Acquisitions and FDIC Indemnification Asset

6 Months Ended

Jun. 30, 2020

Acquisitions and FDIC Indemnification Asset

Acquisitions

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 $3.3 million are included in the Corporation's income statement for the year ended December 31, 2019.

Goodwill of $44.2 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)	As Initially Reported		Measurement Period Adjustments		As Adjusted
Consideration
Cash consideration	$	67,348	$	—	$	67,348
Stock consideration	61,878		—		61,878

Fair value of total consideration transferred	$	129,226	$	—	$	129,226

Assets acquired
Cash	$	34,518			$	34,518
Investment securities available-for-sale	174,851				174,851
Bank owned life insurance	10,693				10,693
Federal Home Loan Bank stock	4,428				4,428
Loans	657,179		1,719		658,898
Premises and equipment	25,316		(6,494)		18,822
Core deposit intangibles	10,369				10,369
Other real estate owned	3,364				3,364
Other assets	6,596		1,600		8,196
Total assets acquired	927,314		(3,175)		924,139

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

Net identifiable assets	88,164		(3,175)		84,989

Goodwill	$	41,062	$	3,175	$	44,237

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 2018. 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.


	Year ended December 31,
(Dollar amounts in thousands, except per share data)	2019		2018

Net interest income	$	147,581	$	145,136
Net income	$	51,088	$	52,252
Basic and diluted earnings per share	$	3.97	$	4.26

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 year ended December 31, 2019, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


(Dollar amount in thousands)	As Initially Reported		Measurement Period Adjustments		As Adjusted
Contractually required payments receivable of loans purchased during the year:
Commercial	$	16,530	$	(3,523)	$	13,007
Consumer	391		(296)		95
	$	16,921	$	(3,819)	$	13,102

Fair value of acquired loans at acquisition	$	8,870	$	(1,857)	$	7,013

The carrying amount of loans accounted for in accordance with FASB ASC 310-30 at June 30, 2020 and 2019 are shown in the following tables:


					2020
(Dollar amounts in thousands)	Commercial		Consumer		Total
Beginning balance, April 1,	$	6,347	$	—	$	6,347

Discount accretion	—		—		—
Disposals	(1,511)		—		(1,511)
ASC 310-30 Loans, June 30,	$	4,836	$	—	$	4,836



					2020
(Dollar amounts in thousands)	Commercial		Consumer		Total
Beginning balance, January 1,	$	7,269	$	—	$	7,269
Loans added	—		—		—
Discount accretion	—		—		—
Disposals	(2,433)		—		(2,433)
ASC 310-30 Loans, June 30,	$	4,836	$	—	$	4,836


					2019
(Dollar amounts in thousands)	Commercial		Consumer		Total
Beginning balance, April 1,	$	1,494	$	—	$	1,494
Discount accretion	—		—		—
Disposals	(36)		—		(36)
ASC 310-30 Loans, June 30,	$	1,458	$	—	$	1,458



					2019
(Dollar amounts in thousands)	Commercial		Consumer		Total
Beginning balance, January 1,	$	1,530	$	—	$	1,530
Discount accretion	—		—		—
Disposals	(72)		—		(72)
ASC 310-30 Loans, June 30,	$	1,458	$	—	$	1,458