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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2022

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, Peoples measures, records and reports various types of assets and liabilities at fair value on either a recurring or a non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented below in the sections entitled "Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis."

Depending on the nature of the asset or liability, Peoples uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under US GAAP uses a hierarchy, which is described in "Note 1 Summary of Significant Accounting Policies."

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented in the Consolidated Financial Statements.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets by level in the fair value hierarchy. At December 31, 2022 and December 31, 2021, there were no assets and liabilities measured on a recurring basis that were considered Level 3 measurements.


	Recurring Fair Value Measurements at Reporting Date
	December 31, 2022				December 31, 2021
(Dollars in thousands)	Level 1		Level 2			Level 1		Level 2
Assets:
Available-for-sale investment securities:
Obligations of:
U.S. Treasury and government agencies	$	152,422	$	—		$	35,604	$	—
U.S. government sponsored agencies	—		88,115			—		81,739
States and political subdivisions	—		225,882			—		259,319
Residential mortgage-backed securities	—		604,653			—		828,517
Commercial mortgage-backed securities	—		50,049			—		63,519
Bank-issued trust preferred securities	—		10,278			—		6,795

Total available-for-sale securities	152,422		978,977			35,604		1,239,889






Equity investment securities (a)	147		199			160		184

Derivative assets (b)	—		34,123			—		12,163
Liabilities:
Derivative liabilities (c)	$	—	$	28,529		$	—	$	17,183

(a) Included in "Other investment securities" on the Consolidated Balance Sheets. For additional information, see "Note 3 Investment Securities."

(b) Included in "Other assets" on the Consolidated Balance Sheets. For additional information, see "Note 15 Derivative Financial Instruments."

(c) Included in "Accrued expenses and other liabilities" on the Consolidated Balance Sheets. For additional information, see "Note 15 Derivative Financial Instruments."

Available-for-Sale Investment Securities: 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) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, SOFR and LIBOR (or other relevant) 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.

Equity Investment Securities: The fair values of Peoples' equity investment securities are obtained from quoted prices in active exchange markets for identical assets or liabilities (Level 1) or quoted prices in less active markets (Level 2).

Derivative Assets and Liabilities: Derivative assets and liabilities are recognized on the Consolidated Balance Sheets at their fair value within "Other assets" and "Accrued expenses and other liabilities", respectively. The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters (Level 2).

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis

The following table provides the fair value for each class of assets and liabilities required to be measured and reported at fair value on a non-recurring basis on the Consolidated Balance Sheets by level in the fair value hierarchy. At December 31, 2022 and December 31, 2021, there were no assets and liabilities measured on a non-recurring basis that were considered Level 1 measurements.


	Non-Recurring Fair Value Measurements at Reporting Date
	December 31, 2022				December 31, 2021
(Dollars in thousands)	Level 2		Level 3		Level 2		Level 3
Collateral dependent loans	$	—	$	10,354	$	—	$	430
Loans held for sale (a)	1,254		—		418		—
Other real estate owned ("OREO")	—		55		—		87
Servicing rights (b)(c)	$	—	$	—	—		$	22

(a) Loans held for sale are presented gross of a valuation allowance of $105 and $0 at December 31, 2022 and December 31, 2021, respectively.

(b) Included in "Other intangible assets" on the Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or estimated market value.

(c) Peoples established a valuation allowance on servicing rights of $1 at December 31, 2022 and $12 at December 31, 2021. The fair value of the servicing rights on 10-year fixed rate loans was less than the carrying value.

Collateral Dependent Loans: Loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty, are considered collateral dependent. Peoples utilizes outside third-party appraisal services to value the underlying collateral, for which Peoples uses to report the loans at their fair value (Level 3).

Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally one-to-four family residential loans, are carried, in aggregate, at the lower of cost or estimated fair value. Peoples uses a valuation model using quoted market prices of similar instruments in arriving at the fair value (Level 2).

Other Real Estate Owned: OREO, included in "Other assets" on the Consolidated Balance Sheets, is comprised primarily of commercial and residential real estate properties acquired by Peoples in satisfaction of a loan. OREO obtained in satisfaction of a loan is recorded at the lower of cost or estimated fair value, less estimated costs to sell the property. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is based on recent real estate appraisals and is updated at least annually. 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 (Level 3).

Servicing Rights: Servicing rights are included in "Other intangible assets" on the Consolidated Balance Sheets. The fair value of servicing rights is determined by using a discounted cash flow model, which estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates (Level 3). The carrying value of servicing rights is not re-measured to fair value on a recurring basis. Peoples assesses the carrying value of servicing rights quarterly for impairment.

Financial Instruments Not Required to be Measured and Reported at Fair Value

The following table provides the carrying amount for each class of assets and liabilities, and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets.


	Fair Value Measurements of Other Financial Instruments
(Dollars in thousands)	Fair Value Hierarchy Level	December 31, 2022				December 31, 2021
		Carrying Amount		Fair Value		Carrying Amount		Fair Value

Assets:
Cash and cash equivalents	1	$	154,022	$	154,022	$	415,727	$	415,727
Held-to-maturity investment securities:
Obligations of:
U.S. government sponsored agencies	2	132,366		123,020		36,431		35,513
States and political subdivisions (a)	2	145,263		108,776		151,688		150,138
Residential mortgage-backed securities	2	176,215		157,998		110,708		110,159
Commercial mortgage-backed securities	2	101,861		85,354		75,588		74,145
Commercial mortgage-backed securities	3	4,748		3,361		—		—
Total held-to-maturity securities		560,453		478,509		374,415		369,955
Other investment securities:
Other investment securities at cost:
Federal Home Loan Bank ("FHLB") stock	N/A	26,605		26,605		17,308		17,308
Federal Reserve Bank ("FRB") stock	N/A	21,231		21,231		13,311		13,311
Total other investment securities at cost		47,836		47,836		30,619		30,619
Other investment securities at fair value:
Nonqualified deferred compensation (b)	1	2,048		2,048		2,240		2,240
Other investment securities (c)	2	1,379		1,379		784		784
Total other investment securities at fair value		51,263		51,263		33,643		33,643
Loans and leases, net of deferred fees and cost (d)	3	4,707,150		4,516,695		4,481,600		4,510,605
Bank owned life insurance	2	105,292		105,292		73,358		73,358

Financial liabilities:
Deposits	2	$	5,716,941	$	4,682,491	$	5,862,552	$	5,546,552
Short-term borrowings	2	500,138		504,584		166,482		164,990
Long-term borrowings	2	101,093		101,992		99,475		101,664

(a) Held-to-maturity investment securities are presented gross of an allowance for credit losses of $241 and $286, at December 31, 2022 and December 31, 2021, respectively.

(b) Nonqualified deferred compensation includes underlying investments in mutual funds.

(c) "Other investment securities", as reported on the Consolidated Balance Sheets, also included equity investment securities at December 31, 2022

and at December 31, 2021, which are reported in the Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

table above and not included in this table.

(d) Loans and leases, net of deferred fees and cost are presented gross of an allowance for credit losses of $53.2 million and $64.0 million, as of December 31, 2022 and December 31, 2021, respectively.

For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These financial instruments include cash and cash equivalents, demand and other non-fixed-maturity deposits, and overnight borrowings. Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, balances due from other banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments with original maturities of ninety days or less. The carrying amount for cash on hand and balances due from banks is a reasonable estimate of fair value (Level 1).

Held-to-Maturity Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, relevant yield curves, credit spreads and prices from market makers and live trading systems (Level 2). When observable market data is absent, the independent pricing service estimates prices based on underlying cash flow characteristics and discount rates and compare to similar securities (Level 3). 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.

Other Investment Securities: Other investment securities at cost are not recorded at fair value as they are not marketable securities. Other investment securities at fair value are valued using quoted prices in an active market (Level 1) or quoted prices in less active markets (Level 2).

Loans and Leases, Net of Deferred Fees and Costs: The fair value of portfolio loans and leases assumes sale of the underlying 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 and leases (Level 3). Fair values for loans and leases are estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans and leases with similar terms, the credit risk associated with the loans and leases and other market factors, including liquidity.

Bank Owned Life Insurance: Peoples' bank owned life insurance policies are recorded at their cash surrender value (Level 2). Peoples recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits.

Deposits: The fair value of fixed-maturity certificates of deposit ("CDs") is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities (Level 2). Demand and other non-fixed-maturity deposits are estimated using a discounted cash flow calculation based on maturity, attrition and re-pricing assumptions.

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

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).

Certain financial assets and financial liabilities that are not required to be measured or reported at fair value can be subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These financial assets and liabilities include the following: customer relationships, the deposit base, and other information required to compute Peoples’ aggregate fair value, which are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.