(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 Mid Penn’s consolidated statements of income.

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.

Mid Penn had no securities considered by management to be other than temporarily impaired as of June 30, 2016 or December 31, 2015, and did not record any securities impairment charges in the respective periods ended on these dates. Mid Penn does not consider the securities with unrealized losses on the respective dates to be other-than-temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.

The amortized cost, fair value, and unrealized gains and losses on investment securities at June 30, 2016 and December 31, 2015 are as follows:



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2016
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	43,604	$	1,271	$	-	$	44,875
Mortgage-backed U.S. government agencies		25,974		403		-		26,377
State and political subdivision obligations		88,973		3,876		11		92,838
Equity securities		3,168		140		56		3,252
	$	161,719	$	5,690	$	67	$	167,342



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2015
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	26,316	$	729	$	55	$	26,990
Mortgage-backed U.S. government agencies		38,983		49		228		38,804
State and political subdivision obligations		64,780		1,914		77		66,617
Equity securities		3,271		82		43		3,310
	$	133,350	$	2,774	$	403	$	135,721

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 $161,564,000 at June 30, 2016 and $130,298,000 at December 31, 2015, were pledged to secure public deposits and other borrowings.

Mid Penn realized net gains of $213,000 on sales of securities available-for-sale during the three and six months ended June 30, 2016. Mid Penn realized no gains on sales of securities available-for-sale during the three months ended June 30, 2015 and realized $177,000 of net gains on sales of securities available-for-sale during the six months ended June 30, 2015.

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 June 30, 2016 and December 31, 2015.



(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
June 30, 2016	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Available for sale securities:
Mortgage-backed U.S. government agencies	1	$	131	$	-	0	$	-	$	-	1	$	131	$	-
State and political subdivision obligations	3		1,789		2	1		325		9	4		2,114		11
Equity securities	1		990		10	2		1,068		46	3		2,058		56
Total temporarily impaired available for sale securities	5	$	2,910	$	12	3	$	1,393	$	55	8	$	4,303	$	67



(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
December 31, 2015	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	6	$	6,259	$	43	2	$	1,383	$	12	8	$	7,642	$	55
Mortgage-backed U.S. government agencies	13		12,759		124	11		6,282		104	24		19,041		228
State and political subdivision obligations	9		4,041		32	3		1,631		45	12		5,672		77
Equity securities	1		990		10	2		615		33	3		1,605		43
Total temporarily impaired available for sale securities	29	$	24,049	$	209	18	$	9,911	$	194	47	$	33,960	$	403

Management evaluates securities for other-than-temporary impairment 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, Mid Penn 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 securities issued by U.S. government agencies and state and political subdivision obligations. 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.

At June 30, 2016, five debt securities and three equity securities with unrealized losses totaling $67,000 were temporarily depreciated 1.56% from their amortized cost basis. At June 30, 2016, securities in an unrealized loss position were attributed to state and political subdivision obligations and equity securities. At December 31, 2015, 44 debt securities and 3 equity securities with unrealized losses totaling $403,000 were temporarily depreciated 1.19% from their amortized cost basis. At December 31, 2015, the majority of the unrealized losses on securities in an unrealized loss position were attributed to mortgage-backed U.S. government agencies.

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



(Dollars in thousands)	June 30, 2016
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	20,259	$	20,299
Due after 1 year but within 5 years		45,319		46,809
Due after 5 years but within 10 years		62,105		65,602
Due after 10 years		4,894		5,003
		132,577		137,713
Mortgage-backed securities		25,974		26,377
Equity securities		3,168		3,252
	$	161,719	$	167,342