Investment Securities

9 Months Ended

Sep. 30, 2013

Investment Securities [Abstract]

Investment Securities

NOTE 3. Investment Securities

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

				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
At September 30, 2013		Cost		Gains		Losses		Value
Available-for-Sale:
	U.S. Government agencies	$	85,149	$	523	$	479	$	85,193
	Obligations of states and political subdivisions		390,752		14,356		3,830		401,278
	Agency residential mortgage-backed securities		1,879,504		18,135		12,829		1,884,810
	Non-agency residential mortgage-backed securities		24,106		70		580		23,596
	Commercial mortgage-backed securities		10,173		319		0		10,492
	Other structured financial products		25,049		0		13,605		11,444
	Other debt securities		43,135		323		629		42,829
			2,457,868		33,726		31,952		2,459,642
	Other equity securities		24,199		439		905		23,733
Total available-for-sale securities		$	2,482,067	$	34,165	$	32,857	$	2,483,375
				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 September 30, 2013 and December 31, 2012, investment securities with carrying values of $1,613,774and $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 September 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.

			September 30, 2013				December 31, 2012
			Amortized		Fair		Amortized		Fair
			Cost		Value		Cost		Value
Securities available for sale:
	Within one year		$	6,068	$	6,230	$	8,690	$	8,781
	After one year but within five years			105,652		106,773		141,362		143,714
	After five years but within ten years			970,915		975,745		935,796		952,680
	After ten years			1,375,233		1,370,894		1,410,879		1,448,207
		Total	$	2,457,868	$	2,459,642	$	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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Gross gains	$	2	$	278	$	435	$	5,018
Gross losses		0		(247)		(1)		(3,241)
Other-than-temporary impairment		0		0		(485)		(144)
Net gains	$	2	$	31	$	(51)	$	1,633

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 September 30, 2013 and December 31, 2012.

September 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	$	42,946	$	479	$	0	$	0	$	42,946	$	479
Obligations of states and political subdivisions		74,465		3,658		7,048		172		81,513		3,830
Agency residential mortgage-backed securities		872,355		12,829		0		0		872,355		12,829
Non-agency residential mortgage-backed securities		535		4		13,177		576		13,712		580
Other structured financial products		0		0		11,444		13,605		11,444		13,605
Other debt securities		18,576		173		6,565		456		25,141		629
Other equity securities		0		0		1,610		905		1,610		905
	$	1,008,877	$	17,143	$	39,844	$	15,714	$	1,048,721	$	32,857
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 September 30, 2013, Susquehanna held three securities that had unrealized losses, of whichtwo 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 there is no unrecognized other-than-temporarily impairment.

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				Nine Months Ended
			September 30,				September 30,
			2013		2012		2013		2012
Balance - beginning of period			$	1,635	$	1,566	$	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		0		0		160		144
Deductions:
	Realized losses			26		0		156		0
	Sale of securities for which other-than-temporary impairment was
		previously recognized		0		0		0		3,180
Balance - end of period			$	1,609	$	1,566	$	1,609	$	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 ($321 and $1,096 at September 30, 2013 and 2012, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

			Weighted-average (%)
			September 30,
			2013	2012
		Conditional repayment rate (1)	10.6%	7.4%
		Loss severity (2)	37.8%	45.0%
		Conditional default rate (3)	3.6%	4.7%
(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 $13,605 and $16,577 at September 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 September 30, 2013		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
Book value (SUSQ)		$	3,000	$	7,183	$	8,116	$	6,750
Fair value			1,400		3,654		4,081		2,309
Unrealized loss			(1,600)		(3,529)		(4,035)		(4,441)
Class		B		B		B		A2L
Class face value		$	35,000	$	59,409	$	89,268	$	45,500
Present value of expected cash flows
	for class noted above and all
	subordinated classes (1)	$	172,482	$	194,406	$	305,868	$	153,932
Lowest credit rating assigned		D		Ca		Ca		Ca
Original collateral		$	623,984	$	501,470	$	700,535	$	487,680
Performing collateral			393,342		299,934		472,261		273,488
Actual defaults			41,600		51,580		44,000		75,357
Actual deferrals			34,300		98,310		93,650		93,080
Projected future defaults			41,274		45,777		49,510		42,236
Actual defaults as a % of original
	collateral		6.7%		10.3%		6.3%		15.5%
Actual deferrals as a % of original
	collateral (2)		5.5%		19.6%		13.4%		19.1%
Actual defaults and deferrals as a % of
	original collateral		12.2%		29.9%		19.7%		34.6%
Projected future defaults as a % of
	original collateral (3)		6.6%		9.1%		7.1%		8.7%
Actual institutions deferring and
	defaulted as a % of total institutions		16.9%		34.5%		24.6%		40.9%
Projected future defaults as a % of
	performing collateral plus
	deferrals		9.7%		11.5%		8.7%		11.5%

As of September 30, 2012		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
Book value (SUSQ)		$	3,000	$	7,142	$	8,078	$	6,750
Fair value			775		2,609		2,927		2,082
Unrealized loss			(2,225)		(4,533)		(5,151)		(4,668)
Class		B		B		B		A2L
Class face value		$	35,000	$	58,745	$	88,449	$	45,500
Present value of expected cash flows
	for class noted above and all
	subordinated classes (1)	$	142,581	$	166,849	$	262,974	$	139,918
Lowest credit rating assigned		Ca		Ca		Ca		Ca
Original collateral		$	623,984	$	501,470	$	700,535	$	487,680
Performing collateral			352,028		293,200		462,731		304,600
Actual defaults			10,000		51,580		44,000		75,446
Actual deferrals			107,400		127,690		138,150		83,081
Projected future defaults			80,793		60,801		68,916		47,451
Actual defaults as a % of original
	collateral		1.6%		10.3%		6.3%		15.5%
Actual deferrals as a % of original
	collateral (2)		17.2%		25.5%		19.7%		17.0%
Actual defaults and deferrals as a % of
	original collateral		18.8%		35.8%		26.0%		32.5%
Projected future defaults as a % of
	original collateral (3)		12.9%		12.1%		9.8%		9.7%
Actual institutions deferring and
	defaulted as a % of total institutions		19.7%		39.3%		34.4%		38.2%
Projected future defaults as a % of
	performing collateral plus
	deferrals		17.6%		14.4%		11.5%		12.2%
(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 September 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.