Fair Value of Financial Instruments

Available-for-sale securities measured at fair value on a recurring basis comprised the following:



			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
June 30, 2016
Obligations of:
U.S. government sponsored agencies	$	1,000	$	—	$	1,000	$	—
States and political subdivisions	114,826		—		114,826		—
Residential mortgage-backed securities	620,819		—		620,819		—
Commercial mortgage-backed securities	23,789		—		23,789		—
Bank-issued trust preferred securities	4,536		—		4,536		—
Equity securities	7,648		7,433		215		—
Total available-for-sale securities	$	772,618	$	7,433	$	765,185	$	—
December 31, 2015
Obligations of:
U.S. government sponsored agencies	$	2,966	$	—	$	2,966	$	—
States and political subdivisions	114,726		—		114,726		—
Residential mortgage-backed securities	632,293		—		632,293		—
Commercial mortgage-backed securities	23,845		—		23,845		—
Bank-issued trust preferred securities	4,635		—		4,635		—
Equity securities	6,236		6,024		212		—
Total available-for-sale securities	$	784,701	$	6,024	$	778,677	$	—

Held-to-maturity securities reported at fair value comprised the following:



			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)
June 30, 2016
Obligations of:
States and political subdivisions	$	4,331	$	—	$	4,331	$	—
Residential mortgage-backed securities	35,977		—		35,977		—
Commercial mortgage-backed securities	5,835		—		5,835		—
Total held-to-maturity securities	$	46,143	$	—	$	46,143	$	—
December 31, 2015
Obligations of:
States and political subdivisions	$	4,221	$	—	$	4,221	$	—
Residential mortgage-backed securities	35,196		—		35,196		—
Commercial mortgage-backed securities	6,436		—		6,436		—
Total held-to-maturity securities	$	45,853	$	—	$	45,853	$	—

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 volatility, 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 management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management 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 June 30, 2016, impaired loans with an aggregate outstanding principal balance of $46.5 million were measured and reported at a fair value of $38.4 million. For the three and six months ended June 30, 2016, Peoples recognized $125,000 and $63,000 of losses on impaired loans, respectively, through the allowance for loan losses.

The following table presents the fair values of financial assets and liabilities carried on Peoples’ Unaudited 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:



	June 30, 2016				December 31, 2015
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	66,344	$	66,344	$	71,115	$	71,115
Investment securities	855,326		857,163		868,830		868,955
Loans (1)	2,115,175		2,083,649		2,057,614		2,018,482
Financial liabilities:
Deposits	$	2,532,971	$	2,537,078	$	2,535,944	$	2,540,131
Short-term borrowings	173,512		173,512		160,386		160,386
Long-term borrowings	147,980		152,610		113,670		117,299
Cash flow hedges (2)	288		288		—		—

(1) Includes loans held for sale

(2) For additional information, see Note 10. Financial Instruments with Off-Balance Sheet Risk

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).

Cash flow hedges: The fair value of cash flow hedges are recognized in the Unaudited Consolidated Balance Sheets at their fair value. The fair value for derivative instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. (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.