Fair Value Disclosures

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures

NOTE 11. Fair Value Disclosures

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dates. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The level in the hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

At September 30, 2011, Susquehanna had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value.

The following is a description of Susquehanna's valuation methodologies for assets and liabilities carried at fair value. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Susquehanna believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities

Where quoted prices are available in an active market, securities are classified in Level 1 of the valuation hierarchy. Securities in Level 1 are exchange-traded equities. If quoted market prices are not available for the specific security, then fair values are provided by independent third-party valuations services. These valuations services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of Susquehanna's overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in Susquehanna's principal markets. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, state and municipal securities, Federal Home Loan Bank stock, and Federal Reserve Bank stock. Securities in Level 3 include thinly traded bank stocks, collateralized debt obligations, certain trust preferred securities, and indexed-amortizing notes.

Derivatives

Currently, Susquehanna uses interest rate swaps to manage its interest rate risk and to assist its borrowers in managing their interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2011, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at September 30, 2011 and December 31, 2010, on the consolidated balance sheets and by levels within the valuation hierarchy.

			Fair Value Measurements at Reporting Date Using
Description	September 30, 2011		Quoted Prices in Active  Markets for Identical Instruments (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	235,757	$	0	$	235,757	$	0
Obligations of states and political subdivisions		412,934				412,934
Agency residential mortgage-backed securities		1,691,587				1,691,587
Non-agency residential mortgage-backed securities		74,767				74,767
Commercial mortgage-backed securities		65,290				65,290
Other structured financial products		12,740				0		12,740
Other debt securities		50,672				50,672
Equity securities of the FHLB		73,007				73,007
Equity securities of the FRB		50,225				50,225
Other equity securities		24,308		1,574		19,304		3,430
Derivatives: (1)						`
Designated as hedging instruments		40				40
Not designated or qualifying as hedging instruments		23,708				23,708
Total	$	2,715,035	$	1,574	$	2,697,291	$	16,170
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	53,802	$	0	$	53,802	$	0
Not designated or qualifying as hedging instruments		22,283				22,283
Total	$	76,085	$	0	$	76,085	$	0

(1) Included in Other assets

(2) Included in Other liabilities

			Fair Value Measurements at Reporting Date Using
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	268,175	$	0	$	268,175	$	0
Obligations of states and political subdivisions		396,660				396,660
Agency residential mortgage-backed securities		1,323,569				1,323,569
Non-agency residential mortgage-backed securities		116,811				116,811
Commercial mortgage-backed securities		104,842				104,842
Other structured financial products		12,503				0		12,503
Other debt securities		41,000				41,000
Equity securities of the FHLB		71,065				71,065
Equity securities of the FRB		50,225				50,225
Other equity securities		24,093		2,446		18,266		3,381
Derivatives: (1)
Designated as hedging instruments		181				181
Not designated or qualifying as hedging instruments		17,167				17,167
Total	$	2,426,291	$	2,446	$	2,407,961	$	15,884
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	31,793	$	0	$	31,793	$	0
Not designated or qualifying as hedging instruments		16,767				16,767
Total	$	48,560	$	0	$	48,560	$	0

(1) Included in Other assets

(2) Included in Other liabilities

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

The following tables present roll forwards of the balance sheet amounts for the three months ended September 30, 2011 and 2010, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

	Available-for-sale Securities
	Equity Securities		Other Structured Financial Products			Total
Balance at January 1, 2011	$	3,399	$	14,133		$	17,532
Total gains or losses (realized/unrealized): Included in other comprehensive income (before taxes)		31		(1,393	)		(1,362	)
Balance at September 30, 2011	$	3,430	$	12,740		$	16,170

	Available-for-sale Securities
	Equity Securities			Synthetic Collateralized Debt Obligations			Other Structured Financial Products		Total
Balance at January 1, 2010	$	3,556		$	1,576		$	10,953	$	16,085
Total gains or losses (realized/unrealized):
Other-than-temporary impairment (1)		(240	)		0			0		(240	)
Included in other comprehensive income (before taxes)		240			(353	)		760		647
Balance at September 30, 2010	$	3,556		$	1,223		$	11,713	$	16,492

The following tables present roll forwards of the balance sheet amounts for the nine months ended September 30, 2011 and 2010, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

	Available-for-sale Securities
	Equity Securities		Other Structured Financial Products		Total
Balance at January 1, 2011	$	3,381	$	12,503	$	15,884
Total gains or losses (realized/unrealized):
Included in other comprehensive income (before taxes)		49		237		286
Balance at September 30, 2011	$	3,430	$	12,740	$	16,170

	Available-for-sale Securities
	Equity Securities			Synthetic Collateralized Debt Obligations			Other Structured Financial Products			Non-agency Residential Mortgage- backed Securities			Interest-only Strips			Total
Balance at January 1, 2010	$	4,081		$	1,331		$	14,113		$	2,111		$	17,840		$	39,476
Adjustments relating to the consolidation of variable interest entities											(2,111	)		(17,840	)		(19,951	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment (1)		(240	)		(557	)											(797	)
Included in other comprehensive income (before taxes)		(285	)		449			(2,400	)								(2,236	)
Balance at September 30, 2010	$	3,556		$	1,223		$	11,713		$	0		$	0		$	16,492

(1) Included in noninterest income, net impairment losses recognized in earnings.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Certain loans are evaluated for impairment in accordance with U.S. GAAP. To estimate the impairment of a loan, Susquehanna uses the practical expedient method, which is based upon the fair value of the underlying collateral for collateral-dependent loans. Currently, most of Susquehanna's impaired loans are secured by real estate. The value of the real estate collateral is determined through appraisals performed by independent licensed appraisers. As part of Susquehanna's overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna's principal markets. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs. Impaired loans are reviewed at least quarterly for additional impairment, and reserves are adjusted accordingly.

Foreclosed Real Estate

Other real estate property acquired through foreclosure is recorded at the lower of its carrying value or the fair market value of the related real estate collateral at the transfer date, less estimated selling costs. The value of the real estate collateral is determined through appraisals performed by independent licensed appraisers. As part of Susquehanna's overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna's principal markets. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs.

The following tables present assets measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010, on the consolidated balance sheets and by the valuation hierarchy.

		$00000000000		$00000000000		$00000000000		$00000000000
Description	September 30, 2011		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	62,172	$	0	$	0	$	62,172
Foreclosed real estate		29,563		0		0		29,563
	$	91,735	$	0	$	0	$	91,735

Specific reserves for the first nine months of 2011 were reduced by $12,689. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at September 30, 2011.

		$00000000000		$00000000000		$00000000000		$00000000000
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	103,818	$	0	$	0	$	103,818
Foreclosed real estate		18,489		0		0		18,489
	$	122,307	$	0	$	0	$	122,307

Specific reserves identified during 2010 were reduced by $4,732. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at December 31, 2010.

Additional Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and due from banks and short-term investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities

Refer to the above discussion on securities.

Loans and leases

Variable-rate loans, which do not expose Susquehanna to interest-rate risk, have a fair value that equals their carrying value, discounted for estimated future credit losses. The fair value of fixed-rate loans and leases was based upon the present value of projected cash flows. The discount rate was based upon the U.S. Treasury yield curve.

Deposits

The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date. The carrying value of variable-rate time deposits represents a reasonable estimate of fair value. The fair value of fixed-rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity. Discount rates were based upon the U.S. Treasury yield curve.

Short-term borrowings

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

FHLB borrowings and long-term debt

Fair values were based upon quoted rates of similar instruments issued by banking institutions with similar credit ratings.

Derivatives

Refer to the above discussion on derivatives.

Off-balance-sheet items

The fair values of unused commitments to lend and standby letters of credit are considered to be the same as their contractual amounts. The fair values of commitments to originate mortgage loans to be held for sale and their corresponding forward-sales agreements are calculated as the reasonable amounts that Susquehanna would agree to pay or receive, after considering the likelihood of the commitments expiring.

The following table represents the carrying amounts and estimated fair values of Susquehanna's financial instruments:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	254,074	$	254,074	$	200,646	$	200,646
Short-term investments		104,208		104,208		93,947		93,947
Investment securities		2,699,764		2,699,764		2,417,611		2,417,611
Loans and leases		9,511,709		9,617,224		9,441,363		9,492,108
Derivatives		23,748		23,748		17,348		17,348
Financial liabilities:
Deposits		9,558,631		9,403,964		9,191,207		9,265,942
Short-term borrowings		551,245		551,245		770,623		770,623
FHLB borrowings		1,115,026		1,177,460		1,101,620		1,167,743
Long-term debt		672,162		643,231		705,954		683,628
Derivatives		76,085		76,085		48,560		48,560