Investment Securities

6 Months Ended

Jun. 30, 2014

Investment Securities [Abstract]

Investment Securities

NOTE 2. Investment Securities

The amortized cost and fair values of investment securities at June 30, 2014 and December 31, 2013 were as follows:

				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
At June 30, 2014		Cost		Gains		Losses		Value
Available-for-Sale:
	U.S. Government agencies	$	95,701	$	276	$	100	$	95,877
	Obligations of states and political subdivisions		379,616		20,922		1,275		399,263
	Agency residential mortgage-backed securities		1,612,979		18,363		10,567		1,620,775
	Non-agency residential mortgage-backed securities		385		1		5		381
	Commercial mortgage-backed securities		5,758		124		0		5,882
	Other structured financial products		24,741		0		12,746		11,995
	Other debt securities		24,064		847		273		24,638
			2,143,244		40,533		24,966		2,158,811
	Other equity securities		24,472		699		889		24,282
Total available-for-sale securities		$	2,167,716	$	41,232	$	25,855	$	2,183,093
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
At December 31, 2013		Cost		Gains		Losses		Value
Available-for-Sale:
	U.S. Government agencies	$	110,227	$	343	$	422	$	110,148
	Obligations of states and political subdivisions		389,199		13,386		4,075		398,510
	Agency residential mortgage-backed securities		1,786,133		12,163		20,104		1,778,192
	Non-agency residential mortgage-backed securities		572		1		8		565
	Commercial mortgage-backed securities		8,568		166		0		8,734
	Other structured financial products		25,038		0		13,741		11,297
	Other debt securities		43,156		1,487		557		44,086
			2,362,893		27,546		38,907		2,351,532
	Other equity securities		24,318		557		1,183		23,692
Total available-for-sale securities		$	2,387,211	$	28,103	$	40,090	$	2,375,224

At June 30, 2014 and December 31, 2013, investment securities with carrying values of $1,340,493and $1,512,824, 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, 2014 and December 31, 2013, 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, 2014				December 31, 2013
			Amortized		Fair		Amortized		Fair
			Cost		Value		Cost		Value
Securities available for sale:
	Within one year		$	24,902	$	25,188	$	8,870	$	9,005
	After one year but within five years			99,490		100,391		129,176		130,091
	After five years but within ten years			875,681		887,302		945,637		946,754
	After ten years			1,143,171		1,145,930		1,279,210		1,265,682
		Total	$	2,143,244	$	2,158,811	$	2,362,893	$	2,351,532

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,
	2014		2013		2014		2013
Gross gains	$	3,339	$	26	$	3,364	$	433
Gross losses		(46)		0		(79)		(1)
Other-than-temporary impairment		0		(97)		0		(485)
Net gains	$	3,293	$	(71)	$	3,285	$	(53)

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, 2014 and December 31, 2013.

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2014	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	24,953	$	47	$	1,947	$	53	$	26,900	$	100
Obligations of states and political subdivisions		0		0		59,429		1,275		59,429		1,275
Agency residential mortgage-backed securities		258,383		1,763		331,792		8,804		590,175		10,567
Non-agency residential mortgage-backed securities		0		0		352		5		352		5
Other structured financial products		0		0		11,995		12,746		11,995		12,746
Other debt securities		0		0		6,786		273		6,786		273
Other equity securities		0		0		1,577		889		1,577		889
	$	283,336	$	1,810	$	413,878	$	24,045	$	697,214	$	25,855
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2013	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	68,111	$	422	$	0	$	0	$	68,111	$	422
Obligations of states and political subdivisions		73,895		3,910		7,025		165		80,920		4,075
Agency residential mortgage-backed securities		1,030,987		20,104		0		0		1,030,987		20,104
Non-agency residential mortgage-backed securities		530		8		0		0		530		8
Other structured financial products		0		0		11,297		13,741		11,297		13,741
Other debt securities		0		0		6,476		557		6,476		557
Other equity securities		19,111		286		1,619		897		20,730		1,183
	$	1,192,634	$	24,730	$	26,417	$	15,360	$	1,219,051	$	40,090

Non-agency residential mortgage-backed securities. At June 30, 2014, Susquehanna held one security that had unrealized losses, but was not 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
			June 30,
			2014				2013
					Equity				Equity
			RMBS		Securities		RMBS		Securities
Balance - beginning of period			$	0	$	609	$	1,122	$	512
Additions:
	Amount related to credit losses for which an other-than-
		temporary impairment was not previously recognized		0		0		0		0
	Additional amount related to credit losses for which an other-than-
		temporary impairment was previously recognized		0		0		0		97
Deductions:
	Realized losses			0		0		96		0
Balance - end of period			$	0	$	609	$	1,026	$	609
			Six Months Ended
			June 30,
			2014				2013
					Equity				Equity
			RMBS		Securities		RMBS		Securities
Balance - beginning of period			$	0	$	609	$	768	$	512
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		63		97
Deductions:
	Realized losses			0		0		130		0
Balance - end of period			$	0	$	609	$	1,026	$	609

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 ($0 and $471 at June 30, 2014 and 2013, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

			Weighted-average (%)
			June 30,
			2014 (1)	2013
		Conditional repayment rate (2)	N/A	10.4%
		Loss severity (3)	N/A	42.0%
		Conditional default rate (4)	N/A	3.6%
(1)	Not applicable as the related securities were sold during 2013.
(2)	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.
(3)	Loss severity rates are projected by considering collateral characteristics such as current loan-to-value, original creditworthiness of borrowers (FICO score) and geographic concentration.
(4)	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 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 $12,746 and $14,543 at June 30, 2014 and 2013, 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 valuation and other-than-temporary impairment analysis of its structured financial product investments. In addition to the valuation work performed by a third party firm which Susquehanna utilizes to support its valuation and other-than-temporary-impairment analysis, management of Susquehanna considered Section 619 of the Dodd-Frank Act (commonly referred to as the “Volcker Rule”). Specifically, Susquehanna considered the interim final rule published by federal regulatory agencies on January 14, 2014, which indicated Susquehanna's trust preferred securities will remain permissible holdings under the Volcker Rule.

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.

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 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 present 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, 2014		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
Recorded investment		$	3,000	$	7,160	$	7,831	$	6,750
Fair value			1,222		3,988		4,372		2,413
Unrealized loss			(1,778)		(3,172)		(3,459)		(4,337)
Class		B		B		B		A2L
Class face value		$	35,000	$	59,724	$	89,651	$	45,500
Present value of expected cash flows
	for class noted above and all
	subordinated classes (1)	$	170,046	$	199,081	$	326,512	$	159,410
Lowest credit rating assigned		D		Ca		Caa2		Ca
Original collateral		$	623,984	$	501,470	$	700,535	$	487,680
Performing collateral			377,342		318,814		486,061		273,100
Actual defaults			47,400		55,580		49,000		83,500
Actual deferrals			28,500		75,430		67,650		65,580
Projected future defaults			38,438		42,129		44,490		27,172
Actual defaults as a % of original
	collateral		7.6%		11.1%		7.0%		17.1%
Actual deferrals as a % of original
	collateral (2)		4.6%		15.0%		9.7%		13.5%
Actual defaults and deferrals as a % of
	original collateral		12.2%		26.1%		16.7%		30.6%
Projected future defaults as a % of
	original collateral (3)		6.2%		8.4%		6.4%		5.6%
Actual institutions deferring and
	defaulted as a % of total institutions		17.2%		31.5%		20.6%		36.5%
Projected future defaults as a % of
	performing collateral plus
	deferrals		9.5%		10.7%		8.0%		8.0%

As of June 30, 2013		Pooled Trust #1		Pooled Trust #2		Pooled Trust #3		Pooled Trust #4
Recorded investment		$	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)
Class		B		B		B		A2L
Class face value		$	35,000	$	59,248	$	89,071	$	45,500
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%
(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, 2014 and 2013, 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.