 2018.

The increase in FDIC premiums during 2020 compared with 2019 was related to a lower level of credits received from the FDIC during 2020 compared with 2019.

The decline in FDIC premiums in 2019 compared with 2018 was attributable to credits received from the FDIC in 2019.

The credits received in both 2019 and 2020 were due to the reserve ratio of the deposit insurance fund exceeding the FDIC's targeted levels.

Data processing fees declined $1,038,000, or 13%, during 2020 compared with 2019.

The decline in data processing fees during 2020 compared with 2019 was largely due to acquisition related costs during 2019.

Data processing fees increased $985,000, or 14%, during 2019 compared with 2018.

The increase in data processing fees during 2019 compared with 2018 was largely related to the on-going operating costs associated with the acquisitions completed during 2018 and 2019.

The increase in 2018 compared with 2017 was largely related to operating costs and non-recurring costs associated with merger and acquisition activities during 2018.

Acquisition-related costs of a non-recurring nature totaled $1,235,000 during 2019 and $2,002,000 during 2018.

Professional fees declined $676,000, or 14%, during 2020 compared with 2019.

The decline in professional fees during 2020 compared with 2019 was largely related to higher levels of merger and acquisition related professional fees in 2019.

Professional fees declined $688,000, or 13%, during 2019 compared with 2018.

The decline in professional fees during 2019 compared with 2018 was largely related to lower levels of merger and acquisition related professional fees.

Merger and acquisition related professional fees totaled approximately $1,167,000 during 2019 compared to $1,738,000 during 2018.

Professional fees increased $2,545,000, or 90%, during 2018 compared with 2017.

The increase was primarily due to professional fees related to merger and acquisition activities which totaled $1,738,000 during 2018 and approximately $930,000 in fees related to certain contract negotiations not related to the acquisition activity.

Merger and acquisition related professional fees totaled approximately $1,167,000 during 2019 and $1,738,000 during 2018.

Advertising and promotion expense declined $641,000, or 15%, during 2020 compared with 2019.

The decline during 2020 was largely attributable to lesser marketing and sponsorship expenditures impacted by the COVID-19 pandemic.

Advertising and promotion expense increased $738,000, or 21%, in 2019 compared with 2018.

The increase in advertising and promotion expense was largely related to the entry into new markets for the Company through the merger and acquisition activity during 2018 and 2019.

Advertising and promotion declined $51,000, or 1%, in 2018 compared with 2017.

Intangible amortization increased $1,969,000, or 112%, during 2019 compared with 2018 and increased $810,000, or 86%, during 2018 compared with 2017.

The increase in intangible amortization was attributable to the previously discussed acquisition transactions completed during 2018 and 2019.

Other operating expenses increased $2,627,000, or 21%, during 2019 compared with 2018.

The increase during 2019 compared with 2018 was largely attributable to the operating costs related to the acquisitions completed in 2018 and 2019.

Other operating expenses increased $3,390,000, or 36%, during 2018 compared with 2017.

The increase during 2018 was largely attributable to the operating costs related to the acquisitions completed in 2018 and to the adoption of the revenue recognition standard effective January 1, 2018 and the reclassification of expenses as previously discussed.

The reclassification of this expense for 2018 totaled $1,244,000.

Intangible amortization declined $182,000, or 5%, during 2020 compared with 2019 and increased $1,969,000, or 112%, during 2019 compared with 2018.

The increase in intangible amortization during 2019 compared with 2018 was attributable to the previously discussed acquisition transactions completed during 2018 and 2019.

PROVISION FOR INCOME TAXES

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The lower effective rate in all periods primarily resulted from the Company’s tax-exempt investment income on securities, loans, and company owned life insurance, income tax credits generated by investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

The Company's effective tax rate and provision for income tax was positively impacted during 2018 by the reduction of federal income tax rates from a statutory rate of 35% to 21% effective January 1, 2018 related to the enactment of the Tax Act during the fourth quarter of 2017.

As a result of the enactment of the Tax Act, the Company revalued its deferred tax assets and deferred tax liabilities during the fourth quarter of 2017 which resulted in a net tax benefit of $2,284,000 and consequently impacted the effective tax rate for 2017 as well.

See Note 10 to the Company’s consolidated financial statements included in Item 8 of this Report for additional details relative to the Company’s income tax provision.

1 unchanged sentence

As of December 31, 2020, shareholders’ equity increased by $50.9 million to $624.7 million compared with $573.8 million at year-end 2019.

The increase in shareholders' equity was in part attributable to the issuance of the Company's common shares in

the acquisition of Citizens First.

Approximately 1.7 million shares were issued to Citizens First shareholders resulting in an increase to shareholders' equity of $50.0 million.

The increase in shareholders' equity was also attributable to an increase of $41.7 million in retained earnings and an increase of $22.2 million in accumulated other comprehensive income primarily related to the increase in value of the Company's available-for-sale securities portfolio.

The increase in shareholders' equity was in part attributable to increased retained earnings of $35.4 million due to 2020 net income of $62.2 million which was partially offset by the payment of $20.1 million in shareholder dividends and a $6.7 million charge relating to the implementation of CECL on January 1, 2020.

In addition, accumulated other comprehensive income increased $20.3 million during 2020 primarily related to the increase in value of the Company's available-for-sale securities portfolio.

Also impacting total shareholders' equity was the repurchase of common stock under the Company's share repurchase plan which totaled $5.8 million during 2020.

Shareholders’ equity represented 12.6% of total assets at December 31, 2020 and 13.0% of total assets at December 31, 2019.

1 unchanged sentence

On January 27, 2020, the Company’s Board of Directors approved a plan to repurchase up to one million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the repurchase plan represents approximately 4% of the Company’s outstanding shares.

At the time it approved the plan, the Board also terminated a similar program that had been adopted in 2001.

At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program.

The Company repurchased 221,912 shares of common stock under the 2020 repurchase plan during 2020 at an average price of $26.09 per share.

On January 25, 2021, the Company’s Board of Directors terminated the 2020 repurchase program and approved a new plan to repurchase up to one million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 4% of the Company’s outstanding shares on the date it was approved.

The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time.

The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements.

At the time it approved the new plan, the Board also terminated a similar program that had been adopted in 2001.

At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program.

At the time of its termination, the Company had been authorized to purchase up to 778,088 shares of common stock under the 2020 repurchase plan.

The Company has not repurchased any shares of common stock under the 2021 repurchase plan.

2 unchanged sentences

The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures.

As of January 1, 2015, the Company and its subsidiary bank adopted the new Basel III regulatory capital framework.

The adoption of this new framework modified the regulatory capital calculations, minimum capital levels and well-capitalized thresholds and added the new Common Equity Tier 1 capital ratio.

Additionally, under the new rules, in order to avoid limitations on capital

distributions, including dividend payments, the Company is required to maintain a capital conservation buffer above the adequately capitalized regulatory capital ratios.

The capital conservation buffer was phased in from 0.00% in 2015 to 2.50% in 2019.

For December 31, 2019, the capital conservation buffer was 2.50% and for December 31, 2018, the capital conservation buffer was 1.875%.

At December 31, 2019, the capital levels for the Company and its subsidiary bank remained well in excess of of the minimum amounts needed for capital adequacy purposes and the Bank's capital levels met the necessary requirements to be considered well-capitalized.

The current risk-based capital rules, as adopted by federal banking regulators, are based upon guidelines developed by the Basel Committee on Banking Supervision and reflect various requirements of the Dodd-Frank Act (the “Basel III Rules”).

The Basel III Rules require banking organizations to, among other things, maintain a minimum ratio of Total Capital to risk-weighted assets, a minimum ratio of Tier 1 Capital to risk-weighted assets, a minimum ratio of “Common Equity Tier 1 Capital” to risk-weighted assets, and a minimum leverage ratio (calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets).

In addition, under the Basel III Rules, in order to avoid limitations on capital distributions, including dividend payments, the Company is required to maintain a 2.5% capital conservation buffer above the adequately capitalized regulatory capital ratios.

At December 31, 2020, the capital levels for the Company and its subsidiary bank remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank's capital levels met the necessary requirements to be considered well-capitalized.

The table below presents the Company’s consolidated and the subsidiary bank's capital ratios under regulatory guidelines:

Minimum for Capital Adequacy Purposes (1)

Ratio 12/31/2019

Ratio Minimum for Capital Adequacy Purposes (1)

Well-Capitalized Guidelines

Total Capital (to Risk Weighted Assets)

Consolidated 15.86 % 14.28 % 8.00 % N/A

Bank 14.00 12.82 8.00 10.00 %

Tier 1 (Core) Capital (to Risk Weighted Assets)

Common Equity Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets)

Consolidated 13.93 % 12.67 % 6.00 % N/A

Bank 13.21 12.35 6.00 8.00 %

Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets)

Consolidated 13.48 % 12.23 % 4.50 % N/A

Bank 13.21 12.35 4.50 6.50 %

Tier 1 Capital (to Average Assets)

Consolidated 10.07 % 10.53 % 4.00 % N/A

Bank 9.56 10.27 4.00 5.00 %

(1) Excludes capital conservation buffer.

Under the final rules provided for by Basel III, accumulated other comprehensive income ("AOCI") was to be included in a banking organization's Common Equity Tier 1 capital.

The final rules allowed community banks to make a one-time election not to include the additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.

The Company elected, in its March 31, 2015 regulatory filings (Call Report and FR Y-9), to opt-out and continue the existing treatment of AOCI for regulatory capital purposes.

On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to, among other things:

(i) address the upcoming implementation of the CECL accounting standard under GAAP;

and (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL.

The Company anticipates adopting the capital transition relief over the permissible three-year period.

In December 2018, the federal banking regulators approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.

The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

On March 27, 2020, in an action related to the CARES Act, the federal banking regulators announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

The Company is adopting the capital transition relief over the permissible five-year period.

Under the existing CBLR framework, which became effective as of January 1, 2020, community banks and holding companies (which would include the Bank and the Company) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework.

It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

The second interim final rule provided a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

Under either framework, the Company and the Bank would be considered well-capitalized under the applicable guidelines.

Specifically, the agencies have clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

USES OF FUNDS

December 31, 2020 total loans increased $10.0 million, or less than 1%, compared with December 31, 2019.

The increase in loans during 2020 compared with year-end 2019 was primarily the result in the Company's participation in the PPP.

Excluding the $186.0 million in PPP loans ($182.0 million net of deferred fees) at December 31, 2020, total loans declined by $172.0 million, or 6%, during 2020 compared with year-end 2019.

The decline in total loans, excluding the PPP loans, was impacted by continued elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio partially attributable to the PPP loan originations during 2020, and continued pay-downs in the Company's residential and home equity loan portfolios related to the current interest rate environment.

December 31, 2019 total loans increased $350.2 million, or 13%, compared with December 31, 2018.

2 unchanged sentences

As of December 31, 2019, outstanding loans from the Citizens First acquisition totaled approximately $320.3 million.

December 31, 2018 total loans increased $586.7 million compared with year-end 2017.

The increase in outstanding loans was largely impacted by the acquisitions completed during 2018.

As of December 31, 2018, outstanding loans from the First Security transaction, which closed in October 2018, totaled $374.5 million.

At December 31, 2018, the loans acquired as a part of the branch acquisition, which closed in May 2018, totaled $106.0 million.

The composition of the loan portfolio has remained relatively stable and diversified over the past several years, including 2020.

The portfolio is most heavily concentrated in commercial real estate loans at 49% of the portfolio.

The Company’s exposure to non-owner occupied commercial real estate, including multi-family housing, was limited to approximately 32% of the total loan portfolio at year-end 2019.

The portfolio is most heavily concentrated in commercial real estate loans at 47% of the portfolio and commercial and industrial loans at 23% of the portfolio, and agricultural loans at 12% of the portfolio.

The Company’s commercial lending is extended to various industries, including multi-family housing and lodging, agribusiness and manufacturing, as well as health care, wholesale, and retail services.

The Company also continues to have only limited exposure in construction and development lending with this segment representing approximately 6% of the total loan portfolio.

Loan Portfolio

Loan Portfolio December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

4 unchanged sentences

Residential Mortgage Loans 256,276 304,855 328,592 178,733 183,290

Total Loans 3,091,998 3,081,973 2,731,741 2,145,019 1,993,404

Unearned Income (3,926) (4,882) (3,682) (3,381) (3,449)

Subtotal 3,088,072 3,077,091 2,728,059 2,141,638 1,989,955

Allowance for Loan Losses (46,859) (16,278) (15,823) (15,694) (14,808)

Loans, Net $ 3,041,213 $ 3,060,813 $ 2,712,236 $ 2,125,944 $ 1,975,147

Ratio of Loans to Total Loans

4 unchanged sentences

Residential Mortgage Loans 8 % 10 % 12 % 8 % 9 %

Total Loans 100 % 100 % 100 % 100 % 100 %

The Company’s policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in southern Indiana and central and western Kentucky.

1 unchanged sentence

The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31, 2020, which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands).

One Year One to Five

Five Years Total

Commercial and Agricultural $ 902,166 $ 1,219,250 $ 238,241 $ 2,359,657

Interest Sensitivity

Variable Rate

Fixed Rate Variable Rate

Loans Maturing After One Year $ 411,165 $ 1,046,326

The investment portfolio is a principal source for funding the Company’s loan growth and other liquidity needs of its subsidiaries.

The Company’s securities portfolio primarily consists of money market securities, uncollateralized federal agency securities, municipal obligations of state and political subdivisions, and mortgage-backed securities and collateralized mortgage obligations (MBS/CMO - Residential) issued by U.S.

The Company’s securities portfolio primarily consists of money market securities, collateralized and uncollateralized federal agency securities, municipal obligations of state and political subdivisions, and mortgage-backed securities and collateralized mortgage obligations (MBS/CMO - Residential) issued by U.S.

government agencies.

1 unchanged sentence

The composition of the year-end balances in the investment portfolio is presented in Note 2 (Securities) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and in the table below:

Investment Portfolio, at Amortized Cost

Investment Portfolio, at Amortized Cost December 31,

(dollars in thousands) 2020 % 2019 % 2018 %

2 unchanged sentences

MBS/CMO - Residential 535,526 37 526,907 60 529,805 62

Equity Securities

US Gov't Sponsored Entities & Agencies 88,376 6 — n/m (1)

Equity Securities 353 n/m (1)

Total Securities Portfolio $ 1,460,304 100 % $ 879,116 100 % $ 853,608 100 %

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The amortized cost of investment securities, including federal funds sold and short-term investments, increased $581.2 million, or 66%, at year-end 2020 compared with year-end 2019 and increased $25.5 million, or 3%, at year-end 2019 compared with year-end 2018.

The increase during 2018 was largely attributable to the First Security acquisition.

The largest component in the investment portfolio continues to be in mortgage related securities, which totaled $526.9 million and represents 60% of the total securities portfolio at December 31, 2019.

The increase during 2020 was largely attributable to increased levels of deposits during 2020.

Federal funds sold and other short-term investments increased $243.9 million as of December 31, 2020 compared with year-end 2019.

The increase as of year-end 2020 compared with year-end 2019 was largely driven by deposit growth throughout 2020 and PPP loan forgiveness activity in the fourth quarter of 2020.

The largest component in the investment portfolio continues to be in agency issued mortgage related securities and collateralized and uncollateralized federal agency securities, which totaled $623.9 million and represents 43% of the total securities portfolio at December 31, 2020.

The Company’s level of obligations of state and political subdivisions increased to $548.3 million or 37% of the portfolio at December 31, 2020.

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MBS/CMO - Residential 548,307 530,525 518,078

US Gov't Sponsored Entities & Agencies 88,298 — —

Total Securities $ 1,217,852 $ 854,825 $ 812,611

The Company’s $854.8 million available-for-sale investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements.

The Company’s $1.218 billion available-for-sale investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements.

Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not necessarily be interpreted as an indication that management anticipates such sales.

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Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations.

Equity securities do not have contractual maturities, and are excluded from the table below.

Maturities and Average Yields of Securities at December 31, 2020

(dollars in thousands)

After One But

Within Five Years

After Five But

Within Ten Years

One Year After One But

Within Five Years After Five But

Within Ten Years After Ten

Amount Yield Amount Yield Amount Yield Amount Yield

Obligations of State and Political Subdivisions $ 7,809 3.68 % $ 16,987 4.10 % $ 68,720 4.01 % $ 454,757 3.35 %

MBS/CMO - Residential — — % 284 3.87 % 21,879 2.41 % 513,363 1.57 %

US Gov't Sponsored Entities & Agencies — — % — — % 18,491 1.02 % 69,885 1.60 %

Total Securities $ 7,809 3.68 % $ 17,271 4.10 % $ 109,090 3.01 % $ 1,038,005 2.24 %

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Scheduled principal payments on long-term borrowings, time deposits, and future minimum lease payments are outlined in the table below.

Contractual Obligations

Payments Due By Period

(dollars in thousands)

Less Than 1 Year

More Than 5 Years

Contractual Obligations Payments Due By Period

(dollars in thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

Long-term Borrowings $ 139,103 $ 8,000 $ 50,000 $ 25,000 $ 56,103

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Funding Sources - Average Balances

(dollars in thousands)

% Change From

(dollars in thousands) December 31, % Change From

2020 2019 2018 2020 2019

Demand Deposits

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(dollars in thousands)

Or Less 3 - 6

Months 6 - 12 Months Over

12 Months Total

December 31, 2020 $ 84,847 $ 76,659 $ 42,007 $ 34,998 $ 238,511

CORE DEPOSITS

The Company’s overall level of average core deposits increased approximately $444.1 million, or 18%, during 2019 following a $245.1 million, or 11%, increase during 2018.

The Company’s overall level of average core deposits increased approximately $672.9 million, or 23%, during 2020 compared with 2019.

During 2020, average demand deposits (non-interest bearing and interest bearing) increased $490.3 million, average savings deposits increased $65.3 million, average money market demand deposits increased $113.7 million and average time deposits under $100,000 increased $3.6 million.

Significant deposit growth during the second quarter of 2020 was partly due to PPP loan proceeds on deposit and COVID-19 related pandemic deposit inflows combined with the closing of the Citizens First acquisition in 2019 were the primary contributors to the increased level of average core deposits during 2020 compared with 2019.

The Company’s overall level of average core deposits increased approximately $444.1 million, or 18%, during 2019 compared with 2018.

The acquisition activity which occurred during the second quarter of 2018, fourth quarter of 2018 and third quarter of 2019 was a significant contributor to the increased level of average core deposits during 2019 compared with 2018.

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Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding for the Company’s bank subsidiary.

Large denomination certificates and brokered deposits increased $133.2 million, or 53%, during 2019 following an increase of $76.5 million, or 43% during 2018.

Large denomination certificates and brokered deposits declined $106.4 million, or 28%, during 2020 following an increase of $133.2 million, or 53% during 2019.

Large certificates and brokered deposits comprised approximately 7% of average total funding sources in 2020 compared with 11% in 2019 and 8% in 2018.

This type of funding is used as both long-term and short-term funding sources.

Federal Home Loan Bank advances and other borrowings represent a significant source of other funding for the Company.

Average borrowed funds increased $21.9 million, or 9%, during 2019 following an increase of $24.4 million, or 10%, during 2018.

Borrowings comprised approximately 8% of average total funding sources during 2019 compared with 9% in both 2017 and 2018.

Federal Home Loan Bank advances and other borrowings represent an important source of other funding for the Company.

Average borrowed funds declined $57.8 million, or 21%, during 2020 following an increase of $21.9 million, or 9%, during 2019.

Borrowings comprised approximately 5% of average total funding sources during 2020 compared with 8% in 2018 and and 9% in 2018.

The bank subsidiary of the Company also utilizes short-term funding sources from time to time.

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The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings, which are discussed in detail below.

On June 25, 2019, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Purchase Agreement”) with certain qualified institutional buyers and institutional accredited investors (the “Purchasers”) pursuant to which the Company sold and issued $40.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”).

The Notes were offered and sold by the Company to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

On June 25, 2019, the Company sold and issued $40.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”).

The Company used the proceeds from the offering to pay $15.0 million of the approximately $15.5 million of cash consideration upon closing of the Citizens First Corporation merger and the remaining balance to repay the Company’s $25.0 million term loan from U.S.

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The Purchase Agreement contains certain customary representations, warranties and covenants made by the Company, on the one hand, and the Purchasers, severally and not jointly, on the other hand.

On June 25, 2019, in connection with the sale and issuance of the Notes, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers.

Pursuant to the Registration Rights Agreement, the Company completed on November 4, 2019, an offer to exchange its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2029, which were registered under the Securities Act of 1933, as amended, for any and all of the outstanding Notes, with beneficial owners holding an aggregate principal amount of $36.5 million electing to participate in the exchange.

The Notes, including the registered exchange notes, were issued under an Indenture, dated June 25, 2019 (the “Indenture”), by and between the Company and U.S.

The Notes were issued under an Indenture, dated June 25, 2019, by and between the Company and U.S.

Bank National Association, as trustee.

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Effective January 1, 2011, and as a result of the acquisition of American Community Bancorp, Inc., the Company assumed long-term debt obligations of American Community in the form of two junior subordinated debentures issued by American Community in the aggregate unpaid principal amount of approximately $8.3 million.

Effective March 1, 2016, and as a result of the acquisition of River Valley Bancorp, the Company assumed long-term debt obligations of River Valley in the form of a junior subordinated debenture issued by River Valley in the aggregate unpaid principal amount of approximately $7.2 million.

Effective March 1, 2016, and as a result of the acquisition of River Valley Bancorp, the Company assumed long-term debt obligations of River Valley in the form of a

junior subordinated debenture issued by River Valley in the aggregate unpaid principal amount of approximately $7.2 million.

Effective July 1, 2019, and as a result of the acquisition of Citizens First Bancorp, the Company assumed long-term debt obligations of Citizens First in the form of a junior subordinated debenture issued by Citizens First in the aggregate unpaid principal amount of approximately $5.2 million.

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Loan personnel at the subsidiary bank have the authority to extend credit under guidelines approved by the bank’s board of directors.

The executive loan committee serves as a vehicle for communication and for the pooling of knowledge, judgment and experience

of its members.

The executive loan committee serves as a vehicle for communication and for the pooling of knowledge, judgment and experience of its members.

The committee provides valuable input to lending personnel, acts as an approval body, and monitors the overall quality of the bank’s loan portfolio.

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The Company also maintains a comprehensive risk-grading and loan review program, which includes quarterly reviews of problem loans, delinquencies and charge-offs.

The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses.

The Company maintains an allowance for loan losses to cover probable, incurred credit losses identified during its loan review process.

Management estimates the required level of allowance for loan losses using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for credit losses.

The Company maintains an allowance for credit losses to cover management's estimate of all expected credit losses over the expected contractual life of the loan portfolio.

Management estimates the required level of allowance for credit losses using past loan loss experience, information about specific borrower situations and estimated collateral values, along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends.

Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio.

Internal factors include evaluating changes in lending policies and procedures;

changes in the nature and volume of the loan portfolio;

and changes in experience, ability and depth of lending management and staff.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

The allowance for loan losses is comprised of:

The allowance for credit losses is comprised of:

(a) specific reserves on individual credits;

(b) general reserves for certain loan categories and industries, and overall historical loss experience;

and (c) unallocated reserves based on performance trends in the loan portfolios, current economic conditions, and other factors that influence the level of estimated probable losses.

and (c) unallocated reserves based on performance trends in the loan portfolios, current economic conditions, and other factors that influence the level of estimated credit losses.

The need for specific reserves are considered for credits when:

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or, (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring.

Allowance for Loan Losses

(dollars in thousands)

Years Ended December 31,

Allowance for Credit Losses

(dollars in thousands) Years Ended December 31,

2020 2019 2018 2017 2016

Balance of Allowance for Possible Losses at Beginning of Period

$ 16,278 $ 15,823 $ 15,694 $ 14,808 $ 14,438

Impact of adopting ASC 326 8,767

Impact of adopting ASC 326 - PCD loans 6,886

Loans Charged-off:

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Net Charge-offs (Recoveries) to Average Loans Outstanding 0.08 % 0.17 % 0.08 % 0.04 % 0.04 %

Provision for Loan Losses to Average Loans Outstanding

Allowance for Loan Losses to Total Loans at Year-end

The following table indicates the breakdown of the allowance for loan losses for the periods indicated (dollars in thousands):

Provision for Credit Losses to Average Loans Outstanding 0.55 % 0.18 % 0.09 % 0.09 % 0.06 %

Allowance for Credit Losses to Total Loans at Year-end 1.52 % 0.53 % 0.58 % 0.73 % 0.74 %

The following table indicates the breakdown of the allowance for credit losses for the periods indicated (dollars in thousands):

Years Ended December 31,

2020 2019 2018 2017 2016

Commercial and Industrial Loans and Leases $ 6,645 $ 4,799 $ 2,953 $ 4,735 $ 3,725

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Residential Mortgage Loans 1,944 333 472 343 329

Total Allowance for Loan Losses

The Company’s allowance for loan losses totaled $16.3 million at December 31, 2019 compared to $15.8 million at December 31, 2018 and $15.7 million at December 31, 2017.

The allowance for loan losses represented 0.53% of period-end loans at December 31, 2019 compared with 0.58% of period-end loans at December 31, 2018 and 0.73% at December 31, 2017.

The decline in the allowance for loan losses as a percent of total loans during 2018 and 2019 was the result of the acquisition activity by the Company during 2018 and 2019.

Under acquisition accounting treatment, loans acquired are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller.

The Company held a discount on acquired loans of $20.4 million at December 31, 2019, $19.5 million at December 31, 2018 and $7.6 million at December 31, 2017.

The Company’s allowance for loan losses represented 0.73% of total non-acquired loans at year-end 2019 compared with 0.77% of total non-acquired loans at year-end 2018 and 0.83% at year-end 2017.

Unallocated — 505 682 503 690

Total Allowance for Credit Losses $ 46,859 $ 16,278 $ 15,823 $ 15,694 $ 14,808

The Company’s allowance for credit losses totaled $46.9 million at December 31, 2020 compared to $16.3 million at December 31, 2019.

The allowance for credit losses represented 1.52% of period-end loans at December 31, 2020 compared with 0.53% of period-end loans at December 31, 2019.

Total PPP loans included in the Commercial and Industrial Loan category totaled $186.0 million at December 31, 2020.

These loans are guaranteed by the SBA and have minimal impact on the allowance for credit losses.

The Company adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) ("CECL") on January 1, 2020.

As a result, the Company recognized a one-time cumulative adjustment to the allowance for credit losses of $15.7 million.

The increase was primarily related to the Company's acquired loan portfolio which totaled approximately $851.1 million at the time of adoption.

The increase included $6.9 million in non-accretable credit marks allocated to purchased credit deteriorated loans which were grossed up between loans and the allowance for credit losses.

Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses.

As of December 31, 2020, the Company held net discounts on acquired loans of $7.6 million.

In addition, the allowance for credit losses increased during 2020 as a result of the Company recording a $17.6 million provision for credit losses while recording net charge-offs of approximately $2.6 million.

The provision for credit losses was elevated during 2020 primarily due to the developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.

The Company realized net charge-offs of $2,622,000, or 0.08% of average loans outstanding during 2020 compared with net charge-offs of $4,870,000, or 0.17% of average loans outstanding during 2019 and $1,941,000, or 0.08% of average loans during 2018.

Please see “RESULTS OF OPERATIONS - Provision for Loan Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Allowance for Loan Losses” for additional information regarding the allowance.

Please see “RESULTS OF OPERATIONS - Provision for Credit Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Allowance for Credit Losses” for additional information regarding the allowance.

NON-PERFORMING ASSETS

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The following table presents an analysis of the Company’s non-performing assets.

Non-performing Assets

Non-performing Assets December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

Non-accrual Loans $ 21,507 $ 13,802 $ 12,579 $ 11,091 $ 3,793

Past Due Loans (90 days or more)

Past Due Loans (90 days or more and accruing) — 190 633 719 2

Total Non-performing Loans 21,507 13,992 13,212 11,810 3,795

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Non-performing Loans to Total Loans 0.70 % 0.45 % 0.48 % 0.55 % 0.19 %

Allowance for Loan Losses to Non-performing Loans

Allowance for Credit Losses to Non-performing Loans 217.88 % 116.34 % 119.76 % 132.89 % 390.20 %

Non-performing assets totaled $21.8 million, or 0.44% of total assets at December 31, 2020 compared to $14.4 million, or 0.33% of total assets at December 31, 2019 and compared to $13.5 million, or 0.34% of total assets at December 31, 2018.

Non-performing loans totaled $21.5 million, or 0.70% of total loans at December 31, 2020 compared with $14.0 million, or 0.45% of total loans at December 31, 2019 and $13.2 million, or 0.48% of total loans at December 31, 2018.

The increases in non-performing assets and non-performing loans at both year-end 2019 and year-end 2018 compared to prior periods was primarily attributable to the merger and acquisition transactions during 2018 and 2019.

The increase in the level of non-performing assets and non-performing loans at December 31, 2020 compared with year-end 2019 was largely attributable to the gross-up of purchased credit deteriorated loans upon the adoption of the CECL standard during 2020 and a commercial real estate credit in the lodging industry that was moved to non-performing status in the third quarter of 2020.

The following tables present an analysis of the Company's non-accrual loans and loans past due 90 days or more and still accruing.

Non-Accrual Loans

Non-Accrual Loans December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

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Residential Mortgage Loans 830 2,496 1,617 487 1,349

Loans Past Due 90 Days or More & Still Accruing

Total $ 21,507 $ 13,802 $ 12,579 $ 11,091 $ 3,793

Loans Past Due 90 Days or More & Still Accruing December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

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Residential Mortgage Loans — — — — —

The Company purchases individual loans and groups of loans.

Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses.

After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.

Purchased loans that indicated evidence of credit deterioration since origination at the time of acquisition by the Company did not have a material adverse impact on the Company’s key credit metrics during 2019 or 2018.

The key credit metrics the Company measures generally include non-performing loans, past due loans, and adversely classified loans.

Loan impairment is reported when full repayment under the terms of the loan is not expected.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral.

Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment.

Smaller balance homogeneous loans are evaluated for impairment in total.

Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures.

Individually evaluated loans on non-accrual are generally considered impaired.

Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The amount of loans individually evaluated for impairment, including purchase credit impaired loans, totaled $11.7 million and $13.6 million at December 31, 2019 and 2018, respectively.

For additional detail on impaired loans, see Note 4 to the Company’s consolidated financial statements included in Item 8 of this Report.

Total $ — $ 190 $ 633 $ 719 $ 2

For additional detail on individually analyzed loans, see Note 4 in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

This discussion doesn't include loan modifications - see the SIGNIFICANT BUSINESS DEVELOPMENTS RELATING TO COVID-19 section as they do not meet this classification of a non-performing asset.

Interest income recognized on non-performing loans for 2020 was $145,000.

The gross interest income that would have been recognized in 2019 on non-performing loans if the loans had been current in accordance with their original terms was $879,000.

The gross interest income that would have been recognized in 2020 on non-performing loans if the loans had been current in accordance with their original terms was $1.2 million.

Loans are typically placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection.

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The liquidity of the parent company is dependent upon the receipt of dividends from its bank subsidiary, which are subject to certain regulatory limitations explained in Note 8 (Shareholders' Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

The subsidiary bank’s source of funding is predominately core deposits, time deposits in excess

of $100,000 and brokered certificates of deposit, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank and Federal Reserve Bank.

The subsidiary bank’s source of funding is predominately core deposits, time deposits in excess of $100,000 and brokered certificates of deposit, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank and Federal Reserve Bank.

Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis