(7)	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. Securities to be held to maturity are carried at amortized cost.

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 (loss), 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 (loss).

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. Mid Penn had no other-than-temporary impaired debt or equity securities in 2017, 2016, and 2015.

At December 31, 2017 and 2016, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

(Dollars in thousands)
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Available for sale 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		1,000		5		—		1,005
Equity securities		900		—		44		856
Total available for sale securities		96,198		14		2,747		93,465
Held to maturity 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
Corporate debt securities		—		—		—		—
Equity securities		—		—		—		—
Total held to maturity securities		101,356		41		914		100,483
Total	$	197,554	$	55	$	3,661	$	193,948

(Dollars in thousands)
	Amortized		Unrealized		Unrealized		Fair
December 31, 2016	Cost		Gains		Losses		Value
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	48,520	$	34	$	1,542	$	47,012
Mortgage-backed U.S. government agencies		26,181		17		579		25,619
State and political subdivision obligations		61,079		91		2,332		58,838
Corporate debt securities		1,000		—		—		1,000
Equity securities		1,268		—		112		1,156
	$	138,048	$	142	$	4,565	$	133,625

There were no held-to-maturity securities as of December 31, 2016.

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 $141,465,000 at December 31, 2017, and $131,469,000 at December 31, 2016, were pledged primarily to secure public deposits.

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 December 31, 2017 and 2016.

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
December 31, 2017	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized 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
Corporate debt securities	0		—		—	0		—		—	0		—		—
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
Corporate debt securities	0		—		—	0		—		—	0		—		—
Equity securities	0		—		—	0		—		—	0		—		—
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


(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
December 31, 2016	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	23	$	43,698	$	1,542	0	$	—	$	—	23	$	43,698	$	1,542
Mortgage-backed U.S. government agencies	18		24,321		579	0		—		—	18		24,321		579
State and political subdivision obligations	108		50,582		2,332	0		—		—	108		50,582		2,332
Corporate debt securities	0		—		—	0		—		—	0		—		—
Equity securities	0		—		—	2		1,056		112	2		1,056		112
Total temporarily impaired available for sale securities	149	$	118,601	$	4,453	2	$	1,056	$	112	151	$	119,657	$	4,565

There were no held-to-maturity securities as of December 31, 2016.

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 mortgage-backed 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, 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 December 31, 2017, the majority of the unrealized losses on securities in an unrealized loss position were attributed to state and political subdivision obligations and mortgage-back U.S. government agencies. At December 31, 2016, the majority of the unrealized losses on securities in an unrealized loss position were attributed to state and political subdivision obligations and U.S. Treasury and government agencies. 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.

Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31, 2017, 2016, and 2015 are shown in the table below.

(Dollars in thousands)	For the year ended December 31,
	2017			2016				2015
Realized gains	$	246		$	1,927		$	325
Realized losses		(204	)		(881	)		—
Net gains	$	42		$	1,046		$	325

The table below is the maturity distribution of investment securities at amortized cost and fair value at December 31, 2017.

(Dollars in thousands)	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
December 31, 2017	Cost		Value		Cost		Value
Due in 1 year or less	$	100	$	100	$	2,001	$	1,989
Due after 1 year but within 5 years		12,072		11,825		9,431		9,357
Due after 5 years but within 10 years		46,307		44,779		35,941		35,679
Due after 10 years		10,771		10,424		511		509
		69,250		67,128		47,884		47,534
Mortgage-backed securities		26,398		25,831		53,472		52,949
Equity securities		550		506		—		—
	$	96,198	$	93,465	$	101,356	$	100,483