(2) Investment Securities

Securities to be held for indefinite periods, but not intended to be held to maturity, are classified as available for sale and carried at fair value. Securities held for indefinite periods include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to liquidity needs, changes in interest rates, resultant prepayment risk, and other factors related to interest rate and resultant prepayment risk changes.

Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Corporation’s results of consolidated statements of income.

Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, this guidance changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

At March 31, 2013 and December 31, 2012, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2013
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	16,379	$	1,274	$	-	$	17,653
Mortgage-backed U.S. government agencies		58,302		360		376		58,286
State and political subdivision obligations		67,354		2,178		352		69,180
Equity securities		400		-		13		387
	$	142,435	$	3,812	$	741	$	145,506



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2012
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	16,394	$	1,346	$	-	$	17,740
Mortgage-backed U.S. government agencies		66,783		393		490		66,686
State and political subdivision obligations		67,033		2,542		96		69,479
Equity securities		400		-		10		390
	$	150,610	$	4,281	$	596	$	154,295

Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued.

Included in equity securities is an investment in Access Capital Strategies, an equity fund that invests in low to moderate income financing projects. This initial investment was purchased in 2004 to help fulfill the Bank’s regulatory requirement of the Community Reinvestment Act and an additional investment was purchased in 2011. At March 31, 2013 and December 31, 2012, the investment is reported at fair value.

Investment securities having a fair value of $93,077,000 at March 31, 2013 and $96,124,000 at December 31, 2012, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of $0 and $16,000 on sales of securities available for sale during the three month periods ended March 31, 2013 and 2012. Mid Penn realized gross losses of $0 during the three month periods ended March 31, 2013 and 2012 on the sale of securities available for sale.

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012.



(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
March 31, 2013	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
Mortgage-backed U.S. government agencies	$	18,847	$	230	$	10,785	$	146	$	29,632	$	376
State and political subdivision obligations		16,624		324		1,238		28		17,862		352
Equity securities		-		-		400		13		400		13
Total temporarily impaired
available for sale securities	$	35,471	$	554	$	12,423	$	187	$	47,894	$	741



(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
December 31, 2012	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
Mortgage-backed U.S. government agencies	$	30,345	$	270	$	15,839	$	220	$	46,184	$	490
State and political subdivision obligations		9,389		66		1,231		30		10,620		96
Equity securities		-		-		390		10		390		10
Total temporarily impaired
available for sale securities	$	39,734	$	336	$	17,460	$	260	$	57,194	$	596

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis; and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near term prospects of the issuer. In addition, for debt securities, the Corporation considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost basis. For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.

At March 31, 2013, 78 debt securities with unrealized losses depreciated 1.97% from their amortized cost basis. At December 31, 2012, 73 debt securities with unrealized losses depreciated 1.03% from their amortized cost basis. These securities are issued by either the U.S. Government or other governmental agencies. The unrealized losses were determined principally by reference to current interest rates for similar types of securities. In analyzing an issuer's financial condition, management considers whether the U.S. Government or its agencies issued the securities, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. Based on the above conditions management has determined that no declines are deemed to be other-than-temporary.

The table below is the maturity distribution of investment securities at amortized cost and fair value.



(Dollars in thousands)	March 31, 2013
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	-	$	-
Due after 1 year but within 5 years		21,553		23,145
Due after 5 years but within 10 years		25,715		26,673
Due after 10 years		36,465		37,015
		83,733		86,833
Mortgage-backed securities		58,302		58,286
Equity securities		400		387
	$	142,435	$	145,506

Mortgage-backed securities at March 31, 2013, had an average life of 2.2 years.