NOTE 3. Investment Securities

The amortized cost and fair values of investment securities at September 30, 2011 and December 31, 2010, were as follows:


At September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	233,206	$	2,553	$	2	$	235,757
Obligations of states and political subdivisions		390,196		22,820		82		412,934
Agency residential mortgage-backed securities		1,653,420		38,376		209		1,691,587
Non-agency residential mortgage-backed securities		83,655		0		8,888		74,767
Commercial mortgage-backed securities		63,144		2,146		0		65,290
Other structured financial products		24,792		0		12,052		12,740
Other debt securities		54,152		170		3,650		50,672
Equity securities of the Federal Home Loan Bank		73,007		0		0		73,007
Equity securities of the Federal Reserve Bank		50,225		0		0		50,225
Other equity securities		24,292		855		839		24,308

Total available-for-sale securities	$	2,650,089	$	66,920	$	25,722	$	2,691,287

Held-to-Maturity:
Other	$	4,570	$	0	$	0	$	4,570
State and municipal		3,907		0		0		3,907

Total held-to-maturity securities	$	8,477	$	0	$	0	$	8,477


At December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	268,828	$	2,230	$	2,883	$	268,175
Obligations of states and political subdivisions		397,777		4,869		5,986		396,660
Agency residential mortgage-backed securities		1,321,771		19,671		17,873		1,323,569
Non-agency residential mortgage-backed securities		129,206		32		12,427		116,811
Commercial mortgage-backed securities		99,501		5,341		0		104,842
Other structured financial products		24,680		0		12,177		12,503
Other debt securities		41,842		88		930		41,000
Equity securities of the Federal Home Loan Bank		71,065		0		0		71,065
Equity securities of the Federal Reserve Bank		50,225		0		0		50,225
Other equity securities		24,689		251		847		24,093

Total available-for-sale securities	$	2,429,584	$	32,482	$	53,123	$	2,408,943

Held-to-Maturity:
Other	$	4,560	$	0	$	0	$	4,560
State and municipal		4,108		0		0		4,108

Total held-to-maturity securities	$	8,668	$	0	$	0	$	8,668

At September 30, 2011 and December 31, 2010, investment securities with carrying values of $1,799,101 and $1,561,964, 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, synthetic collateralized debt obligations, other structured financial products, other debt securities, and residential and commercial mortgage-backed securities, at September 30, 2011, 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, 2011
	Amortized Cost		Fair Value
Securities available for sale:
Within one year	$	29,910	$	30,523
After one year but within five years		242,547		245,806
After five years but within ten years		497,607		508,534
After ten years		1,732,501		1,758,884

Total securities available for sale	$	2,502,565	$	2,543,747

Securities held to maturity:
Within one year	$	0	$	0
After one year but within five years		0		0
After five years but within ten years		0		0
After ten years		8,477		8,477

Total securities held to maturity	$	8,477	$	8,477

Gross realized gains and gross realized losses on available-for-sale 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,
	2011			2010			2011			2010
Gross gains	$	2,070		$	394		$	8,562		$	11,409
Gross losses		(417	)		(1	)		(3,978	)		(124	)
Other-than-temporary impairment		(215	)		(322	)		(3,060	)		(3,059	)

Net gain	$	1,438		$	71		$	1,524		$	8,226

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, 2011 and December 31, 2010.

		$0000000000		$0000000000		$0000000000		$0000000000		$0000000000		$0000000000
	Less than 12 Months				12 Months or More				Total
September 30, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	997	$	2	$	0	$	0	$	997	$	2
Obligations of states and political subdivisions		1,306		77		1,154		5		2,460		82
Agency residential mortgage-backed securities		65,235		209		0		0		65,235		209
Non-agency residential mortgage-backed securities		7,697		327		67,070		8,561		74,767		8,888
Other structured financial products		0		0		12,740		12,052		12,740		12,052
Other debt securities		1,645		144		34,729		3,506		36,374		3,650
Other equity securities		592		124		1,634		715		2,226		839

	$	77,472	$	883	$	117,327	$	24,839	$	194,799	$	25,722


	Less than 12 Months				12 Months or More				Total
December 31, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U. S. Government agencies	$	114,618	$	2,883	$	0	$	0	$	114,618	$	2,883
Obligations of states and political subdivisions		147,732		5,483		6,215		503		153,947		5,986
Agency residential mortgage-backed securities		642,864		17,873		0		0		642,864		17,873
Non-agency residential mortgage-backed securities		5,664		124		109,272		12,303		114,936		12,427
Other structured financial products		0		0		12,503		12,177		12,503		12,177
Other debt securities		15,120		630		1,480		300		16,600		930
Other equity securities		666		210		2,103		637		2,769		847

	$	926,664	$	27,203	$	131,573	$	25,920	$	1,058,237	$	53,123

Non-agency residential mortgage-backed securities (At September 30, 2011, all of the 13 securities were in a loss position, and seven of the securities were rated below investment grade). None of Susquehanna's non-agency residential mortgage-backed securities include subprime or Alt-A components. Management has analyzed the assets underlying these issues with respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality. However, Susquehanna's analysis also concluded that four of these securities were other-than-temporarily impaired, and Susquehanna recorded other-than-temporary impairment losses as presented in the following table.

Credit Losses on Non-agency Residential Mortgage-backed Securities for which a Portion of an

Other-than-temporary Impairment was Recognized in Other Comprehensive Income


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Balance - beginning of period	$	4,582	$	1,737	$	1,737	$	0
Additions:
Amount related to credit losses for which an other- than-temporary impairment was not previously recognized		215		0		2,791		1,737
Additional amount related to credit losses for which an other- than-temporary impairment was previously recognized		0		0		269		0

Balance - end of period	$	4,797	$	1,737	$	4,797	$	1,737

Susquehanna estimated the portion of loss attributable to credit using a discounted cash flow model. Susquehanna, in conjunction with an independent third-party, estimated the expected cash flows of the underlying collateral 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 indenture. Expected principal and interest cash flows on an other-than-temporarily impaired debt security are discounted using the book yield of that debt security.

Based on the expected cash flows derived from the model, Susquehanna expects to recover the aggregate unrealized loss in accumulated other comprehensive income ($1,996 at September 30, 2011). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:


As of September 30, 2011	Weighted-average (%)
Annual constant prepayment speed		8.44
Loss severity (1)		45.01
Life default rate, net of recoveries (2)		7.54

(1)	Loss severity rates are projected considering collateral characteristics such as loan-to-value, creditworthiness of borrowers (FICO score) and geographic concentration.

(2)	Default rates, net of expected recoveries, are projected by considering collateral characteristics including, but not limited to, loan-to-value, FICO score, and geographic concentration.

Other structured financial products. Other structured financial products are comprised of pooled trust preferred securities. All four of these securities are in unrealized loss positions and are rated below investment grade. Management has analyzed the assets underlying these securities with respect to interest deferrals and defaults, collateral coverage, and current levels of subordination and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

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. To make this comparison, Susquehanna works with a third-party financial advisory firm to determine (a) the estimation of cash flows, (b) the application of the cash flows to the percent owned, and (c) the assessment of other-than-temporary impairment.

To determine expected cash flows, the valuation analysis considers credit default rates, prepayments and deferrals, waterfall structure, and covenants relating to the trust preferred securities. The third-party firm uses publicly available data to assess the creditworthiness of each underlying issue in the collateralized debt obligation and through its proprietary valuation methodology, projects the cash flows of the class. Assessments are made relative to the capital adequacy, earnings, asset quality, liquidity, and interest-rate sensitivity of the underlying issuer to determine default-risk. If the issuer is in default, a recovery rate of 10% is estimated with a lag for that recovery being twenty-four months. No recoveries are forecasted for those issuers that have a current Texas ratio greater than 250%. For current performing issuers or those issuers deferring interest payments, determination is made based on the previously mentioned financial assessment as to if and when the issuer is forecasted to default. Future interest deferrals are only projected in the estimate of the projected cash flows for issuers who are currently deferring, and it is assumed that they will defer for the full twenty quarters if not projected to default.

When considering Susquehanna's pooled trust preferred securities, management considers prepayment less relevant than call options (the option of the issuer to call the issue on certain dates). The projected exercising of the call options will change as economic and market conditions change, and management will adjust the valuation model accordingly. As of September 30, 2011, the exercising of call options was assumed to be remote.

In addition to the proprietary valuation methodology used in the estimation of the projected cash flows, the trust indenture documentation and the trustee reports for each specific trust preferred security issuance provide information regarding deferral rights, call options, various triggers (including over-collateralization triggers), and waterfall structure, all of which management believes to be essential in determining projected base cash flows.

The discount rate that is 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 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 projected cash flows in determining the estimated value.

Susquehanna's management has assisted with the development of, and reviews and comments on the results of, this proprietary valuation methodology, and believes that the valuation analysis and methodology reasonably support the value and projected performance of the specific trust preferred securities. Susquehanna's management also believes this valuation methodology presents a logical and analytical approach for the determination of other-than-temporary impairment charges in accordance with Accounting Standards Codification Topic 320-10-35.

The present value of the expected cash flows for Susquehanna's specific class and all subordinate classes, as well as additional information about the pooled trust preferred securities, is included in the following table.


As of September 30, 2011	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Class		B			B			B			A2L
Class face value	$	35,000		$	57,995		$	87,498		$	45,500

Book value	$	3,000		$	7,051		$	7,991		$	6,750
Fair value		1,742			3,637			4,076			3,285

Unrealized loss	$	(1,258	)	$	(3,414	)	$	(3,915	)	$	(3,465	)

Present value of expected cash flows for class noted above and all subordinate classes (1)	$	161,233		$	165,727		$	279,813		$	140,625

Lowest credit rating assigned		CCC-			Caa3			Ca			CCC-

Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		371,728			300,200			507,281			314,700
Actual defaults		3,000			42,580			93,500			71,500
Actual deferrals		97,400			129,690			98,900			83,480
Projected future defaults		68,392			79,609			56,912			52,151

Actual defaults as a % of original collateral		0.5	%		8.5	%		13.3	%		14.7	%
Actual deferrals as a % of original collateral (2)		15.6			25.9			14.1			17.1

Actual defaults and deferrals as a % of original collateral		16.1	%		34.4	%		27.4	%		31.8	%

Projected future defaults as a % of original collateral (3)		11.0	%		15.9	%		8.1	%		10.7	%
Actual institutions deferring and defaulted as a % of total institutions		16.4			37.5			31.1			38.6
Projected future defaults as a % of performing collateral plus deferrals		14.6			18.5			9.4			13.1

(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, using documented assumptions. The present value of the expected cash flows for Susquehanna's specific class and all subordinate classes is listed above. As of September 30, 2011, the present value of the current estimated cash flows was equal to or greater than the face amount of the specific class for all trust preferred securities, and consequently, there was no other-than-temporary impairment.

(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 the full twenty quarters 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.

Other debt securities. Other debt securities consist of single-issuer trust preferred securities. Eight of the 12 securities are in unrealized loss positions, and one security is rated below investment grade. Management has analyzed the assets underlying these securities with respect to interest deferrals and defaults, collateral coverage, and current levels of subordination and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

Susquehanna does not have the intent to sell any of its available-for-sale securities that are in an unrealized loss position, and it is more likely than not that Susquehanna will not be required to sell these securities before recovery of its amortized cost basis.