Investment Securities

3 Months Ended

Mar. 31, 2013

Investment [Line Items]

Investment Securities

NOTE3. Investment Securities

The amortized cost and fair values of investment securities at March 31, 2013 and December 31, 2012 were as follows:

				Gross		Gross
			Amortized	Unrealized		Unrealized		Fair
At March 31, 2013		Cost		Gains		Losses		Value
Available-for-Sale:
	U.S. Government agencies	$	113,328	$	808	$	0	$	114,136
	Obligations of states and political subdivisions		399,419		27,604		579		426,444
	Agency residential mortgage-backed securities		1,682,202		34,861		87		1,716,976
	Non-agency residential mortgage-backed securities		27,438		3		1,203		26,238
	Commercial mortgage-backed securities		35,619		1,275		0		36,894
	Other structured financial products		25,049		0		15,072		9,977
	Other debt securities		43,095		2,777		372		45,500
			2,326,150		67,328		17,313		2,376,165
	Other equity securities		24,188		931		658		24,461
Total available-for-sale securities		$	2,350,338	$	68,259	$	17,971	$	2,400,626
				Gross		Gross
			Amortized	Unrealized		Unrealized		Fair
At December 31, 2012		Cost		Gains		Losses		Value
Available-for-Sale:
	U.S. Government agencies	$	113,367	$	1,041	$	0	$	114,408
	Obligations of states and political subdivisions		403,487		32,585		295		435,777
	Agency residential mortgage-backed securities		1,843,511		37,104		53		1,880,562
	Non-agency residential mortgage-backed securities		29,428		2		1,980		27,450
	Commercial mortgage-backed securities		38,847		1,533		0		40,380
	Other structured financial products		25,011		0		15,461		9,550
	Other debt securities		43,076		2,643		464		45,255
			2,496,727		74,908		18,253		2,553,382
	Other equity securities		24,097		1,179		757		24,519
Total available-for-sale securities		$	2,520,824	$	76,087	$	19,010	$	2,577,901

At March 31, 2013 and December 31, 2012, investment securities with carrying values of $1,651,046and $1,775,345, respectively, were pledged to secure public funds and for other purposes as required by law.

The amortized cost and fair value of U.S. Government agencies, obligations of states and political subdivisions, agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, other structured financial products, other debt securities, and residential and commercial mortgage-backed securities, at March 31, 2013 and December 31, 2012, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			March 31, 2013				December 31, 2012
			Amortized		Fair		Amortized		Fair
			Cost		Value		Cost		Value
Securities available for sale:
	Within one year		$	8,103	$	8,175	$	8,690	$	8,781
	After one year but within five years			140,707		142,617		141,362		143,714
	After five years but within ten years			870,496		886,715		935,796		952,680
	After ten years			1,306,844		1,338,658		1,410,879		1,448,207
		Total	$	2,326,150	$	2,376,165	$	2,496,727	$	2,553,382

Gross realized gains and gross realized losses on investment securities transactions are summarized below. These gains and losses were recognized using the specific identification method and were included in noninterest income.

	Available-for-sale Securities
	Three Months Ended March 31,
	2013		2012
Gross gains	$	407	$	392
Gross losses		(1)		(7)
Other-than-temporary impairment		(388)		(144)
Net gains	$	18	$	241

The following table presents Susquehanna's investments' gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012.

March 31, 2013	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of states and political subdivisions		39,233		476		7,176		103		46,409		579
Agency residential mortgage-backed securities		16,981		87		0		0		16,981		87
Non-agency residential mortgage-backed securities		11,708		151		13,884		1,052		25,592		1,203
Other structured financial products		0		0		9,977		15,072		9,977		15,072
Other debt securities		0		0		6,623		372		6,623		372
Other equity securities		1,275		90		1,260		568		2,535		658
	$	69,197	$	804	$	38,920	$	17,167	$	108,117	$	17,971
December 31, 2012	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of states and political subdivisions		31,791		295		0		0		31,791		295
Agency residential mortgage-backed securities		11,291		53		0		0		11,291		53
Non-agency residential mortgage-backed securities		12,117		450		14,683		1,530		26,800		1,980
Other structured financial products		0		0		9,551		15,461		9,551		15,461
Other debt securities		0		0		6,518		464		6,518		464
Other equity securities		1,751		585		796		172		2,547		757
	$	56,950	$	1,383	$	31,548	$	17,627	$	88,498	$	19,010

Non-agency residential mortgage-backed securities. At March 31, 2013, Susquehanna held three securities that had unrealized losses, and were rated below investment grade. None of Susquehanna's non-agency residential mortgage-backed securities were backed by loans identified by the issuer as subprime or Alt-A collateral. Management has analyzed the collateral underlying these securities with respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that one of these securities is other-than-temporarily impaired.

Susquehanna recorded other-than-temporary impairment losses as presented in the following table:

Credit Losses on Non-agency Residential Mortgage-backed and Other Equity Securities for which a
Portion of an Other-than-temporary Impairment was Recognized in Other Comprehensive Income
				Three Months Ended
				March 31,
				2013		2012
	Balance - beginning of period			$	1,280	$	4,602
	Additions:
		Amount related to credit losses for which an other-than-temporary
			impairment was not previously recognized		325		0
		Additional amount related to credit losses for which an other-than-
			temporary impairment was previously recognized		63		144
	Deletions:
		Realized losses			34		0
	Balance - end of period			$	1,634	$	4,746

Susquehanna estimated the portion of loss attributable to credit using a discounted cash flow model. Susquehanna, in conjunction with a third-party financial advisory firm, assisted with the development of critical assumptions including the expected cash flows of the underlying collateral of the non-agency residential mortgage-backed securities using internal credit risk, interest rate risk, and prepayment risk models that incorporated management's best estimate of current key assumptions, such as default rates, loss severity, and prepayment rates. Assumptions used can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics, and collateral type. The distribution of underlying cash flows is determined in accordance with the security's terms. Expected principal and interest cash flows on an other-than-temporarily impaired debt security are discounted using the effective yield of that debt security.

Based on the expected cash flows derived from the model, Susquehanna expects to recover the unrealized loss in accumulated other comprehensive income ($745 and $4,144 at March 31, 2013 and 2012, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

			Weighted-average (%)
			March 31,
			2013	2012
		Conditional repayment rate (1)	10.3%	9.9%
		Loss severity (2)	43.0%	46.6%
		Conditional default rate (3)	3.8%	6.0%
(1)	Conditional repayment rate represents a rate equal to the proportion of principal balance paid off voluntarily over a certain period of time on an annualized basis.
(2)	Loss severity rates are projected by considering collateral characteristics such as current loan-to-value, original creditworthiness of borrowers (FICO score) and geographic concentration.
(3)	Conditional default rate is an annualized rate of default on a group of mortgages, and represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the borrower being past due 60 days, 90 days, or possibly already in the foreclosure process.

Management provides input and monitors the third party valuation process of the non-agency residential mortgage-backed securities. A detailed review of the critical assumptions and inputs is performed by Susquehanna's Corporate Investment Committee (“CIC”). Key assumptions reviewed by the CIC include prepayment assumptions, default rates, loss severity, bond waterfall payments, and the discount rate. Additionally, available market indications ofsimilar securities are provided by Susquehanna to the third party and are given a significant weighting by the third party.

Other structured financial products. Susquehanna's structured financial product investments are comprised of four pooled trust preferred securities which have an aggregate unrealized loss of $15,072 and $16,859 at March 31, 2013 and 2012, respectively. All of these securities are below investment grade but are of a more senior tranche of the specific issue. Susquehanna has contracted with a third-party financial advisory firm (“third party firm”) to assist in its other-than-temporary impairment analysis of its structured financial product investments. Management has assisted with the development of, and performed a detailed review of the critical assumptions. The review of the inputs for the valuation of the pooled trust preferred securities is performed by the CIC. Key aspects reviewed by CIC include the detail on non-performing financial institutions within the pools of trust preferred securities, the probability of default of the underlying institutions within the pools, the discount rate, trades of similar securities and indexes, and the weighting given to market indications. Susquehanna management believes that the valuation analysis and methodology reasonably supports the value and projected performance of the specific trust preferred securities. Management believes this valuation methodology presents an appropriate approach in the determination of other-than-temporary impairment charges in accordance with GAAP.

The third party firm uses a proprietary methodology to determine the other-than-temporary impairment of Susquehanna's pooled trust preferred securities. Using publicly available financial information, the third party firm's valuation analysis compares the present value of the expected base cash flows with the amortized cost basis of the trust preferred securities to determine whether Susquehanna expects to receive the entire amortized cost basis of such securities. To make this comparison, the third party firm evaluates two scenarios consisting of three phases each. The two scenarios are: (1) the first dollar loss scenario, and, (2) the expected or forecasted scenario. The three phases associated with each scenario are production of cash flows, application of the cash flows to the percent owned, and assessment of any other-than-temporary impairment.

To determine expected cash flows, the valuation analysis considers credit default rates, call options and deferrals, waterfall structure, and covenants relating to the trust preferred securities. The trust indenture documentation and the trustee reports for each specific trust preferred security issuance provides information regarding deferral rights, call options, various triggers, (including over-collateralization triggers), and waterfall structure, which management believes is essential in determining projected base cash flows. The third party firm determines short-term default risk using ratios, including the Texas ratio, that relate to the issuers, capitalization, asset quality, profitability, and liquidity. To determine longer term default probabilities, the third party firm uses an internal scoring approach that relies on key historical financial performance ratios. Management believes that future cash flows for these securities are reasonably developed and supported.

If a collateral security is in default at the assessment date, a recovery rate specific to the issuer of the collateral security is incorporated into the expected cash flows with a twenty-four month lag in timing of receipt of those expected cash flows. The third party firm calculates a terminal default rate based upon certain key financial ratios of the active issuers in the security relative to all FDIC insured bank institutions. The active issuers of the collateral securities are summarized as a weighted average based on issue size according to status of deferral and default assumption. To enhance the analysis, the third party firm calculates the standard deviation across the issuers for each ratio and removes any issuer that falls more than three standard deviations above or below the average for that ratio. No recovery is incorporated into the expected cash flows for any issuers that exceed the terminal default rate. For issuers currently making interest payments and for those currently deferring interest payments, Susquehanna makes an estimate using publicly available financial information as to the likelihood and timing of any default, after which the estimated cash flow reflects a recovery rate specific to the issuer. Issuers of collateral securities that are currently deferring interest payments and not expected to default are assumed to continue to defer interest payments for twenty quarters, the full contractually permitted deferral, from the period of initial deferral.

In considering the amount and timing of expected cash flows on the pooled trust preferred securities, management considers the right of the issuers of the securities underlying the pooled trust preferred securities to call those collateral securities. Management assesses any projected exercise of the call option, incorporating changes in economic and market conditions and the impact of any change in timing of expected cash flows in the measurement of fair value and other-than-temporary impairment.

The discount rate applied to the projected cash flows for the specific class is calculated using a spread to the current swap curve. The swap curve gives a market participant perspective of the term structure of interest rates and on credit spreads. The determination of the discount rate used in Susquehanna's valuation is based upon the referenced swap curve plus an additional credit spread based upon the credit rating of the class. Lower rated classes would have a wider implied credit spread. These multiple discount rates are then applied to the estimated cash flows in determining the estimated value.

	The present value of the expected cash flows for Susquehanna’s specific class and subordinate classes, as well as additional
information about the pooled trust preferred securities, are included in the following tables.
	As of March 31, 2013		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
	Class		B		B		B		A2L
	Class face value		$	35,000	$	58,922	$	88,670	$	45,500
	Book value		$	3,000	$	7,183	$	8,116	$	6,750
	Fair value			1,245		3,068		3,444		2,220
	Unrealized loss			(1,755)		(4,115)		(4,672)		(4,530)
	Present value of expected cash flows
		for class noted above and all
		subordinated classes (1)	$	150,775	$	178,443	$	308,449	$	147,139
	Lowest credit rating assigned		D		Ca		Ca		Ca
	Original collateral		$	623,984	$	501,470	$	700,535	$	487,680
	Performing collateral			361,842		295,080		484,731		281,600
	Actual defaults			30,000		51,580		44,000		77,100
	Actual deferrals			77,400		125,810		96,150		93,080
	Projected future defaults			61,045		53,910		47,105		42,053
	Actual defaults as a % of original
		collateral		4.8%		10.3%		6.3%		15.8%
	Actual deferrals as a % of original
		collateral (2)		12.4%		25.1%		13.7%		19.1%
	Actual defaults and deferrals as a % of
		original collateral		17.2%		35.4%		20.0%		34.9%
	Projected future defaults as a % of
		original collateral (3)		9.8%		10.8%		6.7%		8.6%
	Actual institutions deferring and
		defaulted as a % of total institutions		18.5%		37.5%		25.4%		41.8%
	Projected future defaults as a % of
		performing collateral plus
		deferrals		13.9%		12.8%		8.1%		11.2%

	As of March 31, 2012		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
	Class		B		B		B		A2L
	Class face value		$	35,000	$	58,363	$	87,962	$	45,500
	Book value		$	3,000	$	7,096	$	8,033	$	6,750
	Fair value			967		2,438		2,718		1,897
	Unrealized loss			(2,033)		(4,658)		(5,315)		(4,853)
	Present value of expected cash flows
		for class noted above and all
		subordinated classes (1)	$	151,043	$	171,529	$	277,791	$	142,866
	Lowest credit rating assigned		CCC-		Ca		Ca		Ca
	Original collateral		$	623,984	$	501,470	$	700,535	$	487,680
	Performing collateral			352,028		300,200		470,831		344,600
	Actual defaults			10,000		51,580		44,000		74,500
	Actual deferrals			107,400		120,690		135,150		43,080
	Projected future defaults			72,893		71,392		60,702		46,548
	Actual defaults as a % of original
		collateral		1.6%		10.3%		6.3%		15.3%
	Actual deferrals as a % of original
		collateral (2)		17.2%		24.1%		19.3%		8.8%
	Actual defaults and deferrals as a % of
		original collateral		18.8%		34.4%		25.6%		24.1%
	Projected future defaults as a % of
		original collateral (3)		11.7%		14.2%		8.7%		9.5%
	Actual institutions deferring and
		defaulted as a % of total institutions		19.4%		37.5%		30.4%		30.9%
	Projected future defaults as a % of
		performing collateral plus
		deferrals		15.9%		17.0%		10.0%		12.0%
(1)	Susquehanna determines whether it expects to recover the entire amortized cost basis by comparing the present value of the expected cash flows to be collected with the amortized cost basis. As of March 31, 2013 and 2012, the present value of the current estimated cash flows is equal to or greater than the book value of the trust preferred securities held. Consequently, there is no credit-related other-than-temporary impairment required to be recognized.
(2)	Includes current interest deferrals for the quarter for those institutions deferring as of the date of the assessment of the other-than-temporary impairment. Current deferrals are assumed to continue for twenty quarters, the full contractually permitted deferral period, if the institutions are not projected to default prior to that time.
(3)	Includes those institutions that are performing but are not projected to continue to perform and includes those institutions that are currently deferring interest that are projected to default, based upon third-party proprietary valuation methodology used to determine future defaults. Creditworthiness of each underlying issue in the collateralized debt obligation is determined using publicly available data.