Fair Value of Financial Instruments

Available-for-sale securities measured at fair value on a recurring basis comprised the following as of September 30, 2014 and December 31, 2013:



			Fair Value Measurements at Reporting Date Using
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Fair Value
September 30, 2014
Obligations of:
U.S. Treasury and government agencies	$	7	$	—	$	7	$	—
U.S. government sponsored agencies	8,689		—		8,689		—
States and political subdivisions	64,048		—		64,048		—
Residential mortgage-backed securities	518,159		—		518,159		—
Commercial mortgage-backed securities	27,542		—		27,542		—
Bank-issued trust preferred securities	8,194		—		8,194		—
Equity securities	5,188		4,984		204		—
Total available-for-sale securities	$	631,827	$	4,984	$	626,843	$	—
December 31, 2013
Obligations of:
U.S. Treasury and government agencies	$	20	$	—	$	20	$	—
U.S. government sponsored agencies	319		—		319		—
States and political subdivisions	50,962		—		50,962		—
Residential mortgage-backed securities	510,097		—		510,097		—
Commercial mortgage-backed securities	32,304		—		32,304		—
Bank-issued trust preferred securities	7,829		—		7,829		—
Equity securities	4,577		4,443		134		—
Total available-for-sale securities	$	606,108	$	4,443	$	601,665	$	—

Held-to-maturity securities reported at fair value comprised the following at September 30, 2014 and December 31, 2013:



			Fair Value at Reporting Date Using
(Dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2014
Obligations of:
States and political subdivisions	$	4,251	$	—	$	4,251	$	—
Residential mortgage-backed securities	36,582		—		36,582		—
Commercial mortgage-backed securities	7,401		—		7,401		—
Total held-to-maturity securities	$	48,234	$	—	$	48,234	$	—
December 31, 2013
Obligations of:
States and political subdivisions	$	3,929	$	—	$	3,929	$	—
Residential mortgage-backed securities	34,530		—		34,530		—
Commercial mortgage-backed securities	7,635		—		7,635		—
Total held-to-maturity securities	$	46,094	$	—	$	46,094	$	—

The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2). Management reviews the valuation methodology and quality controls utilized by the pricing services in their overall assessment of the reasonableness of the fair values provided and challenges prices when it believes a material discrepancy in pricing exists.

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis included the following:

Impaired Loans: Impaired loans are measured and reported at fair value when the amounts to be received are less than the carrying value of the loans. One of the allowable methods for determining the amount of impairment is estimating fair value using the fair value of the collateral for collateral-dependent loans. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the collateral based on observable market prices or market value provided by independent, licensed or certified appraisers (Level 2 inputs). At September 30, 2014, impaired loans with an aggregate outstanding principal balance of $1.5 million were measured and reported at a fair value of $1.1 million. For the three months ended September 30, 2014, Peoples recognized $419,000 of losses and for the nine months ended September 30, 2014, Peoples recognized losses of $428,000, on impaired loans through the allowance for loan losses.

The following table presents the fair values of financial assets and liabilities carried on Peoples’ Consolidated Balance Sheets, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:



	September 30, 2014				December 31, 2013
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	65,970	$	65,970	$	53,820	$	53,820
Investment securities	705,759		705,110		680,526		677,398
Loans	1,488,952		1,463,830		1,180,857		1,165,560
Financial liabilities:
Deposits	$	1,861,619	$	1,870,042	$	1,580,758	$	1,587,448
Short-term borrowings	71,897		71,897		113,590		113,590
Long-term borrowings	157,454		161,565		121,826		128,205

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, demand and other non-maturity deposits, and overnight borrowings. Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:

Loans: The fair value of portfolio loans assumes sale of the notes to a third-party financial investor. Accordingly, this value is not necessarily the value to Peoples if the notes were held to maturity. Peoples considered interest rate, credit and market factors in estimating the fair value of loans (Level 3 inputs). In the current whole loan market, financial investors are generally requiring a much higher rate of return than the return inherent in loans if held to maturity given the lack of market liquidity. This divergence accounts for the majority of the difference in carrying amount over fair value.

Deposits: The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities (Level 2 inputs).

Long-term Borrowings: The fair value of long-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2 inputs).

Bank premises and equipment, customer relationships, deposit base, banking center networks, and other information required to compute Peoples’ aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.