(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 effective portfolio management.

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 September 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 the unrealized losses were deemed to 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 September 30, 2016 and December 31, 2015 are as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2016
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	50,046	$	1,099	$	(14	)	$	51,131
Mortgage-backed U.S. government agencies		25,426		369		(8	)		25,787
State and political subdivision obligations		90,407		2,970		(83	)		93,294
Equity securities		3,268		73		(109	)		3,232
	$	169,147	$	4,511	$	(214	)	$	173,444

(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 $168,085,000 at September 30, 2016 and $130,298,000 at December 31, 2015, were pledged to secure public deposits and certain other borrowings.

Mid Penn realized net gains on sales of securities available-for-sale of $200,000 and $138,000, respectively, during the three months ended September 30, 2016 and 2015. Mid Penn realized net gains on sales of securities available-for-sale of $413,000 and $315,000, respectively, during the nine months ended September 30, 2016 and 2015.

The following tables present 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, 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
September 30, 2016	Securities	Value		Losses			Securities	Value		Losses			Securities	Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	3	$	7,486	$	(14	)	0	$	-	$	-		3	$	7,486	$	(14	)
Mortgage-backed U.S. government agencies	3		2,029		(8	)	0		-		-		3		2,029		(8	)
State and political subdivision obligations	24		10,969		(83	)	0		-		-		24		10,969		(83	)
Equity securities	0		-		-		2		1,059		(109	)	2		1,059		(109	)
Total temporarily impaired available for sale securities	30	$	20,484	$	(105	)	2	$	1,059	$	(109	)	32	$	21,543	$	(214	)

(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 September 30, 2016, thirty debt securities and two equity securities with unrealized losses totaling $214,000 were temporarily impaired approximately 1 percent from their amortized cost basis. At September 30, 2016, the majority of the unrealized losses on securities in an unrealized loss position were attributed to obligations of state and political subdivisions. At December 31, 2015, forty-four debt securities and three equity securities with unrealized losses totaling $403,000 were temporarily impaired approximately;;; 1 percent 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)	September 30, 2016
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	16,978	$	17,001
Due after 1 year but within 5 years		46,261		47,617
Due after 5 years but within 10 years		71,216		73,815
Due after 10 years		5,998		5,992
		140,453		144,425
Mortgage-backed securities		25,426		25,787
Equity securities		3,268		3,232
	$	169,147	$	173,444