(3) 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 March 31, 2015 and December 31, 2014, 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, 2015
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	26,337	$	1,026	$	16	$	27,347
Mortgage-backed U.S. government agencies		36,938		250		140		37,048
State and political subdivision obligations		74,162		2,077		242		75,997
Equity securities		2,239		70		21		2,288
	$	139,676	$	3,423	$	419	$	142,680



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2014
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	26,343	$	752	$	29	$	27,066
Mortgage-backed U.S. government agencies		33,763		190		177		33,776
State and political subdivision obligations		77,482		2,007		318		79,171
Equity securities		1,584		60		23		1,621
	$	139,172	$	3,009	$	547	$	141,634

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 $127,164,000 at March 31, 2015 and $134,740,000 at December 31, 2014, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of $177,000 and $150,000 on sales of securities available for sale during the three months ended March 31, 2015 and March 31, 2014. Mid Penn realized gross losses on the sale of securities available for sale of $0 during the three months ended March 31, 2015 and March 31, 2014.

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, 2015 and December 31, 2014.



(Dollars in thousands)		Less Than 12 Months				12 Months or More				Total
March 31, 2015	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Securities	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	4	$	4,397	$	16	$	-	$	-	$	4,397	$	16
Mortgage-backed U.S. government agencies	17		9,881		66		2,968		74		12,849		140
State and political subdivision obligations	25		8,463		48		4,592		194		13,055		242
Equity securities	2		-		-		596		21		596		21
Total temporarily impaired
available for sale securities	48	$	22,741	$	130	$	8,156	$	289	$	30,897	$	419



(Dollars in thousands)		Less Than 12 Months				12 Months or More				Total
December 31, 2014	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Securities	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	5	$	6,059	$	29	$	-	$	-	$	6,059	$	29
Mortgage-backed U.S. government agencies	20		9,511		62		4,416		115		13,927		177
State and political subdivision obligations	37		4,444		33		13,947		285		18,391		318
Equity securities	2		-		-		583		23		583		23
Total temporarily impaired
available for sale securities	64	$	20,014	$	124	$	18,946	$	423	$	38,960	$	547

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 March 31, 2015, 46 debt securities and 2 equity security with unrealized losses totaling $419,000 depreciated 1.36% from their amortized cost basis. At March 31, 2015, unrealized losses for twelve months or longer totaled $289,000 of which the majority was attributed to state and political subdivision obligations with $194,000 in unrealized losses. At December 31, 2014, 62 debt securities and 2 equity security with unrealized losses totaling $547,000 depreciated 1.40% from their amortized cost basis. At December 31, 2014, unrealized losses for twelve months or longer totaled $423,000 of which the majority was attributed to mortgage,-backed U.S. government agencies and state and political subdivision obligations with $115,000 and $285,000 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.



(Dollars in thousands)	March 31, 2015
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	1,488	$	1,516
Due after 1 year but within 5 years		14,470		15,068
Due after 5 years but within 10 years		48,039		49,435
Due after 10 years		36,502		37,325
		100,499		103,344
Mortgage-backed securities		36,938		37,048
Equity securities		2,239		2,288
	$	139,676	$	142,680