Acquisitions, Divestitures and FDIC Indemnification Asset

On July 27, 2019, the Corporation completed its acquisition of HopFed Bancorp, Inc. and its banking subsidiary, Heritage Bank. Therefore, the results of HopFed have been included in the results of operations beginning on July 27, 2019. Pursuant to the terms of the merger agreement, each issued and outstanding share of HopFed common stock, $0.01 par value per share, was converted into the right to receive, at the stockholder's election, either (or a combination of) 0.444 shares of Corporation common stock, without par value, or $21.00 in cash, subject to proration provisions specified in the merger agreement that provide for an aggregate split of 50% of shares of HopFed Common Stock being exchanged for Corporation Common Stock and 50% for cash, with cash to be paid in lieu of fractional shares. Each outstanding share of Corporation common stock remained outstanding and was unaffected by the merger. Acquisition-related costs of $2.9 million are included in the Corporation's income statement for the nine months ended September 30, 2019.

Goodwill of $41.1 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange. The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.



(Dollar amounts in thousands)	HopFed
Consideration
Cash consideration	$	67,348
Stock consideration	61,878

Fair value of total consideration transferred	$	129,226

Assets acquired
Cash	$	34,518
Investment securities available-for-sale	185,544
Federal Home Loan Bank stock	4,428
Loans	657,179
Premises and equipment	25,316
Core deposit intangibles	10,369
Other real estate owned	3,364
Other assets	6,596
Total assets acquired	927,314

Liabilities assumed
Deposits	735,526
FHLB advances	20,775
Other borrowings	75,783
Other liabilities	7,066
Total liabilities assumed	839,150

Net identifiable assets	88,164

Goodwill	$	41,062

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Corporation believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.

The following table presents supplemental pro forma information as if the acquisition had occurred at the beginning of 2019. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.



	Nine months ended September 30, 2019
(Dollar amounts in thousands, except per share data)	2019		2018

Net interest income	$	95,237	$	86,984
Net income	$	28,226	$	35,527
Basic and diluted earnings per share	$	2.24	$	2.90

The Bank was party to a loss sharing agreement with the FDIC as a result of a 2009 acquisition. Under the loss-sharing agreement (“LSA”), the Bank shared in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 million, the FDIC agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC agreed to reimburse the Bank for 95 percent of the losses. The loss-sharing agreement was subject to following servicing procedures as specified in the agreement with the FDIC. Loans acquired that were subject to the loss-sharing agreement with the FDIC were referred to as covered loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $19.4 million for losses and carrying expenses and carried an immaterial balance in the indemnification asset. The balance of loans that were covered by the loss share agreement at September 30, 2019 and December 31, 2018 totaled $2.8 million and $3.2 million, respectively. The agreement expired on July 2, 2019.

FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. FASB ASC 310-30 prohibits carrying over or creating an allowance for loan losses upon initial recognition.

Purchase credit impaired loans purchased during the nine months ending September 30, 2019, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:



(Dollar amount in thousands)	2019
Contractually required payments receivable of loans purchased during the year:
Commercial	$	16,530
Consumer	391
	$	16,921

Fair value of acquired loans at acquisition	$	8,870

The carrying amount of loans accounted for in accordance with FASB ASC 310-30 at September 30, 2019 and 2018 are shown in the following tables:



						2019
(Dollar amounts in thousands)	Commercial			Consumer		Total
Beginning balance, July 1,	$	1,458		$	—	$	1,458
Loans added	8,610			260		8,870
Discount accretion	—			—		—
Disposals	(35		)	—		(35		)
ASC 310-30 Loans, September 30,	$	10,033		$	260	$	10,293




						2019
(Dollar amounts in thousands)	Commercial			Consumer		Total
Beginning balance, January 1,	$	1,530		$	—	$	1,530
Loans added	8,610			260		8,870
Discount accretion	—			—		—
Disposals	(107		)	—		(107		)
ASC 310-30 Loans, September 30,	$	10,033		$	260	$	10,293



						2018
(Dollar amounts in thousands)	Commercial			Consumer		Total
Beginning balance, July 1,	$	1,598		$	—	$	1,598
Discount accretion	—			—		—
Disposals	(16		)	—		(16		)
ASC 310-30 Loans, September 30,	$	1,582		$	—	$	1,582




						2018
(Dollar amounts in thousands)	Commercial			Consumer		Total
Beginning balance, January 1,	$	1,896		$	—	$	1,896
Discount accretion	—			—		—
Disposals	(314		)	—		(314		)
ASC 310-30 Loans, September 30,	$	1,582		$	—	$	1,582