NATIONAL HEALTHCARE CORP 10-Q

Item 1. Financial Statements.     NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Operations (in thousands, except share and per share amounts) (unaudited)       Three Months Ended September 30     Nine Months Ended September 30       2020     2019     2020     2019                                     Revenues and grant income:                                 Net patient revenues   $ 227,383     $ 235,090     $ 697,149     $ 706,465   Other revenues     11,111       11,977       34,463       36,038   Government stimulus income     12,132       -       36,780       -   Net operating revenues and grant income     250,626       247,067       768,392       742,503                                     Cost and expenses:                                 Salaries, wages, and benefits     151,564       152,175       455,947       441,441   Other operating     70,887       66,730       213,416       203,760   Facility rent     10,320       10,167       30,972       30,602   Depreciation and amortization     10,548       10,663       31,531       31,515   Interest     285       764       1,150       2,644   Total costs and expenses     243,604       240,499       733,016       709,962                                     Income from operations     7,022       6,568       35,376       32,541                                     Other income:                                 Non–operating income     6,478       6,663       20,578       20,936   Unrealized gains/(losses) on marketable equity securities     ( 241 )     9,312       ( 40,580 )     16,096                                     Income before income taxes     13,259       22,543       15,374       69,573   Income tax provision     ( 391 )     ( 3,167 )     ( 800 )     ( 15,284 ) Net income     12,868       19,376       14,574       54,289   Net (income)/loss attributable to noncontrolling interest     ( 19 )     85       ( 253 )     152                                     Net income attributable to National HealthCare Corporation   $ 12,849     $ 19,461     $ 14,321     $ 54,441                                     Earnings per share attributable to National HealthCare Corporation stockholders:                                 Basic   $ 0.84     $ 1.27     $ 0.94     $ 3.57   Diluted   $ 0.84     $ 1.27     $ 0.93     $ 3.55                                     Weighted average common shares outstanding:                           Basic     15,310,754       15,275,709       15,304,235       15,267,250   Diluted     15,371,311       15,373,617       15,368,775       15,350,308                                     Dividends declared per common share   $ 0.52     $ 0.52     $ 1.56     $ 1.54     The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   3 Table of Contents     NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Comprehensive Income (unaudited – in thousands)       Three Months Ended September 30     Nine Months Ended September 30       2020     2019     2020     2019                                     Net income   $ 12,868     $ 19,376     $ 14,574     $ 54,289                                     Other comprehensive income:                                 Unrealized gains on investments in restricted marketable debt securities     632       855       2,883       7,049   Reclassification adjustment for realized gains on sales of restricted marketable debt securities     ( 122 )     ( 117 )     ( 135 )     ( 117 ) Income tax expense related to items of other comprehensive income     ( 107 )     ( 155 )     ( 577 )     ( 1,456 ) Other comprehensive income, net of tax     403       583       2,171       5,476                                     Net (income)/loss attributable to noncontrolling interest     ( 19 )     85       ( 253 )     152                                     Comprehensive income attributable to National HealthCare Corporation   $ 13,252     $ 20,044     $ 16,492     $ 59,917     The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   4 Table of Contents     NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Balance Sheets (in thousands)       September 30, 2020     December 31, 2019       unaudited           Assets                 Current Assets:                 Cash and cash equivalents   $ 183,765     $ 50,334   Restricted cash and cash equivalents, current portion     10,623       8,944   Marketable equity securities     111,873       152,453   Restricted marketable debt securities, current portion     19,249       20,576   Accounts receivable     84,595       92,975   Inventories     7,188       7,441   Prepaid expenses and other assets     3,682       6,635   Notes receivable, current portion     1,253       1,695   Total current assets     422,228       341,053                     Property and Equipment:                 Property and equipment, at cost     1,041,832       1,017,204   Accumulated depreciation and amortization     ( 511,216 )     ( 481,774 ) Net property and equipment     530,616       535,430                     Other Assets:                 Restricted cash and cash equivalents, less current portion     1,730       1,732   Restricted marketable debt securities, less current portion     122,791       126,830   Deposits and other assets     5,503       5,124   Operating lease right-of-use assets     185,003       202,909   Goodwill     21,341       20,995   Notes receivable, less current portion     12,679       13,384   Investments in unconsolidated companies     36,888       39,191   Total other assets     385,935       410,165   Total assets   $ 1,338,779     $ 1,286,648     The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   5 Table of Contents   NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Balance Sheets (continued) (in thousands, except share and per share amounts)       September 30, 2020     December 31, 2019       unaudited           Liabilities and Stockholders’ Equity                 Current Liabilities:                 Trade accounts payable   $ 19,890     $ 18,903   Finance lease obligations, current portion     4,357       4,166   Operating lease liabilities, current portion     25,146       24,243   Accrued payroll     60,690       69,826   Amounts due to third party payors     15,642       15,108   Accrued risk reserves, current portion     29,873       29,520   Other current liabilities     23,431       15,029   Provider relief funds     21,404       -   Contract liabilities     51,253       -   Dividends payable     7,987       7,968   Current maturities of long-term debt     -       10,000   Total current liabilities     259,673       194,763                     Finance lease obligations, less current portion     11,671       14,963   Operating lease liabilities, less current portion     159,857       178,666   Accrued risk reserves, less current portion     76,080       66,491   Refundable entrance fees     7,462       7,455   Deferred income taxes     14,185       24,012   Other noncurrent liabilities     32,674       21,229   Total liabilities     561,602       507,579                     Equity:                 Common stock, $ .01 par value; 45,000,000 shares authorized; 15,359,488 and 15,332,206 shares, respectively, issued and outstanding     153       153   Capital in excess of par value     225,616       222,787   Retained earnings     543,460       553,093   Accumulated other comprehensive income     4,731       2,560   Total National HealthCare Corporation stockholders’ equity     773,960       778,593   Noncontrolling interest     3,217       476   Total equity     777,177       779,069   Total liabilities and equity   $ 1,338,779     $ 1,286,648      The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   6 Table of Contents     NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Cash Flows (unaudited – in thousands)         Nine Months Ended September 30       2020     2019   Cash Flows From Operating Activities:                 Net income   $ 14,574     $ 54,289   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation and amortization     31,531       31,515   Equity in earnings of unconsolidated investments     ( 8,448 )     ( 7,548 ) Distributions from unconsolidated investments     10,050       3,884   Unrealized (gains)/losses on marketable equity securities     40,580       ( 16,096 ) Gains on sale of restricted marketable debt securities     ( 135 )     ( 117 ) Gains on acquisitions of equity method investments     ( 1,707 )     ( 1,975 ) Deferred income taxes     ( 10,405 )     6,187   Stock–based compensation     1,807       1,448   Changes in operating assets and liabilities:                 Accounts receivable     9,604       5,234   Income tax receivable     -       ( 2,330 ) Inventories     344       ( 304 ) Prepaid expenses and other assets     2,992       169   Trade accounts payable     207       ( 1,066 ) Accrued payroll     ( 9,545 )     ( 8,121 ) Amounts due to third party payors     388       ( 197 ) Accrued risk reserves     9,977       2,241   Provider relief funds     21,404       -   Contract liabilities     51,253       -   Other current liabilities     7,984       8,345   Other noncurrent liabilities     11,445       ( 674 ) Net cash provided by operating activities     183,900       74,884   Cash Flows From Investing Activities:                 Purchases of property and equipment     ( 17,717 )     ( 19,670 ) Acquisition of equity method investment, net of cash acquired     ( 6,648 )     ( 15,589 ) Investments in unconsolidated companies     ( 305 )     ( 197 ) Investments in notes receivable     ( 425 )     ( 5,462 ) Collections of notes receivable     1,572       1,010   Purchases of restricted marketable debt securities     ( 19,754 )     ( 11,187 ) Proceeds from sale of restricted marketable debt securities     28,004       41,272   Net cash used in investing activities     ( 15,273 )     ( 9,823 ) Cash Flows From Financing Activities:                 Borrowings under credit facility     40,000       -   Repayments under credit facility     ( 50,000 )     ( 25,000 ) Principal payments under finance lease obligations     ( 3,101 )     ( 2,920 ) Dividends paid to common stockholders     ( 23,935 )     ( 23,240 ) Noncontrolling interest contributions/(distributions)     2,488       ( 566 ) Issuance of common shares     1,075       1,383   Repurchase of common shares     ( 53 )     ( 872 ) Entrance fee deposits/(refunds)     7       ( 684 ) Net cash used in financing activities     ( 33,519 )     ( 51,899 ) Net Increase in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents     135,108       13,162   Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period     61,010       54,920   Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period   $ 196,118     $ 68,082                     Balance Sheet Classifications:                 Cash and cash equivalents   $ 183,765     $ 59,261   Restricted cash and cash equivalents     12,353       8,821   Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents   $ 196,118     $ 68,082       The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   7 Table of Contents   NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share and per share amounts) (unaudited)       Common Stock     Capital in Excess of     Retained Earnings     Accumulated Other Comprehensive     Non- controlling     Total Stockholders’       Shares     Amount     Par Value     Earnings     Income (Loss)     Interest     Equity   Balance at January 1, 2020     15,332,206     $ 153     $ 222,787     $ 553,093     $ 2,560     $ 476     $ 779,069   Net income/(loss)     –       –       –       ( 26,852 )     –       36       ( 26,816 ) Noncontrolling interest contributions     –       –       –       –       –       281       281   Other comprehensive loss     –       –       –       –       ( 2,012 )     –       ( 2,012 ) Stock–based compensation     –       –       466       –       –       –       466   Shares sold – options exercised     15,006       –       400       –       –       –       400   Repurchase of common shares     ( 611 )     –       ( 53 )     –       –       –       ( 53 ) Dividends declared to common stockholders ($0.52 per share)     –       –       –       ( 7,980 )     –       –       ( 7,980 ) Balance at March 31, 2020     15,346,601     $ 153     $ 223,600     $ 518,261     $ 548     $ 793       743,355                                                             Net income     –       –       –       28,324       –       198       28,522   Noncontrolling interest contributions     –       –       –       –       –       244       244   Other comprehensive income     –       –       –       –       3,780       –       3,780   Stock–based compensation     –       –       823       –       –       –       823   Shares sold – options exercised     11,073       –       549       –       –       –       549   Repurchase of common shares     ( 186 )     –       -       –       –       –       -   Dividends declared to common stockholders ($0.52 per share)     -       –       -       ( 7,986 )     –       –       ( 7,986 ) Balance at June 30, 2020     15,357,488     $ 153     $ 224,972     $ 538,599     $ 4,328     $ 1,235     $ 769,287                                                             Net income     –       –       –       12,849       –       19       12,868   Noncontrolling interest contributions     –       –       –       –       –       1,963       1,963   Other comprehensive income     –       –       –       –       403       –       403   Stock–based compensation     –       –       518       –       –       –       518   Shares sold – options exercised     2,000       –       126       –       –       –       126   Dividends declared to common stockholders ($0.52 per share)     –       –       –       ( 7,988 )     –       –       ( 7,988 ) Balance at September 30, 2020     15,359,488     $ 153     $ 225,616     $ 543,460     $ 4,731     $ 3,217     $ 777,177     8 Table of Contents   NATIONAL HEALTHCARE CORPORATION Interim Condensed Consolidated Statements of Stockholders’ Equity (con’t) (in thousands, except share and per share amounts) (unaudited)       Common Stock     Capital in Excess of     Retained     Accumulated Other Comprehensive     Non- controlling     Total Stockholders’       Shares     Amount     Par Value     Earnings     Income (Loss)     Interest     Equity   Balance at January 1, 2019     15,255,002     $ 153     $ 219,435     $ 516,435     $ ( 2,745 )   $ 1,179     $ 734,457   Net income/(loss)     –       –       –       21,269       –       ( 38 )     21,231   Other comprehensive income     –       –       –       –       2,548       –       2,548   Stock–based compensation     –       –       424       –       –       –       424   Shares sold – options exercised     59,384       –       579       –       –       –       579   Repurchase of common shares     ( 10,396 )     –       ( 872 )     –       –       –       ( 872 ) Dividends declared to common stockholders ($0.50 per share)     –       –       –       ( 7,652 )     –       –       ( 7,652 ) Balance at March 31, 2019     15,303,990     $ 153     $ 219,566     $ 530,052     $ ( 197 )   $ 1,141       750,715                                                             Net income/(loss)     –       –       –       13,711       –       ( 29 )     13,682   Noncontrolling interest distributions     –       –       –       –       –       ( 17 )     ( 17 ) Other comprehensive income     –       –       –       –       2,345       –       2,345   Stock–based compensation     –       –       684       –       –       –       684   Shares sold – options exercised     14,800       –       804       –       –       –       804   Dividends declared to common stockholders ($0.52 per share)     –       –       –       ( 7,966 )     –       –       ( 7,966 ) Balance at June 30, 2019     15,318,790     $ 153     $ 221,054     $ 535,797     $ 2,148     $ 1,095     $ 760,247                                                             Net income/(loss)     –       –               19,461       –       ( 85 )     19,376   Noncontrolling interest distributions     –       –       –       –       –       ( 549 )     ( 549 ) Other comprehensive income     –       –       –       –       583       –       583   Stock–based compensation     –       –       340       –       –       –       340   Dividends declared to common stockholders ($0.52 per share)     –       –       –       ( 7,966 )     –       –       ( 7,966 ) Balance at September 30, 2019     15,318,790     $ 153     $ 221,394     $ 547,292     $ 2,731     $ 461     $ 772,031     The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.   9 Table of Contents   NATIONAL HEALTHCARE CORPORATION Notes to Interim Condensed Consolidated Financial Statements September 30, 2020 (unaudited)           Note 1 – Description of Business   National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of September 30, 2020, we operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,633 licensed beds, 24 assisted living facilities, five independent living facilities, one behavioral health hospital, and 35 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a noncontrolling ownership interest in a hospice care business that services NHC-owned skilled nursing facilities and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing and assisted living facilities. We operate in 10 states and are located primarily in the southeastern United States.         Note 2 – Summary of Significant Accounting Policies   The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles (“GAAP”), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2019 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by U.S. GAAP. Our audited December 31, 2019 consolidated financial statements are available at our web site: www.nhccare.com .   Basis of Presentation   The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that is attributable to NHC and the noncontrolling interest in its consolidated statements of operations.   We assume that users of these interim financial statements have read or have access to the audited December 31, 2019 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.   Estimates and Assumptions   The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period, including but not limited to, the potential future effects of the novel coronavirus (“COVID- 19” ).     Recently Adopted Accounting Guidance   In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 - 13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU No. 2016 - 13 adds to U.S. GAAP an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. The Company adopted the standard as of January 1, 2020. This standard did not have a material impact on our interim condensed consolidated financial statements; however, we did update our processes specifically in how we monitor credit related declines in market value for our available for sale marketable debt securities.    10 Table of Contents   On December 18, 2019, the FASB issued ASU No. 2019 - 12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes . This ASU is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU No. 2019 - 12 is effective for reporting periods beginning after December 15, 2020, with early adoption permitted. On January 1, 2020, the Company early adopted the provisions of ASU No. 2019 - 12. This standard did not have a material impact on our interim condensed consolidated financial statements.   Net Patient Revenues and Accounts Receivable   Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, and home health care services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third -party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.   The Company recognizes revenue as its performance obligations are completed. Routine services are treated as a single performance obligation satisfied over time as services are rendered. These routine services represent a bundle of services that are not capable of being distinct. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time when those services are rendered.  Contract liabilities are recorded for payments the Company receives in which performance obligations have not been completed.    The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third party payors. Contractual adjustments are based on contractual agreements and historical experience. The Company considers the patient's ability and intent to pay the amount of consideration upon admission. Credit losses are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. Bad debt expense was $ 1,463,000 and $ 3,538,000 for the three months and nine months ended September 30, 2020. For the three months and nine months ended September 30, 2019, bad debt expense was $ 827,000 and $ 2,866,000 , respectively. As of September 30, 2020, and December 31, 2019, the Company has recorded allowance for doubtful accounts of $ 6,295,000 and $ 4,451,000 , respectively, as our best estimate of expected losses inherent in the accounts receivable balance.   Other Revenues   Other revenues include revenues from the provision of insurance services, management and accounting services to other long–term care providers, and rental income. Our insurance revenues consist of premiums that are generally paid in advance and then amortized into income over the policy period. We charge for management services based on a percentage of net revenues. We charge for accounting services based on a monthly fee or a fixed fee per bed of the healthcare center under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements.   Government Grants   In the absence of specific guidance to account for government grants under U.S. GAAP, we have concluded to account for government grants in accordance with International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance , and as such, we recognize grant income on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.      Segment Reporting   In accordance with the provisions of Accounting Standards Codification ("ASC") 280, Segment Reporting , the Company is required to report financial and descriptive information about its reportable operating segments. The Company has two reportable operating segments: ( 1 ) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and one behavioral health hospital, and ( 2 ) homecare services. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. See Note 7 for further disclosure of the Company’s operating segments.   11 Table of Contents   Other Operating Expenses   Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance.    General and Administrative Costs   With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, excluding stock-based compensation, which were $ 10,921,000 and $ 24,535,000  for the three months and nine months ended September 30, 2020, respectively. General and administrative costs were $ 7,170,000 and $ 18,991,000 for the three months and nine months ended September 30, 2019, respectively.   Long-Term Leases   The Company’s lease portfolio primarily consists of finance and operating real estate leases for certain skilled nursing facilities, assisted and independent living facilities, homecare offices, and pharmacy warehouses. The original terms of the leases typically range from two to fifteen years. Several of the real estate leases include renewal options which vary in length and may not include specific rent renewal amounts. We determine if an arrangement is a lease at inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain.   The Company records right-of-use assets and liabilities on the interim condensed consolidated balance sheets for non-cancelable real estate operating leases with original or remaining lease terms in excess of one year. Leases with a lease term of 12 months or less at inception are not recorded on our interim condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in our interim condensed consolidated statements of operations.   Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present value of the lease payments are discounted using the incremental borrowing rate associated with each lease. The variable components of the lease payment that fluctuate with the operations of a health facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.   Property and Equipment   Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20 - 40 years and equipment and furniture, 3 - 15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method.   Finance leases are recorded at cost. Finance leases are amortized in accordance with the provision codified within ASC 842, Leases . Amortization of finance lease assets is included in depreciation and amortization expense.   Goodwill   We perform our annual goodwill impairment assessment on the first day of the fourth quarter.  At September 30, 2020, the Company reviewed the carrying value of goodwill for impairment indicators due to the events and circumstances surrounding the COVID- 19 pandemic. As a result of the review, there were no impairment indicators regarding the Company’s goodwill during the three months ended September 30, 2020 that required a quantitative test to be performed. However, our accounting estimates could materially change from period to period due to changing market factors, including those driven by COVID- 19. We will continue to monitor future events, changes in circumstances, and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to future goodwill impairment losses.     Accrued Risk Reserves      We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.   Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. A significant increase in the number of these claims, or an increase in the amounts due as a result of these claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.   12 Table of Contents   We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.    Continuing Care Contracts   We have one continuing care retirement center (“CCRC”) within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10 % of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor of the price at which the apartment is re-assigned or 90 % of the original entry fee, plus 40 % of any appreciation if the apartment exceeds the original resident’s entry fee.   Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarily determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as noncurrent liabilities section of our consolidated balance sheets. As of September 30, 2020, and December 31, 2019, we have recorded refundable entrance fees in the amount of $ 7,462,000 and $7,455,000, respectively.   We also annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded with a corresponding charge to income. As of September 30, 2020, and December 31, 2019, we have recorded a future service obligation liability in the amount of $ 2,035,000 . This obligation is reflected within other noncurrent liabilities in the interim condensed consolidated balance sheets.    Other Noncurrent Liabilities   Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide future services to our CCRC residents. Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”) and the non-refundable portion ( 10% ) of CCRC entrance fees being amortized over the remaining life expectancies of the residents.   Noncontrolling Interest   The noncontrolling interest in a subsidiary is presented within total equity in the Company's interim condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its interim condensed consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.     Variable Interest Entities   We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a variable interest entity (“VIE”) and would require consolidation. To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.   The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in limited liability companies” in the consolidated balance sheets.       Note 3 – Coronavirus Pandemic ("COVID- 19" )   In early March 2020, COVID- 19, a disease caused by the novel strain of the coronavirus, was characterized as a pandemic by the World Health Organization. The COVID- 19 virus has spread rapidly, with every state in the United States (“U.S.”) having confirmed cases. The rapid spread has resulted in authorities around the U.S. implementing various measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had an adverse impact on the Company's results of operations in 2020. The financial results for the second and third quarters of 2020 have been significantly impacted by COVID- 19 with census in our skilled nursing facilities dropping to 81.3 % during the third quarter of 2020, while we also incurred significantly increased operating expenses.   13 Table of Contents   The U.S. government enacted several laws beginning in March 2020 designed to help the nation respond to the COVID- 19 pandemic. The new laws impact healthcare providers in a variety of ways, but the largest legislation from a monetary relief perspective is the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").  The CARES Act provided $2.2 trillion of economy-wide financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states and municipalities. The CARES Act originally appropriated $100 billion to establish the Public Health and Social Services Emergency Fund , which is referred to as the Provider Relief Fund. The Provider Relief Fund is administered through grants and other mechanisms to skilled nursing providers, home health providers, hospitals, and other Medicare and Medicaid enrolled providers to cover any unreimbursed health care related expenses or lost revenue attributable to the public health emergency resulting from COVID- 19.   On April 24, 2020, another $75 billion was added to the Provider Relief Fund by the Paycheck Protection Program and Health Care Enactment Act, bringing the total amount appropriated in the fund to $175 billion.      During the second and third quarters of 2020, we received four disbursements from the Provider Relief Fund which totaled $ 58,184,000 . These funds come with terms and condition certifications in which all providers are required to submit documents to ensure the funds will be used for healthcare-related expenses or lost revenue attributable to COVID- 19. Of the $58,184,000  of funds received, the Company recorded $ 12,132,000 and $ 36,780,000  of government stimulus income for the three  and nine months ended September 30, 2020, respectively.  As of September 30, 2020, amounts not recognized as income are $ 21,404,000  and are reflected in the current liability section of our interim condensed consolidated balance sheet (provider relief funds). We anticipate incurring additional COVID- 19 related expenses or lost revenues in the future; therefore, at this time, we believe that we will fully utilize the remaining $21,404,000  of provider relief funds before the reporting requirement deadlines outlined by the U.S. Department of Health and Human Services (“HHS”).    The government stimulus income estimates we recorded at  September 30, 2020  may change as our ability to utilize and retain the funds will depend on the magnitude and impact of the pandemic, as well as HHS' reporting requirements as they continue to change and evolve.  On October 22, 2020, HHS issued an updated Post-Payment Notice of Reporting Requirements ( "October 22, 2020 Notice") which, among other changes, materially revises the definition of lost revenues that was the basis for the grant income we recognized during the three and nine months ended September 30, 2020.  As a non-recognizable subsequent event, the Company's estimate as of September 30, 2020, as set forth above, has  not been updated for the October 22, 2020 Notice; additional information is included in Note 17.      Additionally, as part of the CARES Act, the legislation included an expansion of the Medicare Accelerated and Advance Payment Program. The expanded Medicare Accelerated and Advance Payment Program is a streamlined version of existing policy that allows the Medicare Administrative Contractors (“MAC’s”) to issue up to three months of advance Medicare payments to help increase cash flow and liquidity to Medicare Part A and Part B providers in certain circumstances that include national emergencies. We received approximately $ 51,253,000  as part of this program. On October 8, 2020 as part of the Continuing Appropriations Act, 2021 and Other Extensions Act, the Centers for Medicare & Medicaid Services’ (“CMS”) amended the repayment terms for the accelerated and advance payments. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. As of September 30, 2020, the accelerated payments are reflected within contract liabilities in the interim condensed consolidated balance sheets as the related performance obligations have not been completed.   The CARES Act also provided for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursement for the period of May 1, 2020 through December 31, 2020 and the deferral of the employer share of social security taxes ( 6.2% ), effective for payments due after the March 2020 enactment date.  The provision requires that the deferred taxes be paid over a two -year period with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.  As of September 30, 2020, we have deferred $ 14,854,000 of the Company’s share of the social security taxes.  This deferral is included in other noncurrent liabilities within our interim condensed consolidated balance sheets.          Note 4 – Net Patient Revenues   The Company disaggregates revenue from contracts with customers by service type and by payor.   Revenue by Service Type   The Company’s net patient services can generally be classified into the following two categories: ( 1 ) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and a behavioral health hospital, and ( 2 ) homecare services.       Three Months Ended September 30     Nine Months Ended September 30   (in thousands)   2020     2019     2020     2019   Net patient revenues:                                 Inpatient services   $ 214,211     $ 222,246     $ 659,585     $ 664,768   Homecare     13,172       12,844       37,564       41,697   Total net patient revenue   $ 227,383     $ 235,090     $ 697,149     $ 706,465     14 Table of Contents   For inpatient services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the period of care or on a per-visit basis. Typically, patients and third -party payors are billed monthly after services are performed or the patient is discharged, and payments are due based on contract terms.   As our performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care.  As the period between the time of service and time of payment is typically one year or less, the Company did  not adjust for the effects of a significant financing component.     Revenue by Payor   Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated:       Three Months Ended September 30     Nine Months Ended September 30   Source   2020     2019     2020     2019   Medicare     35 %     32 %     34 %     33 % Managed Care     11 %     12 %     11 %     12 % Medicaid     28 %     28 %     29 %     27 % Private Pay and Other     26 %     28 %     26 %     28 % Total     100 %     100 %     100 %     100 %   Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days (there is temporary relief from the three -day hospital stay during the COVID- 19 emergency). For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.   For homecare services, Medicare pays based on the acuity level of the patient and based on periods of care. A period of care is defined as a length of care up to 30 days with multiple continuous periods allowed. The services covered by the payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit.   Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program.   Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the healthcare center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed.   Certain managed care payors for homecare services pay on a per-visit basis. This revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.        15 Table of Contents   Contract Liabilities   Included in the Company’s condensed consolidated balance sheets are contract liabilities, which represent payments the Company receives in advance of services provided. As of September 30, 2020, the Company has recorded $ 51,253,000 in contract liabilities related to receipts from the Medicare Accelerated and Advance Payment Program. These funds will begin to be applied against claims for services provided to Medicare patients after approximately one year from the date we received the funds. During the first eleven months after repayment begins, repayment will occur through an automatic recoupment of twenty-five percent of Medicare payments. During the succeeding six months, repayment will occur through an automatic recoupment of fifty percent of Medicare payments. Any remaining balance that was not paid through the recoupment process within twenty-nine months of receipt of the funds will be required to be paid on-demand, subject to an interest rate of four percent. Recoupment of the accelerated payments is currently expected to begin in April 2021.   A summary of the contract liabilities are follows ( in thousands ):   Balance at December 31, 2019   $ -   Payments received     51,253   Payments recognized     -   Balance at September 30, 2020   $ 51,253     Third Party Payors   Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are following all applicable laws and regulations.    Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. Settlements with third -party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $ 15,642,000 and $ 15,108,000 as of September 30, 2020 and December 31, 2019, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.        Note 5 – Other Revenues   Other revenues are outlined in the table below. Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services include fees provided to manage and provide accounting services to other healthcare operators. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly–owned insurance subsidiaries have written for certain healthcare operators to which we provide management or accounting services. "Other" revenues include miscellaneous health care related earnings.       Three Months Ended September 30     Nine Months Ended September 30   (in thousands)   2020     2019     2020     2019   Rental income   $ 5,646     $ 5,678     $ 16,972     $ 16,963   Management and accounting services fees     4,052       4,520       12,651       13,567   Insurance services     1,294       1,528       4,074       4,667   Other     119       251       766       841   Total other revenues   $ 11,111     $ 11,977     $ 34,463     $ 36,038     Rental Income   The Company leases real estate assets consisting of skilled nursing facilities and assisted living facilities to third party operators. Additionally, we sublease four Florida skilled nursing facilities included in our lease from National Health Investors (“NHI”) as noted in Note 8 – Long Term Leases. Rental income reflected in the interim condensed consolidated statements of operations consisted of the following:        Three Months Ended September 30     Nine Months Ended September 30   (in thousands)   2020     2019     2020     2019   Operating lease payments   $ 5,505     $ 5,482     $ 16,514     $ 16,450   Variable lease payments     141       196       458       513   Total rental income   $ 5,646     $ 5,678     $ 16,972     $ 16,963     16 Table of Contents     Management Fees from National   We manage five skilled nursing facilities owned by National. For the three and nine months ended September 30, 2020, we recognized management fees and interest on management fees of $ 920,000 and $ 3,399,000 from these centers, respectively. For the three months and nine months ended September 30, 2019, we recognized management fees and interest on management fees of $ 1,543,000 and $ 4,748,000 for these centers, respectively.   Insurance Services   For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2020 were $ 779,000 and $ 2,441,000 , respectively. For the three and nine months ended September 30, 2019, the workers’ compensation premium revenues reflected in the interim condensed consolidated statements of operations were $ 866,000 and $ 2,656,000 . Associated losses and expenses are reflected in the interim condensed consolidated statements of operations as "Salaries, wages and benefits."   For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2020 were $ 515,000 and $ 1,633,000 , respectively. For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months and nine months ended September 30, 2019 were $ 662,000 and $ 2,011,000 , respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses".       Note 6 – Non–Operating Income   Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on sales of marketable securities, and interest income.       Three Months Ended September 30     Nine Months Ended September 30   (in thousands)   2020     2019     2020     2019   Equity in earnings of unconsolidated investments   $ 3,019     $ 2,747     $ 8,448     $ 7,548   Dividends and net realized gains on sales of securities     2,084       2,049       5,997       5,911   Interest income     1,375       1,867       4,426       5,502   Gains on acquisitions of equity method investments     -       -       1,707       1,975   Total non-operating income   $ 6,478     $ 6,663     $ 20,578     $ 20,936     Caris HealthCare, L.P. ("Caris")   Our most significant equity method investment is a 75.1 % non–controlling ownership interest in Caris, a business that specializes in hospice care services. The carrying value of our investment is $ 35,035,000 and $ 36,673,000 at September 30, 2020 and December 31, 2019, respectively. The carrying amounts are included in investments in unconsolidated companies in the consolidated balance sheets. Summarized financial information of Caris for the nine months ended September 30, 2020 and 2019 is provided below (in thousands):       Nine Months Ended September 30       2020     2019   Net revenue   $ 48,690     $ 45,554   Expenses     37,753       35,410   Net income   $ 10,937     $ 10,144     Gains on Acquisitions of Equity Method Investments   Effective February 27, 2020, the Company expanded its controlled operations through an acquisition of the remaining ownership interest of a 166 -bed skilled nursing facility in Knoxville, Tennessee. We previously held a 25 % noncontrolling interest in the facility and accounted for the investment as an equity method investment. The operating results of the business have been included in the accompanying interim condensed consolidated financial statements since the remaining ownership interest acquisition date.   17 Table of Contents   Upon acquiring the remaining ownership interest, the Company recorded and increased its previously held equity interest up to fair value as of the acquisition date. This remeasurement of our equity interest at fair value resulted in a gain of $ 1,707,000 . The gain was recorded in "Non-operating income" in the interim condensed consolidated statements of operations.   Additionally, the excess of the fair value over the amounts assigned to the assets and liabilities of the investee resulted in recording goodwill in the amount of $ 346,000 on the acquisition date.   Effective June 1, 2019, the Company expanded its controlled operations through an acquisition of the remaining ownership interest of a 60 -bed memory care facility in St. Peters, Missouri. We previously held a noncontrolling interest in the facility and accounted for the investment as an equity method investment. The operating results of the business have been included in the accompanying interim condensed consolidated financial statements since the remaining ownership interest acquisition date.   Upon acquiring the remaining ownership interest, the Company recorded and increased its previously held equity interest up to fair value as of the acquisition date. This remeasurement of our equity interest at fair value resulted in a gain of $ 1,975,000 during the second quarter of 2019. The gain was recorded in "Non-operating income" in the interim condensed consolidated statements of operations.        Note 7 – Business Segments   The Company has two reportable operating segments: ( 1 ) inpatient services, which includes the operation of skilled nursing facilities, assisted and independent living facilities, and our behavioral health hospital; and ( 2 ) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as chief operating decision maker (“CODM”), to assess performance and allocate resources.   The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 – Summary of Significant Accounting Policies.    The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.   The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands ):       Three Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 214,211     $ 13,172     $ -     $ 227,383   Other revenues     84       -       11,027       11,111   Government stimulus income     12,132       -       -       12,132   Net operating revenues and grant income     226,427       13,172       11,027       250,626                                     Costs and expenses:                                 Salaries, wages, and benefits     132,245       8,210       11,109       151,564   Other operating     65,066       3,311       2,510       70,887   Rent     8,377       448       1,495       10,320   Depreciation and amortization     9,629       106       813       10,548   Interest     325       -       ( 40 )     285   Total costs and expenses     215,642       12,075       15,887       243,604                                     Income (loss) from operations     10,785       1,097       ( 4,860 )     7,022   Non-operating income     -       -       6,478       6,478   Unrealized losses on marketable equity securities     -       -       ( 241 )     ( 241 )                                   Income before income taxes   $ 10,785     $ 1,097     $ 1,377     $ 13,259     18 Table of Contents       Three Months Ended September 30, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 222,246     $ 12,844     $ -     $ 235,090   Other revenues     199       -       11,778       11,977   Net operating revenues     222,445       12,844       11,778       247,067                                     Costs and expenses:                                 Salaries, wages, and benefits     133,949       8,630       9,596       152,175   Other operating     60,800       4,267       1,663       66,730   Rent     8,234       450       1,483       10,167   Depreciation and amortization     9,666       61       936       10,663   Interest     312       -       452       764   Total costs and expenses     212,961       13,408       14,130       240,499                                     Income (loss) from operations     9,484       ( 564 )     ( 2,352 )     6,568   Non-operating income     -       -       6,663       6,663   Unrealized gains on marketable equity securities     -       -       9,312       9,312                                     Income (loss) before income taxes   $ 9,484     $ ( 564 )   $ 13,623     $ 22,543           Nine Months Ended September 30, 2020       Inpatient Services     Homecare     All Other     Total   Revenues and grant income:                                 Net patient revenues   $ 659,585     $ 37,564     $ -     $ 697,149   Other revenues     645       -       33,818       34,463   Government stimulus income     34,754       2,026       -       36,780   Net operating revenues and grant income     694,984       39,590       33,818       768,392                                     Costs and expenses:                                 Salaries, wages, and benefits     403,840       24,490       27,617       455,947   Other operating     194,170       11,471       7,775       213,416   Rent     25,134       1,351       4,487       30,972   Depreciation and amortization     28,826       266       2,439       31,531   Interest     1,073       -       77       1,150   Total costs and expenses     653,043       37,578       42,395       733,016                                     Income (loss) from operations     41,941       2,012       ( 8,577 )     35,376   Non-operating income     -       -       20,578       20,578   Unrealized losses on marketable equity securities     -       -       ( 40,580 )     ( 40,580 )                                   Income (loss) before income taxes   $ 41,941     $ 2,012     $ ( 28,579 )   $ 15,374           Nine Months Ended September 30, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 664,768     $ 41,697     $ -     $ 706,465   Other revenues     672       -       35,366       36,038   Net operating revenues     665,440       41,697       35,366       742,503                                     Costs and expenses:                                 Salaries, wages, and benefits     390,770       25,136       25,535       441,441   Other operating     183,602       13,193       6,965       203,760   Rent     24,754       1,400       4,448       30,602   Depreciation and amortization     28,790       183       2,542       31,515   Interest     979       -       1,665       2,644   Total costs and expenses     628,895       39,912       41,155       709,962                                     Income (loss) from operations     36,545       1,785       ( 5,789 )     32,541   Non-operating income     -       -       20,936       20,936   Unrealized gains on marketable equity securities     -       -       16,096       16,096                                     Income before income taxes   $ 36,545     $ 1,785     $ 31,243     $ 69,573       19 Table of Contents     Note 8 – Long-Term Leases   Operating Leases   At September 30, 2020, we leased from NHI the real property of 35 skilled nursing facilities, seven assisted living centers and three independent living centers under two separate lease agreements. As part of the first lease agreement, we sublease four Florida skilled nursing facilities to a third -party operator. Base rent expense under both NHI lease agreements totals $ 34,200,000 annually with rent thereafter escalating by 4 % of the increase in facility revenue over a base year. Total facility rent expense to NHI was $ 9,655,000 and $ 28,965,000 for the three months and nine months ended September 30, 2020. Total facility rent expense to NHI was $ 9,515,000 and $ 28,545,000 for the three months and nine months ended September 30, 2019.   Finance Leases   At September 30, 2020, we leased and operated three senior healthcare facilities in the state of Missouri under three separate lease agreements. Two of the healthcare facilities are skilled nursing facilities that also include assisted living facilities and the third healthcare facility is a memory care facility. Each of the leases is a ten -year lease with two five –year renewal options. Under the terms of the leases, base rent totals $ 5,200,000 annually with rent thereafter escalating by 4 % of the increase in facility revenue over the 2014 base year.   Minimum Lease Payments   The following table summarizes the maturity of our finance and operating lease liabilities as of September 30, 2020 ( in thousands ):       Finance Leases     Operating Leases   2021   $ 5,200     $ 35,354   2022     5,200       35,074   2023     5,200       34,573   2024     2,167       34,390   2025     -       34,228   Thereafter     -       48,500   Total minimum lease payments     17,767       222,119   Less: amounts representing interest     ( 1,739 )     ( 37,116 ) Present value of future minimum lease payments     16,028       185,003   Less: current portion     ( 4,357 )     ( 25,146 ) Noncurrent lease liabilities   $ 11,671     $ 159,857           Note 9 – Earnings per Share   Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.   20 Table of Contents   The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands, except for share and per share amounts) :       Three Months Ended September 30     Nine Months Ended September 30       2020     2019     2020     2019   Basic:                                 Weighted average common shares outstanding     15,310,754       15,275,709       15,304,235       15,267,250   Net income attributable to National HealthCare Corporation   $ 12,849     $ 19,461     $ 14,321     $ 54,441   Earnings per common share, basic   $ 0.84     $ 1.27     $ 0.94     $ 3.57                                     Diluted:                                 Weighted average common shares outstanding     15,310,754       15,275,709       15,304,235       15,267,250   Effects of dilutive instruments     60,557       97,908       64,540       83,058   Weighted average common shares outstanding     15,371,311       15,373,617       15,368,775       15,350,308                                     Net income attributable to National HealthCare Corporation   $ 12,849     $ 19,461     $ 14,321     $ 54,441   Earnings per common share, diluted   $ 0.84     $ 1.27     $ 0.93     $ 3.55     In the above table, options to purchase 698,080 shares of our common stock have been excluded for the nine months ended September 30, 2020 due to their anti-dilutive impact.             Note 10 – Investments in Marketable Securities   Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. Any credit related decline in fair market values of our available for sale debt securities are recorded in our results of operations through an allowance for credit losses. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 11 for a description of the Company's methodology for determining the fair value of marketable securities.    Marketable securities and restricted marketable securities consist of the following (in thousands) :       September 30, 2020     December 31, 2019       Amortized Cost     Fair Value     Amortized Cost     Fair Value   Investments available for sale:                                 Marketable equity securities   $ 30,176     $ 111,873     $ 30,176     $ 152,453   Restricted investments available for sale:                                 Corporate debt securities     63,446       67,478       63,414       65,653   Asset-based securities     46,851       47,682       54,451       55,185   U.S. Treasury securities     13,208       13,937       13,379       13,410   State and municipal securities     12,546       12,943       12,922       13,158       $ 166,227     $ 253,913     $ 174,342     $ 299,859     Included in the marketable equity securities are the following (in thousands, except share amounts):       September 30, 2020     December 31, 2019       Shares     Cost     Fair Value     Shares     Cost     Fair Value   NHI Common Stock     1,630,642     $ 24,734     $ 98,279       1,630,642     $ 24,734     $ 132,865     The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands) :         September 30, 2020     December 31, 2019         Cost     Fair Value     Cost     Fair Value   Maturities:                                 Within 1 year   $ 22,860     $ 22,795     $ 15,726     $ 15,767   1 to 5 years     82,046       85,640       88,314       90,408   6 to 10 years     31,145       33,605       40,126       41,231                                             $ 136,051     $ 142,040     $ 144,166     $ 147,406     21 Table of Contents   Gross unrealized gains related to marketable equity securities are $ 81,804,000 and $ 122,290,000 as of September 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to marketable equity securities are $ 107,000 and $ 13,000 as of September 30, 2020 and December 31, 2019, respectively. For the three months and nine months ended September 30, 2020, the Company recognized net unrealized losses of $ 241,000 and $ 40,580,000 , respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations. For the three months and nine months ended September 30, 2019, the Company recognized net unrealized gains of $ 9,312,000 and $ 16,096,000 , respectively, for the changes in fair market value of the marketable equity securities in the interim condensed consolidated statements of operations.   Gross unrealized gains related to available for sale marketable debt securities are $ 6,727,000 and $ 3,407,000 as of September 30, 2020 and December 31, 2019, respectively. Gross unrealized losses related to available for sale marketable debt securities are $ 738,000 and $ 167,000 as of September 30, 2020 and December 31, 2019, respectively. The Company’s unrealized losses in our available for sale marketable debt securities were determined to be non-credit related.   The Company has not recognized any credit related impairments for the nine months ending September 30, 2020 and 2019.   For the marketable securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities.   Proceeds from the sale of available for sale marketable debt securities during the nine months ended September 30, 2020 and 2019 were $ 28,004,000 and $ 41,272,000 , respectively. Investment gains of $ 135,000 and $ 117,000 were realized on these sales during the nine months ended September 30, 2020 and 2019, respectively. No sales were reported for marketable equity securities for the nine months ended September 30, 2020 and 2019, respectively.       Note 11 – Fair Value Measurements   The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:     Level  1   – The valuation is based on quoted prices in active markets for identical instruments.   Level  2   – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market.   Level  3   – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.   A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.   The following table summarizes fair value measurements by level at September 30, 2020 and December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands) :       Fair Value Measurements Using   September 30, 2020   Fair Value     Quoted Prices in Active Markets For Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Cash and cash equivalents   $ 183,765     $ 183,765     $ –     $ –   Restricted cash and cash equivalents     12,353       12,353       –       –   Marketable equity securities     111,873       111,873       –       –   Corporate debt securities     67,478       46,513       20,965       –   Mortgage–backed securities     47,682       –       47,682       –   U.S. Treasury securities     13,937       13,937       –       –   State and municipal securities     12,943       2,004       10,939       –   Total financial assets   $ 450,031     $ 370,445     $ 79,586     $ –     22 Table of Contents       Fair Value Measurements Using   December 31, 2019   Fair Value     Quoted Prices in Active Markets For Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Cash and cash equivalents   $ 50,334     $ 50,334     $ –     $ –   Restricted cash and cash equivalents     10,676       10,676       –       –   Marketable equity securities     152,453       152,453       –       –   Corporate debt securities     65,653       48,584       17,069       –   Asset - backed securities     55,185       –       55,185       –   U.S. Treasury securities     13,410       13,410       –       –   State and municipal securities     13,158       1,975       11,183       –   Total financial assets   $ 360,869     $ 277,432     $ 83,437     $ –           Note 12 – Long–Term Debt   Long–term debt consists of the following (dollars in thousands) :     Maturity   September 30, 2020     December 31, 2019                       Credit facility, interest payable monthly 2020   $ -     $ 10,000   Less current portion     -       ( 10,000 ) Total long-term debt   $ -     $ -     On August 13, 2020, NHC terminated the credit facility. At September 30, 2020, the Company does not have a credit facility in place.       Note 13 - Stock Repurchase Program   In August 2020, the Board of Directors authorized a common stock purchase program. The program allows for repurchases of up to $ 25 million of its common stock. During the nine months ended September 30, 2020, the Company repurchased 797 shares of its common stock for a total cost of $ 53,000 . The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued. The plan expires on August 31, 2021.            Note 14 – Stock–Based Compensation   NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $ 518,000 and $ 340,000 for the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation totaled $ 1,807,000 and $ 1,448,000 for the nine months ended September 30, 2020 and 2019, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.   23 Table of Contents   At September 30, 2020, the Company had $ 3,024,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate two -year period.   Stock Options   The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2020 and for the year ended December 31, 2019.       September 30, 2020     December 31, 2019   Risk–free interest rate   0.85 %     2.30 %   Expected volatility   20.2 %     17.4 %   Expected life, in years   2.2     2.3   Expected dividend yield   2.92 %     2.73 %     The following table summarizes our outstanding stock options for the nine months ended September 30, 2020 and for the year ended December 31, 2019.       Number of Shares     Weighted Average Exercise Price     Aggregate Intrinsic Value   Options outstanding at January 1, 2019     1,163,381     $ 71.16     $ –   Options granted     53,316       77.89       –   Options exercised     ( 346,168 )     71.57       –   Options cancelled     ( 85,000 )     72.94       –   Options outstanding at December 31, 2019     785,529       71.24       –   Options granted     102,124       75.74       –   Options exercised     ( 33,573 )     62.46       –   Options cancelled     ( 3,000 )     72.94           Options outstanding at September 30, 2020     851,080     $ 72.12     $ 66,000                             Options exercisable at September 30, 2020     215,456     $ 68.35     $ 18,000     Options Outstanding September 30, 2020     Exercise Prices     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life in Years   153,000     $ 60.73 - $64.64     62.67     2.53   698,080     $ 72.94 - $86.48     74.19     1.55   851,080             72.12     1.48            Note 15 – Income Taxes   The Company's income tax provision as a percentage of our income before income taxes was 3.0 % and 5.2 % for the three and nine months ended September 30, 2020, respectively.  The income tax provision as a percentage of income before income taxes was 14 % and 22.0 % for the three and nine months ended September 30, 2019, respectively.     Typically, these percentages vary from the U.S. federal statutory income tax rate of 21% primarily due to state income taxes, excess tax benefits from stock-based compensation, benefits resulting from the lapsing of statute of limitations of items in our tax contingency reserve, and non-deductible expenses.  The tax benefit related to statute of limitation expirations was $ 2,234,000 for the three and nine months ended September 30, 2020.  The tax benefit related to statute of limitation expirations was $ 2,064,000 for the three and nine months ended September 30, 2019.   Our quarterly income tax provision, and our estimate of our annual effective income tax rate, is subject to variation due to several factors, including volatility based on the amount of pre-tax income or loss.     The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2017 (with certain state exceptions).   24 Table of Contents     Note 16 – Contingencies and Commitments   Accrued Risk Reserves   We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned and leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $ 105,953,000 and $ 96,011,000 at September 30, 2020 and December 31, 2019, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.   As a result of the terms of our insurance policies and our use of wholly–owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors.   Workers’ Compensation   For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis.    General and Professional Liability Insurance and Lawsuits   The senior care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by skilled nursing facilities and their employees in providing care to residents. The Company has been, and continues to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company.   There is certain additional litigation incidental to our business, none of which, based upon information available to date, would be material to our financial position, results of operations, or cash flows. In addition, the long–term care industry is continuously subject to scrutiny by governmental regulators, which could result in litigation or claims related to regulatory compliance matters.   Nutritional Support Services, L.P., Qui Tam Litigation    On June 19, 2018, a First Amended Complaint was filed naming Nutritional Support Services, L.P. (“NSS”), a wholly owned subsidiary of the Company, as a defendant in the action captioned U.S. ex rel. McClain v. Nutritional Support Services, L.P., No. 6:17 -cv- 2608 -AMQ (D.S.C.), which was filed in the United States District Court for the District of South Carolina (the "Court"). The action alleges that NSS violated the False Claims Act by reporting a National Drug Code (“NDC”) number that did not correspond to the NDC for dispensed prescriptions. The plaintiffs were seeking unspecified damages. On April 16, 2018, the United States filed a Notice of Election to Decline Intervention with respect to the allegations asserted in this action. On March 14, 2020, the Court entered an Order granting the Defendant’s Motion to Dismiss.  On May 6, 2020, the Court entered a Final Judgment dismissing the case.   25 Table of Contents   Governmental Regulations   Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is following all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs. There have been several enacted and proposed federal and state relief measures as a result of COVID- 19 which should provide support to us during this pandemic; however, the full benefit of any such programs would not be realized until these payments are fully implemented, government agencies issue applicable regulations, or guidance and such relief is provided.   Divestiture of Skilled Nursing Facility   On August 21, 2020, the Company entered into a definitive agreement for the sale of the real estate and operations of a skilled nursing facility in Town and Country, Missouri.  This transaction is expected to be completed in the fourth quarter of 2020.            Note 17  – Subsequent Event   Provider Relief Funds Guidance   On September 19, 2020, HHS issued a six -page Post-Payment Notice of Reporting Requirements ( "September 19, 2020 Notice") pertaining to the guidance and reporting process for recipients of Provider Relief Funds.  This September 19, 2020 Notice was used to estimate the government stimulus income recorded in the interim condensed consolidated statements of operations for the three and nine months ended  September 30, 2020.  On  October 22, 2020, HHS issued a subsequent Post-Payment Notice of Reporting Requirements ( "October 22, 2020 Notice") document that materially revises the definition of lost revenues compared to the September 19, 2020 Notice.  The definition of lost revenues has subsequently changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenues from patient care related sources as opposed to the negative year-over-year change in net patient care operating income.  As stated in Note 3,  the Company's estimate for recording government stimulus income for the three and nine months ended  September 30, 2020 has  not been updated for the October 22, 2020 Notice.  The Company's evaluation of the October 22, 2020 Notice is ongoing and its impact on our financial statements is  not yet known.  U.S. GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October 22, 2020 Notice.       As evidenced by the October 22, 2020 Notice, HHS' interpretation of the underlying terms and conditions of these Provider Relief Fund payments, including auditing and reporting requirements, continues to change and evolve.  Additional guidance or new and amended interpretations of existing guidance on the terms and conditions may result in changes in the Company's estimates, and such changes may be material.  Additionally, any such changes may result in the Company's inability to recognize additional Provider Relief Fund payments or may result in derecognition of amounts previously recognized, which may be material.