(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, pledging requirements, and other factors related to effective portfolio management. Securities to be held to maturity are carried at amortized cost.

For available-for-sale debt securities, 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 debt securities are based on the difference between the amortized cost and fair value of each security as of the respective reporting date. Unrealized 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 for the respective period.

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, in addition to the credit condition of the underlying issuer, 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, 2018, December 31, 2017, or June 30, 2017, 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.

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value within other assets on the balance sheet, with realized and unrealized gains and losses reported in other expense on the income statement. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value within investment securities available-for-sale on the balance sheet, with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss, net of tax. Equity securities without readily determinable fair values are recorded at cost less any impairment.

The amortized cost, fair value, and unrealized gains and losses on investment securities at June 30, 2018 and December 31, 2017 are as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2018
Available-for-sale debt securities:
U.S. Treasury and U.S. government agencies	$	40,597	$	—	$	2,257	$	38,340
Mortgage-backed U.S. government agencies		43,713		1		1,288		42,426
State and political subdivision obligations		31,551		3		1,980		29,574
Corporate debt securities		1,350		1		—		1,351
Total available-for-sale debt securities		117,211		5		5,525		111,691
Held-to-maturity debt securities:
U.S. Treasury and U.S. government agencies		10,985		—		201		10,784
Mortgage-backed U.S. government agencies		66,512		4		1,649		64,867
State and political subdivision obligations		75,824		57		1,516		74,365
Total held-to-maturity debt securities		153,321		61		3,366		150,016
Total	$	270,532	$	66	$	8,891	$	261,707

(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2017
Available-for-sale debt securities:
U.S. Treasury and U.S. government agencies	$	40,125	$	—	$	1,395	$	38,730
Mortgage-backed U.S. government agencies		26,398		2		569		25,831
State and political subdivision obligations		27,775		7		739		27,043
Corporate debt securities		1,350		5		—		1,355
Total available-for-sale debt securities		95,648		14		2,703		92,959
Available-for-sale equity securities:
Equity securities		550		—		44		506
Total available-for-sale equity securities		550		—		44		506
Held-to-maturity debt securities:
U.S. Treasury and U.S. government agencies		10,984		—		90		10,894
Mortgage-backed U.S. government agencies		53,472		—		523		52,949
State and political subdivision obligations		36,900		41		301		36,640
Total held-to-maturity debt securities		101,356		41		914		100,483
Total	$	197,554	$	55	$	3,661	$	193,948

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. Please refer to Note 5, Fair Value Measurement, for more information on the fair value of investment securities.

Equity securities consist of Community Reinvestment Act funds and, as of June 30, 2018 and December 31, 2017, Mid Penn had $492,000 and $506,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss, net of tax. At December 31, 2017, net unrealized gains of $44,000 had been recognized in accumulated other comprehensive loss. On January 1, 2018, with the adoption of ASU 2016-01, these unrealized gains and losses were reclassified out of accumulated other comprehensive loss and into retained earnings and subsequent changes in fair value are now recognized in net income and the fair value of securities is presented in other assets. No equity securities were sold during the three and six months ended June 30, 2018.

Investment securities having a fair value of $158,363,000 at June 30, 2018 and $141,465,000 at December 31, 2017 were pledged to secure public deposits, some trust account holdings, and certain other borrowings.

Gross realized gains and losses on sales of available-for-sale debt securities for the three and six months ended June 30, 2018 and 2017 are shown in the table below.

(Dollars in thousands)	Three Months Ended June 30,								Six Months Ended June 30,

	2018				2017				2018				2017
Realized gains		$	11			$	77			$	111		$	200
Realized losses			(7	)			(65	)			(9	)		(180	)
Net gains		$	4			$	12			$	102		$	20

The following tables present gross unrealized losses and fair value of debt security investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017.

(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, 2018	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Available-for-sale debt securities:
U.S. Treasury and U.S. government agencies	3	$	4,453	$	231	19	$	33,887	$	2,026	22	$	38,340	$	2,257
Mortgage-backed U.S. government agencies	15		23,474		407	15		18,916		881	30		42,390		1,288
State and political subdivision obligations	15		8,094		356	41		18,486		1,624	56		26,580		1,980
Total temporarily impaired available-for-sale debt securities	33		36,021		994	75		71,289		4,531	108		107,310		5,525

Held-to-maturity debt securities:
U.S. Treasury and U.S. government agencies	3		8,793		191	1		1,991		10	4		10,784		201
Mortgage-backed U.S. government agencies	37		54,276		1,324	7		8,825		325	44		63,101		1,649
State and political subdivision obligations	134		53,362		1,461	3		1,486		55	137		54,848		1,516
Total temporarily impaired held-to-maturity debt securities	174		116,431		2,976	11		12,302		390	185		128,733		3,366
Total	207	$	152,452	$	3,970	86	$	83,591	$	4,921	293	$	236,043	$	8,891

(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, 2017	Securities	Value		Losses		Securities	Value		Losses			Securities	Value		Losses
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	3	$	5,008	$	184	18	$	33,722		$	1,211	21	$	38,730	$	1,395
Mortgage-backed U.S. government agencies	4		5,267		75	15		20,497			494	19		25,764		569
State and political subdivision obligations	11		6,144		102	40		19,091			637	51		25,235		739
Equity securities	0		—		—	1		506			44	1		506		44
Total temporarily impaired available-for-sale securities	18	$	16,419	$	361	74	$	73,816		$	2,386	92	$	90,235	$	2,747
Held-to-maturity securities:
U.S. Treasury and U.S. government agencies	0		—		—	4		10,894			90	4		10,894		90
Mortgage-backed U.S. government agencies	0		—		—	35		52,949			523	35		52,949		523
State and political subdivision obligations	0		—		—	77		29,976			301	77		29,976		301
Total temporarily impaired held to maturity securities	0		—		—	116		93,819			914	116		93,819		914
Total	18	$	16,419	$	361	190	$	167,635		$	3,300	208	$	184,054	$	3,661

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such additional evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized 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 that, based on its analysis, the unrealized losses were primarily caused by the movement of interest rates and not due to an erosion of credit quality of the underlying issuers.

At both June 30, 2018 and December 31, 2017, the majority of available-for-sale securities and held-to-maturity securities in an unrealized loss position were obligations of state and political subdivisions, U.S. Treasury and agency securities, and mortgage-backed U.S. government agencies.

The table below illustrates the maturity distribution of investment securities at amortized cost and fair value as of June 30, 2018.

(Dollars in thousands)	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
June 30, 2018	Cost		Value		Cost		Value
Due in 1 year or less	$	1,460	$	1,460	$	2,001	$	1,991
Due after 1 year but within 5 years		18,711		18,050		11,705		11,494
Due after 5 years but within 10 years		43,730		41,041		71,195		69,796
Due after 10 years		9,597		8,714		1,909		1,868
		73,498		69,265		86,810		85,149

Mortgage-backed securities		43,713		42,426		66,511		64,867
	$	117,211	$	111,691	$	153,321	$	150,016