Note 2: Merger

On April 18, 2018, Cincinnati Federal and Kentucky Federal Savings and Loan Association (“Kentucky Federal”) signed an Agreement and Plan of Merger, pursuant to which Kentucky Federal merged with and into Cincinnati Federal effective October 12, 2018.

On the effective date of the merger, the Company issued from its authorized but unissued shares of common stock, 63,382 shares of common stock to CF Mutual Holding Company. The number of shares issued was in consideration of Kentucky Federal’s appraised value. At closing, Kentucky Federal Director, Philip Wehrman, was added to the Boards of Directors of CF Mutual Holding Company, Cincinnati Bancorp and Cincinnati Federal. The business reason for the merger was to achieve scale and efficiency in operations, as well as, expand market share.

The merger with Kentucky Federal was accounted for using the acquisition method of accounting set forth in ASC No. 805-10-25, Business Combinations and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date. The following table summarizes the fair value recorded as of October 12, 2018:


	Amount		Fair Value		Fair Value
	Recorded		Adjustments		Recorded

Consideration Paid:

Fair value of total consideration transferred (common shares issued)	$	1,240,001	$	—	$	1,240,001

Identifiable Assets Acquired:

Cash and cash equivalents		2,224,645		—		2,224,645
Interest-bearing time deposits		3,580,000		—		3,580,000
Investment securities		5,280,000		(280,107)		4,999,893
Federal Home Loan Bank Stock		1,543,300		—		1,543,300
Net loans receivable		16,159,521		164,074		16,323,595
Premises & Equipment, net		194,202		772,700		966,902
Core deposit and other intangibles		—		221,193		221,193
Other real estate owned		132,590		(33,000)		99,590
Other assets		895,044		(35,718)		859,326

Total identifiable assets acquired		30,009,302		809,142		30,818,444

Liabilities Assumed:

Deposits		26,475,279		3,739		26,479,018
Federal Home Loan Bank advances		343,242		—		343,242
Deferred taxes		41,947		176,636		218,583
Other Liabilities		345,260		—		345,260

Total liabilities assumed		27,205,728		180,375		27,386,103

Total identified net assets acquired		2,803,574		628,767		3,432,341

Gain on merger	$	1,563,573	$	628,767	$	2,192,340

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 12, 2018 based on management’s best estimate using the information available at acquisition date. The application of purchase accounting resulted in a bargain purchase gain of approximately $2.2 million. The primary reason for the bargain purchase gain is the mutual savings structure of Kentucky Federal. The number of institutions that could merge with Kentucky Federal was limited and the mutual holding company structure of the Bank allowed the merger to occur.

The fair value for loans acquired from Kentucky Federal were estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Kentucky Federal’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on October 12, 2018. The Company acquired various loans in the acquisition, none of which had evidence of deterioration of credit quality since origination. The fair value of assets included loans with a fair value of $16,323,595. The gross principal and contractual interest due under the contracts was $16,419,786, of which $251,369 is expected to be uncollectible.

The core deposit intangible asset recognized of $221,193 is being amortized over its estimated life of approximately 10 years using the straight-line method and is included in other assets in the consolidated balance sheets.

Direct acquisition and integration costs were expensed as incurred and totaled approximately $18,000 and $577,000 for the years ended December 31, 2019 and 2018, respectively. These items were recorded as merger-related expenses in the consolidated statements of income.