Fair Value

3 Months Ended

Dec. 31, 2022

FAIR VALUE

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value.

As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At December 31, 2022 and September 30, 2022, respectively, there were no pending agency contracts held for sale. Included in the net loss on the sale of loans is $0 for the three months ending December 31, 2022, and a net loss of $22 for the three months ending December 31, 2021, respectively, related to the changes in fair value of loans held for sale during the period in which loans were subject to pending agency contracts.

Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.

Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At December 31, 2022 and September 30, 2022, respectively, this includes $473,131 and $457,908 of investments in U.S. government and agency obligations including U.S. Treasury notes and investments in highly liquid collateralized mortgage obligations, that can include items issued by Fannie Mae, Freddie Mac and Ginnie Mae, measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.

Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At December 31, 2022 and September 30, 2022, there were $12,549 and $9,661, respectively of loans held for sale measured at fair value. At December 31, 2022 and September 30, 2022 there were no loans carried at cost. Interest income on mortgage loans held for sale is recorded in interest income on loans.

Collateral-dependent Loans—Collateral-dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES. To calculate the credit loss of collateral-dependent loans, the fair market values of the collateral, estimated using third-party appraisals in the majority of instances, are reduced by calculated estimated costs to dispose, derived from historical experience and recent market conditions. Any indicated credit loss is recognized by a charge to the allowance for credit losses. Subsequent increases in collateral values or principal pay downs on loans with recognized credit loss could result in a collateral-dependent loan being carried below its fair value. When no credit loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The amortized cost of loans individually evaluated for credit loss based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs to dispose on fair values is determined at the time of credit loss or when additional credit loss is recognized and is included in quantitative information about significant unobservable inputs later in this note.

Loans held for investment that have been restructured in TDRs, are performing according to the restructured terms of the loan agreement and not evaluated based on collateral are individually evaluated for credit loss using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At December 31, 2022 and September 30, 2022, respectively, this included $76,579 and $76,692 in amortized cost of TDRs with related allowances for loss of $10,120 and $10,284.

Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of

real estate owned at December 31, 2022 and September 30, 2022 were $1,378 and $1,191, respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At December 31, 2022 and September 30, 2022, these adjustments were not significant to reported fair values. At December 31, 2022 and September 30, 2022, respectively, $1,432 and $1,192 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis, where the cost basis equals or exceeds the estimated fair values less costs to dispose of $186 and $156, respectively. Real estate owned includes $132 and $155 of properties carried at their original or adjusted cost basis at December 31, 2022 and September 30, 2022, respectively.

Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in Other assets or Other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges are settled daily, bringing the fair value to $0. Refer to Note 13. DERIVATIVE INSTRUMENTS for additional information on cash flow hedges and other derivative instruments. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.

Assets and liabilities carried at fair value on a recurring basis in the CONSOLIDATED STATEMENTS OF CONDITION at December 31, 2022 and September 30, 2022 are summarized below.


			Recurring Fair Value Measurements at Reporting Date Using
	December 31, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:

REMICs	$	468,538	$	—	$	468,538	$	—
Fannie Mae certificates	943		—		943		—

U.S. government and agency obligations	3,650		—		3,650		—




Total	$	473,131	$	—	$	473,131	$	—
Liabilities
Derivatives:
Interest rate lock commitments	$	29	$	—	$	—	$	29


Total	$	29	$	—	$	—	$	29


			Recurring Fair Value Measurements at Reporting Date Using
	September 30, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:

REMIC's	$	453,268	$	—	$	453,268	$	—
Fannie Mae certificates	1,021		—		1,021		—
U.S. government and agency obligations	3,619		—		3,619		—



Total	$	457,908	$	—	$	457,908	$	—

Liabilities
Derivatives:
Interest rate lock commitments	$	333	$	—	$	—	$	333


Total	$	333	$	—	$	—	$	333

The table below presents a reconciliation of the beginning and ending balances and the location within the CONSOLIDATED STATEMENTS OF INCOME where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).


	Three Months Ended December 31,
		2022		2021
Beginning balance		$	(333)	$	525
(Loss)/Gain during the period due to changes in fair value:
Included in other non-interest income		304		(278)
Ending balance		$	(29)	$	247
Change in unrealized gains for the period included in earnings for assets held at end of the reporting date		$	(29)	$	247

Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.


			Nonrecurring Fair Value Measurements at Reporting Date Using
	December 31, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Collateral-dependent loans, net of allowance	$	45,457	$	—	$	—	$	45,457
Mortgage loans held for sale	12,549		—		12,549		—
Real estate owned(1)	1,432		—		—		1,432
Total	$	59,438	$	—	$	12,549	$	46,889


			Nonrecurring Fair Value Measurements at Reporting Date Using
	September 30, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Collateral-dependent loans, net of allowance	$	47,121	$	—	$	—	$	47,121
Mortgage loans held for sale	9,661		—		9,661		—
Real estate owned(1)	1,192		—		—		1,192
Total	$	57,974	$	—	$	9,661	$	48,313

(1)Amounts represent fair value measurements of properties before deducting estimated costs to dispose.

The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments include both mortgage origination applications and preapprovals. Preapprovals generally have a much lower closure rate than origination applications which is reflected in the aggregate weighted average closure rates shown below.


	Fair Value
	December 31, 2022	Valuation Technique(s)	Unobservable Input	Range			Weighted Average
Collateral-dependent loans, net of allowance	$45,457	Market comparables of collateral discounted to estimated net proceeds	Discount appraised value to estimated net proceeds based on historical experience:
			• Residential Properties	0	-	28%	4.6%

Interest rate lock commitments	$(29)	Quoted Secondary Market pricing	Closure rate	0	-	100%	96.6%


	Fair Value
	September 30, 2022	Valuation Technique(s)	Unobservable Input	Range			Weighted Average
Collateral-dependent loans, net of allowance	$47,121	Market comparables of collateral discounted to estimated net proceeds	Discount appraised value to estimated net proceeds based on historical experience:
			• Residential Properties	0	-	28%	4.7%

Interest rate lock commitments	$(333)	Quoted Secondary Market pricing	Closure rate	0	-	100%	93.7%

The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the CONSOLIDATED STATEMENTS OF CONDITION.


	December 31, 2022
	Carrying		Fair		Level 1		Level 2		Level 3
	Amount		Value
Assets:
Cash and due from banks	$	31,515	$	31,515	$	31,515	$	—	$	—
Interest earning cash equivalents	412,066		412,066		412,066		—		—
Investment securities available for sale	473,131		473,131		—		473,131		—
Mortgage loans held for sale	12,549		12,549		—		12,549		—
Loans, net:
Mortgage loans held for investment	14,470,014		13,393,127		—		—		13,393,127
Other loans	3,481		3,481		—		—		3,481
Federal Home Loan Bank stock	222,415		222,415		N/A		—		—
Accrued interest receivable	45,317		45,317		—		45,317		—

Cash collateral received from or held by counterparty	36,202		36,202		36,202		—		—


Liabilities:
Checking and passbook accounts	$	2,846,894	$	2,846,894	$	—	$	2,846,894	$	—
Certificates of deposit	6,167,401		6,063,239		—		6,063,239		—
Borrowed funds	4,987,287		4,936,724		—		4,936,724		—
Borrowers’ advances for insurance and taxes	109,070		109,070		—		109,070		—
Principal, interest and escrow owed on loans serviced	28,500		28,500		—		28,500		—


Derivatives	29		29		—		—		29


	September 30, 2022
	Carrying		Fair		Level 1		Level 2		Level 3
	Amount		Value
Assets:
Cash and due from banks	$	18,961	$	18,961	$	18,961	$	—	$	—
Interest earning cash equivalents	350,603		350,603		350,603		—		—
Investment securities available for sale	457,908		457,908		—		457,908		—
Mortgage loans held for sale	9,661		9,661		—		9,661		—
Loans, net:
Mortgage loans held for investment	14,253,804		13,106,346		—		—		13,106,346
Other loans	3,263		3,263		—		—		3,263
Federal Home Loan Bank stock	212,290		212,290		N/A		—		—
Accrued interest receivable	40,256		40,256		—		40,256		—


Cash collateral received from or held by counterparty	26,045		26,045		26,045		—		—

Liabilities:
Checking and passbook accounts	$	3,056,506	$	3,056,506	$	—	$	3,056,506	$	—
Certificates of deposit	5,864,511		5,733,418		—		5,733,418		—
Borrowed funds	4,793,221		4,734,377		—		4,734,377		—
Borrowers’ advances for insurance and taxes	117,250		117,250		—		117,250		—
Principal, interest and escrow owed on loans serviced	29,913		29,913		—		29,913		—
Derivatives	333		333		—		—		333

Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value.

Cash and Due from Banks, Interest Earning Cash Equivalents, Cash Collateral Received from or Held by Counterparty— The carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale— Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Mortgage Loans Held for Sale— Fair value of mortgage loans held for sale is based on quoted secondary market pricing for loan portfolios with similar characteristics.

Loans— For mortgage loans held for investment, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. For other loans, the fair value is the principal outstanding at the reporting date. Collateral-dependent loans are measured at the lower of cost or fair value as described earlier in this footnote.

Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB Cincinnati are executed at par.

Deposits— The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.

Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.

Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.

Derivatives— Fair value is estimated based on the valuation techniques and inputs described earlier in this footnote.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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