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Investment Securities
 6 Months Ended
Jun. 30, 2013
Investment [Line Items]  
Investment Securities

NOTE 3. Investment Securities

The amortized cost and fair values of investment securities at June 30, 2013 and December 31, 2012 were as follows:

        Gross Gross   
      Amortized Unrealized Unrealized Fair
 At June 30, 2013 Cost Gains Losses Value
 Available-for-Sale:            
  U.S. Government agencies  $60,189 $412 $535 $60,066
  Obligations of states and political subdivisions   396,320  15,338  4,158  407,500
  Agency residential mortgage-backed securities   1,738,829  15,559  13,856  1,740,532
  Non-agency residential mortgage-backed securities  25,929  1  747  25,183
  Commercial mortgage-backed securities   31,895  890  0  32,785
  Other structured financial products   25,049  0  14,543  10,506
  Other debt securities   43,115  558  470  43,203
      2,321,326  32,758  34,309  2,319,775
  Other equity securities   24,175  384  905  23,654
 Total available-for-sale securities  $2,345,501 $33,142 $35,214 $2,343,429
                
        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 June 30, 2013 and December 31, 2012, investment securities with carrying values of $1,559,473 and $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 June 30, 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.

     June 30, 2013 December 31, 2012 
     Amortized Fair Amortized Fair 
     Cost Value Cost Value 
 Securities available for sale:             
  Within one year  $9,546 $9,719 $8,690 $8,781 
  After one year but within five years   85,458  86,471  141,362  143,714 
  After five years but within ten years   835,879  833,557  935,796  952,680 
  After ten years   1,390,443  1,390,028  1,410,879  1,448,207 
   Total $2,321,326 $2,319,775 $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 June 30, Six Months Ended June 30, 
   2013 2012 2013 2012 
 Gross gains  $26 $4,348 $433 $4,740 
 Gross losses   0  (2,987)  (1)  (2,994) 
 Other-than-temporary impairment   (97)  0  (485)  (144) 
 Net gains  $(71) $1,361 $(53) $1,602 

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 June 30, 2013 and December 31, 2012.

 

June 30, 2013 Less than 12 Months 12 Months or More Total
   Fair Unrealized Fair Unrealized Fair Unrealized
   Value Losses Value Losses Value Losses
U.S. Government agencies  42,890  535  0  0  42,890  535
Obligations of states and political subdivisions   74,856  3,959  7,051  199  81,907  4,158
Agency residential mortgage-backed securities   928,206  13,856  0  0  928,206  13,856
Non-agency residential mortgage-backed securities  11,501  137  13,641  610  25,142  747
Other structured financial products   0  0  10,506  14,543  10,506  14,543
Other debt securities   6,679  68  6,606  402  13,285  470
Other equity securities   0  0  1,610  905  1,610  905
   $1,064,132 $18,555 $39,414 $16,659 $1,103,546 $35,214
                    
                    
December 31, 2012 Less than 12 Months 12 Months or More Total
   Fair Unrealized Fair Unrealized Fair Unrealized
   Value Losses Value Losses Value Losses
U.S. Government agencies  0  0  0  0  0  0
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 June 30, 2013, Susquehanna held five securities that had unrealized losses. Four of those securities 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 none of these securities are 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 Six Months Ended
   June 30, June 30,
    2013 2012 2013 2012
Balance - beginning of period  $1,634 $4,746 $1,280 $4,602
Additions:             
 Amount related to credit losses for which an other-than-            
  temporary impairment was not previously recognized   0  0  325  0
 Additional amount related to credit losses for which an other-than-            
  temporary impairment was previously recognized   97  0  160  144
Deductions:            
 Realized losses  96  0  130  0
 Sale of securities for which other-than-temporary impairment was            
  previously recognized   0  3,180  0  3,180
Balance - end of period  $1,635 $1,566 $1,635 $1,566

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 key 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 ($471 and $1,182 at June 30, 2013 and 2012, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

   Weighted-average (%) 
   June 30, 
   2013 2012 
  Conditional repayment rate (1)10.4% 6.7% 
  Loss severity (2)42.0% 52.6% 
  Conditional default rate (3)3.6% 10.5% 
       
       
       
(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 key assumptions and inputs is performed by Susquehanna's Investment Officers and the results are reviewed by the Corporate Investment Committee (“CIC”) before being accepted and recorded. Key assumptions reviewed by the company include prepayment assumptions, default rates, loss severity, bond waterfall payments, and the discount rate as well as the actual performance of the underlying collateral. Additionally, available market indications of similar 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 $14,543 and $16,462 at June 30, 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. Susquehanna's Investment Officers have assisted with the development of, and performed a detailed review of the key 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 June 30, 2013 Pooled Trust #1 Pooled Trust #2 Pooled Trust #3 Pooled Trust #4
 Class  B B B A2L
 Class face value  $35,000 $59,248 $89,071 $45,500
 Book value  $3,000 $7,183 $8,115 $6,750
 Fair value   1,272  3,231  3,798  2,204
 Unrealized loss   (1,728)  (3,952)  (4,317)  (4,546)
 Present value of expected cash flows            
  for class noted above and all             
  subordinated classes (1) $162,483 $190,163 $305,257 $150,521
 Lowest credit rating assigned  D Ca Ca Ca
 Original collateral  $623,984 $501,470 $700,535 $487,680
 Performing collateral   358,342  279,934  470,731  281,488
 Actual defaults   30,000  51,580  44,000  77,212
 Actual deferrals   80,900  125,810  96,150  93,080
 Projected future defaults   54,168  45,809  49,876  39,479
 Actual defaults as a % of original            
  collateral   4.8%  10.3%  6.3%  15.8%
 Actual deferrals as a % of original            
  collateral (2)  13.0%  25.1%  13.7%  19.1%
 Actual defaults and deferrals as a % of            
  original collateral   17.8%  35.4%  20.0%  34.9%
 Projected future defaults as a % of             
  original collateral (3)  8.7%  9.1%  7.1%  8.1%
 Actual institutions deferring and            
  defaulted as a % of total institutions   20.0%  38.2%  26.2%  40.9%
 Projected future defaults as a % of            
  performing collateral plus            
  deferrals   12.3%  11.3%  8.8%  10.5%

 As of June 30, 2012 Pooled Trust #1 Pooled Trust #2 Pooled Trust #3 Pooled Trust #4
 Class  B B B A2L
 Class face value  $35,000 $58,557 $88,203 $45,500
 Book value  $3,000 $7,119 $8,055 $6,750
 Fair value   946  2,589  2,880  2,047
 Unrealized loss   (2,054)  (4,530)  (5,175)  (4,703)
 Present value of expected cash flows            
  for class noted above and all             
  subordinated classes (1) $143,300 $168,000 $261,812 $142,223
 Lowest credit rating assigned  Ca Ca Ca Ca
 Original collateral  $623,984 $501,470 $700,535 $487,680
 Performing collateral   352,028  293,200  470,731  304,600
 Actual defaults   10,000  51,580  44,000  74,500
 Actual deferrals   107,400  127,690  135,150  83,080
 Projected future defaults   75,111  61,395  68,172  46,599
 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%  25.5%  19.3%  17.0%
 Actual defaults and deferrals as a % of            
  original collateral   18.8%  35.8%  25.6%  32.3%
 Projected future defaults as a % of             
  original collateral (3)  12.0%  12.2%  9.7%  9.6%
 Actual institutions deferring and            
  defaulted as a % of total institutions   19.7%  39.3%  30.4%  38.2%
 Projected future defaults as a % of            
  performing collateral plus            
  deferrals  16.3%  14.6%  11.3%  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 June 30, 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.