Fair Value of Financial Instruments

Available-for-sale securities measured at fair value on a recurring basis were comprised of the following at December 31:



			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
2017
Obligations of:
States and political subdivisions	$	101,569	$	—	$	101,569	$	—
Residential mortgage-backed securities	673,664		—		673,664		—
Commercial mortgage-backed securities	6,976		—		6,976		—
Bank-issued trust preferred securities	5,129		—		5,129		—
Equity securities	7,849		7,694		155		—
Total available-for-sale securities	$	795,187	$	7,694	$	787,493	$	—
2016
Obligations of:
U.S. government sponsored agencies	$	1,000	$	—	$	1,000	$	—
States and political subdivisions	117,230		—		117,230		—
Residential mortgage-backed securities	626,567		—		626,567		—
Commercial mortgage-backed securities	19,291		—		19,291		—
Bank-issued trust preferred securities	4,899		—		4,899		—
Equity securities	8,953		8,734		219		—
Total available-for-sale securities	$	777,940	$	8,734	$	769,206	$	—

Held-to-maturity securities reported at fair value were comprised of the following at December 31:



			Fair Value 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
2017
Obligations of:
States and political subdivisions	$	4,417	$	—	$	4,417	$	—
Residential mortgage-backed securities	32,227		—		32,227		—
Commercial mortgage-backed securities	4,569		—		4,569		—
Total held-to-maturity securities	$	41,213	$	—	$	41,213	$	—
2016
Obligations of:
States and political subdivisions	$	4,041	$	—	$	4,041	$	—
Residential mortgage-backed securities	33,762		—		33,762		—
Commercial mortgage-backed securities	5,424		—		5,424		—
Total held-to-maturity securities	$	43,227	$	—	$	43,227	$	—

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 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 3 inputs), less estimated selling costs. At December 31, 2017, impaired loans with an aggregate outstanding principal balance of $25.7 million were measured and reported at a fair value of $20.6 million. For the year ended December 31, 2017, Peoples recognized losses of $42,000 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 at December 31:



	2017				2016
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	72,194	$	72,194	$	66,146	$	66,146
Investment securities	874,486		874,771		859,455		859,538
Loans (1)	2,340,854		2,276,704		2,210,529		2,152,544
Bank owned life insurance	62,176		62,176		60,225		60,225
Servicing rights	2,305		2,305		2,305		2,305
Financial liabilities:
Deposits	$	2,730,330	$	2,730,071	$	2,509,722	$	2,512,647
Short-term borrowings	209,491		209,628		305,607		305,607
Long-term borrowings	144,019		142,108		145,155		145,106
Cash flow hedges (2)	1,354		1,354		1,779		1,779

(1) Includes loans held for sale.

(2) For additional information, see Note 14 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 below. 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, bank owned life insurance, servicing rights and cash flow hedges. 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).

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

Long-term borrowings: The fair value of long-term borrowings is estimated using 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 is recognized in the Consolidated Balance Sheets at their fair value within other assets. 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.