GERMAN AMERICAN BANCORP, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION German American Bancorp, Inc. is a Nasdaq-traded (symbol: GABC) financial holding company based in Jasper, Indiana. 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.). 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. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc., and the term “Bank” when we mean to refer to only the Company’s bank subsidiary. This Management’s Discussion and Analysis includes an analysis of the major components of the Company’s operations for the years 2018 through 2020 and its financial condition as of December 31, 2019 and 2020. This information should be read in conjunction with the accompanying consolidated financial statements and footnotes contained elsewhere in this Report and with the description of business included in Item 1 of this Report (including the cautionary disclosure regarding “Forward Looking Statements and Associated Risks”). Financial and other information by segment is included in Note 16 (Segment Information) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 7 by reference. The statements of management’s expectations and goals concerning the Company’s future operations and performance that are set forth in the following Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that is expressed or implied by any forward-looking statement. 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. Any statements of management’s expectations and goals concerning the Company’s future operations and performance, and future financial condition, liquidity and capital resources that are set forth in the following Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that is expressed or implied by any forward-looking statement. 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. 29 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. government. 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. 30 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) 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 31 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 both 2018 and 2019 was impacted by merger and acquisition activity. 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). On July 1, 2019, the Company completed the acquisition of Citizens First Corporation (“Citizens First”) through the merger of Citizens First with and into the Company. Immediately following completion of the Citizens First holding company merger, Citizens First's subsidiary bank, Citizen First Bank, Inc., was merged with and into the Company’s subsidiary bank, German American Bank. Citizens First, headquartered in Bowling Green, Kentucky operated eight retail banking offices through Citizens First Bank, Inc. in Barren, Hart, Simpson and Warren Counties in Kentucky. As of the closing of the transaction, Citizens First had total assets of approximately $456.0 million, total loans of approximately $364.6 million, and total deposits of approximately $370.8 million. The Company issued approximately 1.7 million shares of its common stock, and paid approximately $15.5 million in cash, in exchange for all of the issued and outstanding shares of common stock of Citizens First. On October 15, 2018, the Company completed the acquisition of First Security, Inc. ("First Security") through the merger of First Security with and into the Company. Immediately following completion of the First Security holding company merger, First Security’s subsidiary bank, First Security Bank, Inc., was merged with and into the Company’s subsidiary bank, German American Bank. First Security, based in Owensboro, Kentucky, operated 11 retail banking offices, through First Security Bank, Inc., in Owensboro, Bowling Green, Franklin and Lexington, Kentucky and in Evansville and Newburgh, Indiana. 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 32 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. prior to its merger with First Financial Bancorp on April 1, 2018) and certain related assets, and the assumption by German American Bank of certain related liabilities. Four of the branches are located in Columbus, Indiana, and one in Greensburg, Indiana. German American Bank acquired approximately $175.7 million in deposits and approximately $116.3 million in loans associated with the five bank branches. The premium paid on deposits by German American Bank was approximately $7.4 million. The premium was subject to adjustment to reflect increases or decreases in the deposit balances during the six month period following the closing date. In January 2019, an adjustment of approximately $0.1 million in additional premium was paid by German American Bank as a result of the change in deposits during the six month measurement period. German American Bank also had the ability, under certain circumstances, to put loans back to First Financial Bancorp’s bank subsidiary during such six month period. During the fourth quarter of 2018, approximately $1.3 million of loans were put back by German American Bank. For further information regarding these merger and acquisition transactions, see Note 18 (Business Combinations) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The financial condition and results of operations for the Company presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies. 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 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. Subsequent recoveries, if any, are credited to the allowance. 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 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 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 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 when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring. 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. 33 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. 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. 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 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 Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations presumed to occur. A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carry-back and carry-forward periods, including consideration of available tax planning strategies. Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment. Goodwill and Other Intangible Assets Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. 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 34 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. They are initially measured at fair value and then are amortized over their estimated useful lives, which range from 6 to 10 years. RESULTS OF OPERATIONS NET INCOME 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. 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 INTEREST INCOME Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. 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, 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. The tax equivalent net interest margin for the year ended December 31, 2020 was 3.63% compared to 3.92% in 2019. 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 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. 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. 35 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. Also positively impacting the net interest margin was an increased level of accretion of loan discounts and recoveries on acquired loans. 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. 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 all periods presented (1) . Average Balance Sheet (Tax-equivalent basis, dollars in thousands) Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Twelve Months Ended December 31, 2018 Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate ASSETS Federal Funds Sold and Other Short-term Investments $ 209,012 $ 382 0.18 % $ 27,166 $ 522 1.92 % $ 18,587 $ 308 1.65 % Securities: 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 Less: 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 Interest-bearing Demand Deposits $ 1,309,998 $ 4,089 0.31 % $ 1,128,457 $ 8,643 0.77 % $ 969,922 $ 5,755 0.59 % Savings Deposits and Money Market Accounts 912,183 1,885 0.21 % 733,160 3,406 0.46 % 646,636 1,954 0.30 % Time Deposits 567,932 7,722 1.36 % 670,802 11,756 1.75 % 459,289 5,916 1.29 % FHLB Advances and Other Borrowings 221,832 5,430 2.45 % 279,675 7,444 2.66 % 257,737 5,514 2.14 % TOTAL INTEREST-BEARING LIABILITIES 3,011,945 19,126 0.63 % 2,812,094 31,249 1.11 % 2,333,584 19,139 0.82 % Demand Deposit Accounts 1,070,284 761,515 640,865 Other Liabilities 51,996 35,916 20,484 TOTAL LIABILITIES 4,134,225 3,609,525 2,994,933 Shareholders’ Equity 594,781 519,010 385,476 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,729,006 $ 4,128,535 $ 3,380,409 COST OF FUNDS 0.44 % 0.83 % 0.61 % NET INTEREST INCOME $ 158,689 $ 148,115 $ 117,345 NET INTEREST MARGIN 3.63 % 3.92 % 3.75 % (1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. (2) Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $15,003, $8,397, and $3,151 for 2020, 2019 and 2018, respectively. 36 The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates: Net Interest Income – Rate / Volume Analysis (Tax-Equivalent basis, dollars in thousands) 2020 compared to 2019 Increase / (Decrease) Due to (1) 2019 compared to 2018 Increase / (Decrease) Due to (1) Volume Rate Net Volume Rate Net Interest Income: Federal Funds Sold and Other Short-term Investments $ 708 $ (848) $ (140) $ 159 $ 55 $ 214 Taxable Securities 244 (3,707) (3,463) 1,474 31 1,505 Non-taxable Securities 4,208 (1,264) 2,944 1,003 (241) 762 Loans and Leases 14,325 (15,215) (890) 28,813 11,586 40,399 Total Interest Income 19,485 (21,034) (1,549) 31,449 11,431 42,880 Interest Expense: Savings and Interest-bearing Demand 1,994 (8,069) (6,075) 1,293 3,047 4,340 Time Deposits (1,639) (2,395) (4,034) 3,275 2,565 5,840 FHLB Advances and Other Borrowings (1,451) (563) (2,014) 499 1,431 1,930 Total Interest Expense (1,096) (11,027) (12,123) 5,067 7,043 12,110 Net Interest Income $ 20,581 $ (10,007) $ 10,574 $ 26,382 $ 4,388 $ 30,770 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 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 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. 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 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. 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 reasonable and supportable forecasts along with other qualitative and quantitative 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 credit losses. 37 NON-INTEREST INCOME During the year ended December 31, 2020, non-interest income increased $8,973,000, or 20%, from the year ended December 31, 2019. During the year ended December 31, 2019, non-interest income increased $8,431,000, or 23%, from the year ended December 31, 2018. Non-interest Income (dollars in thousands) Years Ended December 31, % Change From Prior Year 2020 2019 2018 2019 2018 Trust and Investment Product Fees $ 8,005 $ 7,278 $ 6,680 10 % 9 % Service Charges on Deposit Accounts 7,334 8,718 7,044 (16) 24 Insurance Revenues 8,922 8,940 8,330 — 7 Company Owned Life Insurance 2,307 2,005 1,243 15 61 Interchange Fee Income 10,529 9,450 7,278 11 30 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 Net Gains on Securities 4,081 1,248 706 227 77 TOTAL NON-INTEREST INCOME $ 54,474 $ 45,501 $ 37,070 20 23 Trust and investment product fees increased $727,000, or 10%, during 2020 compared with 2019. Trust and investment product fees increased $598,000, or 9%, during 2019 compared with 2018. 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 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 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. 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. Interchange fees increased $1,079,000, or 11%, during 2020 compared to 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 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 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. 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. 38 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. 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 Prior Year 2020 2019 2018 2019 2018 Salaries and Employee Benefits $ 68,112 $ 63,885 $ 51,306 7 % 25 % Occupancy, Furniture and Equipment Expense 14,024 13,776 10,877 2 27 FDIC Premiums 740 533 1,033 39 (48) Data Processing Fees 6,889 7,927 6,942 (13) 14 Professional Fees 3,998 4,674 5,362 (14) (13) Advertising and Promotion 3,589 4,230 3,492 (15) 21 Intangible Amortization 3,539 3,721 1,752 (5) 112 Other Operating Expenses 16,232 15,416 12,789 5 21 TOTAL NON-INTEREST EXPENSE $ 117,123 $ 114,162 $ 93,553 3 22 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 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 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. 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 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. 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. 39 PROVISION FOR INCOME TAXES The Company records a provision for current income taxes payable, along with a provision for deferred taxes payable in the future. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. The Company’s effective tax rate was 17.1%, 16.9%, and 17.0%, respectively, in 2020, 2019, and 2018. The effective tax rate in all periods is lower than the blended statutory rate. 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. 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. CAPITAL RESOURCES 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 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. Shareholders’ equity included $130.9 million of goodwill and other intangible assets at December 31, 2020 compared to $134.0 million of goodwill and other intangible assets at December 31, 2019. 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. 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 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. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures. 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. 40 The table below presents the Company’s consolidated and the subsidiary bank's capital ratios under regulatory guidelines: 12/31/2020 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) 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. 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. 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 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 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. 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. 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 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. 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. 41 USES OF FUNDS LOANS 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. Loan growth during 2019 was impacted in each quarterly period by elevated large pay-offs within the agricultural and commercial loan portfolios. The majority of the increase in outstanding loans as of December 31, 2019 compared with December 31, 2018 was attributable to the acquisition of Citizens First. As of December 31, 2019, outstanding loans from the Citizens First acquisition totaled approximately $320.3 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 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. Loan Portfolio December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Commercial and Industrial Loans and Leases $ 694,437 $ 589,758 $ 543,761 $ 486,668 $ 457,372 Commercial Real Estate Loans 1,467,397 1,495,862 1,208,646 926,729 856,094 Agricultural Loans 376,186 384,526 365,208 333,227 303,128 Home Equity and Consumer Loans 297,702 306,972 285,534 219,662 193,520 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 Less: 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 Less: 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 Commercial and Industrial Loans and Leases 23 % 19 % 20 % 23 % 23 % Commercial Real Estate Loans 47 % 49 % 44 % 43 % 43 % Agricultural Loans 12 % 12 % 13 % 16 % 15 % Home Equity and Consumer Loans 10 % 10 % 11 % 10 % 10 % 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. Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a reasonable proximity of the Company’s primary market and are granted on a selective basis. 42 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). Within One Year One to Five Years After Five Years Total Commercial and Agricultural $ 902,166 $ 1,219,250 $ 238,241 $ 2,359,657 Interest Sensitivity Fixed Rate Variable Rate Loans Maturing After One Year $ 411,165 $ 1,046,326 INVESTMENTS 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, 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. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. 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 December 31, (dollars in thousands) 2020 % 2019 % 2018 % Federal Funds Sold and Other Short-term Investments $ 287,776 20 % $ 43,913 5 % $ 32,001 4 % Obligations of State and Political Subdivisions 548,273 37 307,943 35 291,449 34 MBS/CMO - Residential 535,526 37 526,907 60 529,805 62 US Gov't Sponsored Entities & Agencies 88,376 6 — n/m (1) — n/m (1) Equity Securities 353 n/m (1) 353 n/m (1) 353 n/m (1) Total Securities Portfolio $ 1,460,304 100 % $ 879,116 100 % $ 853,608 100 % (1) n/m = not meaningful 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 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. Investment Securities, at Carrying Value (dollars in thousands) December 31, Securities Available-for-Sale 2020 2019 2018 Obligations of State and Political Subdivisions $ 581,247 $ 324,300 $ 294,533 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 $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. 43 The amortized cost of available-for-sale debt securities at December 31, 2020 is shown in the following table by contractual maturity. MBS/CMO - Residential securities are based on estimated average lives. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations. Maturities and Average Yields of Securities at December 31, 2020 (dollars in thousands) Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years 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 % A tax-equivalent adjustment using a tax rate of 21 percent was used in the above table. In addition to the other uses of funds discussed previously, the Company had certain long-term contractual obligations as of December 31, 2020. These contractual obligations primarily consisted of long-term borrowings with the Federal Home Loan Bank (“FHLB”) and junior subordinated debentures, time deposits, and lease commitments for certain office facilities. 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) 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 Time Deposits 494,452 401,792 73,384 19,198 78 Finance Lease Obligations 5,919 500 1,028 1,082 3,309 Operating Lease Commitments 6,768 1,528 2,352 1,435 1,453 Postretirement Benefit Payments 1,368 121 247 239 761 Total Contractual Obligations $ 647,610 $ 411,941 $ 127,011 $ 46,954 $ 61,704 SOURCES OF FUNDS The Company’s primary source of funding is its base of core customer deposits. Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000. Other sources of funds are certificates of deposit of $100,000 or more, brokered deposits, overnight borrowings from other financial institutions and securities sold under agreement to repurchase. The membership of the Company’s affiliate bank in the Federal Home Loan Bank System provides a significant additional source for both long and short-term collateralized borrowings. In addition, the Company, as a separate and distinct corporation from its bank and other subsidiaries, also has the ability to borrow funds from other financial institutions and to raise debt or equity capital from the capital markets and other sources. The following pages contain a discussion of changes in these areas. 44 The table below illustrates changes between years in the average balances of all funding sources: Funding Sources - Average Balances (dollars in thousands) December 31, % Change From Prior Year 2020 2019 2018 2020 2019 Demand Deposits Non-interest-bearing $ 1,070,284 $ 761,515 $ 640,865 41 % 19 % Interest-bearing 1,309,998 1,128,457 969,922 16 16 Savings Deposits 358,389 293,044 254,581 22 15 Money Market Accounts 553,794 440,116 392,055 26 12 Other Time Deposits 288,762 285,208 206,864 1 38 Total Core Deposits 3,581,227 2,908,340 2,464,287 23 18 Certificates of Deposits of $100,000 or more and Brokered Deposits 279,170 385,594 252,425 (28) 53 FHLB Advances and Other Borrowings 221,832 279,675 257,737 (21) 9 Total Funding Sources $ 4,082,229 $ 3,573,609 $ 2,974,449 14 20 Maturities of certificates of deposit of $100,000 or more and brokered deposits are summarized as follows: (dollars in thousands) 3 Months 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 $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. The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the availability of alternative investment products. Core deposits continue to represent a significant funding source for the Company’s operations and represented 88% of average total funding sources during 2020 compared with 81% during 2019 and 83% during 2018. Demand, savings, and money market deposits have provided a growing source of funding for the Company in each of the periods reported. Average demand, savings, and money market deposits increased 26% during 2020 following 16% growth during 2019. Average demand, savings, and money market deposits totaled $3.292 billion or 92% of core deposits (81% of total funding sources) in 2020 compared with $2.623 billion or 90% of core deposits (73% of total funding sources) in 2019 and $2.257 billion or 92% of core deposits (76% of total funding sources) in 2018. Other time deposits consist of certificates of deposits in denominations of less than $100,000. These average deposits increased by 1% during 2020 following an increase of 38% during 2019. Other time deposits comprised 8% of core deposits in 2020, 10% in 2019 and 8% in 2018. OTHER FUNDING SOURCES 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 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. 45 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. These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements that generally mature within one day of the transaction date, and secured overnight variable rate borrowings from the FHLB. These borrowings represent an important source of short-term liquidity for the Company’s bank subsidiary. Long-term debt at the Company’s bank subsidiary is in the form of FHLB advances, which are secured by the pledge of certain investment securities, residential and housing-related mortgage loans, and certain other commercial real estate loans. See Note 7 (FHLB Advances and Other Borrowings) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report for further information regarding borrowed funds. PARENT COMPANY FUNDING SOURCES The parent company is a corporation separate and distinct from its bank and other subsidiaries. For information regarding the financial condition, result of operations, and cash flows of the Company, presented on a parent-company-only basis, see Note 17 (Parent Company Financial Statements) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes. The parent company does not have access to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. See Note 8 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference. 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 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. Bank National Association dated October 11, 2018. The Notes have a ten-year term, from and including the date of issuance to but excluding June 30, 2024, and will bear interest at a fixed annual rate of 4.50%, payable semi-annually in arrears. From and including June 30, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then-current three-month LIBOR (provided, however, that in the event three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero) plus 268 basis points, payable quarterly in arrears. The Notes are redeemable, in whole or in part, on June 30, 2024, on any scheduled interest payment date thereafter and at any time upon the occurrence of certain events. 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. The Notes were issued under an Indenture, dated June 25, 2019, by and between the Company and U.S. Bank National Association, as trustee. The Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. The Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Notes rank junior in right to payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. At year-end 2020, the Company had available to it a $15 million revolving line of credit facility that will mature on September 27, 2021. Borrowings are available for general working capital purposes. Interest is payable quarterly at a floating rate based upon one-month LIBOR plus a margin payable in respect of any principal amounts advanced under the revolving line of credit. There was no outstanding balance as of December 31, 2020. 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 46 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. The junior subordinated debentures were issued to certain statutory trusts established by River Valley, American Community, and Citizens First (in support of related issuances of trust preferred securities issued by those trusts) and mature in installments of principal payable in 2033, 2035 and 2037, respectively, and bear interest payable on a quarterly basis at a floating rate, adjustable quarterly based on the three-month LIBOR plus a specified percentage. These debentures are of a type that are eligible (under current regulatory capital requirements) to qualify as Tier 1 capital (with certain limitations) for regulatory purposes and as of December 31, 2020 approximately $15.8 million of the junior subordinated debentures were treated as Tier 1 capital for regulatory capital purposes. See Note 17 (Parent Company Financial Statements) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report for further information regarding the parent company borrowed funds and other indebtedness. RISK MANAGEMENT The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company’s subsidiary bank to monitor and mitigate risk in the loan and investment portfolios, as well as risks associated with changes in interest rates. Following is a discussion of the Company’s philosophies and procedures to address these risks. LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with the Company’s subsidiary bank. 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 committee provides valuable input to lending personnel, acts as an approval body, and monitors the overall quality of the bank’s loan portfolio. The Corporate Credit Risk Management Committee comprised of members of the Company’s and its subsidiary bank’s executive officers and board of directors, strives to ensure a consistent application of the Company’s lending policies. 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 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 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 credit losses. The need for specific reserves are considered for credits when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring. 47 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: Commercial and Industrial Loans and Leases 2,119 3,810 1,500 151 66 Commercial Real Estate Loans 36 320 49 220 54 Agricultural Loans — — — 49 22 Home Equity and Consumer Loans 942 1,155 922 765 612 Residential Mortgage Loans 39 117 75 93 346 Total Loans Charged-off 3,136 5,402 2,546 1,278 1,100 Recoveries of Previously Charged-off Loans: Commercial and Industrial Loans and Leases 23 56 141 14 32 Commercial Real Estate Loans 129 29 20 48 10 Agricultural Loans — — 20 9 1 Home Equity and Consumer Loans 358 440 387 280 211 Residential Mortgage Loans 4 7 37 63 16 Total Recoveries 514 532 605 414 270 Net Loans Recovered (Charged-off) (2,622) (4,870) (1,941) (864) (830) Additions to Allowance Charged to Expense 17,550 5,325 2,070 1,750 1,200 Balance at End of Period $ 46,859 $ 16,278 $ 15,823 $ 15,694 $ 14,808 Net Charge-offs (Recoveries) to Average Loans Outstanding 0.08 % 0.17 % 0.08 % 0.04 % 0.04 % 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 Commercial Real Estate Loans 29,878 4,692 5,291 4,591 5,452 Agricultural Loans 6,756 5,315 5,776 4,894 4,094 Home Equity and Consumer Loans 1,636 634 649 628 518 Residential Mortgage Loans 1,944 333 472 343 329 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. 48 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 Credit Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Allowance for Credit Losses” for additional information regarding the allowance. NON-PERFORMING ASSETS Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due 90 days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. Uncollected accrued interest is reversed against income at the time a loan is placed on non-accrual. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents an analysis of the Company’s 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 and accruing) — 190 633 719 2 Total Non-performing Loans 21,507 13,992 13,212 11,810 3,795 Other Real Estate 325 425 286 54 242 Total Non-performing Assets $ 21,832 $ 14,417 $ 13,498 $ 11,864 $ 4,037 Restructured Loans $ 111 $ 116 $ 121 $ 149 $ 28 Non-performing Loans to Total Loans 0.70 % 0.45 % 0.48 % 0.55 % 0.19 % 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 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 December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Commercial and Industrial Loans and Leases $ 8,133 $ 4,940 $ 2,430 $ 4,753 $ 86 Commercial Real Estate Loans 10,188 3,433 6,833 4,618 1,408 Agricultural Loans 1,915 2,739 1,449 748 792 Home Equity Loans 271 79 88 199 73 Consumer Loans 170 115 162 286 85 Residential Mortgage Loans 830 2,496 1,617 487 1,349 Total $ 21,507 $ 13,802 $ 12,579 $ 11,091 $ 3,793 49 Loans Past Due 90 Days or More & Still Accruing December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Commercial and Industrial Loans and Leases $ — $ 190 $ — $ — $ 2 Commercial Real Estate Loans — — 364 471 — Agricultural Loans — — 269 248 — Home Equity Loans — — — — — Consumer Loans — — — — — Residential Mortgage Loans — — — — — 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 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. LIQUIDITY AND INTEREST RATE RISK MANAGEMENT Liquidity is a measure of the ability of the Company’s subsidiary bank to fund new loan demand, existing loan commitments and deposit withdrawals. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base, without unduly penalizing earnings. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. 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. Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company’s earnings, the Company monitors interest rate risk through computer-assisted simulation modeling of its net interest income. The Company’s simulation modeling monitors the potential impact to net interest income under various interest rate scenarios. The Company’s objective is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the interest rate scenarios to a reasonable level of tax-equivalent net interest income within that interval. The Company’s Asset/Liability Committee monitors compliance within established guidelines of the Funds Management Policy. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements other than stand-by letters of credit as disclosed in Note 14 (Commitments and Off-balance Sheet Items) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. 50