(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 amortized cost 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 amortized cost 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 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.

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.

In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intent and ability to hold the securities until recovery of unrealized losses.

At September 30, 2014 and December 31, 2013, 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
September 30, 2014
available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	26,350	$	586	$	71	$	26,865
Mortgage-backed U.S. government agencies		40,617		314		252		40,679
State and political subdivision obligations		77,425		1,999		434		78,990
Equity securities		1,583		42		25		1,600
	$	145,975	$	2,941	$	782	$	148,134



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2013
available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	12,134	$	700	$	-	$	12,834
Mortgage-backed U.S. government agencies		39,481		349		438		39,392
State and political subdivision obligations		70,770		744		2,476		69,038
Equity securities		1,550		20		31		1,539
	$	123,935	$	1,813	$	2,945	$	122,803

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.

Investment securities having a fair value of $144,323,000 at September 30, 2014 and $114,600,000 at December 31, 2013, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of $0 on sales of securities available for sale during the three months ended September 30, 2014 and $150,000 during the first nine months of 2014. Mid Penn realized gross gains of $108,000 on sales of securities available for sale during the three months ended September 30, 2013 and $220,000 during the nine months ended September 30, 2013. Mid Penn realized gross losses on the sale of securities available for sale of $0 during the three and nine months ended September 30, 2014 and September 30, 2013.

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 September 30, 2014 and December 31, 2013.



(Dollars in thousands)		Less Than 12 Months				12 Months or More				Total
	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2014	Securities	Value		Losses		Value		Losses		Value		Losses
available-for-sale securities:
U.S. Treasury and U.S. government agencies	8	$	10,488	$	71	$	-	$	-	$	10,488	$	71
Mortgage-backed U.S. government agencies	22		11,367		71		5,395		181		16,762		252
State and political subdivision obligations	39		1,820		19		17,808		415		19,628		434
Equity securities	2		-		-		583		25		583		25
Total temporarily impaired
available-for-sale securities	71	$	23,675	$	161	$	23,786	$	621	$	47,461	$	782



(Dollars in thousands)		Less Than 12 Months				12 Months or More				Total
	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2013	Securities	Value		Losses		Value		Losses		Value		Losses
available-for-sale securities:
Mortgage-backed U.S. government agencies	29	$	9,799	$	182	$	9,866	$	256	$	19,665	$	438
State and political subdivision obligations	90		39,611		2,150		4,288		326		43,899		2,476
Equity securities	1		-		-		550		31		550		31
Total temporarily impaired
available-for-sale securities	120	$	49,410	$	2,332	$	14,704	$	613	$	64,114	$	2,945

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.

The majority of the investment portfolio is comprised of mortgage-backed U.S. government agencies and state and political subdivision obligations with school districts and municipal authorities throughout the U.S. For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis, that the unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

At September 30, 2014, 69 debt securities and 2 equity security with unrealized losses depreciated 1.64% from their amortized cost basis. Securities in an unrealized loss position for twelve months or longer at September 30, 2014 totaled $621,000, of which the majority was attributed to state and political subdivision obligations with $415,000 in unrealized losses. At December 31, 2013, 119 debt securities and 1 equity security with unrealized losses depreciated 4.59% from their amortized cost basis. At December 31, 2013, securities in an unrealized loss position for twelve months or longer totaled $613,000 of which the majority was attributed to mortgage,-backed U.S. government agencies and state and political subdivision obligations with $256,000 and $326,000 in unrealized losses, respectively.

Because Mid Penn does not intend to sell these investments and it is not likely it will be required to sell these investments before a recovery of fair value, which may be maturity, Mid Penn does not consider the securities with unrealized losses to be other-than-temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.

The table below is the maturity distribution of investment securities at amortized cost and fair value, by contractual maturity, where applicable. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.



(Dollars in thousands)	September 30, 2014
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	1,784	$	1,813
Due after 1 year but within 5 years		15,265		15,846
Due after 5 years but within 10 years		45,384		46,136
Due after 10 years		41,342		42,060
		103,775		105,855
Mortgage-backed securities		40,617		40,679
Equity securities		1,583		1,600
	$	145,975	$	148,134