Fair Value Disclosures

The fair value framework as disclosed in the Fair Value Topic includes a hierarchy which focuses on prioritizing the inputs used in valuation techniques. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), a lower priority to observable inputs other than quoted prices in active markets for identical assets and liabilities (Level 2) and the lowest priority to unobservable inputs (Level 3). When determining the fair value measurements for assets and liabilities, First Financial looks to active markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are not traded in active markets, First Financial looks to observable market data for similar assets and liabilities and classifies such items as Level 2. Certain assets and liabilities are not actively traded in observable markets and First Financial must use alternative techniques, based on unobservable inputs, to determine the fair value and classifies such items as Level 3. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.

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
December 31, 2018
Financial assets
Cash and short-term investments	$	273,959	$	273,959	$	273,959	$	0	$	0
Investment securities held-to-maturity	429,328		424,118		0		424,118		0
Other investments	115,660		N/A		N/A		N/A		N/A
Loans held for sale	4,372		4,372		0		4,372		0
Loans and leases, net of ALLL	8,767,672		8,662,868		0		0		8,662,868
Accrued interest receivable	41,816		41,816		0		13,819		27,997

Financial liabilities
Deposits
Noninterest-bearing	$	2,492,434	$	2,492,434	$	0	$	2,492,434	$	0
Interest-bearing demand	2,307,071		2,307,071		0		2,307,071		0
Savings	3,167,325		3,167,325		0		3,167,325		0
Time	2,173,564		2,146,645		0		2,146,645		0
Total deposits	10,140,394		10,113,475		0		10,113,475		0
Short-term borrowings	1,040,691		1,040,691		1,040,691		0		0
Long-term debt	570,739		557,933		0		557,933		0
Accrued interest payable	12,126		12,126		2,035		10,091		0



	Carrying		Estimated Fair Value
(Dollars in thousands)	Value		Total		Level 1		Level 2		Level 3
December 31, 2017
Financial assets
Cash and short-term investments	$	184,624	$	184,624	$	184,624	$	0	$	0
Investment securities held-to-maturity	654,008		653,101		0		653,101		0
Other investments	53,140		N/A		N/A		N/A		N/A
Loans held for sale	11,502		11,502		0		11,502		0
Loans and leases, net of ALLL	5,959,162		6,006,656		0		0		6,006,656
Accrued interest receivable	24,496		24,496		0		8,265		16,231

Financial liabilities
Deposits
Noninterest-bearing	$	1,662,058	$	1,662,058	$	0	$	1,662,058	$	0
Interest-bearing demand	1,453,463		1,453,463		0		1,453,463		0
Savings	2,462,420		2,462,420		0		2,462,420		0
Time	1,317,105		1,306,674		0		1,306,674		0
Total deposits	6,895,046		6,884,615		0		6,884,615		0
Short-term borrowings	814,565		814,565		814,565		0		0
Long-term debt	119,654		117,908		0		117,908		0
Accrued interest payable	5,104		5,104		204		4,900		0

The methods utilized to estimate the fair value of financial instruments at December 31, 2017 did not necessarily represent an exit price. In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

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.

Impaired loans. The fair value of impaired loans are specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. 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). 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). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease 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. If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent declines 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.

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 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.

The financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements were as follows:



	Fair Value Measurements Using						Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
December 31, 2018
Assets
Derivatives	$	0	$	29,543	$	0	$	29,543
Investment securities available-for-sale	97		2,779,158		0		2,779,255
Total	$	97	$	2,808,701	$	0	$	2,808,798

Liabilities
Derivatives	$	0	$	29,336	$	0	$	29,336



	Fair Value Measurements Using						Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
December 31, 2017
Assets
Derivatives	$	0	$	12,757	$	0	$	12,757
Investment securities available-for-sale	2,969		1,346,439		0		1,349,408
Total	$	2,969	$	1,359,196	$	0	$	1,362,165

Liabilities
Derivatives	$	0	$	12,755	$	0	$	12,755

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Adjustments to the fair market 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
December 31, 2018
Assets
Impaired loans	$	0	$	0	$	1,320
OREO	0		0		1,089



	Fair Value Measurements Using
(Dollars in thousands)	Level 1		Level 2		Level 3
December 31, 2017
Assets
Impaired loans	$	0	$	0	$	2,671
OREO	0		0		1,086