The estimated fair values of First Financial’s financial instruments not measured at fair value on a recurring or nonrecurring basis in the consolidated financial statements were as follows:


	Carrying		Estimated fair value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
September 30, 2022
Financial assets
Cash and short-term investments	$	534,531	$	534,531	$	534,531	$	0	$	0
Investment securities held-to-maturity	85,823		78,924		0		78,924		0
Other investments	138,767		138,767		1,077		129,774		7,916

Loans and leases	9,673,340		9,290,399		0		0		9,290,399
Accrued interest receivable	50,926		50,926		0		15,042		35,884

Financial liabilities





Deposits	12,339,935		12,309,592		0		12,309,592		0
Short-term borrowings	1,161,047		1,161,047		1,161,047		0		0
Long-term debt	355,116		356,370		0		356,370		0
Accrued interest payable	6,567		6,567		1,614		4,953		0


	Carrying		Estimated fair value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
December 31, 2021
Financial assets
Cash and short-term investments	$	434,842	$	434,842	$	434,842	$	0	$	0
Investment securities held-to-maturity	98,420		99,898		0		99,898		0
Other investments	102,971		102,971		1,331		92,025		9,615

Loans and leases	9,156,307		9,172,111		0		0		9,172,111
Accrued interest receivable	44,627		44,627		0		15,170		29,457

Financial liabilities





Deposits	12,871,954		12,869,567		0		12,869,567		0
Short-term borrowings	296,203		296,203		296,203		0		0
Long-term debt	409,832		411,569		0		411,569		0
Accrued interest payable	4,498		4,498		0		4,498		0

The following methods, assumptions and valuation techniques were used by First Financial to measure different financial assets and liabilities at fair value on a recurring or nonrecurring basis.

Investment securities. Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. First Financial compiles prices from various sources who may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for the specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment securities not valued based upon the methods previously described are considered Level 3.

First Financial utilizes values provided by third-party pricing vendors to price the investment securities portfolio in accordance with the fair value hierarchy of the Fair Value Topic and reviews the pricing methodologies utilized by the pricing vendors to ensure that the fair value determination is consistent with the applicable accounting guidance. First Financial’s pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, historical prices and other independent pricing services. Further, the Company periodically validates the fair value of a sample of securities in the

portfolio by comparing the fair values to prices from other independent sources for the same or similar securities. First Financial analyzes unusual or significant variances, conducts additional research with the pricing vendor, and if necessary, takes appropriate action based on its findings. The results of the quality assurance process are incorporated into the selection of pricing providers by the portfolio manager.

Loans held for sale. The fair value of the Company’s residential mortgage loans held for sale is determined on a recurring basis based on quoted prices for similar loans in active markets, and therefore, is classified as Level 2 the fair value hierarchy.

Derivatives. The fair values of derivative instruments are based primarily on a net present value calculation of the cash flows related to the interest rate swaps and foreign exchange contracts at the reporting date, using primarily observable market inputs such as interest rate yield curves which represents the cost to terminate the swap if First Financial should choose to do so. Additionally, First Financial utilizes an internally-developed model to value the credit risk component of derivative assets and liabilities, which is recorded as an adjustment to the fair value of the derivative asset or liability on the reporting date. Derivative instruments are classified as Level 2 in the fair value hierarchy.

Collateral dependent loans. Collateral dependent loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals, a calculation of enterprise value or a valuation of business assets including equipment, inventory and accounts receivable. These loans had a principal amount of $4.6 million and $28.8 million at September 30, 2022 and December 31, 2021, respectively, with a valuation allowance of $2.5 million and $9.7 million at September 30, 2022 and December 31, 2021, respectively.

The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional write-downs and are adjusted accordingly.

Enterprise value is defined as imputed value for the entire underlying business. To determine an appropriate range of enterprise value, FFB relies on a standardized set of valuation methodologies that take into account future projected cash flows, market based multiples as well as asset values. Valuations involve both quantitative and qualitative considerations and professional judgments concerning differences in financial and operating characteristics in addition to other factors that may impact values over time (Level 3).

The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial statements. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3).

The fair value of collateral dependent loans is measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income.

OREO. Assets acquired through loan foreclosure are recorded at fair value less costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off establishing a new cost basis. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. The Company classifies OREO in level 3 of the fair value hierarchy.

Operating leases. First Financial performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable and therefore, the carrying value of Operating leases is re-measured at fair value on a nonrecurring basis. When evaluating whether an individual asset is impaired, First Financial considers the current fair value of the asset, the changes in overall market demand for the asset and the rate of change in advancements associated with technological improvements that impact the demand for the specific asset under review. First Financial determines whether the carrying values of certain operating leases are not recoverable and as a result, records an

impairment loss equal to the amount by which the carrying value of the assets exceeds the fair value. The fair value amounts are generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy.


	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/liabilities at fair value
September 30, 2022
Assets
Investment securities available-for-sale	$	34,402	$	3,460,898	$	36,053	$	3,531,353
Loans held for sale	0		10,684		0		10,684
Interest rate derivative contracts	0		163,503		0		163,503
Foreign exchange derivative contracts	0		309,211		0		309,211
Total	$	34,402	$	3,944,296	$	36,053	$	4,014,751

Liabilities
Interest rate derivative contracts	$	0	$	163,507	$	0	$	163,507
Foreign exchange derivative contracts	0		309,211		0		309,211
Total	$	0	$	472,718	$	0	$	472,718


	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/liabilities at fair value
December 31, 2021
Assets
Investment securities available-for-sale	$	34,776	$	4,134,889	$	38,181	$	4,207,846
Loans held for sale	0		29,482		0		29,482
Interest rate derivative contracts	0		92,328		0		92,328
Foreign exchange derivative contracts	0		120,768		0		120,768
Total	$	34,776	$	4,377,467	$	38,181	$	4,450,424

Liabilities
Interest rate derivative contracts	$	0	$	92,444	$	0	$	92,444
Foreign exchange derivative contracts	$	0	$	120,768	$	0	$	120,768
Total	$	0	$	213,212	$	0	$	213,212

The following table presents a reconciliation for certain AFS securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022 and September 30, 2021.


	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2022		2021		2022		2021
Beginning balance	$	36,796	$	39,030	$	38,181	$	40,575
Accretion (amortization)	(22)		(11)		(45)		(28)
Increase (decrease) in fair value	9		12		34		34
Settlements	(730)		(665)		(2,117)		(2,215)
Ending balance	$	36,053	$	38,366	$	36,053	$	38,366

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets. The following table summarizes financial assets and liabilities measured at fair value on a nonrecurring basis.


	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3
September 30, 2022
Assets
Collateral dependent loans
Commercial	$	0	$	0	$	2,106
Commercial real estate	0		0		0
OREO	0		0		22
Operating leases	0		0		0


	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3
December 31, 2021
Assets
Collateral dependent loans
Commercial	$	0	$	0	$	4,449
Commercial real estate	0		0		14,618
OREO	0		0		0

Fair value option. First Financial may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

The Company elected the fair value option for residential mortgage loans held for sale. This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to financially hedge them without having to apply complex hedge accounting requirements. The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.

The aggregate fair value of the Company’s residential mortgage loans held for sale as of September 30, 2022 and December 31, 2021 was $10.7 million and $29.5 million, respectively. The aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of September 30, 2022 and December 31, 2021 was $9.8 million and $27.2 million, respectively. The resulting difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was $0.9 million and $2.3 million as of September 30, 2022 and December 31, 2021, respectively.

Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of Net gain from sales of loans in the Company’s Consolidated Statements of Income. The change in fair value of the Company’s residential mortgage loans held for sale resulted in a net loss of $0.2 million for each of the three month periods ended September 30, 2022 and September 30, 2021. The change in fair value of the Company’s residential mortgage loans held for sale resulted in a net loss of $1.4 million and $2.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.