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 Mid Penn's results of operations.

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, 2012 and December 31, 2011, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:


(Dollars in thousands)
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2012
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	26,083	$	1,466	$	—	$	27,549
Mortgage-backed U.S. government agencies		75,917		568		361		76,124
State and political subdivision obligations		49,663		1,770		216		51,217
Equity securities		400		—		8		392

	$	152,063	$	3,804	$	585	$	155,282


(Dollars in thousands)
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
December 31, 2011
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	26,116	$	1,501	$	—	$	27,617
Mortgage-backed U.S. government agencies		82,777		491		600		82,668
State and political subdivision obligations		46,654		1,836		124		48,366
Equity securities		400		—		8		392

	$	155,947	$	3,828	$	732	$	159,043

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.

Mid Penn's sole equity security is an investment in Access Capital Strategies, an equity fund that invests in low to moderate income financing projects. This investment was purchased in 2004 and additional shares were purchased in 2011 to help fulfill the Bank's regulatory requirement of the Community Reinvestment Act and at March 31, 2012 and December 31, 2011, is reported at fair value.

Investment securities having a fair value of $78,191,000 at March 31, 2012, and $85,591,000 at December 31, 2011, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of $16,000 and $0 in gross losses on sales of securities available for sale during the first quarter of 2012. Mid Penn did not realize any gross gains or losses on sales of securities available for sale during the first quarter of 2011.

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, 2012 and December 31, 2011.


(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
March 31, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale securities:
Mortgage-backed U.S. government agencies	$	40,994	$	358	$	140	$	3	$	41,134	$	361
State and political subdivision obligations		7,418		161		1,194		55		8,612		216
Equity securities		—		—		392		8		392		8

Total temporarily impaired available for sale securities	$	48,412	$	519	$	1,726	$	66	$	50,138	$	585


(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale securities:
Mortgage-backed U.S. government agencies	$	46,497	$	593	$	370	$	7	$	46,867	$	600
State and political subdivision obligations		4,371		49		1,169		75		5,540		124
Equity securities		—		—		392		8		392		8

Total temporarily impaired available for sale securities	$	50,868	$	642	$	1,931	$	90	$	52,799	$	732

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, 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.

At March 31, 2012, Mid Penn had 52 debt securities from separate issuers with unrealized losses. These securities have depreciated 1.16% from their amortized cost basis. At December 31, 2011, 45 debt securities with unrealized losses had depreciated 1.37% from the amortized cost basis. These securities are issued by either the U.S. Government or other governmental agencies. These 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, 2012
	Amortized Cost		Fair Value
Due in 1 year or less	$	2,327	$	2,342
Due after 1 year but within 5 years		24,381		25,438
Due after 5 years but within 10 years		19,586		20,828
Due after 10 years		29,452		30,158

		75,746		78,766

Mortgage-backed securities		75,917		76,124
Equity securities		400		392

	$	152,063	$	155,282

Mortgage-backed securities at March 31, 2012 had an average life of 2.0 years. Prepayment speed assumptions in this category have accelerated since December 31, 2011.