GERMAN AMERICAN BANCORP, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of German American Bancorp, Inc. Jasper, Indiana Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of German American Bancorp, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 53 Report of Independent Registered Public Accounting Firm Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2020 as described in Notes 1 and 4 of the consolidated financial statements using the modified retrospective method. Also see explanatory paragraph above. The ASU requires financial assets, including the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on reasonable and supportable forecast of future economic conditions, historical loss experience and qualitative adjustments for current conditions. In order to estimate the expected credit losses, the Company implemented new loss estimation models. The Company disclosed the impact of adoption of this standard on January 1, 2020 with a $15.7 million increase to the allowance for credit losses, a $173 thousand increase for unfunded loan commitments and a $6.7 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Provision expense for the year ending December 31, 2020 was $17.6 million and the Allowance for Credit Losses at December 31, 2020 was $46.9 million. The Company utilizes the static pool methodology for determining the allowance for credit losses. The static pool methodology tracks loan pool by segment over a period of time to calculate a loss rate. Loss rates are then qualitatively adjusted for current conditions and reasonable and supportable forecast. Commercial and agricultural loans graded special mention and substandard are also adjusted based on a migration analysis technique. Loans that no longer exhibit shared risk characteristics are evaluated on an individual basis. The Allowance for Credit Losses was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes. The principal considerations resulting in our determination included the following: • Significant audit effort to evaluate the appropriateness of selection of loss estimation models, loan segmentation and historical loss period used in the calculation • Significant auditor judgement and effort were used in evaluating the qualitative factors used in the calculation. • Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecast of economic variables. • Significant audit effort to test the completeness and accuracy of data used in the migration analysis calculation, including accuracy of loan risk rating, and its application to the commercial and agricultural loan segments. 54 Report of Independent Registered Public Accounting Firm The primary procedures performed to address this critical audit matter included: • Testing the effectiveness of management’s internal controls over the Company’s significant model assumptions and judgments, loan segmentation, reasonable and supportable forecasts, qualitative factor adjustments, information systems and model validation • Testing the effectiveness of controls over the Company’s preparation and review of the allowance for credit loss calculation, including data used as the basis for adjustments related to the qualitative factors, the development and reasonableness of qualitative factors and mathematical accuracy and appropriateness of the overall calculation; • Evaluating management’s judgments in the selection and application of reasonable and supportable forecast of economic variables • Substantively testing management’s process for developing the qualitative factors and assessing reasonableness, relevance and reliability of data used to develop factors, including evaluating their judgments and assumptions for reasonableness • Testing the effectiveness of controls over the Company’s loan risk rating; • Substantively testing the accuracy of both the loan risk ratings as well as testing the accuracy of the transition matrix /s/ Crowe LLP Crowe LLP We have served as the Company's auditor since 1977. Louisville, Kentucky February 26, 2021 55 Consolidated Balance Sheets Dollars in thousands, except per share data December 31, 2020 2019 ASSETS Cash and Due from Banks $ 57,972 $ 59,971 Federal Funds Sold and Other Short-term Investments 287,776 43,913 Cash and Cash Equivalents 345,748 103,884 Interest-bearing Time Deposits with Banks 1,241 1,985 Securities Available-for-Sale, at Fair Value (Amortized Cost $ 1,172,175 , No Allowance for Credit Losses) 1,217,852 854,825 Other Investments 353 353 Loans Held-for-Sale, at Fair Value 16,904 17,713 Loans 3,091,998 3,081,973 Less: Unearned Income ( 3,926 ) ( 4,882 ) Allowance for Credit Losses ( 46,859 ) ( 16,278 ) Loans, Net 3,041,213 3,060,813 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 13,168 13,968 Premises, Furniture and Equipment, Net 96,593 96,651 Other Real Estate 325 425 Goodwill 121,956 121,306 Intangible Assets 8,984 12,656 Company Owned Life Insurance 69,250 68,883 Accrued Interest Receivable and Other Assets 43,990 44,210 TOTAL ASSETS $ 4,977,577 $ 4,397,672 LIABILITIES Non-interest-bearing Demand Deposits $ 1,183,442 $ 832,985 Interest-bearing Demand, Savings, and Money Market Accounts 2,428,636 1,965,640 Time Deposits 494,452 631,396 Total Deposits 4,106,530 3,430,021 FHLB Advances and Other Borrowings 194,529 349,686 Accrued Interest Payable and Other Liabilities 51,809 44,145 TOTAL LIABILITIES 4,352,868 3,823,852 Commitments and Contingencies (See Note 14) SHAREHOLDERS’ EQUITY Common Stock, no par value, $ 1 stated value; 45,000,000 shares authorized 26,502 26,671 Additional Paid-in Capital 274,385 278,954 Retained Earnings 288,447 253,090 Accumulated Other Comprehensive Income 35,375 15,105 TOTAL SHAREHOLDERS’ EQUITY 624,709 573,820 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,977,577 $ 4,397,672 End of period shares issued and outstanding 26,502,157 26,671,368 See accompanying notes to the consolidated financial statements. 56 Consolidated Statements of Income Dollars in thousands, except per share data Years Ended December 31, 2020 2019 2018 INTEREST INCOME Interest and Fees on Loans $ 151,658 $ 152,481 $ 112,084 Interest on Federal Funds Sold and Other Short-term Investments 382 522 308 Interest and Dividends on Securities: Taxable 10,447 13,910 12,398 Non-taxable 11,882 9,561 8,959 TOTAL INTEREST INCOME 174,369 176,474 133,749 INTEREST EXPENSE Interest on Deposits 13,696 23,805 13,625 Interest on FHLB Advances and Other Borrowings 5,430 7,444 5,514 TOTAL INTEREST EXPENSE 19,126 31,249 19,139 NET INTEREST INCOME 155,243 145,225 114,610 Provision for Credit Losses 17,550 5,325 2,070 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 137,693 139,900 112,540 NON-INTEREST INCOME Trust and Investment Product Fees 8,005 7,278 6,680 Service Charges on Deposit Accounts 7,334 8,718 7,044 Insurance Revenues 8,922 8,940 8,330 Company Owned Life Insurance 2,307 2,005 1,243 Interchange Fee Income 10,529 9,450 7,278 Other Operating Income 3,388 3,229 2,785 Net Gains on Sales of Loans 9,908 4,633 3,004 Net Gains on Securities 4,081 1,248 706 TOTAL NON-INTEREST INCOME 54,474 45,501 37,070 NON-INTEREST EXPENSE Salaries and Employee Benefits 68,112 63,885 51,306 Occupancy Expense 10,033 9,988 7,735 Furniture and Equipment Expense 3,991 3,788 3,142 FDIC Premiums 740 533 1,033 Data Processing Fees 6,889 7,927 6,942 Professional Fees 3,998 4,674 5,362 Advertising and Promotion 3,589 4,230 3,492 Intangible Amortization 3,539 3,721 1,752 Other Operating Expenses 16,232 15,416 12,789 TOTAL NON-INTEREST EXPENSE 117,123 114,162 93,553 Income before Income Taxes 75,044 71,239 56,057 Income Tax Expense 12,834 12,017 9,528 NET INCOME $ 62,210 $ 59,222 $ 46,529 Basic Earnings per Share $ 2.34 $ 2.29 $ 1.99 Diluted Earnings per Share $ 2.34 $ 2.29 $ 1.99 Dividends per Share $ 0.76 $ 0.68 $ 0.60 See accompanying notes to the consolidated financial statements. 57 Consolidated Statements of Comprehensive Income Dollars in thousands, except per share data Years Ended December 31, 2020 2019 2018 NET INCOME $ 62,210 $ 59,222 $ 46,529 Other Comprehensive Income (Loss): Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 29,783 29,866 ( 4,936 ) Reclassification Adjustment for Gains Included in Net Income ( 4,081 ) ( 1,248 ) ( 706 ) Tax Effect ( 5,432 ) ( 6,186 ) 1,218 Net of Tax 20,270 22,432 ( 4,424 ) Postretirement Benefit Obligation: Net (Loss) Arising During the Period — ( 310 ) ( 73 ) Reclassification Adjustment for Amortization of Prior Service Cost and Net Loss Included in Net Periodic Pension Cost — 37 32 Tax Effect — 44 ( 13 ) Net of Tax — ( 229 ) ( 54 ) Total Other Comprehensive Income (Loss) 20,270 22,203 ( 4,478 ) COMPREHENSIVE INCOME $ 82,480 $ 81,425 $ 42,051 See accompanying notes to the consolidated financial statements. 58 Consolidated Statements of Changes in Shareholders’ Equity Dollars in thousands, except per share data Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balances, January 1, 2018 22,934,403 $ 22,934 $ 165,288 $ 178,969 $ ( 2,620 ) $ 364,571 Net Income 46,529 46,529 Other Comprehensive Income (Loss) ( 4,478 ) ( 4,478 ) Cash Dividends ($ 0.60 per share) ( 14,074 ) ( 14,074 ) Issuance of Common Stock for: Acquisition of First Security, Inc. 1,987,698 1,988 62,749 64,737 Restricted Share Grants 45,357 45 1,310 1,355 Balances, December 31, 2018 24,967,458 24,967 229,347 211,424 ( 7,098 ) 458,640 Net Income 59,222 59,222 Other Comprehensive Income (Loss) 22,203 22,203 Cash Dividends ($ 0.68 per share) ( 17,556 ) ( 17,556 ) Issuance of Common Stock for: Acquisition of Citizens First Corporation 1,663,954 1,664 48,360 50,024 Restricted Share Grants 39,956 40 1,247 1,287 Balances, December 31, 2019 26,671,368 26,671 278,954 253,090 15,105 573,820 Cumulative Effect of Change in Accounting Principles ( 6,717 ) ( 6,717 ) Balances, January 1, 2020 26,671,368 26,671 278,954 246,373 15,105 567,103 Net Income 62,210 62,210 Other Comprehensive Income (Loss) 20,270 20,270 Cash Dividends ($ 0.76 per share) ( 20,136 ) ( 20,136 ) Issuance of Common Stock for: Restricted Share Grants 52,701 53 998 1,051 Stock Repurchase ( 221,912 ) ( 222 ) ( 5,567 ) ( 5,789 ) Balances, December 31, 2020 26,502,157 $ 26,502 $ 274,385 $ 288,447 $ 35,375 $ 624,709 See accompanying notes to the consolidated financial statements. 59 Consolidated Statements of Cash Flows Dollars in thousands Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES 2020 2019 2018 Net Income $ 62,210 $ 59,222 $ 46,529 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Amortization on Securities 5,671 3,862 3,550 Depreciation and Amortization 9,429 8,630 6,184 Loans Originated for Sale ( 317,032 ) ( 198,326 ) ( 131,916 ) Proceeds from Sales of Loans Held-for-Sale 327,172 189,875 137,417 Provision for Credit Losses 17,550 5,325 2,070 Gain on Sale of Loans, net ( 9,908 ) ( 4,633 ) ( 3,004 ) Gain on Securities, net ( 4,081 ) ( 1,248 ) ( 706 ) Loss (Gain) on Sales of Other Real Estate and Repossessed Assets 28 200 ( 41 ) Loss (Gain) on Disposition and Donation of Premises and Equipment 223 111 ( 36 ) Loss (Gain) on Disposition of Land 43 ( 352 ) 44 Post Retirement Medical Benefit — ( 228 ) ( 55 ) Increase in Cash Surrender Value of Company Owned Life Insurance ( 1,449 ) ( 1,407 ) ( 1,141 ) Equity Based Compensation 1,051 1,287 1,355 Excess Tax Benefit from Restricted Share Grant 3 25 32 Change in Assets and Liabilities: Interest Receivable and Other Assets ( 2,925 ) ( 1,602 ) 2,211 Interest Payable and Other Liabilities 4,433 4,488 ( 162 ) Net Cash from Operating Activities 92,418 65,229 62,331 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturity of Other Short-term Investments 744 496 — Proceeds from Maturities of Securities Available-for-Sale 200,968 114,669 78,714 Proceeds from Sales of Securities Available-for-Sale 125,106 82,601 91,013 Purchase of Securities Available-for-Sale ( 664,989 ) ( 169,640 ) ( 140,604 ) Proceeds from Redemption of Federal Home Loan Bank Stock 800 1,145 2,607 Purchase of Loans — ( 2,051 ) ( 1,209 ) Proceeds from Sales of Loans 3,128 — 6,000 Loans Made to Customers, net of Payments Received ( 10,114 ) 3,925 ( 87,127 ) Proceeds from Sales of Other Real Estate 340 369 662 Property and Equipment Expenditures ( 7,071 ) ( 9,374 ) ( 15,186 ) Proceeds from Sales of Property and Equipment — — 40 Proceeds from Sale of Land and Building 3,928 1,761 393 Proceeds from Life Insurance 1,082 1,216 765 Acquisition of First Security, Inc. — — ( 17,566 ) Cash from Acquisition of Bank Branches — — 42,700 Acquisition of Citizens First Corporation — 5,545 — Net Cash from Investing Activities ( 346,078 ) 30,662 ( 38,798 ) CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 676,906 ( 13,007 ) ( 11,112 ) Change in Short-term Borrowings ( 114,832 ) ( 82,037 ) 42,999 Advances in Long-term Debt — 89,214 25,000 Repayments of Long-term Debt ( 40,625 ) ( 65,171 ) ( 40,155 ) Issuance (Retirement) of Common Stock ( 5,789 ) — — Dividends Paid ( 20,136 ) ( 17,556 ) ( 14,074 ) Net Cash from Financing Activities 495,524 ( 88,557 ) 2,658 Net Change in Cash and Cash Equivalents 241,864 7,334 26,191 Cash and Cash Equivalents at Beginning of Year 103,884 96,550 70,359 Cash and Cash Equivalents at End of Year $ 345,748 $ 103,884 $ 96,550 Cash Paid During the Year for Interest $ 20,484 $ 30,765 $ 18,239 Income Taxes 11,505 7,977 5,920 Supplemental Non Cash Disclosures (See Note 18 for Business Combinations) Loans Transferred to Other Real Estate $ — $ 708 $ 398 Reclassification of Land and Buildings to Other Assets — 5,712 850 Right of Use Asset Obtained in Exchange for Lease Liabilities — 9,034 — See accompanying notes to the consolidated financial statements. 60 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies 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. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, and other real estate owned could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the continued impact of COVID-19 on the Company’s business. However, if the pandemic continues as a prolonged worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. Description of Business and Basis of Presentation The operations of German American Bancorp, Inc. (the "Company") are primarily comprised of three business segments: core banking, trust and investment advisory services, and insurance operations. The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles. The more significant policies are described below. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform with current classifications. Reclassifications had no impact on shareholders' equity or net income. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Securities Debt securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. These include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Securities classified as available-for-sale are reported at fair value with unrealized gains or losses included as a separate component of equity, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on trade date and determined using the specific identification method. Investments with readily determinable values (except those accounted for under equity method of accounting or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values are carried at historical cost and evaluated for impairment on a periodic basis. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Fair value is determined based on collateral value and prevailing market prices for loans with similar characteristics. Net unrealized gains or losses are recorded through earnings. 61 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Mortgage loans held for sale are generally sold on a servicing released basis. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $ 14,133 at December 31, 2020 and was reported in Accrued Interest Receivable and Other Assets on the Consolidated Balance Sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Purchase Credit Deteriorated (PCD) Loans The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense. Allowance for Credit Losses - Loans The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The Company separately assigns allocations for substandard and special mention commercial and agricultural credits as well as other categories of loans based on migration analysis techniques. The migration analysis factors are calculated using a transition matrix to determine the likelihood of a customer's asset quality rating migrating from its current rating to any other rating. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods: Commercial and Industrial Loans - The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most commercial loans are secured by accounts receivable, inventory and equipment. If cash flow from business operations is reduced, the borrower's ability to repay the loan may diminish, and over time, it may also be difficult to substantiate current value of inventory and equipment. Repayment of these loans are more sensitive than other types of loans to adverse conditions in the general economy. Commercial Real Estate Loans - Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans are collateralized by the borrower's underlying real estate. Therefore, diminished cash flows not only affects the ability to repay the loan, it may also reduce the underlying collateral value. Agricultural Loans - This portfolio is diversified between real estate financing, equipment financing and lines of credit in various segments including grain production, poultry production and livestock production. Mitigating any concentration of risk that may exist in the Company's agricultural loan portfolio is the use of federal government guarantee programs. Leases - Leases are primarily for equipment leased to varying types of businesses. If the cash flows from the business operations is reduced, the business's ability to repay the lease is diminished as well. 62 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Home Equity Loans - Home equity loans are generally secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Consumer Loans - Consumer loan repayment is typically dependent on the borrower remaining employed through the life of the loan as well as the borrower maintaining the underlying collateral adequately. Credit Cards - Credit card loan are unsecured and repayment is primarily dependent on the personal income of the borrower. Residential Mortgage Loans - Residential mortgage loans are typically secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. Troubled Debt Restructurings (“TDR”) A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowances for credit losses on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. Loan Modifications and Troubled Debt Restructurings due to COVID-19 On April 7, 2020, the Board of Governors of the Federal Reserve System (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 2021 Consolidated Appropriations Act adopted on December 27, 2020, to the earlier of (i) 60 days after the national emergency concerning the COVID-19 outbreak terminates, and (ii) January 1, 2022. Allowance for Credit Losses on Available-For-Sale Securities For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it 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 debt securities available for sale that do not meet the aforementioned 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, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to 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, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. 63 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense included in other expense on the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default. Federal Home Loan Bank (FHLB) Stock The Bank is a member of the FHLB of Indianapolis. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Premises, Furniture and Equipment Land is carried at cost. Premises, furniture, and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging generally from 10 to 40 years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging generally from 3 to 10 years. Other Real Estate Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of commercial/residential real estate property collateralizing a commercial/consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through the completion of a deed in lieu of foreclosure or through a similar legal agreement. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Goodwill and Other Intangible Assets Goodwill arises from business combinations and 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 Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. 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. Company Owned Life Insurance The Company has purchased life insurance policies on certain directors and executives. This life insurance is recorded at its cash surrender value or the amount that can be realized, which considers any adjustments or changes that are probable at settlement. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe currently that there are any such matters that will have a material impact on the financial statements. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. 64 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Restrictions on Cash At December 31, 2020, the Company was no t required to have balance on deposits with the Federal Reserve, or as cash on hand. At December 31, 2019, the Company was required to have $ 24,560 on deposit with the Federal Reserve, or as cash on hand. Long-term Assets Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Stock Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in unrecognized amounts in pension and other postretirement benefits, which are also recognized as a separate component of equity. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Retirement Plans Pension expense under the suspended defined benefit plan is the net of interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Earnings Per Share Earnings per share are based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share show the potential dilutive effect of additional common shares issuable under the Company’s stock based compensation plans. Earnings per share are retroactively restated for stock splits and stock dividends. Cash Flow Reporting The Company reports net cash flows for customer loan transactions, deposit transactions, deposits made with other financial institutions and short-term borrowings. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold. Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Recently Adopted Accounting Guidance In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of 65 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). The new CECL model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgement with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. The Company adopted ASC 326 on January 1, 2020 using the modified restrospective approach. Results for reporting periods after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $ 6,717 upon adoption. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $ 6,886 of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020. The Company expanded the loan portfolio segments used to determine the allowance for credit losses for loans into eight loan segments as opposed to six loan segments under the incurred loss methodology. The following table illustrates the impact of the segment expansion as of January 1, 2020. (dollars in thousands) December 31, 2019 Statement Balance Segment Portfolio Reclassifications December 31, 2019 After Reclassification Loans: Commercial and Industrial Loans $ 589,758 $ ( 57,257 ) $ 532,501 Commercial Real Estate Loans 1,495,862 N/A 1,495,862 Agricultural Loans 384,526 N/A 384,526 Leases N/A 57,257 57,257 Home Equity Loans 225,755 N/A 225,755 Consumer Loans 81,217 ( 11,953 ) 69,264 Credit Cards N/A 11,953 11,953 Residential Mortgage Loans 304,855 N/A 304,855 Total Loans $ 3,081,973 $ — $ 3,081,973 66 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) The following table illustrates the impact of ASC 326: (dollars in thousands) December 31, 2019 After Reclassification Impact of ASC 326 Adoption January 1, 2020 Post-ASC 326 Adoption Assets: Loans: Commercial and Industrial Loans $ 532,501 $ 2,191 $ 534,692 Commercial Real Estate Loans 1,495,862 4,385 1,500,247 Agricultural Loans 384,526 128 384,654 Leases 57,257 — 57,257 Home Equity Loans 225,755 35 225,790 Consumer Loans 69,264 — 69,264 Credit Cards 11,953 — 11,953 Residential Mortgage Loans 304,855 147 305,002 Allowance for Credit Losses on Loans ( 16,278 ) ( 15,653 ) ( 31,931 ) Liabilities: Allowance for Credit Losses on Unfunded Loan Commitments $ — $ ( 173 ) $ ( 173 ) In December 2018, 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. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update became effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements. 67 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Accounting Guidance Issued But Not Yet Adopted In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time. NOTE 2 – Securities The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows: Securities Available-for-Sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2020 Obligations of State and Political Subdivisions $ 548,273 $ 33,077 $ ( 103 ) $ 581,247 MBS/CMO 535,526 12,806 ( 25 ) 548,307 US Gov't Sponsored Entities & Agencies 88,376 120 ( 198 ) 88,298 Total $ 1,172,175 $ 46,003 $ ( 326 ) $ 1,217,852 2019 Obligations of State and Political Subdivisions $ 307,943 $ 16,366 $ ( 9 ) $ 324,300 MBS/CMO 526,907 5,414 ( 1,796 ) 530,525 US Gov't Sponsored Entities & Agencies — — — — Total $ 834,850 $ 21,780 $ ( 1,805 ) $ 854,825 All mortgage-backed securities in the above table (identified above and throughout this Note 2 as "MBS/CMO") are residential and multi-family mortgage-backed securities and guaranteed by government sponsored entities. The US Gov't Sponsored Entities & Agencies in the above table have underlying collateral of equipment, machinery and commercial real estate. The amortized cost and fair value of securities at December 31, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed securities are not due at a single maturity date and are shown separately. Amortized Cost Fair Value Securities Available-for-Sale: Due in one year or less $ 7,809 $ 7,802 Due after one year through five years 16,987 17,601 Due after five years through ten years 68,720 73,675 Due after ten years 454,757 482,169 MBS/CMO 535,526 548,307 US Gov't Sponsored Entities & Agencies 88,376 88,298 Total $ 1,172,175 $ 1,217,852 68 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 2 – Securities (continued) 2020 2019 2018 Proceeds from the Sales of Securities are summarized below: Available- for-Sale Available- for-Sale Available- for-Sale Proceeds from Sales $ 125,106 $ 82,601 $ 91,013 Gross Gains on Sales 4,081 1,248 706 Income Taxes on Gross Gains 857 262 148 The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $ 237,506 and $ 245,664 as of December 31, 2020 and 2019, respectively. Below is a summary of securities with unrealized losses as of year-end 2020 and 2019, presented by length of time the securities have been in a continuous unrealized loss position: Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2020 Obligations of State and Political Subdivisions $ 10,652 $ ( 103 ) $ — $ — $ 10,652 $ ( 103 ) MBS/CMO 19,631 ( 25 ) — — 19,631 ( 25 ) US Gov't Sponsored Entities & Agencies 59,054 ( 198 ) — — 59,054 ( 198 ) Total $ 89,337 $ ( 326 ) $ — $ — $ 89,337 $ ( 326 ) Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2019 Obligations of State and Political Subdivisions $ 4,631 $ ( 9 ) $ — $ — $ 4,631 $ ( 9 ) MBS/CMO 89,267 ( 241 ) 155,989 ( 1,555 ) 245,256 ( 1,796 ) US Gov't Sponsored Entities & Agencies — — — — — — Total $ 93,898 $ ( 250 ) $ 155,989 $ ( 1,555 ) $ 249,887 $ ( 1,805 ) 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, we compare 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 totaled $ 5,954 at December 31, 2020 and is excluded from the estimate of credit losses. The Company’s equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at December 31, 2020 and 2019. The original investment totaled $ 1,350 and other-than-temporary impairment was previously recorded totaling $ 997 . The Company's equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. There was no additional impairment recognized through earnings during 2020 or 2019. 69 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 3 – Derivatives The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $ 117.6 million and $ 102.4 million at December 31, 2020 and 2019, respectively. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures. The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of: December 31, 2020 December 31, 2019 Notional Amount Fair Value Notional Amount Fair Value Included in Other Assets: Interest Rate Swaps $ 117,621 $ 8,806 $ 102,351 $ 2,607 Included in Other Liabilities: Interest Rate Swaps $ 117,621 $ 9,353 $ 102,351 $ 2,829 The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 is as follows: 2020 2019 2018 Interest Rate Swaps: Included in Other Income $ 268 $ 429 $ 48 NOTE 4 – Loans Loans were comprised of the following classifications at December 31: 2020 2019 Commercial: Commercial and Industrial Loans $ 638,773 $ 532,501 Commercial Real Estate Loans 1,467,397 1,495,862 Agricultural Loans 376,186 384,526 Leases 55,664 57,257 Retail: Home Equity Loans 219,348 225,755 Consumer Loans 66,717 69,264 Credit Cards 11,637 11,953 Residential Mortgage Loans 256,276 304,855 Subtotal 3,091,998 3,081,973 Less: Unearned Income ( 3,926 ) ( 4,882 ) Allowance for Credit Losses ( 46,859 ) ( 16,278 ) Loans, net $ 3,041,213 $ 3,060,813 70 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) 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 amends 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. During 2020, the Bank originated loans totaling approximately $ 351.3 million ($ 339.3 million net of deferred fees) in principal amount, on 3,070 PPP loan relationships under this program. As a result of the forgiveness of PPP loans which began in the fourth quarter of 2020 for the Company, remaining PPP loans outstanding totaled $ 186.0 million ($ 182.0 million net of deferred fees) as of December 31, 2020 and are included above in the Commercial and Industrial Loan category. Allowance for Credit Losses for Loans The following table presents the activity in the allowance for credit losses by portfolio segment for the year ended December 31, 2020: December 31, 2020 Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Unallocated Total Allowance for Credit Losses: Beginning balance prior to adoption of ASC 326 $ 4,799 $ 4,692 $ 5,315 $ — $ 434 $ 200 $ — $ 333 $ 505 $ 16,278 Impact of adopting ASC 326 2,245 3,063 1,438 105 ( 59 ) 762 124 1,594 ( 505 ) 8,767 Impact of adopting ASC 326 - PCD Loans 2,191 4,385 128 — — 35 — 147 — 6,886 Provision for credit loss expense ( 694 ) 17,645 ( 125 ) 95 527 66 131 ( 95 ) — 17,550 Initial allowance on loans purchased with credit deterioration — — — — — — — — — — Loans Charged-off ( 2,119 ) ( 36 ) — — ( 766 ) ( 67 ) ( 109 ) ( 39 ) — ( 3,136 ) Recoveries collected 23 129 — — 354 — 4 4 — 514 Total ending allowance balance $ 6,445 $ 29,878 $ 6,756 $ 200 $ 490 $ 996 $ 150 $ 1,944 $ — $ 46,859 The Company utilizes the Static Pool methodology in determining expected future credit losses. Static pool analysis means segmenting and tracking loans over a period of time based on similar risk characteristics such as loan structure, collateral type, industry of borrower and concentrations, contractual terms and credit risk indicators. Static pool calculates a loss rate on a closed pool of loans that existed on a specified start date based upon the remaining life of each segment. The Company's expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look-back period includes January 2014 through the current period, on a monthly basis. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. For the year ended December 31, 2020, the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. While there continues to be great uncertainty related to COVID-19 on our borrowers and communities, we have recognized significant declines in employment and gross domestic product which are key indicators utilized in our forecasting for our allowance calculations. Based on the potential increased losses related to the economic impact 71 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) of the COVID-19 pandemic, the bank has considered this loss experience may align with loss experience from the recessionary period from 2008-2011 and qualitative adjustments have been made accordingly. Since PPP loans are guaranteed by the Small Business Administration (SBA), they have minimal impact on the allowance for credit losses. All classes of loans, including loans acquired with deteriorated credit quality, are generally 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. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 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 the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of December 31, 2020: Non-Accrual With No Allowance for Credit Loss (1) Non-Accrual Loans Past Due Over 89 Days Still Accruing Commercial and Industrial Loans $ 4,571 $ 8,133 $ — Commercial Real Estate Loans 3,152 10,188 — Agricultural Loans 1,291 1,915 — Leases — — — Home Equity Loans 271 271 — Consumer Loans 77 84 — Credit Cards 86 86 — Residential Mortgage Loans 671 830 — Total $ 10,119 $ 21,507 $ — (1) Includes non-accrual loans with no allowance for credit loss and are also included in Non-Accrual loans totaling $ 21,507 . Interest income on non-accrual loans recognized during the year ended December 31, 2020 total $ 28 . The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020: Real Estate Equipment Accounts Receivable Other Total Commercial and Industrial Loans $ 4,943 $ 3,014 $ 669 $ 154 $ 8,780 Commercial Real Estate Loans 11,877 — — 1,530 13,407 Agricultural Loans 3,064 — — — 3,064 Leases — — — — — Home Equity Loans 416 — — — 416 Consumer Loans 4 4 — 3 11 Credit Cards — — — — — Residential Mortgage Loans 817 — — — 817 Total $ 21,121 $ 3,018 $ 669 $ 1,687 $ 26,495 72 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the aging of the amortized cost basis in past due loans by class of loans as of December 31, 2020: 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Loans Not Past Due Total December 31, 2020 Commercial and Industrial Loans $ 477 $ 909 $ 2,441 $ 3,827 $ 634,946 $ 638,773 Commercial Real Estate Loans 5 4,877 3,682 8,564 1,458,833 1,467,397 Agricultural Loans — — 651 651 375,535 376,186 Leases — — — — 55,664 55,664 Home Equity Loans 672 5 271 948 218,400 219,348 Consumer Loans 233 84 65 382 66,335 66,717 Credit Cards 95 80 86 261 11,376 11,637 Residential Mortgage Loans 3,737 1,590 529 5,856 250,420 256,276 Total $ 5,219 $ 7,545 $ 7,725 $ 20,489 $ 3,071,509 $ 3,091,998 Troubled Debt Restructurings: In certain instances, the Company may choose to restructure the contractual terms of loans. A troubled debt restructuring occurs when the Bank grants a concession to the borrower that it would not otherwise consider due to a borrower’s financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company’s internal underwriting policy. The Company uses the same methodology for loans acquired with deteriorated credit quality as for all other loans when determining whether the loan is a troubled debt restructuring. As of December 31, 2020 and 2019, the Company had trouble debt restructurings totaling $ 111 and $ 116 , respectively. The Company had no specific allocation of allowance for these loans at December 31, 2020. The Company had no t committed to lending any additional amounts during 2020 or 2019 to customers with outstanding loans that are classified as trouble debt restructurings. During the years ended December 31, 2020 and 2019, the Company had no loans modified as troubled debt restructurings. Additionally, there were no loans modified as trouble debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2020 and 2019. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. Loan Modifications and Troubled Debt Restructurings due to COVID-19 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. 73 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) 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 Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $ 250 . This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. 74 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) Based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Term Loans Amortized Cost Basis by Origination Year As of December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total Commercial and Industrial: Risk Rating Pass $ 260,027 $ 88,273 $ 46,681 $ 31,612 $ 21,025 $ 48,508 $ 109,228 $ 605,354 Special Mention 618 1,102 2,756 1,739 206 1,972 9,948 18,341 Substandard 143 164 1,283 1,530 607 5,416 5,935 15,078 Doubtful — — — — — — — — Total Commercial & Industrial Loans $ 260,788 $ 89,539 $ 50,720 $ 34,881 $ 21,838 $ 55,896 $ 125,111 $ 638,773 Commercial Real Estate: Risk Rating Pass $ 296,265 $ 215,226 $ 179,129 $ 183,703 $ 171,016 $ 295,641 $ 29,634 $ 1,370,614 Special Mention 883 9,361 15,232 23,489 7,578 20,294 147 76,984 Substandard — 1,131 1,735 1,692 4,292 10,849 100 19,799 Doubtful — — — — — — — — Total Commercial Real Estate Loans $ 297,148 $ 225,718 $ 196,096 $ 208,884 $ 182,886 $ 326,784 $ 29,881 $ 1,467,397 Agricultural: Risk Rating Pass $ 49,242 $ 25,449 $ 31,285 $ 32,368 $ 22,702 $ 64,890 $ 75,871 $ 301,807 Special Mention 11,503 9,911 3,111 8,767 2,707 10,125 16,318 62,442 Substandard 578 73 394 1,228 4,466 5,198 — 11,937 Doubtful — — — — — — — — Total Agricultural Loans $ 61,323 $ 35,433 $ 34,790 $ 42,363 $ 29,875 $ 80,213 $ 92,189 $ 376,186 Leases: Risk Rating Pass $ 18,258 $ 17,517 $ 9,176 $ 5,415 $ 1,605 $ 3,693 $ — $ 55,664 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total Leases $ 18,258 $ 17,517 $ 9,176 $ 5,415 $ 1,605 $ 3,693 $ — $ 55,664 75 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, home equity and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in residential, home equity and consumer loans based on payment activity. Term Loans Amortized Cost Basis by Origination Year As of December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total Consumer: Payment performance Performing $ 33,857 $ 16,486 $ 8,456 $ 2,115 $ 910 $ 2,245 $ 2,563 $ 66,632 Nonperforming — — 11 2 14 23 35 85 Total Consumer Loans $ 33,857 $ 16,486 $ 8,467 $ 2,117 $ 924 $ 2,268 $ 2,598 $ 66,717 Home Equity: Payment performance Performing $ — $ — $ 34 $ 46 $ 67 $ 490 $ 218,440 $ 219,077 Nonperforming — — — — — — 271 271 Total Home Equity Loans $ — $ — $ 34 $ 46 $ 67 $ 490 $ 218,711 $ 219,348 Residential Mortgage: Payment performance Performing $ 45,945 $ 26,536 $ 28,050 $ 28,764 $ 25,155 $ 100,998 $ — $ 255,448 Nonperforming — — — — — 828 — 828 Total Residential Mortgage Loans $ 45,945 $ 26,536 $ 28,050 $ 28,764 $ 25,155 $ 101,826 $ — $ 256,276 The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For certain retail loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in retail loans based on payment activity: Credit Cards As of December 31, 2020 Performing $ 11,551 Nonperforming 86 Total $ 11,637 The following tables present loans purchased and/or sold during the year by portfolio segment: Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Total December 31, 2020 Purchases $ — $ — $ — $ — $ — $ — $ — $ — $ — Sales — 3,128 — — — — — — 3,128 December 31, 2019 Purchases $ 2,051 $ — $ — $ — $ — $ — $ — $ — $ 2,051 Sales — — — — — — — — — 76 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 2020. A summary of the activity of these loans follows: Balance January 1, 2020 Additions Changes in Persons Included Deductions Balance December 31, 2020 Collected Charged-off $ 26,243 $ 24,482 $ — $ ( 17,981 ) $ — $ 32,744 Allowance for Loan Losses Prior to the adoption of ASC 326 on January 1, 2020, the Company calculated the allowance for loan losses using the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods. The following tables present the activity in the allowance for loan losses by portfolio class for the years ended December 31, 2019 and 2018: Commercial and Industrial Loans and Leases Commercial Real Estate Loans Agricultural Loans Home Equity Loans Consumer Loans Residential Mortgage Loans Unallocated Total December 31, 2019 Beginning Balance $ 2,953 $ 5,291 $ 5,776 $ 229 $ 420 $ 472 $ 682 $ 15,823 Provision for Loan Losses 5,600 ( 308 ) ( 461 ) ( 27 ) 727 ( 29 ) ( 177 ) 5,325 Recoveries 56 29 — 8 432 7 — 532 Loans Charged-off ( 3,810 ) ( 320 ) — ( 10 ) ( 1,145 ) ( 117 ) — ( 5,402 ) Ending Balance $ 4,799 $ 4,692 $ 5,315 $ 200 $ 434 $ 333 $ 505 $ 16,278 Commercial and Industrial Loans and Leases Commercial Real Estate Loans Agricultural Loans Home Equity Loans Consumer Loans Residential Mortgage Loans Unallocated Total December 31, 2018 Beginning Balance $ 4,735 $ 4,591 $ 4,894 $ 330 $ 298 $ 343 $ 503 $ 15,694 Provision for Loan Losses ( 423 ) 729 862 ( 52 ) 608 167 179 2,070 Recoveries 141 20 20 12 375 37 — 605 Loans Charged-off ( 1,500 ) ( 49 ) — ( 61 ) ( 861 ) ( 75 ) — ( 2,546 ) Ending Balance $ 2,953 $ 5,291 $ 5,776 $ 229 $ 420 $ 472 $ 682 $ 15,823 77 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of December 31, 2019: December 31, 2019 Total Commercial and Industrial Loans and Leases Commercial Real Estate Loans Agricultural Loans Home Equity Loans Consumer Loans Residential Mortgage Loans Unallocated Allowance for Loan Losses: Ending Allowance Balance Attributable to Loans: Individually Evaluated for Impairment $ 2,971 $ 2,412 $ 559 $ — $ — $ — $ — $ — Collectively Evaluated for Impairment 12,902 2,387 3,733 5,315 200 434 328 505 Acquired with Deteriorated Credit Quality 405 — 400 — — — 5 — Total Ending Allowance Balance $ 16,278 $ 4,799 $ 4,692 $ 5,315 $ 200 $ 434 $ 333 $ 505 Loans: Loans Individually Evaluated for Impairment $ 6,269 $ 4,707 $ 1,562 $ — $ — $ — $ — n/m (2) Loans Collectively Evaluated for Impairment 3,076,835 585,328 1,491,090 387,710 226,406 81,429 304,872 n/m (2) Loans Acquired with Deteriorated Credit Quality 12,798 1,368 7,212 3,161 369 — 688 n/m (2) Total Ending Loans Balance (1) $ 3,095,902 $ 591,403 $ 1,499,864 $ 390,871 $ 226,775 $ 81,429 $ 305,560 n/m (2) (1) Total recorded investment in loans includes $ 13,929 in accrued interest. (2) n/m = not meaningful The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019: Unpaid Principal Balance (1) Recorded Investment Allowance for Loan Losses Allocated December 31, 2019 With No Related Allowance Recorded: Commercial and Industrial Loans and Leases $ 3,638 $ 524 $ — Commercial Real Estate Loans 4,738 2,058 — Agricultural Loans 3,294 2,738 — Subtotal 11,670 5,320 — With An Allowance Recorded: Commercial and Industrial Loans and Leases 5,042 4,521 2,412 Commercial Real Estate Loans 2,187 1,865 959 Agricultural Loans — — — Subtotal 7,229 6,386 3,371 Total $ 18,899 $ 11,706 $ 3,371 Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above) $ 9,994 $ 4,624 $ — Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above) $ 1,134 $ 813 $ 400 (1) Unpaid Principal Balance is the remaining contractual payments gross of partial charge-offs and discounts. 78 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following tables present the average balance and related interest income of loans individually evaluated for impairment by class of loans for the years ended December 31, 2019 and 2018: Average Recorded Investment Interest Income Recognized Cash Basis Recognized December 31, 2019 With No Related Allowance Recorded: Commercial and Industrial Loans and Leases $ 1,175 $ 19 $ 1 Commercial Real Estate Loans 2,947 81 1 Agricultural Loans 1,790 1 — Subtotal 5,912 101 2 With An Allowance Recorded: Commercial and Industrial Loans and Leases 3,753 — 1 Commercial Real Estate Loans 3,141 — 1 Agricultural Loans — — — Subtotal 6,894 — 2 Total $ 12,806 $ 101 $ 4 Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above) $ 4,321 $ 61 $ 3 Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above) $ 1,766 $ — $ — Average Recorded Investment Interest Income Recognized Cash Basis Recognized December 31, 2018 With No Related Allowance Recorded: Commercial and Industrial Loans and Leases $ 1,164 $ 53 $ 3 Commercial Real Estate Loans 2,163 80 36 Agricultural Loans 770 — — Subtotal 4,097 133 39 With An Allowance Recorded: Commercial and Industrial Loans and Leases 2,956 2 9 Commercial Real Estate Loans 4,680 18 — Agricultural Loans — — — Subtotal 7,636 20 9 Total $ 11,733 $ 153 $ 48 Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above) $ 875 $ 21 $ — Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above) $ 151 $ 29 $ — 79 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of December 31, 2019: Loans Past Due 90 Days or More Non-Accrual & Still Accruing Commercial and Industrial Loans and Leases $ 4,940 $ 190 Commercial Real Estate Loans 3,433 — Agricultural Loans 2,739 — Home Equity Loans 79 — Consumer Loans 115 — Residential Mortgage Loans 2,496 — Total $ 13,802 $ 190 Loans Acquired With Deteriorated Credit Quality (Included in the Total Above) $ 5,393 $ — Loans Acquired in Current Year (Included in the Total Above) $ 2,058 $ — The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2019: Total 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Loans Not Past Due December 31, 2019 Commercial and Industrial Loans and Leases $ 591,403 $ 4,689 $ 83 $ 799 $ 5,571 $ 585,832 Commercial Real Estate Loans 1,499,864 209 431 2,106 2,746 1,497,118 Agricultural Loans 390,871 499 — 329 828 390,043 Home Equity Loans 226,775 1,121 253 80 1,454 225,321 Consumer Loans 81,429 347 156 89 592 80,837 Residential Mortgage Loans 305,560 5,014 1,461 2,308 8,783 296,777 Total (1) $ 3,095,902 $ 11,879 $ 2,384 $ 5,711 $ 19,974 $ 3,075,928 Loans Acquired With Deteriorated Credit Quality (Included in the Total Above) $ 12,798 $ 18 $ — $ 1,589 $ 1,607 $ 11,191 Loans Acquired in Current Year (Included in the Total Above) $ 321,464 $ 639 $ 1 $ 797 $ 1,437 $ 320,027 (1) Total recorded investment in loans includes $ 13,929 in accrued interest. The risk category of loans by class of loans at December 31, 2019 is as follows: Pass Special Mention Substandard Doubtful Total December 31, 2019 Commercial and Industrial Loans and Leases $ 556,706 $ 19,671 $ 15,026 $ — $ 591,403 Commercial Real Estate Loans 1,453,310 30,504 16,050 — 1,499,864 Agricultural Loans 325,991 49,053 15,827 — 390,871 Total $ 2,336,007 $ 99,228 $ 46,903 $ — $ 2,482,138 Loans Acquired With Deteriorated Credit Quality (Included in the Total Above) $ 68 $ 613 $ 11,060 $ — $ 11,741 Loans Acquired in Current Year (Included in the Total Above) $ 254,629 $ 16,535 $ 12,769 $ — $ 283,933 80 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of December 31, 2019: Home Equity Loans Consumer Loans Residential Mortgage Loans December 31, 2019 Performing $ 226,695 $ 81,314 $ 303,065 Nonperforming 80 115 2,495 Total $ 226,775 $ 81,429 $ 305,560 NOTE 5 – Premises, Furniture, and Equipment Premises, furniture, and equipment was comprised of the following classifications at December 31: 2020 2019 Land $ 21,200 $ 21,186 Buildings and Improvements 98,364 94,462 Furniture and Equipment 41,504 38,915 Total Premises, Furniture and Equipment 161,068 154,563 Less: Accumulated Depreciation ( 64,475 ) ( 57,912 ) Total $ 96,593 $ 96,651 Depreciation expense was $ 5,988 , $ 5,773 and $ 4,739 for 2020, 2019 and 2018, respectively. NOTE 6 – Deposits At year end 2020, stated maturities of time deposits were as follows: 2021 $ 401,792 2022 48,703 2023 24,681 2024 12,341 2025 6,857 Thereafter 78 Total $ 494,452 Time deposits and brokered certificates of deposit of $250 or more at December 31, 2020 and 2019 were $ 104,518 and $ 143,103 , respectively. Time deposits originated from outside the geographic area, generally through brokers, totaled $ 5,510 and $ 14,582 at December 31, 2020 and 2019, respectively. Deposits from principal officers, directors, and their affiliates at year-end 2020 and 2019 were $ 79.9 million and $ 49.6 million, respectively. 81 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 7 – FHLB Advances and Other Borrowings The Company’s funding sources include Federal Home Loan Bank advances, borrowings from other third party correspondent financial institutions, issuance and sale of subordinated debt and other capital securities, and repurchase agreements. Information regarding each of these types of borrowings or other indebtedness is as follows: December 31, 2020 2019 Long-term Advances from Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities $ 83,000 $ 123,573 Term Loans — — Junior Subordinated Debentures assumed from American Community Bancorp, Inc. 6,075 5,924 Junior Subordinated Debentures assumed from River Valley Bancorp, Inc. 5,923 5,818 Junior Subordinated Debentures assumed from Citizens First Corporation 4,105 4,040 Subordinated Debentures 39,297 39,214 Finance Lease Obligation 3,224 3,381 Long-term Borrowings 141,624 181,950 Overnight Variable Rate Advances from Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities $ — $ 124,000 Federal Funds Purchased — 4,311 Repurchase Agreements 52,905 39,425 Short-term Borrowings 52,905 167,736 Total Borrowings $ 194,529 $ 349,686 Repurchase agreements, which are classified as secured borrowings, generally mature within one day of the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the value of the underlying securities. 2020 2019 Average Daily Balance During the Year $ 58,000 $ 35,916 Average Interest Rate During the Year 0.30 % 0.56 % Maximum Month-end Balance During the Year $ 73,580 $ 39,425 Weighted Average Interest Rate at Year-end 0.10 % 0.57 % At December 31, 2020, interest rates on the fixed rate long-term FHLB advances ranged from 1.54 % to 2.23 % with a weighted average rate of 1.87 %. At December 31, 2019 interest rates on the fixed rate long-term FHLB advances ranged from 1.54 % to 7.22 % with a weighted average rate of 1.95 %. At December 31, 2020 and 2019, the Company had no advances containing options whereby the FHLB may convert a fixed rate advance to an adjustable rate advance. 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 ("U.S. Bank") 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 82 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 7 - FHLB Advances and Other Borrowings (continued) 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 December 31, 2020, the parent company had a $ 15 million line of credit with U.S. Bank, which had no outstanding balance. The line of credit matures September 27, 2021. Interest on the line of credit is based upon one-month LIBOR plus 2.25 % and includes an unused commitment fee of 0.30 %. At December 31, 2020, scheduled principal payments on long-term borrowings, excluding the capitalized lease obligation and acquired subordinated debentures (which are discussed below) are as follows: 2021 $ 7,918 2022 49,834 2023 — 2024 24,834 2025 — Thereafter 39,711 Total $ 122,297 The Company assumed the obligations of junior subordinated debentures through the acquisitions of American Community Bancorp, Inc., River Valley Bancorp and Citizens First Corporation. The junior subordinated debentures were issued to ACB Capital Trust I, ACB Capital Trust II, RIVR Statutory Trust I, and Citizens First Statutory Trust I. The trusts are wholly owned by the Company. In accordance with accounting guidelines, the trusts are not consolidated with the Company's financials, but rather the subordinated debentures are shown as borrowings. The Company guarantees payment of distributions on the trust preferred securities issued by ACB Trust I, ACB Trust II, RIVR Statutory Trust I, and Citizens First Statutory Trust I. Interest is payable on a quarterly basis. These securities qualify as Tier 1 capital (with certain limitations) for regulatory purposes. $ 15,764 of the junior subordinated debentures were treated as Tier 1 capital for regulatory capital purposes as of December 31, 2020. $ 15,447 of the junior subordinated debentures were treated as Tier 1 capital for regulatory capital purposes as of December 31, 2019. As a result of the acquisitions of American Community, River Valley, and Citizens First these liabilities were recorded at fair value at the acquisition date with the discount amortizing into interest expense over the life of the liability, ultimately accreting to the issuance amount disclosed below. The following table summarizes the terms of each issuance: Date of Issuance Issuance Amount Carrying Amount at December 31, 2020 Variable Rate Rate as of December 31, 2020 Rate as of December 31, 2019 Maturity Date ACB Trust I 5/6/2005 $ 5,155 $ 3,830 90 day LIBOR + 2.15 % 2.40 % 4.09 % May 2035 ACB Trust II 7/15/2005 3,093 2,245 90 day LIBOR + 1.85 % 2.06 % 3.76 % July 2035 RIVR Statutory Trust 1 3/26/2003 7,217 5,923 3-Month LIBOR + 3.15 % 3.40 % 5.10 % March 2033 Citizens First Statutory Trust I 10/16/2006 5,155 4,105 3-Month LIBOR + 1.65 % 1.88 % 3.75 % January 2037 Note 8 - Shareholders' Equity Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. 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 83 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders' Equity (continued) 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. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. At December 31, 2020, the Company and Bank meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2020 and 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. At December 31, 2020, consolidated and bank actual capital and minimum required levels are presented below: Actual: Minimum Required For Capital Adequacy Purposes: Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations: Amount Ratio Amount Ratio (1) Amount Ratio Total Capital (to Risk Weighted Assets) Consolidated $ 554,168 15.86 % $ 279,554 8.00 % N/A N/A Bank 488,409 14.00 279,088 8.00 $ 348,860 10.00 % Tier 1 (Core) Capital (to Risk Weighted Assets) Consolidated $ 486,695 13.93 % $ 209,665 6.00 % N/A N/A Bank 460,936 13.21 209,316 6.00 $ 279,088 8.00 % Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) Consolidated $ 470,931 13.48 % $ 157,249 4.50 % N/A N/A Bank 460,936 13.21 156,987 4.50 $ 226,759 6.50 % Tier 1 (Core) Capital (to Average Assets) Consolidated $ 486,695 10.07 % $ 193,343 4.00 % N/A N/A Bank 460,936 9.56 192,915 4.00 $ 241,143 5.00 % (1) Excludes 2.5 % capital conservation buffer. 84 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders' Equity (continued) At December 31, 2019, consolidated and bank actual capital and minimum required levels are presented below: Actual: Minimum Required For Capital Adequacy Purposes: Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations: Amount Ratio Amount Ratio (1) Amount Ratio Total Capital (to Risk Weighted Assets) Consolidated $ 499,020 14.28 % $ 279,499 8.00 % N/A N/A Bank 447,090 12.82 278,997 8.00 $ 348,746 10.00 % Tier 1 (Core) Capital (to Risk Weighted Assets) Consolidated $ 442,742 12.67 % $ 209,624 6.00 % N/A N/A Bank 430,812 12.35 209,248 6.00 $ 278,997 8.00 % Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) Consolidated $ 427,295 12.23 % $ 157,218 4.50 % N/A N/A Bank 430,812 12.35 156,936 4.50 $ 226,685 6.50 % Tier 1 (Core) Capital (to Average Assets) Consolidated $ 442,742 10.53 % $ 168,195 4.00 % N/A N/A Bank 430,812 10.27 167,765 4.00 $ 209,706 5.00 % (1) Excludes 2.5 % capital conservation buffer. The Company and the bank at year end 2020 and 2019 were categorized as well-capitalized. There have been no conditions or events that management believes has changed the classification of the bank under the prompt corrective action regulations since the last notification from regulators. Regulations require the maintenance of certain capital levels at the bank, and may limit the dividends payable by the affiliate to the holding company, or by the holding company to its shareholders. At December 31, 2020 the bank had $ 99,000 in retained earnings available for payment of dividends to the parent company without prior regulatory approval. In December 2018, 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 adopted the capital transition relief over the permissible five-year period. Equity Plans and Equity Based Compensation During the periods presented, the Company maintained two equity incentive plans under which stock options, restricted stock, and other equity incentive awards could be granted. Those plans include (i) the Company’s 2009 Long-Term Equity Incentive Plan, under which no new grants may be made, and (ii) the Company’s 2019 Long-Term Equity Incentive Plan (the “2019 LTI Plan”). The 2019 LTI Plan, which authorizes a maximum aggregate issuance of 1,000,000 shares of common stock (subject to certain permitted adjustments), became effective on May 16, 2019, following approval of the Company’s shareholders. It will remain in effect until May 16, 2029, or until all shares of common stock subject to the 2019 LTI Plan are distributed, all awards have expired or terminated, or the plan is terminated pursuant to its terms, whichever occurs first. 85 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders' Equity (continued) Stock Options Options may be designated as incentive stock options or as nonqualified stock options. While the date after which options are first exercisable is determined by the appropriate committee of the Board of Directors of the Company or, in the case of options granted to directors, by the Board of Directors, no stock option may be exercised after ten years from the date of grant ( twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the plans must be no less than the market value of the Common Stock on the date of the grant. The plans authorize an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. Certain of these plans authorize an optionee to surrender the value of an unexercised option in payment of an equivalent amount of the exercise price of the option. The Company typically issues authorized but unissued common shares upon the exercise of options. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of common stock as of the reporting date. During 2020, 2019 and 2018, the Company granted no options, and recorded no stock compensation expense related to option grants. The Company recorded no other stock compensation expense applicable to options during the years ended December 31, 2020, 2019 and 2018. Restricted Stock During the periods presented, awards of long-term incentives were granted in the form of restricted stock. In 2019 and prior, awards that were granted to management and selected other employees under the Company's management incentive plan were granted in tandem with cash credit entitlements in the form of 60 % restricted stock grants and 40 % cash credit entitlements. In 2020, awards granted under the management incentive plan were granted in tandem with cash credit entitlements in the form of 66.67 % restricted stock grants and 33.33 % cash credit entitlements. In 2019 and prior, the restricted stock grants and tandem cash credit entitlements, generally, vested in three annual installments of 33.3 % each. In 2020, 100 % of the cash portion of an award vests towards the end of the year in which the grant was made, followed by the restricted stock grants vesting 50 % in each of the 2nd and 3rd years. Awards that are granted to directors as additional retainers for their services do not include any cash credit entitlement. These director restricted stock grants are subject to forfeiture in the event that the recipient of the grant does not continue in service as a director of the Company through December 31 of the year after grant or does not satisfy certain meeting attendance requirements, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. The following table presents expense recorded for restricted stock and cash entitlements as well as the related tax effect for the years ended 2020, 2019, and 2018: 2020 2019 2018 Restricted Stock Expense $ 1,051 $ 1,287 $ 1,355 Cash Entitlement Expense 995 639 718 Tax Effect ( 531 ) ( 499 ) ( 542 ) Net of Tax $ 1,515 $ 1,427 $ 1,531 Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $ 2,046 , $ 2,022 , and $ 2,172 as of December 31, 2020, 2019, and 2018, respectively. 86 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders' Equity (continued) The following table presents information on restricted stock grants outstanding for the period shown: Year Ended December 31, 2020 Restricted Shares Weighted Average Market Price at Grant Outstanding at Beginning of Period 43,279 $ 32.71 Granted 54,627 27.68 Issued and Vested ( 31,579 ) 33.41 Forfeited ( 1,926 ) 29.41 Outstanding at End of Period 64,401 $ 28.20 Employee Stock Purchase Plan Through August 16, 2019, the company maintained the 2009 Employee Stock Purchase Plan (the "2009 ESPP") whereby eligible employees had the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this plan was set at 95 % of the market value of the Company’s common stock as of the last day of the plan year. The plan had provided for the purchase of up to 750,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. The Company's shareholders approved the Company's new 2019 Employee Stock Purchase Plan on May 16, 2019, as well as an Amended and Restated 2019 Employee Stock Purchase Plan on May 21, 2020, which was amended and restated to reflect certain clarifying changes (the "2019 ESPP"). The 2019 ESPP replaces the 2009 ESPP, which expired on its own terms on August 16, 2019. The 2019 ESPP, which first became effective as of October 1, 2019, provides for a series of 3 -month offering periods, commencing on the first day and ending on the last trading day of each calendar quarter, for the purchase of the Company's common stock by participating employees. The purchase price of the shares has been set at 95 % of the fair market value of the Company's common stock on the last trading day of the offering period. A total of 750,000 common shares has been reserved for issuance under the 2019 ESPP. The 2019 ESPP will continue until September 30, 2029, or, if earlier, until all of the shares of common stock allocated to the 2019 ESPP have been purchased. Funding for the purchase of common stock is from employee and Company contributions. In 2020, the Company recorded $ 40 of expense $ 30 net of tax, for the employee stock purchase plan. In 2019, the Company recorded $ 23 of expense, $ 1 net of tax, for the employee stock purchase plan. In 2018, the Company recorded $ 39 of expense, $ 29 net of tax, for the employee stock purchase plan. There was no unrecognized compensation expense as of December 31, 2020, 2019 and 2018 for the Employee Stock Purchase Plans. Stock Repurchase Plan On January 27, 2020, the Company’s Board of Directors approved a plan to repurchase up to one million shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the repurchase plan represents approximately 4 % of the Company’s outstanding shares. The Company is not obligated to purchase shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. At the time it approved the new plan, the Board also terminated a similar program that had been adopted in 2001. At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program. The Company has repurchased 221,912 shares of common stock under the 2020 plan. NOTE 9 - Employee Benefit Plans The Company provides a contributory trusteed 401(k) deferred compensation and profit sharing plan, which covers substantially all employees. The Company agrees to match certain employee contributions under the 401(k) portion of the plan, while profit sharing contributions are discretionary and are subject to determination by the Board of Directors. Company contributions were $ 1,956 , $ 1,755 , and $ 1,438 for 2020, 2019, and 2018, respectively. 87 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 9 – Employee Benefit Plans (continued) The Company self-insures employee health benefits. Stop loss insurance covers annual losses exceeding $ 175 per covered family. Management’s policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. Charges to earnings were $ 5,234 , $ 5,495 , and $ 3,724 for 2020, 2019, and 2018, respectively. The Company maintains deferred compensation plans for the benefit of certain directors and officers. Under the plans, the Company agrees in return for the directors and officers deferring the receipt of a portion of their current compensation, to pay a retirement benefit computed as the amount of the compensation deferred plus accrued interest at a variable rate. Accrued benefits payable totaled $ 2,089 and $ 2,043 at December 31, 2020 and 2019. Deferred compensation expense was $ 304 , $ 243 , and $ 324 for 2020, 2019, and 2018, respectively. In conjunction with the plans, the Company purchased life insurance on certain directors and officers. Postretirement Medical and Life Benefit Plan The Company has an unfunded postretirement benefit plan covering substantially all of its employees. The medical plan is contributory with the participants’ contributions adjusted annually; the life insurance plans are noncontributory. Changes in Accumulated Postretirement Benefit Obligations: 2020 2019 Obligation at the Beginning of Year $ 1,498 $ 1,154 Unrecognized Loss (Gain) 114 296 Components of Net Periodic Postretirement Benefit Cost Service Cost 110 83 Interest Cost 41 43 Net Expected Benefit Payments ( 96 ) ( 92 ) Amendments ( 33 ) 14 Obligation at End of Year $ 1,634 $ 1,498 Components of Postretirement Benefit Expense: 2020 2019 2018 Service Cost $ 110 $ 83 $ 69 Interest Cost 41 43 34 Amortization of Prior Service Costs 2 — — Amortization of Unrecognized Net (Gain) Loss 64 37 32 Net Postretirement Benefit Expense 217 163 135 Net Gain (Loss) During Period Recognized in Other Comprehensive Income (Loss) 15 273 41 Total Recognized in Net Postretirement Benefit Expense and Other Comprehensive Income $ 232 $ 436 $ 176 Assumptions Used to Determine Net Periodic Cost and Benefit Obligations: 2020 2019 2018 Discount Rate 1.81 % 2.81 % 3.91 % Assumed Health Care Cost Trend Rates at Year-end: 2020 2019 Health Care Cost Trend Rate Assumed for Next Year 8.00 % 8.00 % Rate that the Cost Trend Rate Gradually Declines to 4.50 % 4.50 % Year that the Rate Reaches the Rate it is Assumed to Remain at 2027 2026 88 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 9 – Employee Benefit Plans (continued) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2020: One-Percentage-Point Increase One-Percentage-Point Decrease Effect on Total of Service and Interest Cost $ 15 $ ( 13 ) Effect on Postretirement Benefit Obligation $ 122 $ ( 108 ) Contributions The Company expects to contribute $ 96 to its postretirement medical and life insurance plan in 2021. Estimated Future Benefits The following postretirement benefit payments, which reflect expected future service, are expected to be paid: 2021 $ 121 2022 117 2023 130 2024 115 2025 124 2026-2030 761 Multi-Employer Pension Plan Through the acquisition of River Valley Bancorp, the Company acquired a participation in a multi-employer defined benefit pension plan. Effective December 31, 2015, the plan was frozen. Pension expense was approximately $ 42 and $ 84 during 2020 and 2019, respectively. Specific plan asset and accumulated benefit information for the Company's portion of the fund is not available. Under the Employee Retirement Income and Security Act of 1974 ("ERISA"), a contributor to a multi-employer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA, but there is no intention to withdraw. The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the "Pentegra DB Plan"), a tax-qualified defined-benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under ERISA and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $ 138,322 and $ 164,570 for the plan years ended June 30, 2019 and 2018, respectively. The Company's contributions to the Pentegra DB Plan for the fiscal year ending December 31, 2020 were not more than 5 % of total contributions to the Pentegra DB Plan for the year ending June 30, 2019. NOTE 10 - Income Taxes The provision for income taxes consists of the following: 2020 2019 2018 Current Federal $ 14,186 $ 8,263 $ 6,699 Current State 2,265 1,004 412 Deferred Federal ( 2,765 ) 3,545 2,226 Deferred State ( 852 ) ( 795 ) 191 Total $ 12,834 $ 12,017 $ 9,528 89 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 10 – Income Taxes (continued) Effective tax rates differ from the federal statutory rate of 21 % for 2020, 2019 and 2018 applied to income before income taxes due to the following: 2020 2019 2018 Statutory Rate Times Pre-tax Income $ 15,759 $ 14,960 $ 11,772 Add (Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments ( 2,681 ) ( 2,246 ) ( 2,129 ) State Income Tax, Net of Federal Tax Effect 1,116 165 476 General Business Tax Credits ( 1,085 ) ( 1,039 ) ( 914 ) Company Owned Life Insurance ( 484 ) ( 421 ) ( 260 ) Other Differences 209 598 583 Total Income Taxes $ 12,834 $ 12,017 $ 9,528 The net deferred tax liability at December 31 consists of the following: 2020 2019 Deferred Tax Assets: Allowance for Credit Losses $ 10,568 $ 3,466 Lease Liability (Operating Leases) 2,055 2,198 Unrealized Loss on Securities — — Deferred Compensation and Employee Benefits 823 787 Other-than-temporary Impairment 246 240 Accrued Expenses 1,200 1,209 Business Combination Fair Value Adjustments 777 3,475 Pension and Postretirement Plans 200 200 Other Real Estate Owned 25 48 Non-Accrual Loan Interest Income 678 554 Net Operating Loss Carryforward 1,010 786 Other 1,000 1,044 Total Deferred Tax Assets 18,582 14,007 Deferred Tax Liabilities: Depreciation ( 2,331 ) ( 2,498 ) Leasing Activities, Net ( 10,638 ) ( 10,816 ) Unrealized Gain on Securities ( 9,734 ) ( 4,302 ) FHLB Stock Dividends ( 206 ) ( 245 ) Prepaid Expenses ( 641 ) ( 629 ) Intangibles ( 1,670 ) ( 2,032 ) Deferred Loan Fees ( 730 ) ( 589 ) Mortgage Servicing Rights ( 9 ) ( 75 ) Right of Use Asset (Operating Leases) ( 2,028 ) ( 2,180 ) Other ( 230 ) ( 685 ) Total Deferred Tax Liabilities ( 28,217 ) ( 24,051 ) Valuation Allowance — — Net Deferred Tax Liability $ ( 9,635 ) $ ( 10,044 ) Under the Internal Revenue Code, through 1996 three acquired banking companies, which are now a part of the Company’s single banking subsidiary, were allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The acquired banks were formerly known as River Valley Financial Bank (acquired in March 2016), Peoples Community Bank (acquired in October 2005) and First American Bank (acquired in January 1999). Subject to certain limitations, these Banks were permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. The Banks generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the Banks were only allowed a deduction based on actual loss experience. 90 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 10 – Income Taxes (continued) Retained earnings at December 31, 2020, include approximately $ 5,095 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 2020 was approximately $ 1,070 . As of December 31, 2020, the Company had net operating loss carryforwards of $ 20,207 , which expire in years ranging from 2021 through 2039. These net operating loss carryforwards were primarily derived from the acquisition of First Security and Citizens First. Unrecognized Tax Benefits The Company had no unrecognized tax benefits as of December 31, 2020, 2019, and 2018, and did no t recognize any increase in unrecognized benefits during 2020 relative to any tax positions taken in 2020. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income tax expense accounts; no such accruals existed as of December 31, 2020, 2019, and 2018. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2015. The Company and its corporate subsidiaries doing business in Indiana file a combined Indiana unitary return, which is subject to examination for all years after 2015. NOTE 11 - Revenue Recognition The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), for the years ended December 31, 2020 and 2019. Trust and investment product fees are included in the trust and investment advisory services segment while insurance revenues are included in the insurance segment. All other revenue streams are primarily included in the banking segment. Year Ended December 31, Non-interest Income 2020 2019 2018 In-Scope of Topic 606: Trust and Investment Product Fees $ 8,005 $ 7,278 $ 6,680 Service Charges on Deposit Accounts 7,334 8,718 7,044 Insurance Revenues 8,922 8,940 8,330 Interchange Fee Income 10,529 9,450 7,278 Other Operating Income 2,361 2,073 1,720 Non-interest Income (in-scope of Topic 606) 37,151 36,459 31,052 Non-interest Income (out-of-scope of Topic 606) 17,323 9,042 6,018 Total Non-interest Income $ 54,474 $ 45,501 $ 37,070 A description of the Company's revenue streams accounted for under Topic 606 follows: Service Charges on Deposit Accounts : The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed (the point in time the Company fills the customer's request). Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Interchange Fee Income: The Company earns interchange fees from debit/credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. 91 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 11 – Revenue Recognition (continued) Trust and Investment Product Fees: The Company earns trust and investment brokerage fees from its contracts with trust and brokerage customers to manage assets for investment and/or to transact their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (trade date). Insurance Revenues : The Company earns insurance revenue from commissions derived from the sale of personal and corporate property and casualty insurance products. These commissions are primarily earned over time as the Company provides the contracted insurance product to customers. NOTE 12 – Per Share Data The computation of Basic Earnings per Share and Diluted Earnings per Share are provided below: 2020 2019 2018 Basic Earnings per Share: Net Income $ 62,210 $ 59,222 $ 46,529 Weighted Average Shares Outstanding 26,539,024 25,824,538 23,381,616 Basic Earnings per Share $ 2.34 $ 2.29 $ 1.99 Diluted Earnings per Share: Net Income $ 62,210 $ 59,222 $ 46,529 Weighted Average Shares Outstanding 26,539,024 25,824,538 23,381,616 Stock Options, Net — — — Diluted Weighted Average Shares Outstanding 26,539,024 25,824,538 23,381,616 Diluted Earnings per Share $ 2.34 $ 2.29 $ 1.99 There were no anti-dilutive shares at December 31, 2020, 2019, and 2018. There were no stock options outstanding at December 31, 2020, 2019 and 2018. Restricted stock units are participating shares and included in outstanding shares for purposes of the calculation of earnings per share. NOTE 13 - Leases At the inception of a contract, an entity should determine whether the contract contains a lease. Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of an identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset. German American has finance leases for branch offices as well as operating leases for branch offices, ATM locations and certain office equipment. The right-of-use asset is included in the 'Premises, Furniture and Equipment, Net' line of the consolidated balance sheet. The lease liability is included in the 'Accrued Interest Payable and Other Liabilities' line of the consolidated balance sheet. The Company used the implicit lease rate when determining the present value of lease payments for finance leases. The present value of lease payments for operating leases was determined using the incremental borrowing rate as of the date the Company adopted this standard. 92 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 13 – Leases (continued) The components of lease expense were as follows: December 31, 2020 December 31, 2019 Finance Lease Cost: Amortization of Right-of-Use Assets $ 210 $ 210 Interest on Lease Liabilities 363 378 Operating Lease Cost 1,781 1,807 Short-term Lease Cost 34 68 Total Lease Cost $ 2,388 $ 2,463 The weighted average lease term and discount rates were as follows: December 31, 2020 December 31, 2019 Weighted Average Remaining Lease Term: Finance Leases 11 years 12 years Operating Leases 8 years 8 years Weighted Average Discount Rate: Finance Leases 11.47 % 11.49 % Operating Leases 3.17 % 3.29 % Supplemental balance sheet information related to leases were as follows: December 31, 2020 December 31, 2019 Finance Leases Premises, Furniture and Equipment, Net $ 2,278 $ 2,488 Other Borrowings $ 3,224 $ 3,381 Operating Leases Operating Lease Right-of-Use Assets $ 8,217 $ 9,052 Operating Lease Liabilities $ 8,325 $ 9,125 Supplemental cash flow information related to leases were as follows: December 31, 2020 December 31, 2019 Cash Paid for Amounts in the Measurement of Lease Liabilities: Operating Cash Flows from Finance Leases $ 363 $ 378 Operating Cash Flows from Operating Leases 1,710 1,734 Financing Cash Flows from Finance Leases 125 109 93 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 13 – Leases (continued) The following table presents a maturity analysis of Finance and Operating Lease Liabilities: December 31, 2020 Finance Leases Operating Leases Year 1 $ 519 $ 1,535 Year 2 519 1,369 Year 3 519 1,217 Year 4 519 1,088 Year 5 519 924 Thereafter 2,953 3,413 Total Lease Payments 5,548 9,546 Less Imputed Interest ( 2,324 ) ( 1,221 ) Total $ 3,224 $ 8,325 NOTE 14 – Commitments and Off-balance Sheet Items In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and commitments to sell loans, which are not reflected in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make commitments as it uses for on-balance sheet items. The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of government sponsored entity counterparts. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments and contingent liabilities are summarized as follows, at December 31: 2020 2019 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to Fund Loans: Consumer Lines $ 15,319 $ 424,441 $ 11,637 $ 381,050 Commercial Operating Lines 33,892 447,270 47,310 384,513 Residential Mortgages 52,394 2,262 29,654 2,017 Total Commitments to Fund Loans $ 101,605 $ 873,973 $ 88,601 $ 767,580 Commitments to Sell Loans: Mandatory $ — $ — $ — $ — Non-mandatory $ 19,724 $ — $ 19,406 $ — Standby Letters of Credit $ 2,122 $ 5,463 $ 1,138 $ 6,549 The fixed rate commitments to fund loans have interest rates ranging from 3.00 % to 21.00 % and maturities ranging from less than 1 year to 32 years. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land, and other items. 94 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At December 31, 2020, the Company held $ 497 thousand in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these investment securities are reported by the Company in a Level 3 classification. Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Individually Analyzed Loans: Fair values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances includes consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor's required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return. Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized. Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification. 95 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) Assets and Liabilities Measured on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below: Fair Value Measurements at December 31, 2020 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Obligations of State and Political Subdivisions $ — $ 580,750 $ 497 $ 581,247 MBS/CMO — 548,307 — 548,307 US Gov't Sponsored Entities & Agencies — 88,298 — 88,298 Total Securities $ — $ 1,217,355 $ 497 $ 1,217,852 Loans Held-for-Sale $ — $ 16,904 $ — $ 16,904 Derivative Assets $ — $ 8,806 $ — $ 8,806 Derivative Liabilities $ — $ 9,353 $ — $ 9,353 Fair Value Measurements at December 31, 2019 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Obligations of State and Political Subdivisions $ — $ 320,279 $ 4,021 $ 324,300 MBS/CMO — 530,525 — 530,525 US Gov't Sponsored Entities & Agencies — — — — Total Securities $ — $ 850,804 $ 4,021 $ 854,825 Loans Held-for-Sale $ — $ 17,713 $ — $ 17,713 Derivative Assets $ — $ 2,607 $ — $ 2,607 Derivative Liabilities $ — $ 2,829 $ — $ 2,829 As of December 31, 2020 and 2019, the aggregate fair value, contractual balance (including accrued interest), and gain or loss were as follows: 2020 2019 Aggregate Fair Value $ 16,904 $ 17,713 Contractual Balance 16,378 17,378 Gain (Loss) 526 335 The total amount of gains and losses from changes in fair value included in earnings for the years ended December 31, 2020, 2019 and 2018 for loans held for sale were $ 191 , $ 303 , and ($ 111 ), respectively. 96 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2020 and 2019: Obligations of State and Political Subdivisions 2020 2019 Balance of Recurring Level 3 Assets at January 1 $ 4,021 $ 4,991 Total Gains (Losses) Included in Other Comprehensive Income ( 26 ) ( 25 ) Maturities / Calls ( 3,498 ) ( 945 ) Purchases — — Balance of Recurring Level 3 Assets at December 31 $ 497 $ 4,021 Of the total gain/loss included in earnings for the years ended December 31, 2020 and 2019, ($ 26 ) and ($ 25 ) was attributable to other changes in fair value, respectively. Assets and Liabilities Measured on a Non-Recurring Basis Assets and liabilities measured at fair value on a non-recurring basis are summarized below: Fair Value Measurements at December 31, 2020 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Individually Analyzed Loans Commercial and Industrial Loans $ — $ — $ 4,985 $ 4,985 Commercial Real Estate Loans — — 8,893 8,893 Agricultural Loans — — 551 551 Home Equity Loans — — 369 369 Residential Mortgage Loans — — 75 75 Fair value for collateral dependent loans, had a carrying amount of $ 14,873 , with a valuation allowance of $ 5,657 , resulting in an increase to the provision for credit losses of $ 330 for the year ended December 31, 2020. As discussed in Note 1 - Summary of Significant Accounting Policies, the Company adopted ASC 326 on January 1, 2020. The table below is based upon previously applicable GAAP. Fair Value Measurements at December 31, 2019 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Impaired Loans Commercial and Industrial Loans $ — $ — $ 2,109 $ 2,109 Commercial Real Estate Loans — — 493 493 Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $ 5,574 with a valuation allowance of $ 2,971 , resulting in an increase to the provision for loan losses of $ 1,149 for the year ended December 31, 2019. There was no Other Real Estate carried at fair value less costs to sell at December 31, 2020 and 2019. No charge to earnings was included in the years ended December 31, 2020 and 2019. 97 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2020 and 2019: December 31, 2020 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) Individually Analyzed Loans - Commercial and Industrial Loans $ 4,985 Sales comparison approach Adjustment for physical condition of comparable properties sold 26 % - 100 % ( 61 %) Individually Analyzed Loans - Commercial Real Estate Loans $ 8,893 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 % - 100 % ( 56 %) Individually Analyzed Loans - Agricultural Loans $ 551 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 % - 96 % ( 65 %) Individually Analyzed Loans - Consumer Loans $ — Sales comparison approach Adjustment for physical condition of comparable properties sold 100 % ( 100 %) Individually Analyzed Loans - Home Equity Loans $ 369 Sales comparison approach Adjustment for physical condition of comparable properties sold 9 % - 9 % ( 9 %) Individually Analyzed Loans - Residential Mortgage Loans $ 75 Sales comparison approach Adjustment for physical condition of comparable properties sold 43 % - 97 % ( 67 %) December 31, 2019 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) Impaired Loans - Commercial and Industrial Loans $ 2,109 Sales comparison approach Adjustment for physical condition of comparable properties sold 29 % - 100 % ( 64 %) Impaired Loans - Commercial Real Estate Loans $ 493 Sales comparison approach Adjustment for physical condition of comparable properties sold 47 % - 91 % ( 64 %) The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending December 31, 2020 and 2019. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the tables. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision. In accordance with the adoption of ASU 2016-01, the table below for December 31, 2020 and 2019, present the fair values measured using an exit price notion. 98 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) Fair Value Measurements at December 31, 2020 Using Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Short-term Investments $ 345,748 $ 57,972 $ 287,776 $ — $ 345,748 Interest Bearing Time Deposits with Banks 1,241 — 1,241 — 1,241 Loans, Net 3,026,340 — — 3,032,690 3,032,690 Accrued Interest Receivable 20,278 — 6,137 14,141 20,278 Financial Liabilities: Demand, Savings, and Money Market Deposits ( 3,612,078 ) ( 3,612,078 ) — — ( 3,612,078 ) Time Deposits ( 494,452 ) — ( 495,171 ) — ( 495,171 ) Short-term Borrowings ( 52,905 ) — ( 52,905 ) — ( 52,905 ) Long-term Debt ( 141,624 ) — ( 88,342 ) ( 54,960 ) ( 143,302 ) Accrued Interest Payable ( 1,084 ) — ( 1,049 ) ( 35 ) ( 1,084 ) Fair Value Measurements at December 31, 2019 Using Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Short-term Investments $ 103,884 $ 59,971 $ 43,913 $ — $ 103,884 Interest Bearing Time Deposits with Banks 1,985 — 1,985 — 1,985 Loans, Net 3,058,211 — — 3,056,521 3,056,521 Accrued Interest Receivable 18,425 — 4,400 14,025 18,425 Financial Liabilities: Demand, Savings, and Money Market Deposits ( 2,798,625 ) ( 2,798,625 ) — — ( 2,798,625 ) Time Deposits ( 631,396 ) — ( 624,666 ) — ( 624,666 ) Short-term Borrowings ( 167,736 ) ( 128,311 ) ( 39,425 ) — ( 167,736 ) Long-term Debt ( 181,950 ) — ( 127,174 ) ( 55,234 ) ( 182,408 ) Accrued Interest Payable ( 2,442 ) — ( 2,376 ) ( 66 ) ( 2,442 ) Note 16 - Segment Information The Company’s operations include three primary segments: core banking, wealth management services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary market. The wealth management segment involves providing trust, investment advisory, brokerage and retirement planning services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets. The core banking segment is comprised by the Company’s banking subsidiary, German American Bank, which operated through 73 banking offices at December 31, 2020. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The wealth management segment’s revenues are comprised primarily of fees generated by the trust operations of the Company's banking subsidiary and by German American Investment Services, Inc. These fees are derived by providing trust, investment advisory, brokerage and retirement planning services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment. The following segment financial information has been derived from the internal financial statements of the Company which are used by management to monitor and manage financial performance. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments. 99 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 16 – Segment Information (continued) Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2020 Net Interest Income $ 157,936 $ 18 $ 11 $ ( 2,722 ) $ 155,243 Net Gains on Sales of Loans 9,908 — — — 9,908 Net Gains on Securities 4,081 — — — 4,081 Trust and Investment Product Fees 3 8,002 — — 8,005 Insurance Revenues 12 15 8,895 — 8,922 Noncash Items: Provision for Credit Losses 17,550 — — — 17,550 Depreciation and Amortization 9,012 28 68 321 9,429 Income Tax Expense (Benefit) 13,758 452 536 ( 1,912 ) 12,834 Segment Profit (Loss) 60,812 1,355 1,655 ( 1,612 ) 62,210 Segment Assets at December 31, 2020 4,963,655 4,480 10,263 ( 821 ) 4,977,577 Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2019 Net Interest Income $ 147,735 $ 15 $ 18 $ ( 2,543 ) $ 145,225 Net Gains on Sales of Loans 4,633 — — — 4,633 Net Gains on Securities 1,248 — — — 1,248 Trust and Investment Product Fees 4 7,274 — — 7,278 Insurance Revenues 25 28 8,887 — 8,940 Noncash Items: Provision for Loan Losses 5,325 — — — 5,325 Depreciation and Amortization 8,265 6 71 288 8,630 Income Tax Expense (Benefit) 12,724 469 511 ( 1,687 ) 12,017 Segment Profit (Loss) 58,793 1,366 1,538 ( 2,475 ) 59,222 Segment Assets at December 31, 2019 4,381,945 3,670 9,080 2,977 4,397,672 Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2018 Net Interest Income $ 115,710 $ 5 $ 13 $ ( 1,118 ) $ 114,610 Net Gains on Sales of Loans 3,004 — — — 3,004 Net Gains on Securities 706 — — — 706 Trust and Investment Product Fees 4 6,676 — — 6,680 Insurance Revenues 17 40 8,273 — 8,330 Noncash Items: Provision for Loan Losses 2,070 — — — 2,070 Depreciation and Amortization 5,847 5 76 256 6,184 Income Tax Expense (Benefit) 9,671 437 440 ( 1,020 ) 9,528 Segment Profit (Loss) 46,075 1,263 1,312 ( 2,121 ) 46,529 Segment Assets at December 31, 2018 3,926,242 2,658 11,368 ( 11,178 ) 3,929,090 100 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 17 - Parent Company Financial Statements The condensed financial statements of German American Bancorp, Inc. are presented below: CONDENSED BALANCE SHEETS December 31, 2020 2019 ASSETS Cash $ 47,533 $ 42,738 Other Investments 353 353 Investment in Subsidiary Bank 614,661 577,332 Investment in Non-banking Subsidiaries 5,956 5,904 Other Assets 17,247 7,954 Total Assets $ 685,750 $ 634,281 LIABILITIES Borrowings $ 55,400 $ 54,996 Other Liabilities 5,641 5,465 Total Liabilities 61,041 60,461 SHAREHOLDERS’ EQUITY Common Stock 26,502 26,671 Additional Paid-in Capital 274,385 278,954 Retained Earnings 288,447 253,090 Accumulated Other Comprehensive Income (Loss) 35,375 15,105 Total Shareholders’ Equity 624,709 573,820 Total Liabilities and Shareholders’ Equity $ 685,750 $ 634,281 101 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 17 – Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 2020 2019 2018 INCOME Dividends from Subsidiaries Bank $ 40,000 $ 45,000 $ 7,000 Non-bank 1,580 1,400 1,200 Interest Income 118 102 38 Other Income (Loss) 25 ( 2 ) ( 13 ) Total Income 41,723 46,500 8,225 EXPENSES Salaries and Employee Benefits 498 530 576 Professional Fees 564 1,685 2,079 Occupancy and Equipment Expense 7 7 7 Interest Expense 2,907 2,781 1,279 Other Expenses 1,286 975 813 Total Expenses 5,262 5,978 4,754 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 36,461 40,522 3,471 Income Tax Benefit 1,922 1,712 1,042 INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 38,383 42,234 4,513 Equity in Undistributed Income of Subsidiaries 23,827 16,988 42,016 NET INCOME 62,210 59,222 46,529 Other Comprehensive Income: Changes in Unrealized Gain (Loss) on Securities, Available-for-Sale 20,270 22,432 ( 4,424 ) Changes in Unrecognized Loss in Postretirement Benefit Obligation, Net — ( 229 ) ( 54 ) TOTAL COMPREHENSIVE INCOME $ 82,480 $ 81,425 $ 42,051 102 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 17 – Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 62,210 $ 59,222 $ 46,529 Adjustments to Reconcile Net Income to Net Cash from Operations Change in Other Assets ( 8,575 ) 31 1,588 Change in Other Liabilities ( 142 ) ( 406 ) ( 163 ) Equity Based Compensation 1,051 1,287 1,355 Excess Tax Benefit from Restricted Share Grant 3 25 32 Equity in Excess Undistributed Income of Subsidiaries ( 23,827 ) ( 16,988 ) ( 42,016 ) Net Cash from Operating Activities 30,720 43,171 7,325 CASH FLOWS FROM INVESTING ACTIVITIES Cash Used for Business Acquisitions — ( 14,958 ) ( 25,160 ) Net Cash from Investing Activities — ( 14,958 ) ( 25,160 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long-term Debt — 39,213 25,000 Repayment of Long-term Debt — ( 25,000 ) — Issuance (Retirement) of Common Stock ( 5,789 ) — — Dividends Paid ( 20,136 ) ( 17,556 ) ( 14,074 ) Net Cash from Financing Activities ( 25,925 ) ( 3,343 ) 10,926 Net Change in Cash and Cash Equivalents 4,795 24,870 ( 6,909 ) Cash and Cash Equivalents at Beginning of Year 42,738 17,868 24,777 Cash and Cash Equivalents at End of Year $ 47,533 $ 42,738 $ 17,868 NOTE 18 - Business Combinations, Goodwill and Intangible Assets Business Combinations Citizens First Acquisition Effective July 1, 2019, the Company acquired Citizens First Corporation (“Citizens First”) and its subsidiary, Citizens First Bank, Inc., pursuant to an Agreement and Plan of Reorganization dated February 22, 2019. The acquisition was accomplished by the merger of Citizens First with and into the Company, immediately followed by the merger of Citizens First Bank with and into the Company’s subsidiary bank, German American Bank. Citizens First Bank operated 8 banking offices in Barren, Hart, Simpson and Warren Counties in Kentucky. Citizens First's consolidated assets and equity (unaudited) as of July 1, 2019 totaled $ 456.0 million and $ 49.8 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. In accordance with ASC 805, the Company expensed approximately $ 3.3 million of direct acquisition costs and recorded $ 17.7 million of goodwill and $ 4.5 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $ 17.7 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as a part of the Citizens First acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction. 103 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) Consideration Cash for Options and Fractional Shares $ 216 Cash Consideration 15,294 Equity Instruments 50,118 Fair Value of Total Consideration Transferred $ 65,628 Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: Cash $ 21,055 Interest-bearing Time Deposits with Banks 2,231 Securities 43,839 Loans 356,970 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 2,065 Premises, Furniture & Equipment 10,772 Other Real Estate — Intangible Assets 4,547 Company Owned Life Insurance 8,796 Accrued Interest Receivable and Other Assets 3,863 Deposits - Non-interest Bearing ( 52,521 ) Deposits - Interest Bearing ( 318,966 ) FHLB Advances and Other Borrowings ( 31,068 ) Accrued Interest Payable and Other Liabilities ( 3,694 ) Total Identifiable Net Assets $ 47,889 Goodwill $ 17,739 Under the terms of the merger agreement, each Citizens First common shareholder of record at the effective time of the merger (other than those holding shares in the Citizens First Bank 401(k) Profit Sharing Plan (the "CFB 401(k) Plan")) became entitled to receive a cash payment of $ 5.80 and a 0.6629 share of common stock of the Company for each of their former shares of Citizens First common stock. In addition, as record holder of shares of Citizens First common stock held in the CFB 401(k) Plan, the plan administrator was entitled to receive a cash payment of $ 25.77 for each share held by the CFB 401(k) Plan, which amount is equal to (i) the exchange ratio multiplied by the closing trading price of the Company's common stock on June 28, 2019, plus (ii) $ 5.80 . As a result, in connection with the closing of the merger on July 1, 2019, the Company issued approximately 1,664,000 shares of its common stock to the former shareholders of Citizens First and paid cash consideration in the aggregate amount of $ 15.5 million. This acquisition is consistent with the Company's strategy to build a regional presence in central and western Kentucky. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which are loans that have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value of $ 349.9 million and unpaid principal of $ 353.3 million on the date of acquisition. The following table presents unaudited pro forma information as if the acquisition had occured on January 1, 2018 after giving effect to certain adjustments. The unaudited pro forma information for the years ended December 31, 2019 and 2018 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date. 104 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) Unaudited Pro Forma Year Ended 12/31/2019 Unaudited Pro Forma Year Ended 12/31/2018 Net Interest Income $ 155,439 $ 134,129 Non-interest Income 46,857 40,678 Total Revenue 202,296 174,807 Provision for Loan Losses Expense 5,648 2,070 Non-interest Expense 116,083 107,995 Income Before Income Taxes 80,565 64,742 Income Tax Expense 14,358 11,281 Net Income $ 66,207 $ 53,461 Earnings Per Share and Diluted Earnings Per Share $ 2.48 $ 2.13 The above pro forma financial information includes approximately $ 6,624 of net income and $ 18,436 of total revenue related to the operations of Citizens First during the year ended 2019. The above pro forma financial information related to 2019 excludes non-recurring merger costs that totaled $ 3,205 on a pre-tax basis for the year ended December 2019. The above pro forma financial information excludes the Citizens First provision for loan loss recognized during the year ended 2019. Under acquisition accounting treatment, loans are recorded at fair value which includes a credit risk component, and therefore the provision for loan loss recognized during the year ended December 31, 2018 was presumed to not be necessary. First Security Acquisition Effective October 15, 2018, the Company acquired First Security, Inc. ("First Security") and its subsidiary, First Security Bank, Inc., pursuant to an Agreement and Plan of Reorganization dated May 22, 2018. The acquisition was accomplished by the merger of First Security with and into the Company, immediately followed by the merger of First Security Bank with and into the Company's bank subsidiary, German American Bank. First Security Bank operated 11 banking offices in Owensboro, Bowling Green, Franklin and Lexington, Kentucky and in Evansville and Newburgh, Indiana. First Security's consolidated assets and equity (unaudited) as of October 14, 2018 totaled $ 563.0 million and $ 58.3 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. In accordance with ASC 805, the Company has expensed approximately $ 4.0 million of direct acquisition costs and recorded $ 43.2 million of goodwill and $ 6.1 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $ 43.2 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as a part of the First Security acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction. 105 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) Consideration Cash for Options and Fractional Shares $ 132 Cash Consideration 31,039 Equity Instruments 64,898 Fair Value of Total Consideration Transferred $ 96,069 Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: Cash $ 13,605 Interest-bearing Time Deposits with Banks 250 Securities 109,580 Loans 390,106 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 2,607 Premises, Furniture & Equipment 11,149 Other Real Estate 468 Intangible Assets 6,139 Company Owned Life Insurance 13,135 Accrued Interest Receivable and Other Assets 6,126 Deposits - Non-interest Bearing ( 66,112 ) Deposits - Interest Bearing ( 358,285 ) FHLB Advances and Other Borrowings ( 73,275 ) Accrued Interest Payable and Other Liabilities ( 2,618 ) Total Identifiable Net Assets $ 52,875 Goodwill $ 43,194 Under the terms of the merger agreement, the Company issued approximately 1,988,000 shares of its common stock to the former shareholders of First Security. Each First Security common shareholder of record at the effective time of the merger (other than those holding shares in the First Security, Inc. 401k and Employee Stock Ownership Plan (the "First Security KSOP")) became entitled to receive 0.7982 shares of common stock of the Company for each of their former shares of First Security common stock. In connection with the closing of the merger, the Company paid to First Security's shareholders of record at the close of business on October 14, 2018, cash consideration of $ 12.00 per First Security share, other than First Security KSOP shares (an aggregate of $ 29,886 to shareholders), and cash consideration of $ 40.00 per First Security KSOP share (an aggregate of $ 1,153 ), and the Company paid approximately $ 124 to persons who held options to purchase First Security common stock (all of which rights were canceled at the effective time of the merger and were not assumed by the Company). This acquisition was consistent with the Company’s strategy to build a regional presence in Southern Indiana and Kentucky. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which are loans that have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value of $ 382.4 million and unpaid principal of $ 385.4 million on the date of acquisition. Branch Acquisition 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. At the time of closing, German American Bank 106 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) 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. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. This branch acquisition was consistent with the Company's strategy to continue building its regional presence in Southern Indiana. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. In accordance with ASC 805, the Company has expensed approximately $ 691 of direct acquisition costs and recorded $ 7.0 million of goodwill and $ 3.5 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $ 7.0 million is tax deductible and will be amortized over 15 years. The following table summarizes the fair value of the total cash received as part of the branch acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction. Total Cash Received from First Financial $ 41,826 Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: Cash $ 756 Loans 116,305 Premises, Furniture & Equipment 5,666 Intangible Assets 3,475 Accrued Interest Receivable and Other Assets 780 Deposits - Non-interest Bearing ( 39,607 ) Deposits - Interest Bearing ( 136,096 ) Accrued Interest Payable and Other Liabilities ( 70 ) Total Identifiable Net Assets $ ( 48,791 ) Goodwill $ 6,965 Goodwill The changes in the carrying amount of goodwill for the periods ended December 31, 2020, 2019, and 2018, were classified as follows: 2020 2019 2018 Beginning of Year $ 121,306 $ 103,681 $ 54,058 Acquired Goodwill 650 17,625 49,623 Impairment — — — End of Year $ 121,956 $ 121,306 $ 103,681 Of the $ 121,956 carrying amount of goodwill, $ 120,624 is allocated to the core banking segment, and $ 1,332 is allocated to the insurance segment for the period ended December 31, 2020. During 2020, the Company finalized valuation estimates for the Citizens First acquisition and recorded $ 650 of additional goodwill. Of the $ 121,306 carrying amount of goodwill, $ 119,974 is allocated to the core banking segment, and $ 1,332 is allocated to the insurance segment for the period ended December 31, 2019. Of the $ 103,681 carrying amount of goodwill, $ 102,349 is allocated to the core banking segment and $ 1,332 is allocated to the insurance segment for the period ended December 31, 2018. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2020, the Company’s reporting units had positive equity, and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. The 107 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Acquired Intangible Assets Acquired intangible assets were as follows as of year end: 2020 Gross Amount Accumulated Amortization Core Banking Core Deposit Intangible $ 25,780 $ ( 18,619 ) Branch Acquisition Intangible 257 ( 257 ) Insurance Customer List 5,408 ( 5,318 ) Total $ 31,445 $ ( 24,194 ) 2019 Gross Amount Accumulated Amortization Core Banking Core Deposit Intangible $ 25,780 $ ( 15,110 ) Branch Acquisition Intangible 257 ( 257 ) Insurance Customer List 5,408 ( 5,288 ) Total $ 31,445 $ ( 20,655 ) Amortization Expense was $ 3,539 , $ 3,721 and $ 1,752 , for 2020, 2019 and 2018. Estimated amortization expense for each of the next five years is as follows: 2021 $ 2,745 2022 1,990 2023 1,337 2024 751 2025 337 NOTE 19 – Other Comprehensive Income (Loss) The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2020 and 2019, net of tax: December 31, 2020 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance $ 15,673 $ ( 568 ) $ 15,105 Other Comprehensive Income (Loss) Before Reclassification 23,494 — 23,494 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 3,224 ) — ( 3,224 ) Net Current Period Other Comprehensive Income (Loss) 20,270 — 20,270 Ending Balance $ 35,943 $ ( 568 ) $ 35,375 108 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 19 – Other Comprehensive Income (Loss) (continued) December 31, 2019 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance $ ( 6,759 ) $ ( 339 ) $ ( 7,098 ) Other Comprehensive Income (Loss) Before Reclassification 23,418 ( 256 ) 23,162 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 986 ) 27 ( 959 ) Net Current Period Other Comprehensive Income (Loss) 22,432 ( 229 ) 22,203 Ending Balance $ 15,673 $ ( 568 ) $ 15,105 The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2020: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 4,081 Net Gain (Loss) on Securities ( 857 ) Income Tax Expense 3,224 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ — Salaries and Employee Benefits — Income Tax Expense — Net of Tax Total Reclassifications for the Period $ 3,224 The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2019: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 1,248 Net Gain (Loss) on Securities ( 262 ) Income Tax Expense 986 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ ( 37 ) Salaries and Employee Benefits 10 Income Tax Expense ( 27 ) Net of Tax Total Reclassifications for the Period $ 959 109 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 19 – Other Comprehensive Income (Loss) (continued) The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2018: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 706 Net Gain (Loss) on Securities ( 148 ) Income Tax Expense 558 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ ( 32 ) Salaries and Employee Benefits 9 Income Tax Expense ( 23 ) Net of Tax Total Reclassifications for the Period $ 535 Note 20 - Quarterly Financial Data (Unaudited) The following table represents selected quarterly financial data for the Company: Interest Income Net Interest Income Net Income Basic Earnings per Share Diluted Earnings per Share 2020 First Quarter $ 43,571 $ 36,256 $ 12,472 $ 0.47 $ 0.47 Second Quarter 43,541 38,459 14,255 0.54 0.54 Third Quarter 42,113 38,388 14,593 0.55 0.55 Fourth Quarter 45,144 42,140 20,890 0.79 0.79 2019 First Quarter $ 41,189 $ 33,591 $ 15,067 $ 0.60 $ 0.60 Second Quarter 41,036 33,641 15,271 0.61 0.61 Third Quarter 46,911 38,578 13,064 0.49 0.49 Fourth Quarter 47,338 39,415 15,820 0.59 0.59 110 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable.