NATIONAL HEALTHCARE CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     To the Stockholders and the Board of Directors of National HealthCare Corporation   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of National HealthCare Corporation (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with U.S. generally accepted accounting principles.   We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 19, 2021 expressed an unqualified opinion thereon.   Basis for Opinion   These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that response 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. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matter   The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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.       Estimation of Professional Liability Claims Reserves Description of the Matter   The Company’s accrued risk reserves totaled $99,537,000 as of December 31, 2020. As described in Note 17 to the consolidated financial statements, the accrued risk reserves include professional liability claims reserves for unpaid reported professional liability claims and estimates for incurred but unreported claims. The Company’s policy with respect to the professional liability claims reserves is to use an actuary to assist management in estimating the exposure for claims obligations (for both asserted and unasserted claims).   Auditing management’s professional liability claims reserves was complex and highly judgmental due to the significant estimation required in determining the reserves, particularly the assumptions of the severity of asserted claims and the quantity and severity of unknown claims.    How We Addressed the Matter in Our Audit   We obtained an understanding, evaluated the design and tested the effectiveness of controls over the Company’s professional liability claims reserve determination, including controls over management’s review of the significant assumptions described above. For example, we tested controls over management’s review of the actuarial analysis, the significant actuarial assumptions and the data inputs provided to the actuary.   To test the professional liability claims reserves, our audit procedures included, among others, testing the completeness and accuracy of the underlying claims data provided to the Company’s actuarial specialist, obtaining legal confirmation letters to evaluate the reserves recorded on significant litigated matters, and reviewing the Company's insurance contracts by policy year to assess the Company's self-insured retentions, deductibles, and coverage limits. In addition, we involved our actuarial specialists to assist in our evaluation of the methodologies applied by management's specialist and assessing the accuracy of the Company’s reserves. We also compared the reserves recorded to a range developed by our actuarial specialists based on independently selected assumptions.   /s/ Ernst & Young LLP   We have served as the Company's auditor since 2009.   Nashville, Tennessee   February 19, 2021   35 Table of Contents     NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Operations (in thousands, except share and per share amounts)       Year Ended December 31,       2020     2019     2018                             Revenues:                         Net patient revenues   $ 931,795     $ 947,872     $ 932,774   Other revenues     48,917       48,511       47,575   Government stimulus income     47,505       –       –   Net operating revenues and grant income     1,028,217       996,383       980,349                             Costs and expenses:                         Salaries, wages and benefits     609,306       592,831       582,721   Other operating     286,845       268,442       254,038   Facility rent     40,494       40,518       40,923   Depreciation and amortization     42,018       42,419       41,894   Interest     1,399       3,135       4,697   Total costs and expenses     980,062       947,345       924,273                             Income from operations     48,155       49,038       56,076                             Other income:                         Non-operating income     28,234       26,747       17,670   Unrealized gains (losses) on marketable equity securities     ( 23,966 )     12,230       1,138                             Income before income taxes     52,423       88,015       74,884   Income tax provision     ( 10,433 )     ( 20,039 )     ( 16,185 ) Net income     41,990       67,976       58,699   Net (income) loss attributable to noncontrolling interest     ( 119 )     235       265                             Net income attributable to National HealthCare Corporation   $ 41,871     $ 68,211     $ 58,964                             Earnings per share attributable to National HealthCare Corporation stockholders:                         Basic   $ 2.74     $ 4.47     $ 3.87   Diluted   $ 2.72     $ 4.44     $ 3.87                             Weighted average common shares outstanding:                         Basic     15,306,174       15,270,154       15,224,886   Diluted     15,369,523       15,360,046       15,236,826                             Dividends declared per common share   $ 2.08     $ 2.06     $ 1.98     The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   36 Table of Contents     NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Comprehensive Income (in thousands)       Year Ended December 31,       2020     2019     2018                             Net income   $ 41,990     $ 67,976     $ 58,699                             Other comprehensive income (loss):                         Unrealized gains (losses) on investments in marketable debt securities     3,352       6,842       ( 2,574 ) Reclassification adjustment for realized gains on sale of marketable debt securities     ( 195 )     ( 127 )     ( 18 ) Income tax (expense) benefit related to items of other comprehensive income (loss)     ( 660 )     ( 1,410 )     544   Other comprehensive income (loss), net of tax     2,497       5,305       ( 2,048 )                           Net (income) loss attributable to noncontrolling interest     ( 119 )     235       265                             Comprehensive income attributable to National HealthCare Corporation   $ 44,368     $ 73,516     $ 56,916      The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   37 Table of Contents     NATIONAL HEALTHCARE CORPORATION Consolidated Balance Sheets (in thousands)       December 31,       2020     2019   Assets                 Current Assets:                 Cash and cash equivalents   $ 147,093     $ 50,334   Restricted cash and cash equivalents, current portion     9,673       8,944   Marketable equity securities     128,590       152,453   Marketable debt securities     47,762       –   Restricted marketable equity securities     4,680       –   Restricted marketable debt securities, current portion     16,601       20,576   Accounts receivable     89,670       92,975   Inventories     8,781       7,441   Prepaid expenses and other assets     2,977       6,635   Notes receivable, current portion     928       1,695   Total current assets     456,755       341,053                     Property and Equipment:                 Property and equipment, at cost     1,030,426       1,017,204   Accumulated depreciation and amortization     ( 510,108 )     ( 481,774 ) Net property and equipment     520,318       535,430                     Other Assets:                 Restricted cash and cash equivalents, less current portion     1,736       1,732   Restricted marketable debt securities, less current portion     125,472       126,830   Deposits and other assets     4,580       5,124   Operating lease – right-of-use assets     179,055       202,909   Goodwill     21,341       20,995   Notes receivable, less current portion     12,093       13,384   Investments in unconsolidated companies     40,782       39,191   Total other assets     385,059       410,165   Total assets   $ 1,362,132     $ 1,286,648     The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   38 Table of Contents   NATIONAL HEALTHCARE CORPORATION Consolidated Balance Sheets (in thousands, except share and per share amounts)        December 31,       2020     2019   Liabilities and Equity                 Current Liabilities:                 Trade accounts payable   $ 21,112     $ 18,903   Finance lease obligations, current portion     4,423       4,166   Operating lease liabilities, current portion     25,451       24,243   Accrued payroll     86,183       69,826   Amounts due to third party payors     16,454       15,108   Accrued risk reserves, current portion     30,953       29,520   Other current liabilities     21,344       15,029   Provider relief funds     16,068       –   Contract liabilities     51,253       –   Dividends payable     7,987       7,968   Current maturities of long-term debt     –       10,000   Total current liabilities     281,228       194,763                     Finance lease obligations, less current portion     10,540       14,963   Operating lease liabilities, less current portion     153,604       178,666   Accrued risk reserves, less current portion     68,584       66,491   Refundable entrance fees     7,462       7,455   Deferred income taxes     14,079       24,012   Other noncurrent liabilities     28,375       21,229   Total liabilities     563,872       507,579                     Equity:                 Common stock, $.01 par value; 45,000,000 shares authorized; 15,369,745 and 15,332,206 shares, respectively, issued and outstanding     153       153   Capital in excess of par value     226,943       222,787   Retained earnings     563,024       553,093   Accumulated other comprehensive income     5,057       2,560   Total National HealthCare Corporation stockholders’ equity     795,177       778,593   Noncontrolling interest     3,083       476   Total equity     798,260       779,069   Total liabilities and equity   $ 1,362,132     $ 1,286,648      The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   39 Table of Contents     NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Cash Flows (in thousands)       Year Ended December 31,       2020     2019     2018                             Cash Flows From Operating Activities:                         Net income   $ 41,990     $ 67,976     $ 58,699   Adjustments to reconcile net income to net cash provided by operating activities:                         Depreciation and amortization     42,018       42,419       41,894   Equity in earnings of unconsolidated investments     ( 12,342 )     ( 9,744 )     ( 1,020 ) Distributions from unconsolidated investments     10,050       3,902       5,241   Unrealized losses (gains) on marketable equity securities     23,966       ( 12,230 )     ( 1,138 ) Gains on sale of marketable debt securities     ( 195 )     ( 127 )     ( 18 ) Gain on acquisition of equity method investment     ( 1,707 )     ( 1,975 )     ( 2,050 ) Gain on sale of skilled nursing facility     ( 2,784 )     –       ( 1,668 ) Deferred income taxes     ( 10,593 )     4,052       718   Stock–based compensation     2,453       1,878       1,778   Changes in operating assets and liabilities:                         Accounts receivable     4,529       4,299       ( 9,398 ) Federal income tax receivable     –       ( 2,560 )     5,465   Inventories     ( 1,249 )     29       ( 317 ) Prepaid expenses and other assets     4,727       ( 287 )     ( 1,743 ) Trade accounts payable     1,429       ( 856 )     3,467   Accrued payroll     15,948       2,208       516   Amounts due to third party payors     1,200       ( 1,000 )     ( 1,281 ) Accrued risk reserves     3,454       540       2,818   Provider relief funds     16,068       –       –   Contract liabilities     51,253       –       –   Other current liabilities     5,898       780       ( 2,050 ) Other noncurrent liabilities     7,146       799       ( 1,478 ) Net cash provided by operating activities     203,259       100,103       98,435   Cash Flows From Investing Activities:                         Purchases of property and equipment     ( 21,873 )     ( 26,400 )     ( 29,772 ) Proceeds from the sale of skilled nursing facility     6,750       –       4,300   Investments in unconsolidated companies     ( 305 )     ( 222 )     ( 444 ) Acquisition of equity method investment     ( 6,648 )     ( 15,589 )     ( 527 ) Investments in notes receivable     ( 425 )     ( 5,462 )     –   Collections of notes receivable     2,483       1,379       1,553   Purchases of marketable securities     ( 84,854 )     ( 12,471 )     ( 13,311 ) Sale of marketable securities     40,994       44,500       4,539   Net cash used in investing activities     ( 63,878 )     ( 14,265 )     ( 33,662 ) Cash Flows From Financing Activities:                         Borrowings under credit facility     40,000       –       –   Principal payments under credit facility     ( 50,000 )     ( 45,000 )     ( 45,000 ) Principal payments under finance lease obligations     ( 4,166 )     ( 3,923 )     ( 3,696 ) Dividends paid to common stockholders     ( 31,921 )     ( 31,208 )     ( 29,827 ) Issuance of common shares     1,756       2,346       2,865   Repurchase of common shares     ( 53 )     ( 872 )     ( 867 ) Noncontrolling interest contributions (distributions)     2,488       ( 468 )     –   Entrance fee deposits (refunds)     7       ( 623 )     ( 749 ) Net cash used in financing activities     ( 41,889 )     ( 79,748 )     ( 77,274 ) Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents     97,492       6,090       ( 12,501 ) Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period     61,010       54,920       67,421   Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period   $ 158,502     $ 61,010     $ 54,920                             Balance Sheet Classifications:                         Cash and cash equivalents   $ 147,093     $ 50,334     $ 43,247   Restricted cash and cash equivalents     11,409       10,676       11,673   Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents   $ 158,502     $ 61,010     $ 54,920       40 Table of Contents   NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Cash Flows (continued, in thousands)       Year Ended December 31,       2020     2019     2018   Supplemental Information:                                                   Cash payments for interest   $ 1,425     $ 3,118     $ 4,899                             Cash payments for income taxes     16,524       20,889       9,182     The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   41 Table of Contents     NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Equity (in thousands, except for share and per share amounts)       Common Stock     Capital in Excess of     Retained     Accumulated Other Comprehensive     Non- controlling     Total       Shares     Amount     Par Value     Earnings     Income (Loss)     Interest     Equity   Balance at January 1, 2018     15,212,133     $ 152     $ 215,659     $ 419,423     $ 67,504     $ 694     $ 703,432   Reclassification due to new accounting standards     –       –       –       68,201       ( 68,201 )     –       –   Net income     –       –       –       58,964       –       ( 265 )     58,699   Equity contributed by noncontrolling interest     –       –       –       –       –       750       750   Other comprehensive loss     –       –       –       –       ( 2,048 )     –       ( 2,048 ) Stock–based compensation     –       –       1,778       –       –       –       1,778   Shares sold – options exercised     57,375       1       2,865       –       –       –       2,866   Repurchase of common shares     ( 14,506 )     –       ( 867 )     –       –       –       ( 867 ) Dividends declared to common stockholders ( $1.98 per share)     –       –       –       ( 30,153 )     –       –       ( 30,153 ) Balance at January 1, 2019     15,255,002     $ 153     $ 219,435     $ 516,435     $ ( 2,745 )   $ 1,179     $ 734,457   Net income     –       –       –       68,211       –       ( 235 )     67,976   Distributions attributable to noncontrolling interest     –       –       –       –       –       ( 468 )     ( 468 ) Other comprehensive income     –       –       –       –       5,305       –       5,305   Stock–based compensation     –       –       1,878       –       –       –       1,878   Shares sold – options exercised     87,600       –       2,346       –       –       –       2,346   Repurchase of common shares     ( 10,396 )     –       ( 872 )     –       –       –       ( 872 ) Dividends declared to common stockholders ( $2.06 per share)     –       –       –       ( 31,553 )     –       –       ( 31,553 ) Balance at December 31, 2019     15,332,206     $ 153     $ 222,787     $ 553,093     $ 2,560     $ 476     $ 779,069   Net income     –       –       –       41,871       –       119       41,990   Contributions attributable to noncontrolling interest     –       –       –       –       –       2,488       2,488   Other comprehensive income     –       –               –       2,497       –       2,497   Stock–based compensation     –       –       2,453       –       –       –       2,453   Shares sold – options exercised     38,336       –       1,756       –       –       –       1,756   Repurchase of common shares     ( 797 )     –       ( 53 )     –       –       –       ( 53 ) Dividends declared to common stockholders ( $2.08 per share)     –       –       –       ( 31,940 )     –       –       ( 31,940 ) Balance at December 31, 2020     15,369,745     $ 153     $ 226,943     $ 563,024     $ 5,057     $ 3,083     $ 798,260      The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.   42 Table of Contents   Notes to Consolidated Financial Statements       Note 1 – Summary of Significant Accounting Policies   Nature of Operations   National HealthCare Corporation ("NHC" or "the Company") operates, manages or provides services to skilled nursing facilities, assisted living facilities, independent living facilities, home health care programs, and a behavioral health hospital located in 10 Southeastern, Northeastern and Midwestern states in the United States. The most significant part of our business relates to skilled and intermediate nursing care in which setting we also provide assisted living and retirement services, rehabilitative therapy services, memory and Alzheimer's care services, and home health care. We also have a non–controlling ownership interest in a hospice care business that services NHC owned health care centers 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. The health care environment has continually undergone changes with regard to Federal and state reimbursement programs and other payor sources, compliance regulations, competition among other health care providers and patient care litigation issues. We continually monitor these industry developments as well as other factors that affect our business.   Principles of Consolidation and Basis of Presentation   The consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), include our wholly owned and controlled subsidiaries and affiliates. All significant intercompany transactions and balances have been eliminated in consolidation. 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.   Variable interest entities (“VIEs”) in which we have an interest have been consolidated when we have been identified as the primary beneficiary. Investments in ventures in which we have the ability to exercise significant influence but do not have control over are accounted for using the equity method. Equity method investments are initially recorded at cost and subsequently are adjusted for our share of the venture’s earnings or losses and cash distributions. Our most significant equity method investment is a 75.1 % noncontrolling ownership interest in Caris, a business that specializes in hospice care services. Investments in entities in which we lack the ability to exercise significant influence are included in the consolidated financial statements at cost unless there has been a decline in the market value of our investment.   Use of Estimates   The preparation of financial statements in conformity with U.S. GAAP requires management 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” ).   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.  Subsequent changes resulting from a patient’s ability to pay are recorded as bad debt expense, which is included as a component of other operating expenses in the consolidated statements of operations. Bad debt expense was $ 3,339,000 , $ 2,403,000 , and $ 1,524,000 for years ended December 31, 2020, 2019, and 2018, respectively.  As of December 31, 2020, and 2019, the Company has recorded allowance for doubtful accounts of $ 5,672,000 and $ 4,451,000 , respectively, as our best estimate of probable losses inherent in the accounts receivable balance.   Other Revenues   As discussed in Note 4, 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 long–term care center under contract. We record other revenues as the performance obligations are satisfied based on the terms of our contractual arrangements.   We recognize rental income based on the terms of our operating leases. Under certain of our leases, we receive variable rent, which is based on the increase in revenues of a lessee over a base year. We recognize variable rent annually or monthly, as applicable, when, based on the actual revenue of the lessee is earned.   43 Table of Contents   Government Grants   Given 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 6 for further disclosure of the Company’s operating segments.    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, professional 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 $ 31,983,000 , $ 24,758,000 , and $ 28,710,000 for the years ended December 31, 2020, 2019, and 2018, respectively.   Cash and Cash Equivalents   Cash equivalents include highly liquid investments with an original maturity of three months or less when purchased.   Restricted Cash and Cash Equivalents and Restricted Marketable Securities   Restricted cash and cash equivalents and restricted marketable securities represent assets that are primarily held by our wholly owned limited purpose insurance companies for workers' compensation and professional liability claims.   Investments in Marketable Securities and Restricted Marketable Securities   On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016 - 01 using the modified retrospective method as required in the standard. ASU No. 2016 - 01 revised the classification and measurement of investments in certain equity investments and required the change in fair value of many equity investments to be recognized in net income. The adoption of ASU No. 2016 - 01 resulted in a $ 68,073,000 reclassification of net unrealized gains from accumulated other comprehensive income to the opening balance sheet of retained earnings.   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. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s cost basis is written down to fair value through our results of operations. For debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the 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.   Inventories   Inventories consist generally of food and supplies and are valued at the lower of cost or net realizable value, with cost determined on a first–in, first–out (FIFO) basis.   Mortgage and Other Notes Receivable   In accordance with ASC Topic 310, Receivables , NHC evaluates the carrying values of its mortgage and other notes receivable on an instrument-by-instrument basis. On a quarterly basis, NHC reviews its notes receivable for recoverability when events or circumstances, including the non–receipt of contractual principal and interest payments, significant deteriorations of the financial condition of the borrower and significant adverse changes in general economic conditions, indicate that the carrying amount of the note receivable may not be recoverable. If necessary, impairment is measured as the amount by which the carrying amount exceeds the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.   44 Table of Contents   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.   Expenditures for repairs and maintenance are charged to expense as incurred. Betterments, which significantly extend the useful life, are capitalized. We remove the costs and related allowances for accumulated depreciation or amortization from the accounts for properties sold or retired, and any resulting gains or losses are included in income.   In accordance with ASC Topic 360, Property, Plant, and Equipment , we evaluate the recoverability of the carrying values of our properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize impairment is based on estimated future undiscounted cash flows from a property over the remaining useful life compared to the carrying value of that property. If recognition of impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the estimated fair value of the property.   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 the inception of a contract. We determine the lease term by assuming exercise of renewal options that are reasonably certain to be exercised.   The Company records right-of-use assets and liabilities on the 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 consolidated balance sheets and are expensed on a straight-line basis over the lease term in our consolidated statement of operations. We recognize lease components and non-lease components together and not as separate parts of a lease for real estate leases.   Operating lease right-of-use assets and liabilities are recorded at the present value of the lease payments over the lease term. The present values 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 healthcare facility are not included in determining the right-of-use assets and lease liabilities. Rather, these variable components are expensed as incurred.   Goodwill   The Company accounts for goodwill under ASC Topic 350, Intangibles – Goodwill and Other . Under the provisions of this guidance, goodwill and intangible assets with indefinite useful lives are not amortized but are subject to impairment tests based on their estimated fair value. Unamortized goodwill is continually reviewed for impairment in accordance with ASC Topic 350. The Company performs its annual impairment assessment on the first day of the fourth quarter.   The following table represents activity in goodwill by segment ( in thousands ):       Year Ended December 31, 2020       Inpatient Services     Homecare     All Other     Total   January 1, 2018   $ –     $ 17,600     $ –     $ 17,600   Additions     3,395       –       –       3,395   December 31, 2018     3,395       17,600       –       20,995   Additions     –       –       –       –   December 31, 2019     3,395       17,600       –       20,995   Additions     346       –       –       346   December 31, 2020   $ 3,741     $ 17,600     $ –     $ 21,341     45 Table of Contents     Accrued Risk Reserves   We are principally self–insured for risks related to employee health insurance and utilize wholly owned limited purpose insurance companies for workers’ compensation and professional liability claims. Accrued risk reserves primarily represent the accrual for risks associated with employee health insurance, workers’ compensation and professional liability claims. The accrued risk reserves include a liability for unpaid reported claims and estimates for incurred but unreported claims. Our policy with respect to a significant portion of our workers’ compensation and professional and general liability claims is to use an actuary to assist management in estimating our exposure for claims obligation (for both asserted and unasserted claims). Our health insurance reserve is based on our known claims incurred and an estimate of incurred but unreported claims determined by our analysis of historical claims paid. We reassess our accrued risk reserves on a quarterly basis, with changes in estimated losses being recorded in the consolidated statements of operations in the period first identified.   Other Current Liabilities   Other current liabilities primarily represent accruals for current federal and state income taxes, real estate taxes and other current liabilities.   Continuing Care Contracts and Refundable Entrance Fees       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 contract provides 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 actuarially 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 other noncurrent liabilities in the Company's consolidated balance sheets. The balances of refundable entrance fees as of December 31, 2020 and December  31, 2019 were $ 7,462,000 and $ 7,455,000 , respectively.    We annually estimate the present value of the net 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 net cost of future services exceeds the related anticipated revenues, a liability is recorded (obligation to provide future services) with a corresponding charge to income. The obligation to provide future services is included in other noncurrent liabilities in the Company’s consolidated balance sheets. At December 31, 2020 and 2019, we have recorded a future service obligation in the amounts of $ 2,177,000 and $ 2,035,000 , respectively.   Other Noncurrent Liabilities   Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions, deferred revenue, and obligations to provide 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.    Income Taxes   We utilize ASC Topic 740, Income Taxes , which requires an asset and liability approach for financial accounting and reporting for income taxes. Under this guidance, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 14 for further discussion of our accounting for income taxes.   Also, under ASC Topic 740, Income Taxes , tax positions are evaluated for recognition using a more–likely–than–not threshold, and those tax positions requiring recognition are measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Liabilities for income tax matters include amounts for income taxes, applicable penalties, and interest thereon and are the result of the potential alternative interpretations of tax laws and the judgmental nature of the timing of recognition of taxable income.   46 Table of Contents   Noncontrolling Interest   The noncontrolling interest in a subsidiary is presented within total equity in the Company’s consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its 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.   Stock–Based Compensation   Stock–based awards granted include stock options, restricted stock units, and stock purchased under our employee stock purchase plan. Stock–based compensation cost is measured at the grant date, based on the fair value of the awards, and is recognized as expense over the requisite service period only for those equity awards expected to vest.   The fair value of the restricted stock units is determined based on the stock price on the date of grant. We estimated the fair value of stock options and stock purchased under our employee stock purchase plan using the Black–Scholes model. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, we use the expected term of the grant, the expected volatility of the price of our common stock, risk–free interest rates and expected dividend yield of our common stock. The fair value is amortized on a straight–line basis over the requisite service periods of the awards.   Comprehensive Income   ASC Topic 220, Comprehensive Income, requires that changes in the amounts of certain items, including unrealized gains and losses on marketable debt securities, be shown in the consolidated financial statements as comprehensive income. We report comprehensive income in the consolidated statements of comprehensive income and also in the consolidated statements of stockholders’ equity.   Concentration of Credit Risks   Our credit risks primarily relate to cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, marketable securities, restricted marketable securities and notes receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. Restricted cash and cash equivalents are primarily invested in commercial paper and certificates of deposit with financial institutions and other interest-bearing accounts. Accounts receivable consist primarily of amounts due from patients (funded through Medicare, Medicaid, other contractual programs and through private payors) and from other health care companies for management, accounting and other services. We perform continual credit evaluations of our clients and maintain appropriate allowances for doubtful accounts on any accounts receivable proving uncollectible, and continually monitor and adjust these allowances as necessary. Marketable securities and restricted marketable securities are held primarily in accounts with brokerage institutions. Notes receivable relate primarily to secured loans with health care facilities.   At any point in time we have funds in our operating accounts and restricted cash accounts that are with third party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. While we monitor the cash balances in our operating accounts, these cash and restricted cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets.   Our financial instruments, principally our notes receivable, are subject to the possibility of loss of the carrying values as a result of the failure of other parties to perform according to their contractual obligations. We obtain various collateral and other protective rights, and continually monitor these rights in order to reduce such possibilities of credit loss. We evaluate the need to provide reserves for potential credit losses on our financial instruments based on management's periodic review of the portfolio on an instrument-by-instrument basis.   Recently Adopted Accounting Guidance   In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU Update 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 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.    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 consolidated financial statements.   47 Table of Contents   Note 2 – 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.”) being impacted. 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, third, and fourth quarters of 2020 have been significantly impacted by COVID- 19 with census in our skilled nursing facilities dropping to 83.6 % for the year, while we also incurred significantly increased operating expenses.    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, third, and fourth quarters of 2020, we received disbursements from the Provider Relief Fund which totaled $ 63,573,000 . 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 $63,573,000  of funds received, the Company recorded $ 47,505,000  of government stimulus income for the year ended December 31, 2020  determined on a systematic basis in line with the recognition of specific expenses and lost revenues for which the grants are intended to compensate.  The Company’s assessment of whether the terms and conditions for amounts received have been met for income recognition and the Company’s related income calculation considered all frequently asked questions and other interpretive guidance issued to date by the US. Department of Health and Human Services (“HHS”), but are subject to audit by the HHS.     As of December 31, 2020, amounts not recognized as income are $ 16,068,000  and are reflected in the current liability section of our 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 we will fully utilize the remaining $16,068,000  of provider relief funds before the reporting requirement deadline that is required by the U.S. HHS.     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, 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 December 31, 2020, the accelerated payments are reflected within contract liabilities in the consolidated balance sheets as the related performance obligations have not been completed.   The CARES Act temporarily suspended Medicare sequestration beginning May 1, 2020 through December 31, 2020. The Medicare sequestration policy reduces fee-for-service Medicare payments by 2 percent. The CARES Act extends the sequestration policy through 2030 in exchange for this temporary suspension. Our net patient revenues increased by approximately $ 2,900,000 in 2020 ( 2nd, 3rd, and 4th quarter impact) due to sequestration being temporarily suspended for the eight -month period.   The CARES Act also temporarily permitted employers to defer the deposit and payment of the employer’s portion of the social security taxes ( 6.2% of employee wages) that otherwise would be due between March 27, 2020 and December 31, 2020. 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. At December 31, 2020, we have deferred $ 21,158,000 of the Company’s share of the social security taxes.  At December 31, 2020, half of the payroll tax deferral is included in accrued payroll in the current liabilities section of the consolidated balance sheet and the other half of the payroll tax deferral is included in other noncurrent liabilities within our consolidated balance sheet.    We have also received from many of the states in which we operate a supplemental Medicaid payment to help mitigate the incremental costs resulting from the COVID- 19 public health emergency. For the year ended December 31, 2020, we have recorded $ 26,179,000 in net patient revenues in our consolidated statements of operations for these supplemental Medicaid payments.   48 Table of Contents   Note 3 – 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.       Year Ended December 31,   (in thousands)   2020     2019     2018   Inpatient services   $ 879,693     $ 893,201     $ 872,912   Homecare services     52,102       54,671       59,862   Total net patient revenue   $ 931,795     $ 947,872     $ 932,774     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:       Year Ended December 31,   Source   2020     2019     2018   Medicare     33 %       34 %       35 %   Managed Care     11 %       12 %       12 %   Medicaid     31 %       27 %       26 %   Private Pay and Other     25 %       27 %       27 %   Total     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 a 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 episodes 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.   49 Table of Contents   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 facilities 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.      Contract Liabilities   Included in the Company’s consolidated balance sheets are contract liabilities, which represent payments the Company receives in advance of services provided. As of December 31, 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.    A summary of the contract liabilities are follows ( in thousands ):   Balance, January 1, 2020   $ –   Payments received     51,253   Payments recognized     –   Balance, December 31, 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 in compliance with 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 currently 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 $ 16,454,000 and $ 15,108,000 as of December 31, 2020 and 2019, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.   50 Table of Contents   Note 4 – 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.       Year Ended December 31,   (in thousands)   2020     2019     2018   Rental income   $ 22,768     $ 22,641     $ 22,262   Management and accounting service fees     17,147       18,533       15,175   Insurance services     5,447       6,209       7,084   Other     771       1,128       1,386   Gain on sale of skilled nursing facility     2,784       –       1,668   Total other revenues   $ 48,917     $ 48,511     $ 47,575     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 7 – Long-Term Leases. Rental income reflected in the consolidated statements of operations consisted of the following:       Year Ended December 31,   (in thousands)   2020     2019     2018   Operating lease payments   $ 22,019     $ 21,937     $ 21,516   Variable lease payments     749       704       746   Total rental income   $ 22,768     $ 22,641     $ 22,262       The following table sets forth the undiscounted cash flows for future minimum lease payments receivable for leases in effect at December 31, 2020 ( in thousands ):   2021   $ 23,011   2022     22,907   2023     22,738   2024     22,730   2025     22,730   Thereafter     220   Total future minimum lease payments   $ 114,336     Management Fees from National   We have managed skilled nursing facilities for National since 1988, and we currently manage five facilities. See Note 19 regarding our relationship with National.   51 Table of Contents   During 2020, 2019 and 2018, we recognized approximately $ 4,729,000 , $ 6,627,000 , and $ 4,304,000 , respectively, of management fees and interest on management fees. Unrecognized and unpaid management fees and interest on management fees from National total $ 18,971,000 and $ 19,148,000 at December 31, 2020 and 2019, respectively.   The unpaid fees from these five facilities, because collection of substantially all of the contract consideration was not probable when the performance obligation was satisfied, will be recognized as revenues only in the period in which the amounts are received. Under the terms of our management agreement with National, the payment of these fees to us may be subordinated to other expenditures of the five skilled nursing facilities. We continue to manage these facilities so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a facility may be small compared to the potential benefit. We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of centers or proceeds from the sale of the centers are sufficient to pay the fees. There can be no assurance that such future improved cash flows will occur.   Management Fees and Financial and Accounting Services for Other Healthcare Centers   During 2020, 2019 and 2018, we provided management services to certain healthcare facilities (in addition to the five National centers) operated by third party owners.  For the years ended December 31, 2020, 2019 and 2018, we recognized management fees of $ 2,973,000 , $ 2,952,000 and $ 2,532,000 from these centers, respectively.    Insurance Services   For workers’ compensation insurance services, the premium revenues reflected in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 were $ 3,300,000 , $ 3,536,000 , and $ 4,392,000 , respectively. Associated losses and expenses are reflected in the consolidated statements of operations as "Salaries, wages and benefits."   For professional liability insurance services, the premium revenues reflected in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 were $ 2,147,000 , $ 2,673,000 , and $ 2,692,000 , respectively. Associated losses and expenses including those for self–insurance are included in the consolidated statements of operations as "Other operating costs and expenses".   Gain on sale of skilled nursing facility   In November 2020, the Company sold a skilled nursing facility located in Town & Country, Missouri. The total consideration paid to the Company was $ 6,750,000 , which resulted in a gain of $ 2,784,000 .   In October  2018, the Company sold a skilled nursing facility located in Madisonville, Kentucky.  The total consideration paid to the Company was $ 4,300,000 , which resulted in a gain of $ 1,668,000 .       Note 5 – Non–Operating Income   Non–operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on marketable securities, and interest income.       Year Ended December 31,   (in thousands)   2020     2019     2018   Equity in earnings of unconsolidated investments   $ 12,342     $ 9,744     $ 1,020   Dividends and net realized gains on sale of securities     8,390       7,840       7,417   Interest income     5,795       7,188       7,183   Gain on acquisitions of equity method investments     1,707       1,975       2,050   Total non-operating income   $ 28,234     $ 26,747     $ 17,670     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 $ 38,916,000 and $ 36,673,000 at December 31, 2020 and 2019, respectively. The carrying amounts are included in investments in unconsolidated companies in the consolidated balance sheets.   52 Table of Contents   Gain on acquisition s of equity method investment s   On 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 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 $ 1,707,000 . 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.   In June 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. This remeasurement of our equity interest at fair value resulted in a gain of $ 1,975,000 . The operating results of the business have been included in the accompanying consolidated financial statements since the June 2019  acquisition date.   In July 2018, the Company expanded its controlled operations through an acquisition of additional ownership resulting in a controlling financial interest of a 16 -bed geriatric psychiatric hospital in Osage Beach, Missouri.  We previously held a noncontrolling interest and accounted for the hospital as an equity method investment.  This remeasurement of our equity interest at fair value resulted in a gain of $ 2,050,000 . The operating results of the business have been included in the accompanying consolidated financial statements since the July 2018  acquisition date.       Note 6 – 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 make (“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 1 - “ 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 tables set forth the Company’s consolidated statements of operations by business segment (in thousands ):       Year Ended December 31, 2020       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 879,693     $ 52,102     $ –     $ 931,795   Other revenues     3,403       –       45,514       48,917   Government stimulus income     47,505       –       –       47,505   Net operating revenues and grant income     930,601       52,102       45,514       1,028,217                                     Costs and Expenses:                                 Salaries, wages and benefits     538,775       33,104       37,427       609,306   Other operating     261,643       14,689       10,513       286,845   Facility rent     33,090       1,802       5,602       40,494   Depreciation and amortization     38,217       377       3,424       42,018   Interest     1,374       –       25       1,399   Total costs and expenses     873,099       49,972       56,991       980,062                                     Income (loss) before non-operating income     57,502       2,130       ( 11,477 )     48,155   Non-operating income     –       –       28,234       28,234   Unrealized losses on marketable equity securities     –       –       ( 23,966 )     ( 23,966 )                                   Income (loss) before income taxes   $ 57,502     $ 2,130     $ ( 7,209 )   $ 52,423     53 Table of Contents       Year Ended December 31, 2019       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 893,201     $ 54,671     $ –     $ 947,872   Other revenues     910       –       47,601       48,511   Net operating revenues     894,111       54,671       47,601       996,383                                     Costs and Expenses:                                 Salaries, wages and benefits     526,430       33,037       33,364       592,831   Other operating     242,435       17,003       9,004       268,442   Facility rent     32,748       1,854       5,916       40,518   Depreciation and amortization     38,731       250       3,438       42,419   Interest     1,578       –       1,557       3,135   Total costs and expenses     841,922       52,144       53,279       947,345                                     Income (loss) before non-operating income     52,189       2,527       ( 5,678 )     49,038   Non-operating income     –       –       26,747       26,747   Unrealized gains on marketable equity securities     –       –       12,230       12,230                                     Income before income taxes   $ 52,189     $ 2,527     $ 33,299     $ 88,015           Year Ended December 31, 2018       Inpatient Services     Homecare     All Other     Total   Revenues:                                 Net patient revenues   $ 872,912     $ 59,862     $ –     $ 932,774   Other revenues     2,494       –       45,081       47,575   Net operating revenues     875,406       59,862       45,081       980,349                                     Costs and Expenses:                                 Salaries, wages and benefits     513,647       33,339       35,735       582,721   Other operating     225,133       19,566       9,339       254,038   Facility rent     33,052       1,945       5,926       40,923   Depreciation and amortization     38,372       229       3,293       41,894   Interest     1,504       –       3,193       4,697   Total costs and expenses     811,708       55,079       57,486       924,273                                     Income (loss) before non-operating income     63,698       4,783       ( 12,405 )     56,076   Non-operating income     –       –       17,670       17,670   Unrealized gains on marketable securities     –       –       1,138       1,138                                     Income before income taxes   $ 63,698     $ 4,783     $ 6,403     $ 74,884         Note 7 – Long–Term Leases      As of December 31, 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.   On January 1, 2007, a 15–year lease extension began which included three additional five–year renewal options. In December 2012, NHC extended the lease agreement through the first of the three additional five –year renewal options, which extended the lease date through 2026. The two additional five–year renewal options on the lease still remain. Under the terms of the lease, base rent totals $ 30,750,000 annually with rent thereafter escalating by 4 % of the increase in facility revenue over a 2007 base year.   In September 2013 and under the second lease agreement, NHC began operating seven skilled nursing facilities in New Hampshire and Massachusetts. The 15 -year lease term consists of base rent of $ 3,450,000 annually with rent escalating by 4 % of the increase in facility revenue over a 2014 base year. Additionally, NHC has the option to purchase the seven facilities from NHI in the 13th year of the lease for a purchase price of $ 49,000,000 .   54 Table of Contents   Base rent expense under both NHI lease agreements totals $ 34,200,000 annually. Percentage rent under the leases is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Percentage rent expense under both leases for 2020, 2019, and 2018 was $ 3,617,000 , $ 3,587,000 and $ 3,713,000 , respectively.    We have a right of first refusal with NHI to purchase any of the properties should NHI receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease.   Finance Leases   Effective June 1, 2014, NHC began leasing and operating 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.   Fixed assets recorded under the finance leases, which are included in property and equipment in the consolidated balance sheets, are as follows (in thousands) :       December 31,       2020     2019   Buildings and personal property   $ 39,032     $ 39,032   Accumulated amortization     ( 26,739 )     ( 22,859 )     $ 12,293     $ 16,173     Lease Classification   The Company recorded the following on the consolidated balance sheets ( in thousands ):           December 31,   Right-of-Use Assets   Balance Sheet Classification   2020     2019   Finance lease assets   Net property and equipment   $ 12,293     $ 16,173   Operating lease right-of use assets   Operating lease right-of-use assets     179,055       202,909   Total   $ 191,348       219,082               December 31,   Lease Liabilities   Balance Sheet Classification   2020     2019   Current:                     Finance lease liabilities   Finance lease obligations, current portion   $ 4,423     $ 4,166   Operating lease liabilities   Operating lease liabilities, current portion     25,451       24,243   Noncurrent:                     Finance lease liabilities   Finance lease obligations, less current portion     10,540       14,963   Operating lease liabilities   Operating lease liabilities, less current portion     153,604       178,666   Total   $ 194,018     $ 222,038     Weighted-average remaining lease terms and discount rates were as follows:   December 31,   2020     2019   Weighted-average remaining lease terms (in years)                 Finance     3.2       4.2   Operating     6.2       7.1                     Weighted-average discount rate                 Finance     6.0 %     6.0 % Operating     6.0 %     6.0 %   55 Table of Contents   Lease Costs    Lease costs recorded in the consolidated statement of operations are as follows (in thousands):   December 31,   2020     2019   Finance lease costs:                 Depreciation of leased assets   $ 3,906     $ 3,889   Interest of lease liabilities     1,064       1,306   Total finance lease costs     4,970       5,195                     Operating lease costs:                 Operating lease costs     35,656       35,881   Variable lease costs     3,617       3,587   Short-term lease costs     1,221       1,050   Total operating lease costs     40,494       40,518                     Total lease costs   $ 45,464     $ 45,713     Minimum Lease Payments   The following table summarizes the maturity of our finance and operating lease liabilities as of December 31, 2020 ( in thousands ):       Finance Leases     Operating Leases   2021   $ 5,200     $ 35,292   2022     5,200       34,971   2023     5,200       34,613   2024     867       34,414   2025     –       34,253   Thereafter     –       39,950   Total minimum lease payments   $ 16,467     $ 213,493   Less: amounts representing interest     ( 1,504 )     ( 34,438 ) Present value of future minimum lease payments     14,963       179,055   Less: current portion     ( 4,423 )     ( 25,451 ) Noncurrent lease liabilities   $ 10,540     $ 153,604     Other   Supplemental cash flow data were as follows (in thousands) :   December 31,   2020     2019   Cash paid for amounts included in the measurement of lease liabilities:                 Operating cash flows for operating leases   $ 35,655     $ 35,881   Operating cash flows for finance leases     1,064       1,306   Financing cash flows for finance leases     4,166       3,923     56 Table of Contents     Note 8 – Earning Per Share   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 share and per share amounts) :       Year Ended December 31,       2020     2019     2018   Basic:                         Weighted average common shares outstanding     15,306,174       15,270,154       15,224,886   Net income attributable to common stockholders of National Healthcare Corporation   $ 41,871     $ 68,211     $ 58,964                             Earnings per common share, basic   $ 2.74     $ 4.47     $ 3.87                             Diluted:                         Weighted average common shares outstanding     15,306,174       15,270,154       15,224,886   Dilutive effect of stock options     63,349       89,892       11,940   Assumed average common shares outstanding     15,369,523       15,360,046       15,236,826                             Net income attributable to common stockholders of National Healthcare Corporation   $ 41,871     $ 68,211     $ 58,964                             Earnings per common share, diluted   $ 2.72     $ 4.44     $ 3.87           Note 9 – Investments in Marketable Securities   Our investments in marketable securities include marketable equity securities and marketable debt 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 value 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.   Marketable securities consist of the following (in thousands) :       December 31, 2020     December 31, 2019   (in thousands)   Amortized Cost     Fair Value     Amortized Cost     Fair Value   Investments available for sale:                                 Marketable equity securities   $ 30,176     $ 128,590     $ 30,176     $ 152,453   Corporate debt securities     25,812       25,778       –       –   Asset-backed securities     2,485       2,480       –       –   U.S. Treasury securities     19,519       19,504       –       –   Restricted investments available for sale:                           Marketable equity securities     4,783       4,680       –       –   Corporate debt securities     61,709       66,247       63,414       65,653   Asset–backed securities     40,655       41,769       54,451       55,185   U.S. Treasury securities     20,760       21,159       13,379       13,410   State and municipal securities     12,497       12,898       12,922       13,158       $ 218,396       323,105     $ 174,342     $ 299,859     Included in the marketable equity securities available for sale are the following (in thousands, except share amounts) :       December 31, 2020     December 31, 2019       Shares     Cost     Fair Value     Shares     Cost     Fair Value   NHI Common Stock     1,630,642     $ 24,734     $ 112,792       1,630,642     $ 24,734     $ 132,865     57 Table of Contents   The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows:       December 31, 2020     December 31, 2019   (in thousands)   Cost     Fair Value     Cost     Fair Value   Maturities:                                 Within 1 year   $ 49,694     $ 49,863     $ 15,726     $ 15,767   1 to 5 years     99,143       103,002       88,314       90,408   6 to 10 years     34,326       36,685       40,126       41,231   Over 10 years     274       285       –       –       $ 183,437     $ 189,835     $ 144,166     $ 147,406     Gross unrealized gains related to marketable equity securities are $ 98,445,000 and $ 122,290,000 as of December 31, 2020 and 2019, respectively. Gross unrealized losses related to marketable equity securities are $ 134,000 and $ 13,000 as of December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, the Company recognized net unrealized losses of $ 23,966,000 and net unrealized gains of $ 12,230,000 , respectively, in the consolidated statements of operations.   Gross unrealized gains related to available for sale marketable debt securities are $ 6,759,000 and $ 3,407,000 as of December 31, 2020 and 2019, respectively. Gross unrealized losses related to available for sale marketable debt securities are $ 361,000 and $ 137,000 as of December 31, 2020 and 2019, respectively.   The Company has not recognized any credit related impairments for the years ended December 31, 2020, 2019, and 2018.   For the marketable debt 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 years ended December 31, 2020, 2019, and 2018 were $ 40,994,000 , $ 44,500,000 , and $ 4,539,000 , respectively. Net investment gains of $ 195,000 , $ 127,000 , and $ 18,000 were realized on these sales during the years ended December 31, 2020, 2019, and 2018, respectively. No sales were reported for the marketable equity securities for the years ended December 31, 2020, 2019, and 2018.       Note 10 – 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.   Valuation of Marketable Securities   The Company determines fair value for marketable securities with Level 1 inputs through quoted market prices. The Company determines fair value for marketable securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Our Level 2 marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each month, typically utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events.   58 Table of Contents   We validated the prices provided by our broker by reviewing their pricing methods, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing our validation procedures, we did not adjust or override any fair value measurements provided by our broker as of December 31, 2020 or 2019.   Other   The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short–term nature. The estimated fair value of notes receivable approximates the carrying value based principally on their underlying interest rates and terms, maturities, collateral and credit status of the receivables. At December 31, 2020 and 2019, there were no material differences between the carrying amounts and fair values of NHC’s financial instruments.         The following table summarizes fair value measurements by level at December 31, 2020 and December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands) :       Fair Value Measurements Using   December 31, 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   $ 147,093     $ 147,093     $ –     $ –   Restricted cash and cash equivalents     11,409       11,409       –       –   Marketable equity securities     133,270       133,270       –       –   Corporate debt securities     92,025       56,772       35,253       –   Asset–backed securities     44,249       –       44,249       –   U.S. Treasury securities     40,663       40,663       –       –   State and municipal securities     12,898       –       12,898       –   Total financial assets   $ 481,607     $ 389,207     $ 92,400     $ –             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     $ –     59 Table of Contents     Note 1 1 – Property and Equipment   Property and equipment, at cost, consists of the following (in thousands) :       December 31,       2020     2019   Land   $ 64,385     $ 61,018   Leasehold improvements     125,889       122,520   Buildings and improvements     641,367       644,236   Furniture and equipment     180,463       177,717   Construction in progress     18,322       11,713   Property and equipment, at cost     1,030,426       1,017,204   Less: Accumulated depreciation     ( 510,108 )     ( 481,774 ) Net property and equipment   $ 520,318     $ 535,430     The Company estimates the cost to complete construction in progress is approximately $ 380,000 at December 31, 2020.       Note 1 2 – Notes Receivable   At December 31, 2020 and 2019, we have notes receivable from healthcare facilities totaling $ 13,021,000 and $ 15,079,000 , respectively, reflected in the accompanying consolidated balance sheets. The notes include a working capital loan and a first mortgage, both with 8 % fixed interest rates and periodic payments required prior to maturity. The notes mature in 2022 and 2025.       Note 1 3 – Long–Term Debt   Long–term debt consists of the following (dollars in thousands) :         December 31,     Maturity   2020     2019   Credit Facility, interest payable monthly 2020   $ –     $ 10,000   Less current portion       –       (10,000)         $ –     $ –     On August 13, 2020, NHC terminated the credit facility. At December 31, 2020, the Company does not have a credit facility in place.         Note 1 4 – Income Taxes   The provision for income taxes is comprised of the following components (in thousands) :       Year Ended December 31,       2020     2019     2018   Current tax provision                         Federal   $ 19,054     $ 13,356     $ 13,583   State     2,337       1,101       1,612   Total current tax provision     21,391       14,457       15,195   Deferred tax provision                         Federal     ( 8,349 )     4,048       610   State     ( 2,609 )     1,534       380   Total deferred tax provision     ( 10,958 )     5,582       990   Income tax provision   $ 10,433     $ 20,039     $ 16,185     60 Table of Contents   The deferred tax assets and liabilities, consisting of temporary differences tax effected at the respective income tax rates, are as follows (in thousands) :       December 31,       2020     2019   Deferred tax assets:                 Accrued risk reserves   $ 1,764       1,625   Accrued expenses     11,803       5,926   Financial reporting depreciation in excess of tax depreciation     4,125       3,966   Stock based compensation     1,063       666   Deferred revenue     4,215       5,425   Operating lease liabilities     45,486       52,870   Other     698       665   Total gross deferred tax assets     69,154       71,143   Less: valuation allowance     –       –   Deferred tax assets less valuation allowance   $ 69,154     $ 71,143                     Deferred tax liabilities:                 Unrealized gains on marketable securities   $ ( 27,040 )   $ ( 32,638 ) Deferred gain on sale of assets, net     ( 2,042 )     ( 2,094 ) Book basis in excess of tax basis of intangible assets     ( 2,360 )     ( 2,063 ) Book basis in excess of tax basis of securities     ( 2,514 )     ( 2,172 ) Long–term investments     ( 3,791 )     ( 3,318 ) Operating lease assets     ( 45,486 )     ( 52,870 ) Total deferred tax liabilities   $ ( 83,233 )   $ ( 95,155 )                   Net deferred tax liability   $ ( 14,079 )   $ ( 24,012 )   A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows (in thousands) :       Year Ended December 31,       2020     2019     2018   Tax provision at federal statutory rate   $ 11,009     $ 18,483     $ 15,726                             Increase (decrease) in income taxes resulting from:                         State, net of federal benefit     1,631       3,850       3,213   Return to provision     ( 382 )     ( 793 )     ( 1,418 ) Unrecognized tax benefits     166       512       586   Expiration of statute of limitations     ( 2,366 )     ( 2,064 )     ( 2,222 ) Other net     375       51       300   Total increases (decreases)     ( 576 )     1,556       459   Effective income tax expense   $ 10,433     $ 20,039     $ 16,185     Our deferred tax assets have been evaluated for realization based on historical taxable income, tax planning strategies, the expected timing of reversals of existing temporary differences and future taxable income anticipated. Our deferred tax assets are more likely than not to be realized in full due to the existence of sufficient taxable income of the appropriate character under the tax law.   Uncertain tax positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment. Under ASC Topic 740, tax positions are evaluated for recognition using a more–likely–than–not threshold, and those tax positions requiring recognition are measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.   In accordance with current guidance, the Company has established a liability for unrecognized tax benefits, which are differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured. Generally, a liability is created for an unrecognized tax benefit because it represents a company’s potential future obligation to a taxing authority for a tax position that was not recognized per above. We believe that our liabilities reflect the anticipated outcome of known uncertain tax positions in conformity with ASC Topic 740 Income Taxes . Our liabilities for unrecognized tax benefits are presented in the consolidated balance sheets within other noncurrent liabilities.   61 Table of Contents   A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands) :       Deferred Tax Asset     Liability For Unrecognized Tax Benefits     Liability For Interest and Penalties     Liability Total   Balance, January 1, 2018   $ 5,048     $ 12,520     $ 3,275     $ 15,795   Additions based on tax positions related to the current year     811       811       –       811   Additions for tax positions of prior years     209       388       937       1,325   Reductions for statute of limitation expirations     ( 505 )     ( 1,786 )     ( 941 )     ( 2,727 ) Balance, December 31, 2018     5,563       11,933       3,271       15,204   Additions based on tax positions related to the current year     1,418       1,418       –       1,418   Additions for tax positions of prior years     907       1,002       973       1,975   Reductions for statute of limitation expirations     ( 475 )     ( 1,604 )     ( 935 )     ( 2,539 ) Balance, December 31, 2019     7,413       12,749       3,309       16,058   Additions based on tax positions related to the current year     1,229       1,229       –       1,229   Additions (reductions) for tax positions of prior years     ( 2,432 )     ( 2,273 )     403       ( 1,870 ) Reductions for statute of limitation expirations     ( 544 )     ( 1,812 )     ( 1,098 )     ( 2,910 ) Balance, December 31, 2020   $ 5,666     $ 9,893     $ 2,614     $ 12,507     During the year ended December 31, 2020, we have recognized a $ 1,812,000 decrease in unrecognized tax benefits and an accompanying $ 1,098,000 decrease of related interest and penalties due to the effect of statute of limitations lapse. The favorable impact on our tax provision was $ 2,366,000 . We have also recognized a $ 2,273,000 decrease in unrecognized tax benefits primarily as a result of the CARES Act. During the years ended December 31, 2019 and 2018, the favorable impact on our tax provision due to the effect of statute of limitations lapsing was $2,064,000 and $ 2,222,000 , respectively.   Unrecognized tax benefits of $ 4,727,000 , net of federal benefit at December 31, 2020, attributable to permanent differences, would favorably impact our effective tax rate if recognized. We do not expect significant increases or decreases in unrecognized tax benefits for the 2021 year, except for the effect of decreases related to the lapse of statute of limitations estimated at $ 2,286,000 .   Interest and penalties expense related to U.S. federal and state income tax returns are included within income tax expense. Interest and penalties expense (benefit) was $( 695,000 ), $ 38,000 , and $( 4,000 ) for the years ended December 31, 2020, 2019, and 2018, respectively.   The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2017 (with few state exceptions).        Note 1 5 – Stock Repurchase Program   The stock repurchase plan began on September 1, 2019  and expired on August 31, 2020. During 2020, the Company purchased 797 shares of its common stock for a total cost of $ 53,000 . During 2019, the Company purchased 10,396 shares of its common stock for a total cost of $ 872,000 . During 2018, the Company repurchased 14,506 shares of its common stock for a total cost of $ 867,000 . The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.   62 Table of Contents     Note 1 6 – Stock–Based Compensation   NHC recognizes stock–based compensation for all stock options and restricted stock granted over the requisite service period using the fair value for these grants as estimated at the date of grant either using the Black–Scholes pricing model for stock options or the quoted market price for restricted stock.   The Compensation Committee of the Board of Directors ("the Committee") has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option ("ISO"), a non–qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years. The exercise price of any non–qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.   In May 2020, our stockholders approved the 2020 Omnibus Equity Incentive Plan (the “2020 Equity Incentive Plan”) pursuant to which 2,500,000 shares of our common stock were available to grant for restricted stock, stock appreciation rights, stock options, and employee stock purchase plans. At December 31, 2020, 2,444,943 shares were available for future grants under the 2020 Equity Incentive Plan.   Additionally, we have an employee stock purchase plan that allows employees to purchase our shares of stock through payroll deductions. The plan allows employees to terminate participation at any time.   Compensation expense is recognized only for the awards that ultimately vest. The Company accounts for forfeitures when they occur. Stock–based compensation totaled $ 2,453,000 , $ 1,878,000 , and $ 1,778,000 , for the years ended December 31, 2020, 2019, and 2018, respectively. Stock–based compensation is included in salaries, wages and benefits in the consolidated statements of operations. Tax deductions for the options exercised totaled $ 677,000 , $ 3,918,000 , and $ 1,047,000 for the years ended December 31, 2020, 2019, and 2018, respectively. The total intrinsic value of shares exercised was $ 677,000 , $ 3,960,000 , and $ 1,047,000 for the years ended December 31, 2020, 2018 and 2018, respectively.   At December 31, 2020, the Company had $ 2,581,000 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 Company is required to estimate the fair value of stock–based awards on the date of grant. The fair value of each option award is estimated using the Black–Scholes option valuation model with the weighted average assumptions indicated in the following table. Each grant is valued as a single award with an expected term based upon expected employment and termination behavior. Compensation cost is recognized over the requisite service period in a manner consistent with the option vesting provisions. The straight–line attribution method requires that compensation expense is recognized at least equal to the portion of the grant–date fair value that is vested at that date. The expected volatility is derived using weekly historical data for periods immediately preceding the date of grant. The risk–free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised. The following table summarizes the assumptions used to value the options granted in the periods shown.       Year Ended December 31,       2020     2019     2018   Risk–free interest rate     0.87 %     2.30 %     2.46 % Expected volatility     20.1 %     17.4 %     16.1 % Expected life, in years     2.2       2.3       3.0   Expected dividend yield     2.91 %     2.73 %     3.29 %   The following table summarizes option activity:       Number of Shares     Weighted Average Exercise Price     Aggregate Intrinsic Value   Options outstanding at January 1, 2018     1,239,407       71.19       −   Options granted     110,265       61.39       −   Options exercised     ( 68,291 )     54.31       −   Options cancelled     ( 118,000 )     72.11       −   Options outstanding at December 31, 2018     1,163,381       71.16       −   Options granted     77,316       77.89       −   Options exercised     ( 346,168 )     71.57       −   Options cancelled     ( 85,000 )     72.94       −   Options outstanding at December 31, 2019     809,529       71.24       −   Options granted     104,057       73.98       −   Options exercised     ( 43,630 )     63.37       −   Options cancelled     ( 3,000 )     72.94       −   Options outstanding at December 31, 2020     866,956     $ 72.11     $ 572,790                             Options exercisable at December 31, 2020     215,456     $ 68.35     $ 572,790     63 Table of Contents   Options Outstanding December 31, 2020     Exercise Prices     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life in Years   153,000     $ 60.73 – 64.64     $ 62.67       2.3   713,956     $ 72.94 – $ 84.30       74.14       1.3   866,956               $ 72.11       1.3          Note 1 7 – Contingencies and Guarantees   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 or 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 $ 99,537,000 and $ 96,011,000 at December 31, 2020 and 2019, respectively. The liability is included in accrued risk reserves in the consolidated balance sheets. The amounts are 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 would have a material adverse effect on our 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 use independent actuaries to assist management 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 long–term care industry. Business is written on a direct basis. For direct business, coverage is written for statutory limits and the insurance company’s losses in excess of those limits are covered by reinsurance.   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.   Insurance coverage for all years includes primary policies and excess policies. The primary coverage is in the amount of a per incident claim and a per location claim with an annual primary policy aggregate limit that is adjusted on an annual basis. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly owned captive insurance company.   64 Table of Contents   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.   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.    Debt Guarantees   At December 31, 2020, no agreement to guarantee the debt of other parties exists.        Note 1 8 – Equity Method Investment in Caris HealthCare, L.P.   As of December 31, 2020, we have a 75.1 % non–controlling ownership interest in Caris, a business that specializes in hospice care services in NHC owned health care centers and in other settings. The carrying value of our investment is $ 38,916,000 and $ 36,673,000 at December 31, 2020 and 2019, respectively. The carrying amounts are included in investments in unconsolidated companies in the consolidated balance sheets. The difference between the carrying value of our investment and our capital account balance in Caris is due to the additional limited partner ownership interest the Company acquired from current and former partners. Summarized financial information of Caris for the years ended December 31, 2020, 2019, and 2018 is provided below (in thousands) .       December 31,       2020     2019     2018   Current assets   $ 27,737     $ 25,664     $ 17,539   Noncurrent assets     12,083       12,336       10,266   Liabilities     9,825       10,784       8,657   Partners’ capital     29,995       27,216       19,148   Revenue     68,649       62,034       56,410   Expenses     52,522       48,803       55,507   Net income     16,127       13,231       903     We have included separate audited financial statements for Caris as an exhibit to this filing.   Consolidation Considerations   Due to our ownership percentage in Caris, we have considered whether Caris should be consolidated by NHC under the guidance provided in ASC Topic 810, Consolidation . We do not consolidate Caris because ( 1 ) Caris’ equity at risk is sufficient to finance its activities without additional subordinated financial support, ( 2 ) the general partner of the Partnership has the power to direct the activities that most significantly impact the economic performance of Caris, and ( 3 ) the equity holders of Caris possess the characteristics of a controlling financial interest, including voting rights that are proportional to their economic interests. Supporting the assertions above is the following: ( 1 ) the ownership percentage of the general partner remains equally divided between NHC and another party, ( 2 ) the general partner manages and controls the Partnership with full and complete discretion, and ( 3 ) the limited partners have no right or power to take part in the control of the business of the Partnership, which is the position of the majority of our ownership interest.   65 Table of Contents     Note 1 9 – Relationship with National Health Corporation   National Health Corporation ("National"), which is wholly owned by the National Health Corporation Leveraged Employee Stock Ownership Plan ("ESOP"), was formed in 1986 and is our administrative services affiliate and contractor. As discussed below, all of the personnel conducting our business, including our executive management team, are employees of National and may have ownership interests in National only through their participation as employees in the ESOP.   Management Contracts   We currently manage five skilled nursing facilities for National under a management contract. The management contract has been extended until January 1, 2028. See Note 4 for additional information regarding management services fees recognized from National.    Financing Activities    In conjunction with our management contract, we have entered into a line of credit arrangement whereby we may have amounts due from National from time to time. The maximum loan commitment under the line of credit is $ 2,000,000 . At December 31, 2019, National did not have an outstanding balance on the line of credit.   The maximum line of credit commitment amount of $ 2,000,000 is also the amount of a deferred gain that has been outstanding since NHC sold certain assets to National in 1988. The amount of the deferred gain is expected to remain deferred until the management contract with National expires, currently scheduled in January 2028. The deferred gain is included in deferred revenue in the consolidated balance sheets.   Payroll and Related Services   The personnel conducting our business, including our executive management team, are employees of National and may have ownership interests in National only through their participation in the ESOP. National provides payroll services to NHC, provides employee fringe benefits, and maintains certain liability insurance. We pay to National all the costs of personnel employed for our benefit, as well as an administrative fee equal to 1 % of payroll costs. The administrative fee paid to National for the years ended December 31, 2020, 2019, and 2018 was $ 5,026,000 , $ 5,131,000 , and $ 5,064,000 , respectively. At December 31, 2020 and 2019, the Company has recorded $ 0 and $ 1,653,000 , respectively, in accounts receivable and $ 3,140,000 and $ 79,000 , respectively, in accounts payable in the consolidated balance sheets as a result of the timing differences between interim payments for payroll and employee benefits services costs.   National’s Ownership of Our Stock   At December 31, 2020, National owns 1,084,763 shares, or approximately 7.1 %, of our outstanding common stock.    Consolidation Considerations   Because of the contractual and management relationships between NHC and National as described in this note above, we have considered whether National should be consolidated by NHC under the guidance provided in ASC Topic 810, Consolidation . We do not consolidate National because ( 1 ) NHC does not have any obligation or rights (current or future) to absorb losses or to receive benefits from National. The ESOP participants bear the current and future financial gain or burden of National, ( 2 ) National’s equity at risk is sufficient to finance its activities without past or future subordinated support from NHC or other parties, and ( 3 ) the equity holders of National (that is collectively the ESOP, its trustees, and the ESOP participants) possess the characteristics of a controlling financial interest, including voting rights that are proportional to their economic interests. Supporting the assertions above is the following: ( 1 ) substantive independent trustees are appointed for the benefit of the ESOP participants when decisions must be made that may create the appearance of a conflict of interest between NHC and the ESOP, and ( 2 ) National was designed, formed and is operated for the purpose of creating variability and passing that variability along to the ESOP participants—that is, to provide retirement benefits and value to the employees of NHC and NHC’s affiliates. The contractual and management relationships between NHC and National are with the skilled nursing facilities that are substantially less than 50% of the fair value of the total assets of National. NHC does not have a variable interest in National as a whole.   66 Table of Contents     Note 20 – Variable Interest Entity   Accounting guidance requires that a variable interest entity (“VIE”), according to the provisions of ASC Topic 810, Consolidation , must be consolidated by the primary beneficiary. The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. We perform ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE. At December 31, 2020, we are the primary beneficiary of one VIE and therefore consolidate that entity.   Springfield, Missouri Lease   In December 2010, we signed an operating agreement to lease Springfield Rehabilitation and Health Care Center, a 120–bed skilled nursing facility located in Springfield, Missouri. The terms of the lease include a ten -year lease and include five additional, five -year lease options as well as a purchase option. The operating lease agreement was established on the same date third party owners purchased the real estate of the 120–bed skilled nursing facility. The third -party owners purchased the real estate for $ 4,500,000 , which is the amount NHC loaned the owners to purchase the facility under the terms of the lease agreement and the mortgage note. The risks and rewards associated with the operations of the facility and any appreciation or deprecation in the value of the real estate of the facility is borne by NHC. A mortgage note receivable from the third -party owners of $ 11,047,000 at December 31, 2020 and 2019 is eliminated in our consolidated financial statements. Land and buildings and improvements of $ 11,047,000 at December 31, 2020 and 2019 have been recorded in our consolidated financial statements, as well as the operations of the facility because we are the primary beneficiary in the relationship.         ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   None.