##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2010

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period from
 to

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 23-2201716                          
|(State or Other Jurisdiction
of Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)
|                                                               | 
|26 North Cedar St., Lititz, Pennsylvania                       |  | 17543                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code (717) 626-4721

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  
 ̈

Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)

Yes   ̈    No  
 ̈

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large Accelerated Filer   ̈ |  | Accelerated Filer  x |  | Non-Accelerated Filer   ̈                      |  | Smaller Reporting Company   ̈
|                           |  |                      |  | (Do not check if a smaller reporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes   ̈    No  
x

As of July 30, 2010, there were 129,706,801 shares of the
registrants common stock outstanding, par value $2.00 per share.









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##### Table of Contents

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS



|              |  |                                                                                                            |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                            |  | Page
|              |  |                                                                                                           
|PART I.       |  | FINANCIAL INFORMATION                                                                                      |  |     
|              |  |                                                                                                           
|Item 1        |  | Financial Statements (Unaudited)                                                                           |  |     
|              |  |                                                                                                           
|              |  | Consolidated Balance Sheets as of June 30, 2010 and 2009, and December 31, 2009                            |  | 1   
|              |  |                                                                                                           
|              |  | Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009                |  | 2   
|              |  |                                                                                                           
|              |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009                      |  | 3   
|              |  |                                                                                                           
|              |  | Consolidated Statements of Changes in Shareholders Equity for the six months ended June 30, 2010 and 2009 |  | 5   
|              |  |                                                                                                           
|              |  | Notes to the Consolidated Financial Statements                                                             |  | 6   
|              |  |                                                                                                           
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 30  
|              |  |                                                                                                           
|Item 3        |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 46  
|              |  |                                                                                                           
|Item 4        |  | Controls and Procedures                                                                                    |  | 48  
|              |  |                                                                                                           
|PART II.      |  | OTHER INFORMATION                                                                                          |  |     
|              |  |                                                                                                           
|Item 1        |  | Legal Proceedings                                                                                          |  | 48  
|              |  |                                                                                                           
|Item 1A       |  | Risk Factors                                                                                               |  | 49  
|              |  |                                                                                                           
|Item 2        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 49  
|              |  |                                                                                                           
|Item 3        |  | Defaults Upon Senior Securities                                                                            |  | 49  
|              |  |                                                                                                           
|Item 4        |  | Reserved                                                                                                   |  | 49  
|              |  |                                                                                                           
|Item 5        |  | Other Information                                                                                          |  | 49  
|              |  |                                                                                                           
|Item 6        |  | Exhibits                                                                                                   |  | 49  
|              | 
|SIGNATURES    |  | 50                                                                                                        
|              | 
|EXHIBIT INDEX |  | 51                                                                                                        



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ---------------- | - | ---------- | ------------ |  | - | ---------- | -
|                                                                                                                                                                     |  | June 30,2010                      |            |   | December 31,2009 |   |            | June 30,2009 | 
|                                                                                                                                                                     |  | (in thousands, except share data) |           
|Assets                                                                                                                                                               |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Cash and due from banks                                                                                                                                              |  | $                                 | 200,520    |   |                  | $ | 203,240    |              |  | $ | 336,074    |  
|Unrestricted short-term investments                                                                                                                                  |  |                                   | 120,021    |   |                  |   | 87,966     |              |  |   | 93,449     |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Cash and cash equivalents                                                                                                                                            |  |                                   | 320,541    |   |                  |   | 291,206    |              |  |   | 429,523    |  
|Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the
consolidated variable interest entities |  |                                   | 6,062      |   |                  |   | 0          |              |  |   | 0          |  
|Restricted short-term investments                                                                                                                                    |  |                                   | 100        |   |                  |   | 154        |              |  |   | 50         |  
|Securities available for sale                                                                                                                                        |  |                                   | 2,140,318  |   |                  |   | 1,866,346  |              |  |   | 1,780,226  |  
|Securities held to maturity (fair values approximate $8,800; $8,921; and $9,041)                                                                                     |  |                                   | 8,800      |   |                  |   | 8,921      |              |  |   | 9,041      |  
|Loans and leases, net of unearned income                                                                                                                             |  |                                   | 9,555,737  |   |                  |   | 9,827,279  |              |  |   | 9,916,618  |  
|Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable
interest entities                     |  |                                   | 231,319    |   |                  |   | 0          |              |  |   | 0          |  
|Less: Allowance for loan and lease losses                                                                                                                            |  |                                   | 185,795    |   |                  |   | 172,368    |              |  |   | 157,517    |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Net loans and leases                                                                                                                                                 |  |                                   | 9,601,261  |   |                  |   | 9,654,911  |              |  |   | 9,759,101  |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Premises and equipment, net                                                                                                                                          |  |                                   | 163,183    |   |                  |   | 165,529    |              |  |   | 171,351    |  
|Foreclosed assets (OREO)                                                                                                                                             |  |                                   | 17,379     |   |                  |   | 24,292     |              |  |   | 25,809     |  
|Accrued income receivable                                                                                                                                            |  |                                   | 35,142     |   |                  |   | 36,127     |              |  |   | 39,695     |  
|Bank-owned life insurance                                                                                                                                            |  |                                   | 352,010    |   |                  |   | 355,373    |              |  |   | 356,199    |  
|Goodwill                                                                                                                                                             |  |                                   | 1,018,031  |   |                  |   | 1,018,031  |              |  |   | 1,018,031  |  
|Intangible assets with finite lives                                                                                                                                  |  |                                   | 38,770     |   |                  |   | 43,513     |              |  |   | 48,741     |  
|Other assets                                                                                                                                                         |  |                                   | 189,936    |   |                  |   | 224,859    |              |  |   | 234,716    |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Assets                                                                                                                                                         |  | $                                 | 13,891,533 |   |                  | $ | 13,689,262 |              |  | $ | 13,872,483 |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Liabilities and Shareholders Equity                                                                                                                                 |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Deposits:                                                                                                                                                            |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Demand                                                                                                                                                               |  | $                                 | 1,321,411  |   |                  | $ | 1,261,208  |              |  | $ | 1,253,124  |  
|Interest-bearing demand                                                                                                                                              |  |                                   | 3,481,397  |   |                  |   | 3,262,812  |              |  |   | 2,831,315  |  
|Savings                                                                                                                                                              |  |                                   | 778,600    |   |                  |   | 743,687    |              |  |   | 746,164    |  
|Time                                                                                                                                                                 |  |                                   | 2,390,652  |   |                  |   | 2,540,805  |              |  |   | 2,887,967  |  
|Time of $100 or more                                                                                                                                                 |  |                                   | 1,197,887  |   |                  |   | 1,165,851  |              |  |   | 1,307,379  |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total deposits                                                                                                                                                       |  |                                   | 9,169,947  |   |                  |   | 8,974,363  |              |  |   | 9,025,949  |  
|Federal Home Loan Bank short-term borrowings                                                                                                                         |  |                                   | 0          |   |                  |   | 100,000    |              |  |   | 0          |  
|Other short-term borrowings                                                                                                                                          |  |                                   | 619,439    |   |                  |   | 1,040,703  |              |  |   | 1,151,312  |  
|Federal Home Loan Bank long-term borrowings                                                                                                                          |  |                                   | 967,674    |   |                  |   | 923,817    |              |  |   | 1,049,943  |  
|Other long-term debt                                                                                                                                                 |  |                                   | 176,042    |   |                  |   | 176,050    |              |  |   | 176,274    |  
|Junior subordinated debentures                                                                                                                                       |  |                                   | 322,605    |   |                  |   | 272,324    |              |  |   | 272,059    |  
|Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehannas general
credit                                   |  |                                   | 222,960    |   |                  |   | 0          |              |  |   | 0          |  
|Accrued interest, taxes, and expenses payable                                                                                                                        |  |                                   | 49,902     |   |                  |   | 47,688     |              |  |   | 59,497     |  
|Deferred taxes                                                                                                                                                       |  |                                   | 56,783     |   |                  |   | 87,981     |              |  |   | 92,234     |  
|Other liabilities                                                                                                                                                    |  |                                   | 213,730    |   |                  |   | 85,255     |              |  |   | 95,376     |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Liabilities                                                                                                                                                    |  |                                   | 11,799,082 |   |                  |   | 11,708,181 |              |  |   | 11,922,644 |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Shareholders equity:                                                                                                                                                |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Issued: 100,000 at June 30, 2010; 300,000 at
December 31, 2009 and June 30, 2009             |  |                                   | 97,745     |   |                  |   | 292,359    |              |  |   | 291,529    |  
|Common stock, $2.00 par value, 200,000,000 shares authorized; Issued:129,694,801 at June 30, 2010; 86,473,612 at
December 31, 2009; and 86,325,977 at June 30, 2009  |  |                                   | 259,390    |   |                  |   | 172,947    |              |  |   | 172,652    |  
|Additional paid-in capital                                                                                                                                           |  |                                   | 1,299,498  |   |                  |   | 1,057,305  |              |  |   | 1,056,298  |  
|Retained earnings                                                                                                                                                    |  |                                   | 470,874    |   |                  |   | 478,167    |              |  |   | 477,250    |  
|Accumulated other comprehensive loss, net of taxes of $19,470; $10,606; and $25,787, respectively                                                                    |  |                                   | (35,056    | ) |                  |   | (19,697    | )            |  |   | (47,890    | )
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Shareholders Equity                                                                                                                                           |  |                                   | 2,092,451  |   |                  |   | 1,981,081  |              |  |   | 1,949,839  |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Liabilities and Shareholders Equity                                                                                                                           |  | $                                 | 13,891,533 |   |                  | $ | 13,689,262 |              |  | $ | 13,872,483 |  
|                                                                                                                                                                     |  |                                   |            |   |                  |   |            |              |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



1



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                        |  | Three Months EndedJune 30,            |         |   | Six Months EndedJune 30, |  
|                                                                        |  | 2010                                  |         |   | 2009                     |   |         | 2010 |  |   | 2009    |  
|                                                                        |  | (in thousands, except per share data) |        
|Interest Income:                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loans and leases, including fees                                        |  | $                                     | 136,252 |   |                          | $ | 138,731 |      |  | $ | 272,481 |   |  | $ | 275,750 |  
|Securities:                                                             |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Taxable                                                                 |  |                                       | 13,458  |   |                          |   | 17,951  |      |  |   | 27,487  |   |  |   | 37,571  |  
|Tax-exempt                                                              |  |                                       | 3,371   |   |                          |   | 3,736   |      |  |   | 7,061   |   |  |   | 7,420   |  
|Dividends                                                               |  |                                       | 962     |   |                          |   | 989     |      |  |   | 1,937   |   |  |   | 1,950   |  
|Short-term investments                                                  |  |                                       | 39      |   |                          |   | 188     |      |  |   | 73      |   |  |   | 475     |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total interest income                                                   |  |                                       | 154,082 |   |                          |   | 161,595 |      |  |   | 309,039 |   |  |   | 323,166 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest Expense:                                                       |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Deposits:                                                               |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest-bearing demand and savings                                     |  |                                       | 5,980   |   |                          |   | 6,173   |      |  |   | 11,691  |   |  |   | 13,711  |  
|Time                                                                    |  |                                       | 21,072  |   |                          |   | 36,241  |      |  |   | 43,794  |   |  |   | 75,938  |  
|Federal Home Loan Bank short-term borrowings                            |  |                                       | 0       |   |                          |   | 0       |      |  |   | 38      |   |  |   | 0       |  
|Other short-term borrowings                                             |  |                                       | 536     |   |                          |   | 1,070   |      |  |   | 1,295   |   |  |   | 2,135   |  
|Federal Home Loan Bank long-term borrowings                             |  |                                       | 11,098  |   |                          |   | 10,093  |      |  |   | 20,696  |   |  |   | 20,153  |  
|Other long-term debt                                                    |  |                                       | 9,165   |   |                          |   | 7,913   |      |  |   | 17,003  |   |  |   | 15,855  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total interest expense                                                  |  |                                       | 47,851  |   |                          |   | 61,490  |      |  |   | 94,517  |   |  |   | 127,792 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net interest income                                                     |  |                                       | 106,231 |   |                          |   | 100,105 |      |  |   | 214,522 |   |  |   | 195,374 |  
|Provision for loan and lease losses                                     |  |                                       | 43,000  |   |                          |   | 50,000  |      |  |   | 88,000  |   |  |   | 85,000  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net interest income, after provision for loan and lease losses          |  |                                       | 63,231  |   |                          |   | 50,105  |      |  |   | 126,522 |   |  |   | 110,374 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Income:                                                     |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Service charges on deposit accounts                                     |  |                                       | 8,886   |   |                          |   | 9,402   |      |  |   | 16,955  |   |  |   | 18,951  |  
|Vehicle origination and servicing fees                                  |  |                                       | 1,887   |   |                          |   | 1,701   |      |  |   | 3,484   |   |  |   | 3,787   |  
|Asset management fees                                                   |  |                                       | 7,513   |   |                          |   | 6,217   |      |  |   | 14,626  |   |  |   | 12,187  |  
|Income from fiduciary-related activities                                |  |                                       | 1,787   |   |                          |   | 1,742   |      |  |   | 3,591   |   |  |   | 3,468   |  
|Commissions on brokerage, life insurance, and annuity sales             |  |                                       | 2,000   |   |                          |   | 1,886   |      |  |   | 3,660   |   |  |   | 3,559   |  
|Commissions on property and casualty insurance sales                    |  |                                       | 2,879   |   |                          |   | 2,968   |      |  |   | 6,281   |   |  |   | 6,785   |  
|Income from bank-owned life insurance                                   |  |                                       | 1,341   |   |                          |   | 1,146   |      |  |   | 2,631   |   |  |   | 2,782   |  
|Net gain on sale of loans and leases                                    |  |                                       | 2,766   |   |                          |   | 3,302   |      |  |   | 4,733   |   |  |   | 4,999   |  
|Net realized gain on sales of securities                                |  |                                       | 4,299   |   |                          |   | 327     |      |  |   | 10,892  |   |  |   | 352     |  
|Total other-than-temporary impairment losses                            |  |                                       | (3,566  | ) |                          |   | (937    | )    |  |   | (4,123  | ) |  |   | (937    | )
|Portion of loss recognized in other comprehensive income (before taxes) |  |                                       | 1,386   |   |                          |   | 0       |      |  |   | 1,386   |   |  |   | 0       |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net impairment losses recognized in earnings                            |  |                                       | (2,180  | ) |                          |   | (937    | )    |  |   | (2,737  | ) |  |   | (937    | )
|Other                                                                   |  |                                       | 7,093   |   |                          |   | 7,043   |      |  |   | 12,837  |   |  |   | 21,084  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest income                                                |  |                                       | 38,271  |   |                          |   | 34,797  |      |  |   | 76,953  |   |  |   | 77,017  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Expenses:                                                   |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Salaries and employee benefits                                          |  |                                       | 49,259  |   |                          |   | 49,515  |      |  |   | 97,394  |   |  |   | 97,079  |  
|Occupancy                                                               |  |                                       | 8,510   |   |                          |   | 9,575   |      |  |   | 18,351  |   |  |   | 19,063  |  
|Furniture and equipment                                                 |  |                                       | 3,409   |   |                          |   | 3,591   |      |  |   | 7,086   |   |  |   | 7,342   |  
|Advertising and marketing                                               |  |                                       | 3,115   |   |                          |   | 2,395   |      |  |   | 5,896   |   |  |   | 4,590   |  
|FDIC insurance                                                          |  |                                       | 4,575   |   |                          |   | 9,947   |      |  |   | 8,784   |   |  |   | 15,991  |  
|Amortization of intangible assets                                       |  |                                       | 2,360   |   |                          |   | 2,648   |      |  |   | 4,743   |   |  |   | 5,303   |  
|Vehicle lease disposal                                                  |  |                                       | 3,844   |   |                          |   | 3,548   |      |  |   | 7,171   |   |  |   | 6,526   |  
|Other                                                                   |  |                                       | 21,091  |   |                          |   | 21,938  |      |  |   | 41,042  |   |  |   | 42,089  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest expenses                                              |  |                                       | 96,163  |   |                          |   | 103,157 |      |  |   | 190,467 |   |  |   | 197,983 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                       |  |                                       | 5,339   |   |                          |   | (18,255 | )    |  |   | 13,008  |   |  |   | (10,592 | )
|Provision for (benefit from) income taxes                               |  |                                       | (52     | ) |                          |   | (10,478 | )    |  |   | 114     |   |  |   | (8,840  | )
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net Income (Loss)                                                       |  |                                       | 5,391   |   |                          |   | (7,777  | )    |  |   | 12,894  |   |  |   | (1,752  | )
|Preferred stock dividends and accretion                                 |  |                                       | 6,754   |   |                          |   | 4,165   |      |  |   | 10,942  |   |  |   | 8,329   |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net (Loss) Income Applicable to Common Shareholders                     |  | $                                     | (1,363  | ) |                          | $ | (11,942 | )    |  | $ | 1,952   |   |  | $ | (10,081 | )
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share:                                              |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                   |  | $                                     | (0.01   | ) |                          | $ | (0.14   | )    |  | $ | 0.02    |   |  | $ | (0.12   | )
|Diluted                                                                 |  | $                                     | (0.01   | ) |                          | $ | (0.14   | )    |  | $ | 0.02    |   |  | $ | (0.12   | )
|Cash dividends per common share                                         |  | $                                     | 0.01    |   |                          | $ | 0.05    |      |  | $ | 0.02    |   |  | $ | 0.31    |  
|Average common shares outstanding:                                      |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                   |  |                                       | 129,630 |   |                          |   | 86,213  |      |  |   | 112,207 |   |  |   | 86,183  |  
|Diluted                                                                 |  |                                       | 129,630 |   |                          |   | 86,213  |      |  |   | 112,233 |   |  |   | 86,183  |  

The accompanying
notes are an integral part of these consolidated financial statements.



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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                                                                            |  |                          |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                            |  | Six Months EndedJune 30, |         
|                                                                                                                                            |  | 2010                     |          |   | 2009 |  
|                                                                                                                                            |  | (in thousands)           |         
|Cash Flows from Operating Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net income (loss)                                                                                                                           |  | $                        | 12,894   |   |      | $ | (1,752   | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                                    |  |                          |          |   |      |   |          |  
|Depreciation, amortization, and accretion                                                                                                   |  |                          | 13,082   |   |      |   | 11,912   |  
|Provision for loan and lease losses                                                                                                         |  |                          | 88,000   |   |      |   | 85,000   |  
|Realized (gain) loss on available-for-sale securities, net                                                                                  |  |                          | (8,155   | ) |      |   | 585      |  
|Deferred income taxes                                                                                                                       |  |                          | (22,168  | ) |      |   | (15,610  | )
|Gain on sale of loans and leases                                                                                                            |  |                          | (4,733   | ) |      |   | (4,999   | )
|Loss on sale of foreclosed assets                                                                                                           |  |                          | 1,493    |   |      |   | 377      |  
|Gain on sale of branch                                                                                                                      |  |                          | 0        |   |      |   | (402     | )
|Mortgage loans originated for sale                                                                                                          |  |                          | (155,011 | ) |      |   | (196,136 | )
|Proceeds from sale of mortgage loans originated for sale                                                                                    |  |                          | 150,727  |   |      |   | 182,136  |  
|Loans and leases originated/acquired for sale, net of payments received                                                                     |  |                          | 0        |   |      |   | (95,042  | )
|Payments received on loans and leases transferred from held for sale to held for investment, net of advances on home equity lines
of credit |  |                          | 71,641   |   |      |   | 39,757   |  
|Increase in cash surrender value of bank-owned life insurance                                                                               |  |                          | (2,259   | ) |      |   | (2,428   | )
|Decrease in accrued interest receivable                                                                                                     |  |                          | 1,651    |   |      |   | 791      |  
|Increase (decrease) in accrued interest payable                                                                                             |  |                          | 1,337    |   |      |   | (6,206   | )
|Increase in accrued expenses and taxes payable                                                                                              |  |                          | 841      |   |      |   | 10,577   |  
|Other, net                                                                                                                                  |  |                          | (3,285   | ) |      |   | 22,169   |  
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash provided by operating activities                                                                                                   |  |                          | 146,055  |   |      |   | 30,729   |  
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Cash Flows from Investing Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net decrease in restricted short-term investments                                                                                           |  |                          | 1,529    |   |      |   | 164      |  
|Activity in available-for-sale securities:                                                                                                  |  |                          |          |   |      |   |          |  
|Sales                                                                                                                                       |  |                          | 231,241  |   |      |   | 13,313   |  
|Maturities, repayments, and calls                                                                                                           |  |                          | 317,120  |   |      |   | 259,904  |  
|Purchases                                                                                                                                   |  |                          | (694,554 | ) |      |   | (141,839 | )
|Net decrease (increase) in loans and leases                                                                                                 |  |                          | 141,253  |   |      |   | (250,613 | )
|Cash flows received from retained interests                                                                                                 |  |                          | 0        |   |      |   | 11,478   |  
|Proceeds from bank-owned life insurance                                                                                                     |  |                          | 5,622    |   |      |   | 0        |  
|Proceeds from sale of foreclosed assets                                                                                                     |  |                          | 16,200   |   |      |   | 5,047    |  
|Additions to premises and equipment, net                                                                                                    |  |                          | (4,761   | ) |      |   | (5,869   | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                                                         |  |                          | 13,650   |   |      |   | (108,415 | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Cash Flows from Financing Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net increase (decrease) in deposits                                                                                                         |  |                          | 195,584  |   |      |   | (26,732  | )
|Sale of branch deposits                                                                                                                     |  |                          | 0        |   |      |   | (13,410  | )
|Net (decrease) increase in other short-term borrowings                                                                                      |  |                          | (421,264 | ) |      |   | 241,093  |  
|Net decrease in short-term FHLB borrowings                                                                                                  |  |                          | (100,000 | ) |      |   | 0        |  
|Proceeds from long-term FHLB borrowings                                                                                                     |  |                          | 150,000  |   |      |   | 0        |  
|Repayment of long-term FHLB borrowings                                                                                                      |  |                          | (105,095 | ) |      |   | (18,832  | )
|Proceeds from issuance of long-term debt                                                                                                    |  |                          | 47,749   |   |      |   | 0        |  
|Repayment of long-term debt                                                                                                                 |  |                          | (16,984  | ) |      |   | (10      | )
|Proceeds from issuance of common stock                                                                                                      |  |                          | 328,636  |   |      |   | 1,346    |  
|Redemption of preferred stock                                                                                                               |  |                          | (200,000 | ) |      |   | 0        |  
|Cash dividends paid                                                                                                                         |  |                          | (8,996   | ) |      |   | (33,093  | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                                                                         |  |                          | (130,370 | ) |      |   | 150,362  |  
|                                                                                                                                            |  |                          |          |   |      |   |          |  



The accompanying notes are an integral part of these consolidated financial statements.

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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)



|                                                                                                                                                                                        |  |   |         |   |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | - |  | - | ------- | 
|Net change in cash and cash equivalents                                                                                                                                                 |  |   | 29,335  |   |  |   | 72,676  | 
|Cash and cash equivalents at January 1                                                                                                                                                  |  |   | 291,206 |   |  |   | 356,847 | 
|                                                                                                                                                                                        |  |   |         |   |  |   |         | 
|Cash and cash equivalents at June 30                                                                                                                                                    |  | $ | 320,541 |   |  | $ | 429,523 | 
|                                                                                                                                                                                        |  |   |         |   |  |   |         | 
|Supplemental Disclosure of Cash Flow Information                                                                                                                                        |  |   |         |   |  |   |         | 
|Cash paid for interest on deposits and borrowings                                                                                                                                       |  | $ | 93,143  |   |  | $ | 133,998 | 
|Income tax payments                                                                                                                                                                     |  |   | 19,412  |   |  |   | 2,210   | 
|Supplemental Schedule of Noncash Activities                                                                                                                                             |  |   |         |   |  |   |         | 
|Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the
consolidated variable interest entities at January 1, 2010 |  | $ | 7,537   |   |  | $ | 0       | 
|Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable
interest entities at January 1, 2010                     |  |   | 248,333 |   |  |   | 0       | 
|Real estate acquired in settlement of loans                                                                                                                                             |  |   | 11,553  |   |  |   | 25,976  | 
|Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehannas general
credit at January 1, 2010                                   |  |   | 239,936 |   |  |   | 0       | 
|Securities purchased not settled                                                                                                                                                        |  |   | 99,475  |   |  |   | 0       | 
|Accretion of preferred stock discount                                                                                                                                                   |  |   | 5,386   |   |  |   | 829     | 
|Home equity line of credit loans transferred from held for sale to held for investment                                                                                                  |  |   | 434,897 |   |  |   | 0       | 
|Cumulative-effect adjustment to retained earnings relating to the consolidation of variable interest entities                                                                           |  |   | (5,805  | ) |  |   | 0       | 
|Adjustment to accumulated other comprehensive income relating to the consolidation of variable interest entities                                                                        |  |   | (6,922  | ) |  |   | 0       | 

The accompanying
notes are an integral part of these consolidated financial statements.



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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

(In thousands, except share data)



|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------- | -------- | - | -------------------- | ----------- | ----------- | - | ------------------------ |  | ---------------- | --------- |  | --------------------------------- | ------- | - | ----- | - | ------- | - |  | - | --------- | -
|                                                                                                                   |  | PreferredStock |          |   | Shares ofCommonStock |             | CommonStock |   | AdditionalPaid-inCapital |  | RetainedEarnings |           |  | AccumulatedOtherComprehensiveLoss |         |   | Total |  
|Balance at January 1, 2009                                                                                         |  | $              | 290,700  |   |                      | 86,174,285  |             | $ | 172,349                  |  | $                | 1,055,255 |  | $                                 | 512,924 |   |       | $ | (85,310 | ) |  | $ | 1,945,918 |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Comprehensive income:                                                                                              |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Net income                                                                                                         |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (1,752  | ) |       |   |         |   |  |   | (1,752    | )
|Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $229   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 25,812  |   |  |   | 25,812    |  
|Change in unrealized gain on recorded interests in securitized assets, net of taxes                                |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 1,816   |   |  |   | 1,816     |  
|Change in unrealized loss on cash flow hedges, net of taxes                                                        |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 9,792   |   |  |   | 9,792     |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Total comprehensive income                                                                                         |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   | 35,668    |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Issuance of common stock and options under employee benefit plans                                                  |  |                |          |   |                      | 151,692     |             |   | 303                      |  |                  | 1,043     |  |                                   |         |   |       |   |         |   |  |   | 1,346     |  
|Accretion of discount on preferred stock                                                                           |  |                | 829      |   |                      |             |             |   |                          |  |                  |           |  |                                   | (829    | ) |       |   |         |   |  |   | 0         |  
|Cash dividends paid on preferred stock                                                                             |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (6,375  | ) |       |   |         |   |  |   | (6,375    | )
|Cash dividends paid on common stock ($0.31 per share)                                                              |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (26,718 | ) |       |   |         |   |  |   | (26,718   | )
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at June 30, 2009                                                                                           |  | $              | 291,529  |   |                      | 86,325,977  |             | $ | 172,652                  |  | $                | 1,056,298 |  | $                                 | 477,250 |   |       | $ | (47,890 | ) |  | $ | 1,949,839 |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at January 1, 2010                                                                                         |  | $              | 292,359  |   |                      | 86,473,612  |             | $ | 172,947                  |  | $                | 1,057,305 |  | $                                 | 478,167 |   |       | $ | (19,697 | ) |  | $ | 1,981,081 |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Cumulative-effect adjustment resulting from the consolidation of variable interest entities                        |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (5,805  | ) |       |   | (6,922  | ) |  |   | (12,727   | )
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Comprehensive income:                                                                                              |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Net income                                                                                                         |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | 12,894  |   |       |   |         |   |  |   | 12,894    |  
|Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of
$5,166 |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 15,829  |   |  |   | 15,829    |  
|Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $508        |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | (878    | ) |  |   | (878      | )
|Change in unrealized loss on cash flow hedges, net of taxes                                                        |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   | (23,388 | ) |  |   | (23,388   | )
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Total comprehensive income                                                                                         |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   | 4,457     |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Issuance of common stock                                                                                           |  |                |          |   |                      | 43,125,000  |             |   | 86,250                   |  |                  | 241,090   |  |                                   |         |   |       |   |         |   |  |   | 327,340   |  
|Issuance of common stock and options under employee benefit plans                                                  |  |                |          |   |                      | 96,189      |             |   | 193                      |  |                  | 1,103     |  |                                   |         |   |       |   |         |   |  |   | 1,296     |  
|Redemption of preferred stock                                                                                      |  |                | (200,000 | ) |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   | (200,000  | )
|Accretion of discount on preferred stock                                                                           |  |                | 5,386    |   |                      |             |             |   |                          |  |                  |           |  |                                   | (5,386  | ) |       |   |         |   |  |   | 0         |  
|Cash dividends paid on preferred stock                                                                             |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (6,833  | ) |       |   |         |   |  |   | (6,833    | )
|Cash dividends paid on common stock ($0.02 per share)                                                              |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   | (2,163  | ) |       |   |         |   |  |   | (2,163    | )
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at June 30, 2010                                                                                           |  | $              | 97,745   |   |                      | 129,694,801 |             | $ | 259,390                  |  | $                | 1,299,498 |  | $                                 | 470,874 |   |       | $ | (35,056 | ) |  | $ | 2,092,451 |  
|                                                                                                                   |  |                |          |   |                      |             |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)

NOTE 1. Accounting Policies

The information contained in this report is unaudited. Certain prior year amounts have been reclassified to conform to current period
classifications. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended June 30, 2010 and 2009. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). Operating results for the three and six-month periods ended June 30, 2010
are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The accounting
policies of Susquehanna Bancshares, Inc. and Subsidiaries (Susquehanna), as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages
76 through 83 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Recently Adopted Accounting Guidance

Effective July 1, 2009, changes to the source of authoritative U.S. GAAP, theFASB Accounting Standards
Codification (FASC), will be communicated through an Accounting Standards Update (ASU). ASUs will be published for all authoritative U.S. GAAP promulgated by the Financial Accounting Standards Board
(FASB), regardless of the form in which such guidance may have been issued prior to the release of the FASB Codification.

In February 2010, FASB issued ASU 2010-08, Technical Corrections to Various Topics. While none of the provisions in the amendments in
this ASU fundamentally change U.S. GAAP, certain clarifications to the guidance on embedded derivatives and hedging (FASC Subtopic 815-15) may cause a change in the application of that Subtopic. This ASU was effective for Susquehanna on
April 1, 2010. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In February 2010, FASB issued ASU 2010-10, Consolidation (Topic 810) - Amendments for Certain Investment Funds. These amendments defer
the consolidation requirements for a reporting entitys interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting
purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant
to the entity. This ASU was effective January 1, 2010. Adoption of this guidance has not had a material impact on result of operations or financial condition.

In February 2010, FASB issued ASU 2010-09, Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements.
ASU 2010-09, among other things, removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. Adoption of this guidance has not had a material impact on results of operations or financial
condition.

In January 2010, FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving
Disclosures about Fair Value Measurements. This ASU provides amendments to Subtopic 820-10 that require new disclosures as follows: a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2
fair value measurements and describe the reasons for the transfers. This ASU also provides amendments that clarify existing disclosures relating to the level of disaggregation and inputs and valuation techniques. This ASU was effective for interim
and annual reporting periods that began after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this ASU has not had and will not have a material impact on results of operations or financial condition.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



In June 2009, FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities and ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets. ASU 2009-16 requires more information about transfers of financial
assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special-purpose entity, changes the requirements
for derecognizing financial assets, and requires additional disclosures. ASU 2009-17 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.
The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the
entitys economic performance. Both ASUs were effective January 1, 2010. As a result of adopting this guidance, Susquehanna, as primary beneficiary, consolidated two securitization trusts. For additional information, refer to Note
10. Securitization and Variable Interest Entities.

Recently Issued Accounting Guidance

In July 2010, FASB issued ASU 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. This update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The additional disclosures required for
financing receivables include: aging of past due receivables, credit quality indicators, and modifications of financing receivables. Under the update, a company will need to disaggregate new and existing disclosures based on how it develops its
allowance for credit losses and how it manages credit exposures. The amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures
about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Adoption of this guidance is not expected to have a material impact on results of operations or financial condition.

In April 2010, FASB issued ASU 2010-18, Receivables (Topic 310) - Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset  a consensus of the FASB Emerging Issues Task Force. As a result of the amendments in this ASU, modifications of loans that are accounted for within a pool do not result in the removal of those loans from the
pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. This ASU is effective for modifications occurring in the first interim or annual period ending on or after July 15, 2010. The amendments
are to be applied prospectively with early adoption permitted. In addition, upon initial adoption of the guidance in this ASU, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. Adoption of this
guidance is not expected to have a material impact on results of operations or financial condition.

In March 2010, FASB
issued ASU 2010-11, Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit Derivatives. This ASU provides amendments that clarify the scope exception for embedded credit derivative features related to the transfer of credit
risk in the form of subordination of one financial instrument to another. This ASU will be effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Adoption of this guidance is not expected
to have a material impact on results of operations or financial condition.



7



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



2. Investment Securities

The amortized cost and fair values of investment securities at June 30, 2010 and December 31, 2009, were as follows:



|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|------------------------------------------------- |  | ------------- | --------- | -------------------- | - | --------------------- |  | ---------- | ------ |  | - | ---------
|                                                  |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At June 30, 2010                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Available-for-Sale:                               |  |               |           |                      |   |                       |  |            |        |  |   |          
|U.S. Government agencies                          |  | $             | 400,116   |                      | $ | 5,918                 |  | $          | 25     |  | $ | 406,009  
|Obligations of states and political subdivisions  |  |               | 350,220   |                      |   | 11,335                |  |            | 1,308  |  |   | 360,247  
|Agency residential mortgage-backed securities     |  |               | 953,298   |                      |   | 25,609                |  |            | 74     |  |   | 978,833  
|Non-agency residential mortgage-backed securities |  |               | 147,802   |                      |   | 103                   |  |            | 19,599 |  |   | 128,306  
|Commercial mortgage-backed securities             |  |               | 99,253    |                      |   | 5,318                 |  |            | 0      |  |   | 104,571  
|Synthetic collateralized debt obligations         |  |               | 744       |                      |   | 832                   |  |            | 0      |  |   | 1,576    
|Other structured financial products               |  |               | 26,371    |                      |   | 0                     |  |            | 14,009 |  |   | 12,362   
|Equity securities of the Federal Home Loan Bank   |  |               | 73,217    |                      |   | 0                     |  |            | 0      |  |   | 73,217   
|Equity securities of the Federal Reserve Bank     |  |               | 50,225    |                      |   | 0                     |  |            | 0      |  |   | 50,225   
|Other equity securities                           |  |               | 26,198    |                      |   | 549                   |  |            | 1,775  |  |   | 24,972   
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                  |  |               | 2,127,444 |                      |   | 49,664                |  |            | 36,790 |  |   | 2,140,318
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Held-to-Maturity:                                 |  |               |           |                      |   |                       |  |            |        |  |   |          
|Other                                             |  |               | 4,560     |                      |   | 0                     |  |            | 0      |  |   | 4,560    
|State and municipal                               |  |               | 4,240     |                      |   | 0                     |  |            | 0      |  |   | 4,240    
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                  |  |               | 8,800     |                      |   | 0                     |  |            | 0      |  |   | 8,800    
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investment securities                       |  | $             | 2,136,244 |                      | $ | 49,664                |  | $          | 36,790 |  | $ | 2,149,118
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                  |  |               |           |                     
|                                                  |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At December 31, 2009                              |  |               |           |                      |   |                       |  |            |        |  |   |          
|Available-for-Sale:                               |  |               |           |                      |   |                       |  |            |        |  |   |          
|U.S. Government agencies                          |  | $             | 366,065   |                      | $ | 5,142                 |  | $          | 188    |  | $ | 371,019  
|Obligations of states and political subdivisions  |  |               | 343,254   |                      |   | 12,043                |  |            | 1,878  |  |   | 353,419  
|Agency residential mortgage-backed securities     |  |               | 661,755   |                      |   | 19,813                |  |            | 1,386  |  |   | 680,182  
|Non-agency residential mortgage-backed securities |  |               | 168,476   |                      |   | 18                    |  |            | 33,029 |  |   | 135,465  
|Commercial mortgage-backed securities             |  |               | 162,835   |                      |   | 2,625                 |  |            | 435    |  |   | 165,025  
|Synthetic collateralized debt obligations         |  |               | 1,301     |                      |   | 30                    |  |            | 0      |  |   | 1,331    
|Other structured financial products               |  |               | 26,294    |                      |   | 0                     |  |            | 10,975 |  |   | 15,319   
|Equity securities of the Federal Home Loan Bank   |  |               | 74,342    |                      |   | 0                     |  |            | 0      |  |   | 74,342   
|Equity securities of the Federal Reserve Bank     |  |               | 45,725    |                      |   | 0                     |  |            | 0      |  |   | 45,725   
|Other equity securities                           |  |               | 26,597    |                      |   | 302                   |  |            | 2,380  |  |   | 24,519   
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                  |  |               | 1,876,644 |                      |   | 39,973                |  |            | 50,271 |  |   | 1,866,346
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Held-to-Maturity:                                 |  |               |           |                      |   |                       |  |            |        |  |   |          
|Other                                             |  |               | 4,550     |                      |   | 0                     |  |            | 0      |  |   | 4,550    
|State and municipal                               |  |               | 4,371     |                      |   | 0                     |  |            | 0      |  |   | 4,371    
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                  |  |               | 8,921     |                      |   | 0                     |  |            | 0      |  |   | 8,921    
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investment securities                       |  | $             | 1,885,565 |                      | $ | 39,973                |  | $          | 50,271 |  | $ | 1,875,267
|                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          

At June 30, 2010 and December 31, 2009,
investment securities with carrying values of $1,335,025 and $1,344,858, 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, and residential and commercial mortgage-backed securities, at June 30, 2010, 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.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



|                                      |  |               |           |            |   |          
|------------------------------------- |  | ------------- | --------- | ---------- | - | ---------
|                                      |  | AmortizedCost |           | Fair Value
|Securities available for sale:        |  |               |           |            |   |          
|Within one year                       |  | $             | 58,301    |            | $ | 59,177   
|After one year but within five years  |  |               | 204,731   |            |   | 209,629  
|After five years but within ten years |  |               | 352,400   |            |   | 360,557  
|After ten years                       |  |               | 1,362,372 |            |   | 1,362,541
|                                      |  |               |           |            |   |          
|                                      |  |               | 1,977,804 |            |   | 1,991,904
|                                      |  |               |           |            |   |          
|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                       |  |               | 8,800     |            |   | 8,800    
|                                      |  |               |           |            |   |          
|                                      |  |               | 8,800     |            |   | 8,800    
|                                      |  |               |           |            |   |          
|Total debt securities                 |  | $             | 1,986,604 |            | $ | 2,000,704
|                                      |  |               |           |            |   |          

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.



|                                |  |                                     |        |      |                  |   |                    |  |   |                  |   |  |   |  
|------------------------------- |  | ----------------------------------- | ------ | ---- | ---------------- | - | ------------------ |  | - | ---------------- | - |  | - | -
|                                |  | For the Three Months Ended June 30,
|                                |  | 2010                                |        | 2009
|                                |  | Available-for-Sale                  |        |      | Held-to-Maturity |   | Available-for-Sale |  |   | Held-to-Maturity
|Gross gains                     |  | $                                   | 4,388  |      |                  | $ | 0                  |  | $ | 327              |   |  | $ | 0
|Gross losses                    |  |                                     | (89    | )    |                  |   | 0                  |  |   | 0                |   |  |   | 0
|Other-than-temporary impairment |  |                                     | (2,180 | )    |                  |   | 0                  |  |   | (937             | ) |  |   | 0
|                                |  |                                     |        |      |                  |   |                    |  |   |                  |   |  |   |  
|Net gains (losses)              |  | $                                   | 2,119  |      |                  | $ | 0                  |  | $ | (610             | ) |  | $ | 0
|                                |  |                                     |        |      |                  |   |                    |  |   |                  |   |  |   |  
|                                | 
|                                |  | For the Six Months Ended June 30,  
|                                |  | 2010                                |        | 2009
|                                |  | Available-for-Sale                  |        |      | Held-to-Maturity |   | Available-for-Sale |  |   | Held-to-Maturity
|Gross gains                     |  | $                                   | 11,015 |      |                  | $ | 0                  |  | $ | 352              |   |  | $ | 0
|Gross losses                    |  |                                     | (123   | )    |                  |   | 0                  |  |   | 0                |   |  |   | 0
|Other-than-temporary impairment |  |                                     | (2,737 | )    |                  |   | 0                  |  |   | (937             | ) |  |   | 0
|                                |  |                                     |        |      |                  |   |                    |  |   |                  |   |  |   |  
|Net gains (losses)              |  | $                                   | 8,155  |      |                  | $ | 0                  |  | $ | (585             | ) |  | $ | 0
|                                |  |                                     |        |      |                  |   |                    |  |   |                  |   |  |   |  



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



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, 2010 and December 31, 2009.



|                                                  |  |                     |        |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       
|------------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ---------- |  | ---------------- | ------- | ---------- | - | ---------------- |  | - | ------- |  | - | ------
|June 30, 2010                                     |  | Less than 12 Months |        | 12 Months or More |   | Total     
|                                                  |  | FairValue           |        | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |         | Fair Value |   | UnrealizedLosses
|U. S. Government agencies                         |  | $                   | 24,975 |                   | $ | 25         |  | $                | 0       |            | $ | 0                |  | $ | 24,975  |  | $ | 25    
|Obligations of states and political subdivisions  |  |                     | 11,416 |                   |   | 228        |  |                  | 31,489  |            |   | 1,080            |  |   | 42,905  |  |   | 1,308 
|Agency residential mortgage-backed securities     |  |                     | 39,180 |                   |   | 74         |  |                  | 0       |            |   | 0                |  |   | 39,180  |  |   | 74    
|Non-agency residential mortgage-backed securities |  |                     | 82     |                   |   | 1          |  |                  | 123,755 |            |   | 19,598           |  |   | 123,837 |  |   | 19,599
|Other structured financial products               |  |                     | 0      |                   |   | 0          |  |                  | 12,362  |            |   | 14,009           |  |   | 12,362  |  |   | 14,009
|Other equity securities                           |  |                     | 261    |                   |   | 331        |  |                  | 3,005   |            |   | 1,444            |  |   | 3,266   |  |   | 1,775 
|                                                  |  |                     |        |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       
|                                                  |  | $                   | 75,914 |                   | $ | 659        |  | $                | 170,611 |            | $ | 36,131           |  | $ | 246,525 |  | $ | 36,790
|                                                  |  |                     |        |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       



|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       
|------------------------------------------------- |  | ------------------- | ------- | ----------------- | - | ---------- |  | ---------------- | ------- | ---------- | - | ---------------- |  | - | ------- |  | - | ------
|December 31, 2009                                 |  | Less than 12 Months |         | 12 Months or More |   | Total     
|                                                  |  | Fair Value          |         | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |         | Fair Value |   | UnrealizedLosses
|U. S. Government agencies                         |  | $                   | 14,813  |                   | $ | 188        |  | $                | 0       |            | $ | 0                |  | $ | 14,813  |  | $ | 188   
|Obligations of states and political subdivisions  |  |                     | 45,348  |                   |   | 554        |  |                  | 31,637  |            |   | 1,324            |  |   | 76,985  |  |   | 1,878 
|Agency residential mortgage-backed securities     |  |                     | 157,762 |                   |   | 1,386      |  |                  | 0       |            |   | 0                |  |   | 157,762 |  |   | 1,386 
|Non-agency residential mortgage-backed securities |  |                     | 89      |                   |   | 7          |  |                  | 130,579 |            |   | 33,022           |  |   | 130,668 |  |   | 33,029
|Commercial mortgage-backed securities             |  |                     | 0       |                   |   | 0          |  |                  | 43,498  |            |   | 435              |  |   | 43,498  |  |   | 435   
|Other structured financial products               |  |                     | 0       |                   |   | 0          |  |                  | 15,319  |            |   | 10,975           |  |   | 15,319  |  |   | 10,975
|Other equity securities                           |  |                     | 24      |                   |   | 29         |  |                  | 2,727   |            |   | 2,351            |  |   | 2,751   |  |   | 2,380 
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       
|                                                  |  | $                   | 218,036 |                   | $ | 2,164      |  | $                | 223,760 |            | $ | 48,107           |  | $ | 441,796 |  | $ | 50,271
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |       

Non-agency residential mortgage-backed securities(16 of the 18 securities are in a loss position). 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.

During the second quarter of 2010, however, Susquehannas analysis determined that one of these
securities was other-than-temporarily impaired, and Susquehanna recorded an other-than-temporary impairment loss as presented in 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 monthsended June 30, |       | Six monthsended June 30,
|                                                                                                                          |  | 2010                       |       | 2009                     |   | 2010 |  | 2009
|Balance - beginning of period                                                                                             |  | $                          | 0     |                          | $ | 0    |  | $    | 0     |  | $ | 0
|Additions - amount related to the credit loss for which an other- than-temporary impairment was not previously
recognized |  |                            | 1,737 |                          |   | 0    |  |      | 1,737 |  |   | 0
|                                                                                                                          |  |                            |       |                          |   |      |  |      |       |  |   |  
|Balance - end of period                                                                                                   |  | $                          | 1,737 |                          | $ | 0    |  | $    | 1,737 |  | $ | 0
|                                                                                                                          |  |                            |       |                          |   |      |  |      |       |  |   |  

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



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



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 unrealized loss in accumulated other comprehensive income ($878 at June 30, 2010). Significant assumptions used in the valuation of this other-than-temporarily
impaired security were as follows:



|                                         |  |                     
|---------------------------------------- |  | --------------------
|As of June 30, 2010                      |  | Weighted-average (%)
|Annual constant prepayment speed         |  | 1.6                 
|Loss severity (1)                        |  | 29.0                
|Life default rate, net of recoveries (2) |  | 12.2                



|(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. 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.

Other equity securities.During the second quarter of 2010, Susquehanna recognized an aggregate other-than-temporary impairment of
$443 relating to five financial institution equity securities. The determination that an other-than-temporary impairment had occurred was the result of managements assessment of the near-term prospects of each specific issuer and the severity
and duration of the decline in fair value of those equity securities.

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.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



NOTE 3. Loans and Leases

Loans and Leases, net of unearned income



|                                                                                                        |  |              |           |     |                  |   |          
|------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | --- | ---------------- | - | ---------
|                                                                                                        |  | June 30,2010 |           |     | December 31,2009
|Commercial, financial, and agricultural                                                                 |  | $            | 1,891,349 |     |                  | $ | 2,050,110
|Real estate - construction                                                                              |  |              | 947,073   |     |                  |   | 1,114,709
|Real estate secured - residential                                                                       |  |              | 2,646,699 |     |                  |   | 2,369,380
|Real estate secured - commercial                                                                        |  |              | 3,042,460 |     |                  |   | 3,060,331
|Consumer                                                                                                |  |              | 548,453   |     |                  |   | 482,266  
|Leases                                                                                                  |  |              | 711,022   |     |                  |   | 750,483  
|                                                                                                        |  |              |           |     |                  |   |          
|Total loans and leases                                                                                  |  | $            | 9,787,056 |     |                  | $ | 9,827,279
|                                                                                                        |  |              |           |     |                  |   |          
|Nonaccrual loans and leases                                                                             |  | $            | 237,378   |     |                  | $ | 219,554  
|Loans and leases contractually past due 90 days and still accruing                                      |  |              | 13,039    |     |                  |   | 14,820   
|Troubled debt restructurings                                                                            |  |              | 79,595    |     |                  |   | 58,244   
|Home equity line of credit loans held for sale (included in Real estate secured - residential, above) |  |              | 0         | (1) |                  |   | 403,574  



| | (1) | During the first quarter of 2010, Susquehanna concluded that, due to recent changes in U.S. GAAP and market conditions, it was highly unlikely that the home equity line
of credit loans held for sale would be securitized and sold. Therefore, on March 31, 2010, Susquehanna transferred $434,897 of home equity line of credit loans held for sale to held for investment.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net investment in direct financing leases was as follows:



|                                      |  |              |         |   |                  |   |         |  
|------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                      |  | June 30,2010 |         |   | December 31,2009 |  
|Minimum lease payments receivable     |  | $            | 479,534 |   |                  | $ | 492,664 |  
|Estimated residual value of leases    |  |              | 303,891 |   |                  |   | 335,003 |  
|Unearned income under lease contracts |  |              | (72,403 | ) |                  |   | (77,184 | )
|                                      |  |              |         |   |                  |   |         |  
|Total leases                          |  | $            | 711,022 |   |                  | $ | 750,483 |  
|                                      |  |              |         |   |                  |   |         |  

Allowance for Loan and Lease Losses



|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|----------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                              |  | 2010                       |         |   | 2009                     |   |         | 2010 |  |   | 2009    |  
|Balance - Beginning of period |  | $                          | 178,819 |   |                          | $ | 132,164 |      |  | $ | 172,368 |   |  | $ | 113,749 |  
|Additions                     |  |                            | 43,000  |   |                          |   | 50,000  |      |  |   | 88,000  |   |  |   | 85,000  |  
|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                              |  |                            | 221,819 |   |                          |   | 182,164 |      |  |   | 260,368 |   |  |   | 198,749 |  
|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Charge-offs                   |  |                            | (41,266 | ) |                          |   | (26,848 | )    |  |   | (83,610 | ) |  |   | (45,867 | )
|Recoveries                    |  |                            | 5,242   |   |                          |   | 2,201   |      |  |   | 9,037   |   |  |   | 4,635   |  
|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net charge-offs               |  |                            | (36,024 | ) |                          |   | (24,647 | )    |  |   | (74,573 | ) |  |   | (41,232 | )
|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Balance - Period end          |  | $                          | 185,795 |   |                          | $ | 157,517 |      |  | $ | 185,795 |   |  | $ | 157,517 |  
|                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Impaired Loans

An analysis of impaired loans, as of June 30, 2010 and December 31, 2009, is as follows:



|                                         |  |              |         |                  |   |        
|---------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                         |  | June 30,2010 |         | December 31,2009
|Impaired loans without a related reserve |  | $            | 127,342 |                  | $ | 118,887
|Impaired loans with a reserve            |  |              | 141,384 |                  |   | 130,460
|                                         |  |              |         |                  |   |        
|Total impaired loans                     |  | $            | 268,726 |                  | $ | 249,347
|                                         |  |              |         |                  |   |        
|Reserve for impaired loans               |  | $            | 32,733  |                  | $ | 35,030 
|                                         |  |              |         |                  |   |        

Additional information relating to impaired loans for
the three months and six months ended June 30, 2010 and 2009 is as follows:



|                                               |  |                            |         |                          |   |         |  |      |         |  |   |        
|---------------------------------------------- |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                                               |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|                                               |  | 2010                       |         | 2009                     |   | 2010    |  | 2009
|Average balance of impaired loans              |  | $                          | 294,952 |                          | $ | 211,851 |  | $    | 283,415 |  | $ | 169,137
|Interest income on impaired loans (cash-basis) |  |                            | 2,178   |                          |   | 1,802   |  |      | 3,640   |  |   | 2,951  

NOTE 4. Goodwill

Susquehanna tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be an
impairment. This test, which requires significant judgment and analysis, involves discounted cash flows and market-price multiples of non-distressed financial institutions.

Susquehanna performed its annual goodwill impairment test in the second quarter of 2010 and determined that the fair value of each of its
reporting units exceeded its book value, and there was no goodwill impairment.

Bank Reporting Unit

Goodwill assigned to the bank reporting unit at both May 31, 2010 and December 31, 2009 was $915,421. Fair value of the bank
reporting unit was determined utilizing the market multiples approach, which measures the value of the reporting unit using recent non-distressed sales of financial institutions in Susquehannas market. Susquehanna considers three key ratios to
measure goodwill of the bank reporting unit for impairment: price to earnings, price to book, and price to tangible book. In keeping with the investment communitys valuations of financial institutions in 2009, Susquehanna predominantly used
the price to book ratio and the price to tangible book ratio, with little consideration given to the price to earnings ratio due to the stress in the current economic environment. In keeping with the investment communitys current valuations of
financial institutions, in 2010 Susquehanna gave no consideration to the price to earnings ratio. The following table shows the ratios used at May 31, 2010 and December 31, 2009.



|                       |  |                |  |                 
|---------------------- |  | -------------- |  | ----------------
|                       |  | Annual         |  | Interim         
|Ratio                  |  | May 31,2010    |  | December 31,2009
|Price to book          |  | 1.41X          |  | 1.42X           
|Price to tangible book |  | 1.60X          |  | 1.62X           
|Price to earnings      |  | Not Meaningful |  | 25X             

Fair value of the bank
reporting unit exceeded carrying value by 14.2% at June 30, 2010 and by 3.1% at December 31, 2009.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Wealth Management Reporting Unit

Goodwill assigned to the wealth management reporting unit at both May 31, 2010 and December 31, 2009 was $82,746. Fair value of
the wealth management reporting unit was determined utilizing the market multiples approach and the income approach. The income approach measures the value of the reporting unit based on a discount rate to determine the
present value of the reporting units future economic benefit over ten years, assuming a weighted increase in the reporting units revenues and a weighted increase in the reporting units expenses. In keeping with the investment
communitys current valuations of wealth management institutions, Susquehanna predominantly uses the income approach. The following table shows the factors used in the income approach at May 31, 2010 and December 31, 2009.



|                                      |  |             |   |  |                  |  
|------------------------------------- |  | ----------- | - |  | ---------------- | -
|                                      |  | Annual      |   |  | Interim          |  
|Factors                               |  | May 31,2010 |   |  | December 31,2009 |  
|Discount rate                         |  | 17.5        | % |  | 17.5             | %
|Weighted-average increase in revenues |  | 6.0         | % |  | 6.0              | %
|Weighted-average increase in expenses |  | 5.0         | % |  | 5.0              | %

Fair value of
the wealth management reporting unit exceeded carrying value by 53.6% at May 31, 2010 and by 41.8% at December 31, 2009.

Property and Casualty Insurance Reporting Unit

Goodwill assigned to the property and casualty insurance reporting unit at May 31, 2010 was $17,177. Fair value of the property and
casualty insurance reporting unit was determined utilizing the market multiples approach, which measures the value of the reporting unit using recent sales of property and casualty insurance companies in Susquehannas market. Susquehanna uses
two key ratios to measure goodwill of the property and casualty insurance reporting unit for impairment: average price to book and median price to earnings. The following table shows the ratios used at May 31, 2010. There was no interim
impairment test performed at December 31, 2009.



|                         |  |            
|------------------------ |  | -----------
|                         |  | Annual     
|Ratio                    |  | May 31,2010
|Average price to book    |  | 1.06X      
|Median price to earnings |  | 8.5X       

Fair value of the
property and casualty insurance reporting unit exceeded carrying value by 33.9% at May 31, 2010.

NOTE 5. Borrowings



|                                            |  |              |         |                  |   |          
|------------------------------------------- |  | ------------ | ------- | ---------------- | - | ---------
|Short-term borrowings                       |  | June 30,2010 |         | December 31,2009
|Securities sold under repurchase agreements |  | $            | 292,439 |                  | $ | 333,803  
|Federal funds purchased                     |  |              | 320,000 |                  |   | 200,000  
|Treasury tax and loan notes                 |  |              | 7,000   |                  |   | 6,900    
|Federal Reserve term auction facility (1)   |  |              | 0       |                  |   | 500,000  
|                                            |  |              |         |                  |   |          
|Total short-term borrowings                 |  | $            | 619,439 |                  | $ | 1,040,703
|                                            |  |              |         |                  |   |          



| | (1) | The final auction was held on March 8, 2010.
| | --- | --------------------------------------------

11% Junior Subordinated Deferrable Interest Debentures, Series II

On March 16, 2010, Susquehanna Capital II, a Delaware statutory trust, sold to the public $50,000 aggregate principal amount of 11%
Cumulative Trust Preferred Securities, Series II and used the proceeds from those sales to fund its purchase of $50,010 of 11% Junior Subordinated Deferrable Interest Debentures, Series II



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



issued by Susquehanna. The subordinated debentures are unsecured and rank equally in right of payment with Susquehannas existing series of junior subordinated debt securities. Interest on
the subordinated debentures is payable semi-annually in arrears on each March 23 and September 23, beginning September 23, 2010, unless Susquehanna defers payment. Susquehanna may elect to redeem any or all of the subordinated
debentures at any time on or after March 23, 2015. The maturity date of the subordinated debentures is March 23, 2040.

NOTE 6.
Shareholders Equity

Preferred Stock

On April 21, 2010, Susquehanna redeemed $200,000 of the outstanding $300,000 of its Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program in December 2008. The redemption price included $200,000 of the original investment amount plus approximately $1,800 of accrued and unpaid
dividends. The preferred stock that Susquehanna redeemed in the second quarter of 2010 for $200,000 had a carrying value of $195,198 (net of a $4,802 unaccreted discount.) As a result of the redemption, Susquehanna accelerated the accretion of the
discount, which reduced net income applicable to common shareholders by $4,802 in the second quarter of 2010.

The U.S.
Treasury continues to own $100,000 of Susquehannas Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as a warrant giving the U. S. Treasury the right to purchase up to 3,028 shares of Susquehannas common stock at a price
of $14.86 per share. Susquehanna does not expect to redeem the remaining $100,000 of preferred stock until there is sustained economic recovery and related improvement in its credit metrics.

Common Stock

On
March 15, 2010, Susquehanna completed an offering of 43,125 shares of its common stock, par value $2.00 per share, at a public offering price of $8.00 per share. Proceeds from the offering, net of underwriting discounts and commissions of
$17,250 and expenses of $409, totaled $327,341.

NOTE 7. Earnings per Share (EPS)

The following tables set forth the calculation of basic and diluted EPS for the three-month and six-month periods ended June 30, 2010
and 2009.



|                                                                 |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  
|---------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ------------------- | ------- | --------------- | - | ----- | ------ |  | - | ------------------- | - | --------------- | ------ |  | - | ----- | -
|                                                                 |  | For the Three Months Ended June 30, |       
|                                                                 |  | 2010                                |        |   | 2009                |        
|                                                                 |  | Income                              |        |   | AverageCommonShares |         | Per ShareAmount |   |       | Income |  |   | AverageCommonShares |   | Per ShareAmount |       
|Basic Earnings per Share:                                        |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  
|Income applicable to common shareholders                         |  | $                                   | (1,363 | ) |                     | 129,630 |                 | $ | (0.01 | )      |  | $ | (11,942             | ) |                 | 86,213 |  | $ | (0.14 | )
|Effect of Diluted Securities:                                    |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  
|Stock options and restricted shares outstanding                  |  |                                     |        |   |                     | 0       |                 |   |       |        |  |   |                     |   |                 | 0      |  |   |       |  
|                                                                 |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  
|Diluted Earnings per Share:                                      |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  
|Income applicable to common shareholders and assuming conversion |  | $                                   | (1,363 | ) |                     | 129,630 |                 | $ | (0.01 | )      |  | $ | (11,942             | ) |                 | 86,213 |  | $ | (0.14 | )
|                                                                 |  |                                     |        |   |                     |         |                 |   |       |        |  |   |                     |   |                 |        |  |   |       |  

For the three months ended June 30, 2010 and 2009, average options to purchase 2,301 and 2,506 shares,
respectively, were outstanding but were not included in the computation of diluted EPS because the options common stock equivalents were antidilutive. For the three months ended June 30, 2010 and 2009, warrants to purchase 3,028 shares of
common stock were outstanding but were not included in the computation of diluted EPS because the warrants common stock equivalents were antidilutive.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



|                                                                 |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  
|---------------------------------------------------------------- |  | --------------------------------- | ----- | ------------------- | ------- | --------------- | - | ------ |  | - | ------------------- | - | --------------- | ------ |  | - | ----- | -
|                                                                 |  | For the Six Months Ended June 30, |      
|                                                                 |  | 2010                              |       | 2009                |        
|                                                                 |  | Income                            |       | AverageCommonShares |         | Per ShareAmount |   | Income |  |   | AverageCommonShares |   | Per ShareAmount |       
|Basic Earnings per Share:                                        |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  
|Income applicable to common shareholders                         |  | $                                 | 1,952 |                     | 112,207 |                 | $ | 0.02   |  | $ | (10,081             | ) |                 | 86,183 |  | $ | (0.12 | )
|Effect of Diluted Securities:                                    |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  
|Stock options and restricted shares outstanding                  |  |                                   |       |                     | 26      |                 |   | 0      |  |   |                     |   |                 | 0      |  |   |       |  
|                                                                 |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  
|Diluted Earnings per Share:                                      |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  
|Income applicable to common shareholders and assuming conversion |  | $                                 | 1,952 |                     | 112,233 |                 | $ | 0.02   |  | $ | (10,081             | ) |                 | 86,183 |  | $ | (0.12 | )
|                                                                 |  |                                   |       |                     |         |                 |   |        |  |   |                     |   |                 |        |  |   |       |  

For the six months ended June 30, 2010 and 2009, average options to purchase 2,075 and 2,506 shares,
respectively, were outstanding but were not included in the computation of diluted EPS because the options common stock equivalents were antidilutive. For the six months ended June 30, 2010 and 2009, warrants to purchase 3,028 shares of
common stock were outstanding but were not included in the computation of diluted EPS because the warrants common stock equivalents were antidilutive.

NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost



|                                              |  |                             |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    
|--------------------------------------------- |  | --------------------------- | ------ | - | ----------------------------------- | - | --------------------------- | ---- |  | ---- | --- | ---- | - | ---- |  | - | --- |  | - | ---
|                                              |  | Three Months Ended June 30,
|                                              |  | Pension Benefits            |        |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementBenefits
|                                              |  | 2010                        |        |   | 2009                                |   |                             | 2010 |  | 2009 |     | 2010 |   | 2009
|Service cost                                  |  | $                           | 1,401  |   |                                     | $ | 1,716                       |      |  | $    | 33  |      | $ | 30   |  | $ | 191 |  | $ | 128
|Interest cost                                 |  |                             | 1,589  |   |                                     |   | 1,418                       |      |  |      | 73  |      |   | 63   |  |   | 193 |  |   | 162
|Expected return on plan assets                |  |                             | (2,437 | ) |                                     |   | (1,892                      | )    |  |      | 0   |      |   | 0    |  |   | 0   |  |   | 0  
|Amortization of prior service cost            |  |                             | 6      |   |                                     |   | 4                           |      |  |      | 29  |      |   | 29   |  |   | 16  |  |   | 23 
|Amortization of transition obligation (asset) |  |                             | 0      |   |                                     |   | 0                           |      |  |      | 0   |      |   | 0    |  |   | 28  |  |   | 28 
|Amortization of net actuarial loss            |  |                             | 595    |   |                                     |   | 626                         |      |  |      | 25  |      |   | 16   |  |   | 0   |  |   | 0  
|Curtailments/settlements                      |  |                             | 0      |   |                                     |   |                            |      |  |      | 0   |      |   | 0    |  |   | 0   |  |   | 0  
|                                              |  |                             |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    
|Net periodic benefit cost                     |  | $                           | 1,154  |   |                                     | $ | 1,872                       |      |  | $    | 160 |      | $ | 138  |  | $ | 428 |  | $ | 341
|                                              |  |                             |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



|                                              |  |                           |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    
|--------------------------------------------- |  | ------------------------- | ------ | - | ----------------------------------- | - | --------------------------- | ---- |  | ---- | --- | ---- | - | ---- |  | - | --- |  | - | ---
|                                              |  | Six Months Ended June 30,
|                                              |  | Pension Benefits          |        |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementBenefits
|                                              |  | 2010                      |        |   | 2009                                |   |                             | 2010 |  | 2009 |     | 2010 |   | 2009
|Service cost                                  |  | $                         | 2,802  |   |                                     | $ | 3,432                       |      |  | $    | 66  |      | $ | 60   |  | $ | 382 |  | $ | 256
|Interest cost                                 |  |                           | 3,178  |   |                                     |   | 2,836                       |      |  |      | 146 |      |   | 126  |  |   | 386 |  |   | 324
|Expected return on plan assets                |  |                           | (4,874 | ) |                                     |   | (3,784                      | )    |  |      | 0   |      |   | 0    |  |   | 0   |  |   | 0  
|Amortization of prior service cost            |  |                           | 12     |   |                                     |   | 8                           |      |  |      | 58  |      |   | 58   |  |   | 32  |  |   | 46 
|Amortization of transition obligation (asset) |  |                           | 0      |   |                                     |   | 0                           |      |  |      | 0   |      |   | 0    |  |   | 56  |  |   | 56 
|Amortization of net actuarial loss            |  |                           | 1,190  |   |                                     |   | 1,252                       |      |  |      | 50  |      |   | 32   |  |   | 0   |  |   | 0  
|Curtailments/settlements                      |  |                           | 0      |   |                                     |   | 204                         |      |  |      | 0   |      |   | 0    |  |   | 0   |  |   | 0  
|                                              |  |                           |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    
|Net periodic benefit cost                     |  | $                         | 2,308  |   |                                     | $ | 3,948                       |      |  | $    | 320 |      | $ | 276  |  | $ | 856 |  | $ | 682
|                                              |  |                           |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |     |  |   |    

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2009, that it expected to contribute
$124 to its pension plans and $290 to its other postretirement benefit plan in 2010. As of June 30, 2010, $62 of contributions have been made to its pension plans, and $145 of contributions have been made to its other postretirement benefit
plan. Susquehanna anticipates contributing an additional $62 to fund its pension plan in 2010, for a total of $124, and an additional $145 to its other postretirement benefit plan, for a total of $290.

Changes to Susquehannas Retirement Program

On February 24, 2009, Susquehanna notified its employees that changes were going to be made to the retirement program, effective
July 1, 2009. The changes affected three groups of Susquehanna employees differently - employees for whom there were no retirement program changes, employees for whom the cash balance plan was frozen, and employees who were not yet
eligible to participate in the plan and will not be eligible in the future.

Note 9. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Susquehanna is exposed to certain risks arising from both its business operations and economic conditions, and principally manages its
exposures through management of its core business activities. Susquehanna manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through
the use of derivative financial instruments. Specifically, Susquehanna enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash
amounts, the value of which are determined by interest rates. Susquehannas derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to
certain variable-rate liabilities. Susquehanna also has derivatives that are a result of a service it provides to certain qualifying customers, and therefore, are not used to manage interest-rate risk in its assets or liabilities. Susquehanna
manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net exposure resulting from such transactions.

Cash Flow Hedges of Interest Rate Risk

Susquehannas objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its
exposure to interest rate movements. To accomplish this objective, Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of its variable-rate borrowings, Susquehanna uses interest rate swaps
designated as cash flow hedges that involve the receipt of variable amounts from a counterparty in exchange for fixed-rate payments from Susquehanna. As of June 30, 2010,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Susquehanna had nine interest rate swaps with an aggregate notional amount of $759,471 that were designated as cash flow hedges of interest-rate risk. Two of these interest rate swaps, with
notional amounts of $49,818 and $34,653 and fair values of $177 and ($2,061), respectively, relate to the consolidated variable interest entities.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in
accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During the first six months of 2010, such derivatives were used to hedge the variable cash outflows
associated with Federal Home Loan Bank borrowings, federal funds borrowings, and long-term debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the first six months of 2010, Susquehanna
recognized $461 in other expenses as a result of the ineffectiveness of cash flow hedges, $402 of which was related to consolidated variable interest entities.

Amounts recorded in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest
payments are made on Susquehannas variable-rate liabilities. During 2010, Susquehanna estimates that $7,580 will be reclassified as an increase to interest expense.

Non-designated Hedges

Susquehanna does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are used to manage
Susquehannas exposure to interest rate movements and other identified risks but do not meet the strict requirements of hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly
in earnings. Additionally, Susquehanna has interest rate derivatives, including interest rate swaps and option products, resulting from a service it provides to certain customers with high-quality credit ratings. Susquehanna executes interest rate
derivatives with commercial banking customers to facilitate their respective risk management strategies. The credit risk associated with derivatives executed with these customers is essentially the same as that involved in extending loans and is
subject to our normal credit policies. Susquehanna obtains collateral based upon its assessment of the customers credit quality. Those derivatives are simultaneously hedged by offsetting derivatives that Susquehanna executes with a third party
to minimize Susquehannas net risk exposure resulting from those transactions.

At June 30, 2010, Susquehanna had
ninety derivative transactions related to this program with an aggregate notional amount of $611,691. For the first six months of 2010, Susquehanna recognized a net gain of $71 related to changes in fair value of the derivatives in this program. For
the first six months of 2009, Susquehanna recognized a net loss of $127 related to changes in fair value of the derivatives in this program.

Credit-risk-related Contingent Features

Susquehanna has agreements with certain of its derivative counterparties that contain the following provisions:



| |  |  | if Susquehanna defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then
Susquehanna could also be declared in default on its derivative obligations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if Susquehanna fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative
positions, and Susquehanna would be required to settle its obligations under the agreements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if Susquehanna fails to maintain a specified minimum leverage ratio, then Susquehanna could be declared in default on its derivative obligations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if a specified event or condition occurs that materially changes Susquehannas creditworthiness in an adverse manner, it may be required to fully
collateralize its obligations under the derivative instrument; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



| |  |  | if Susquehannas credit rating is reduced below investment grade, then a termination event shall be deemed to have occurred and the non-affected
counterparty shall have the right, but not the obligation, to terminate all transactions under the agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At June 30, 2010, the fair value of derivatives in a net liability position, which includes accrued interest and any credit
valuation adjustments, related to these agreements was $20,920. At June 30, 2010, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $35,260. If Susquehanna had
breached any of the above provisions at June 30, 2010, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts
previously posted as collateral with the respective counterparty.





|                                                  |  |                                                    |  |                       |        |                       |                   |            |   |       
|------------------------------------------------- |  | -------------------------------------------------- |  | --------------------- | ------ | --------------------- | ----------------- | ---------- | - | ------
|                                                  |  | Fair Values of Derivative
InstrumentsJune 30, 2010
|                                                  |  | Asset Derivatives                                  |  | Liability Derivatives
|                                                  |  | Balance SheetLocation                              |  | Fair Value            |        | Balance SheetLocation |                   | Fair Value
|Derivatives designated as hedging instruments     |  |                                                    |  |                       |        |                       |                   |            |   |       
|Interest rate contracts                           |  | Other assets                                       |  | $                     | 177    |                       | Other liabilities |            | $ | 31,793
|Derivatives not designated as hedging instruments |  |                                                    |  |                       |        |                       |                   |            |   |       
|Interest rate contracts                           |  | Other assets                                       |  |                       | 21,010 |                       | Other liabilities |            |   | 20,440
|                                                  |  |                                                    |  |                       |        |                       |                   |            |   |       
|Total derivatives                                 |  |                                                    |  | $                     | 21,187 |                       |                   |            | $ | 52,233
|                                                  |  |                                                    |  |                       |        |                       |                   |            |   |       
|                                                  | 
|                                                  |  | December 31, 2009                                 
|                                                  |  | Asset Derivatives                                  |  | Liability Derivatives
|                                                  |  | Balance SheetLocation                              |  | Fair Value            |        | Balance SheetLocation |                   | Fair Value
|Derivatives designated as hedging instruments     |  |                                                    |  |                       |        |                       |                   |            |   |       
|Interest rate contracts                           |  | Other assets                                       |  | $                     | 6,956  |                       | Other liabilities |            | $ | 408   
|Derivatives not designated as hedging instruments |  |                                                    |  |                       |        |                       |                   |            |   |       
|Interest rate contracts                           |  | Other assets                                       |  |                       | 13,781 |                       | Other liabilities |            |   | 13,282
|                                                  |  |                                                    |  |                       |        |                       |                   |            |   |       
|Total derivatives                                 |  |                                                    |  | $                     | 20,737 |                       |                   |            | $ | 13,690
|                                                  |  |                                                    |  |                       |        |                       |                   |            |   |       



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



The Effect of Derivative Instruments on the Statement of Income

Three months ended June 30, 2010



|                                                  |  |                                                   |              |   |                                                             |   |                  |                                                           |  |   |                                                         |   |                                                       |               |  |   |      |  
|------------------------------------------------- |  | ------------------------------------------------- | ------------ | - | ----------------------------------------------------------- | - | ---------------- | --------------------------------------------------------- |  | - | ------------------------------------------------------- | - | ----------------------------------------------------- | ------------- |  | - | ---- | -
|Derivatives in cash flow hedging relationships    |  | Amount of 
LossRecognizedin OCI                   |              |   | Location of LossReclassified fromAccumulated OCIinto
Income |   |                  | Amount of LossReclassified fromAccumulated OCIinto
Income |  |   | Location of LossRecognized inIncome(IneffectivePortion) |   | Amount of LossRecognized inIncome(IneffectivePortion) |              
|Interest rate contracts:                          |  | $                                                 | (16,324      | ) |                                                             |   | Interest expense |                                                           |  | $ | (2,098                                                  | ) |                                                       | Other expense |  | $ | (69  | )
|                                                  |  |                                                   |              |   |                                                            
|Derivatives not designated as hedging instruments |  | Location of GainRecognized inIncome onDerivatives |              |   | Amount of GainRecognized inIncome onDerivatives             |   |                  |                                                           |  |   |                                                         |   |                                                       |              
|Interest rate contracts:                          |  |                                                   | Other income |   |                                                             | $ | 625              |                                                           |  |   |                                                         |   |                                                       |               |  |   |      |  
|                                                 
|Three months ended June 30, 2009                  | 
|Derivatives in cash flow hedging relationships    |  | Amount of GainRecognizedin OCI                    |              |   | Location of LossReclassified fromAccumulated OCIinto Income |   |                  | Amount of LossReclassified fromAccumulated OCIinto Income |  |   |                                                         |   |                                                       |              
|Interest rate contracts:                          |  | $                                                 | 13,936       |   |                                                             |   | Interest expense |                                                           |  | $ | (188                                                    | ) |                                                       |               |  |   |      |  
|                                                  |  |                                                   |              |   |                                                            
|Derivatives not designated as hedging instruments |  | Location of LossRecognized inIncome onDerivatives |              |   | Amount of LossRecognized inIncome onDerivatives             |   |                  |                                                           |  |   |                                                         |   |                                                       |              
|Interest rate contracts:                          |  |                                                   | Other income |   |                                                             | $ | (421             | )                                                         |  |   |                                                         |   |                                                       |               |  |   |      |  
|                                                 
|Six months ended June 30, 2010                    | 
|                                                  |  |                                                   |              |   |                                                            
|Derivatives in cash flow hedging relationships    |  | Amount of LossRecognizedin OCI                    |              |   | Location of LossReclassified fromAccumulated OCIinto Income |   |                  | Amount of LossReclassified fromAccumulated OCIinto Income |  |   | Location of LossRecognized inIncome(IneffectivePortion) |   | Amount of LossRecognized inIncome(IneffectivePortion) |              
|Interest rate contracts:                          |  | $                                                 | (23,388      | ) |                                                             |   | Interest expense |                                                           |  | $ | (2,465                                                  | ) |                                                       | Other expense |  | $ | (461 | )
|                                                  |  |                                                   |              |   |                                                            
|Derivatives not designated as hedging instruments |  | Location of GainRecognized inIncome onDerivatives |              |   | Amount of GainRecognized inIncome onDerivatives             |   |                  |                                                           |  |   |                                                         |   |                                                       |              
|Interest rate contracts:                          |  |                                                   | Other income |   |                                                             | $ | 71               |                                                           |  |   |                                                         |   |                                                       |               |  |   |      |  



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Six months ended June 30, 2009



|                                                  |  |                                                   |              |                                                             |   |                  |                                                           |  |   |      |  
|------------------------------------------------- |  | ------------------------------------------------- | ------------ | ----------------------------------------------------------- | - | ---------------- | --------------------------------------------------------- |  | - | ---- | -
|Derivatives in cash flow hedging relationships    |  | Amount of GainRecognizedin OCI                    |              | Location of LossReclassified fromAccumulated OCIinto Income |   |                  | Amount of LossReclassified fromAccumulated OCIinto Income | 
|Interest rate contracts:                          |  | $                                                 | 9,792        |                                                             |   | Interest expense |                                                           |  | $ | (322 | )
|                                                  |  |                                                   |             
|Derivatives not designated as hedging instruments |  | Location of LossRecognized inIncome onDerivatives |              | Amount of LossRecognized inIncome onDerivatives             |   |                  |                                                           | 
|Interest rate contracts:                          |  |                                                   | Other income |                                                             | $ | (127             | )                                                         |  |   |      |  

Note 10. Securitizations and Variable Interest Entities (VIEs)

In 2005 and 2006, Susquehanna entered into term securitization transactions in which it sold portfolios of home equity loans to
securitization trusts. Both of the securitization trusts are, by definition, variable interest entities. Susquehanna performed an analysis to determine whether it has a controlling financial interest in these entities, and thus, as the primary
beneficiary, would be required to consolidate the entities. An enterprise is deemed to have a controlling financial interest in a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most
significantly impact the entitys economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be
significant to the VIE. Susquehanna retained servicing responsibilities and interests in the VIEs. Susquehanna receives servicing fees and rights to cash flows remaining after the investors have received the return for which they contracted.
Susquehanna, as servicer, has the ability to manage the entities assets that become delinquent to improve the economic performance of the entities. Therefore, Susquehanna meets the power criterion. In addition, through its
ownership of the entities equity certificates, Susquehanna has the right to receive potentially significant or insignificant benefits. Therefore, Susquehanna meets the losses/benefits criterion. Since Susquehanna meets both
criteria, it is the primary beneficiary of the VIEs and is required to consolidate them. Upon consolidation, Susquehanna removed retained interests of $23,705 and recorded interest-bearing deposits of $7,537, aggregate loans balances of $248,333,
and long term-debt of $239,936 on January 1, 2010. In addition, Susquehanna recognized a cumulative-effect adjustment that reduced retained earnings by $5,805 and an adjustment that reduced accumulated other comprehensive income by $6,922.
Susquehanna entered into these securitization transactions primarily to achieve low-cost funding for the growth of its loan and lease portfolios and to manage capital. The investors and the VIEs have no recourse to Susquehannas general credit
for failure of debtors to pay when due.

2006 Transaction

In September 2006, Susquehanna securitized $349,403 of fixed-rate home mortgage loans and variable-rate line of credit loans. Susquehanna
retained the right to service the loans and recorded a servicing asset of $2,334.

In this securitization, approximately 70.5%
of the variable-rate loans as of the cut-off date included a feature that permits the obligor to convert all or a portion of the loan from a variable interest rate to a fixed interest rate. If the total principal balance of the converted loans is
greater than 10% of the total outstanding balance of the portfolio, Susquehanna is required to purchase the converted loans in excess of the 10% threshold until the total principal balance of the loans purchased by Susquehanna is equal to 10% of the
original principal balance of the loans. Based upon Susquehannas experience with this product, Susquehanna has concluded that the event requiring the purchase of converted loans of the VIE would be remote. The maximum dollar amount of this
purchase obligation at the cut-off date was $11,140, and its related fair value was considered to be de minimis.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



2005 Transaction

In December 2005, Susquehanna securitized $239,766 of home equity line of credit loans. Susquehanna retained the right to service the
loans and recorded a servicing asset of $1,289.

In this securitization, approximately 35.4% of the loans as of the cut-off
date included a feature that permits the obligor to convert all or a portion of the loan from a variable interest rate to a fixed interest rate. If the total principal balance of the converted loans is greater than 10% of the total outstanding
balance of the portfolio, Susquehanna is required to purchase the converted loans in excess of the 10% threshold until the total principal balance of the loans purchased by Susquehanna is equal to 10% of the original principal balance of the loans.
Based upon Susquehannas experience with this product, Susquehanna has concluded that the event requiring the purchase of converted loans of the VIE would be remote. The maximum dollar amount of this purchase obligation at the cut-off date was
$23,980, and its related fair value was considered to be de minimis.



|                                   |  |                   |           |                   |   |                                |  |                   |         |                                  |   |         |      |   |        |   |  |   |        |  
|---------------------------------- |  | ----------------- | --------- | ----------------- | - | ------------------------------ |  | ----------------- | ------- | -------------------------------- | - | ------- | ---- | - | ------ | - |  | - | ------ | -
|                                   |  |                   |           |                   |   |                                |  |                   |         | For the Six Months EndedJune 30, |  
|                                   |  | Principal Balance |           | Risk Assets(1)    |   | Net Credit Losses (Recoveries) | 
|                                   |  | June 30, 2010     |           | December 31, 2009 |   | June 30, 2010                  |  | December 31, 2009 |         | 2010                             |   |         | 2009 |  
|Loans and leases held in portfolio |  | $                 | 9,555,737 |                   | $ | 9,827,279                      |  | $                 | 263,056 |                                  | $ | 258,667 |      | $ | 74,573 |   |  | $ | 41,232 |  
|Leases held by VIEs                |  |                   | 0         |                   |   | 0                              |  |                   | 0       |                                  |   | 0       |      |   | 0      |   |  |   | 73     |  
|Home equity loans held by VIEs     |  |                   | 231,319   |                   |   | 248,554                        |  |                   | 4,740   |                                  |   | 4,797   |      |   | 456    |   |  |   | 32     |  
|Leases serviced for others         |  |                   | 6,755     |                   |   | 13,551                         |  |                   | 142     |                                  |   | 7       |      |   | (12    | ) |  |   | (14    | )
|                                   |  |                   |           |                   |   |                                |  |                   |         |                                  |   |         |      |   |        |   |  |   |        |  
|Total loans and leases serviced    |  | $                 | 9,793,811 |                   | $ | 10,089,384                     |  | $                 | 267,938 |                                  | $ | 263,471 |      | $ | 75,017 |   |  | $ | 41,323 |  
|                                   |  |                   |           |                   |   |                                |  |                   |         |                                  |   |         |      |   |        |   |  |   |        |  



|(1) | Includes nonaccrual loans and leases, other real estate owned, and loans and leases past due 90 days and still accruing.
|--- | ------------------------------------------------------------------------------------------------------------------------

Certain cash flows received from or conveyed to the VIEs associated with the securitizations are as follows:



|                          |  |                            |       |                          |   |        |  |      |        |  |   |       
|------------------------- |  | -------------------------- | ----- | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|Automobile Leases         |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                          |  | 2010                       |       | 2009                     |   | 2010   |  | 2009
|Servicing fees received   |  | $                          | 0     |                          | $ | 251    |  | $    | 0      |  | $ | 531   
|Other cash flows received |  |                            | 0     |                          |   | 5,560  |  |      | 0      |  |   | 7,029 
|                          |  |                           
|Home Equity Loans         |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                          |  | 2010                       |       | 2009                     |   | 2010   |  | 2009
|Additional draws conveyed |  | $                          | 9,141 |                          | $ | 12,867 |  | $    | 17,513 |  | $ | 24,007
|Servicing fees received   |  |                            | 255   |                          |   | 286    |  |      | 515    |  |   | 576   
|Other cash flows received |  |                            | 1,430 |                          |   | 1,872  |  |      | 2,634  |  |   | 4,449 

There were no
proceeds from securitizations or amounts derecognized for the six-month periods ended June 30, 2010 and 2009 relating to home equity loans and automobile leases.

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.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



At June 30, 2010, 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. In addition, non-financial assets and non-financial liabilities have not been measured at fair value because Susquehanna has made
the determination that the impact on its financial statements would be immaterial.

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, 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
June 30, 2010, 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.

Certain Retained Interests in Securitizations - Prior to January 1, 2010

For interest-only strips, there was a lack of similar observable transactions for similar assets in the marketplace. Therefore,
Susquehanna used the present-value approach to determine the initial and ongoing fair values of the cash flows associated with securitizations. Assumptions used, which incorporate certain market information obtained from third parties, included an
estimation of an appropriate discount rate, net credit losses, and prepayment rates. Changes in the assumptions used may have had a significant impact on Susquehannas valuation of retained interests, and accordingly, such interests were
classified within Level 3 of the valuation hierarchy.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at June 30, 2010 and December 31, 2009, on the
consolidated balance sheets and by levels within the valuation hierarchy.



|                                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|------------------------------------------------- |  | ------------- | --------- | ---------------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | --------- |  | - | ------
|                                                  |  |               |           | Fair Value Measurements at Reporting Date Using                 
|Description                                       |  | June 30, 2010 |           | Quoted Prices inActive Markets forIdentical Instruments(Level
1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Assets                                            |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Available-for-sale securities:                    |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|U.S. Government Agencies                          |  | $             | 406,009   |                                                                  | $ | 0                                           |  | $                                       | 406,009   |  | $ | 0     
|Obligations of states and political subdivisions  |  |               | 360,247   |                                                                  |   |                                             |  |                                         | 360,247   |  |   |       
|Agency residential mortgage-backed securities     |  |               | 978,833   |                                                                  |   |                                             |  |                                         | 978,833   |  |   |       
|Non-agency residential mortgage-backed securities |  |               | 128,306   |                                                                  |   |                                             |  |                                         | 128,306   |  |   |       
|Commercial mortgage-backed securities             |  |               | 104,571   |                                                                  |   |                                             |  |                                         | 104,571   |  |   |       
|Synthetic collateralized debt obligations         |  |               | 1,576     |                                                                  |   |                                             |  |                                         | 0         |  |   | 1,576 
|Other structured financial products               |  |               | 12,362    |                                                                  |   |                                             |  |                                         | 1,409     |  |   | 10,953
|Equity securities of the FHLB                     |  |               | 73,217    |                                                                  |   |                                             |  |                                         | 73,217    |  |   |       
|Equity securities of the FRB                      |  |               | 50,225    |                                                                  |   |                                             |  |                                         | 50,225    |  |   |       
|Other equity securities                           |  |               | 24,972    |                                                                  |   | 3,083                                       |  |                                         | 18,333    |  |   | 3,556 
|Derivatives: (1)                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Designated as hedging instruments                 |  |               | 177       |                                                                  |   |                                             |  |                                         | 177       |  |   |       
|Not designated as hedging instruments             |  |               | 21,010    |                                                                  |   |                                             |  |                                         | 21,010    |  |   |       
|                                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $             | 2,161,505 |                                                                  | $ | 3,083                                       |  | $                                       | 2,142,337 |  | $ | 16,085
|                                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Liabilities                                       |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Derivatives: (2)                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Designated as hedging instruments                 |  | $             | 31,793    |                                                                  | $ | 0                                           |  | $                                       | 31,793    |  | $ | 0     
|Not designated as hedging instruments             |  |               | 20,440    |                                                                  |   |                                             |  |                                         | 20,440    |  |   |       
|                                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $             | 52,233    |                                                                  | $ | 0                                           |  | $                                       | 52,233    |  | $ | 0     
|                                                  |  |               |           |                                                                  |   |                                             |  |                                         |           |  |   |       



|(1) | Included in Other assets
|--- | ------------------------



|(2) | Included in Other liabilities
|--- | -----------------------------



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



|                                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|------------------------------------------------- |  | ----------------- | --------- | ---------------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | --------- |  | - | ------
|                                                  |  |                   |           | Fair Value Measurements at Reporting Date Using                 
|Description                                       |  | December 31, 2009 |           | Quoted Prices inActive Markets forIdentical Instruments(Level
1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Assets                                            |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Available-for-sale securities:                    |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|U.S. Government Agencies                          |  | $                 | 371,019   |                                                                  | $ | 0                                           |  | $                                       | 371,019   |  | $ | 0     
|Obligations of states and political subdivisions  |  |                   | 353,419   |                                                                  |   |                                             |  |                                         | 353,419   |  |   |       
|Agency residential mortgage-backed securities     |  |                   | 680,182   |                                                                  |   |                                             |  |                                         | 680,182   |  |   |       
|Non-agency residential mortgage-backed securities |  |                   | 135,465   |                                                                  |   |                                             |  |                                         | 133,354   |  |   | 2,111 
|Commercial mortgage-backed securities             |  |                   | 165,025   |                                                                  |   |                                             |  |                                         | 165,025   |  |   |       
|Synthetic collateralized debt obligations         |  |                   | 1,331     |                                                                  |   |                                             |  |                                         |           |  |   | 1,331 
|Other structured financial products               |  |                   | 15,319    |                                                                  |   |                                             |  |                                         | 1,206     |  |   | 14,113
|Equity securities of the FHLB                     |  |                   | 74,342    |                                                                  |   |                                             |  |                                         | 74,342    |  |   |       
|Equity securities of the FRB                      |  |                   | 45,725    |                                                                  |   |                                             |  |                                         | 45,725    |  |   |       
|Other equity securities                           |  |                   | 24,519    |                                                                  |   | 2,907                                       |  |                                         | 17,531    |  |   | 4,081 
|Derivatives: (1)                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Designated as hedging instruments                 |  |                   | 6,956     |                                                                  |   |                                             |  |                                         | 6,956     |  |   |       
|Not designated as hedging instruments             |  |                   | 13,781    |                                                                  |   |                                             |  |                                         | 13,781    |  |   |       
|Interest-only strips (1)(3)                       |  |                   | 17,840    |                                                                  |   |                                             |  |                                         |           |  |   | 17,840
|                                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                 | 1,904,923 |                                                                  | $ | 2,907                                       |  | $                                       | 1,862,540 |  | $ | 39,476
|                                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Liabilities                                       |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Derivatives: (2)                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Designated as hedging instruments                 |  | $                 | 408       |                                                                  | $ | 0                                           |  | $                                       | 408       |  | $ | 0     
|Not designated as hedging instruments             |  |                   | 13,282    |                                                                  |   |                                             |  |                                         | 13,282    |  |   |       
|                                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                 | 13,690    |                                                                  | $ | 0                                           |  | $                                       | 13,690    |  | $ | 0     
|                                                  |  |                   |           |                                                                  |   |                                             |  |                                         |           |  |   |       



|(1) | Included in Other assets
|--- | ------------------------



|(2) | Included in Other liabilities
|--- | -----------------------------



|(3) | On January 1, 2010, interest-only strips were eliminated as a result of the consolidation of the variable interest entities.
|--- | ----------------------------------------------------------------------------------------------------------------------------



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



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

The following tables present rollforwards of the balance sheet amounts for the three months ended June 30, 2010 and
2009, 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                                           |       |   |                                        |   |       |                                  |  |   |                                                
|                                                      |  | EquitySecurities                                                        |       |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  |   |                                                 |   |                     |   |       | Total |  
|Balance at April 1, 2010                              |  | $                                                                       | 4,081 |   |                                        | $ | 734   |                                  |  | $ | 13,407                                          |   |                     |   |       |       |   |        |   |  | $ | 18,222 |  
|Total gains or losses (realized/unrealized):          |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  
|Included in other comprehensive income (before taxes) |  |                                                                         | (525  | ) |                                        |   | 842   |                                  |  |   | (2,454                                          | ) |                     |   |       |       |   |        |   |  |   | (2,137 | )
|                                                      |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  
|Balance at June 30, 2010                              |  | $                                                                       | 3,556 |   |                                        | $ | 1,576 |                                  |  | $ | 10,953                                          |   |                     |   |       |       |   |        |   |  | $ | 16,085 |  
|                                                      |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  
|                                                      |  |                                                                         |      
|                                                      |  | Available-for-sale Securities                                           |       |   |                                        |   |       |                                 
|                                                      |  | EquitySecurities                                                        |       |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  |   | Non-agencyResidentialMortgage-
backedSecurities |   | Interest-onlyStrips |   |       | Total |  
|Balance at April 1, 2009                              |  | $                                                                       | 5,008 |   |                                        | $ | 1,000 |                                  |  | $ | 13,847                                          |   |                     | $ | 2,790 |       | $ | 19,233 |   |  | $ | 41,878 |  
|Total gains or losses (realized/unrealized):          |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  
|Other-than-temporary impairment (1)                   |  |                                                                         |       |   |                                        |   | (937  | )                                |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   | (937   | )
|Included in other comprehensive income (before taxes) |  |                                                                         |       |   |                                        |   | 1,450 |                                  |  |   | (1,776                                          | ) |                     |   | 5     |       |   | (456   | ) |  |   | (777   | )
|Purchases, issuances, and settlements                 |  |                                                                         | (927  | ) |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   | (757   | ) |  |   | (1,684 | )
|                                                      |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  
|Balance at June 30, 2009                              |  | $                                                                       | 4,081 |   |                                        | $ | 1,513 |                                  |  | $ | 12,071                                          |   |                     | $ | 2,795 |       | $ | 18,020 |   |  | $ | 38,480 |  
|                                                      |  |                                                                         |       |   |                                        |   |       |                                  |  |   |                                                 |   |                     |   |       |       |   |        |   |  |   |        |  



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



26



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



The following tables present rollforwards of the balance sheet amounts for the six
months ended June 30, 2010 and 2009, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.



|                                                                        |  |  |  |  |  |                               |       |   |                                        |   |       |                                  |  |   |                                                 |   |  |                     |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  |  |  |  |  | ----------------------------- | ----- | - | -------------------------------------- | - | ----- | -------------------------------- |  | - | ----------------------------------------------- | - |  | ------------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                        |  |  |  |  |  | Available-for-sale Securities |       |   |                                        |   |       |                                  | 
|                                                                        |  |  |  |  |  | EquitySecurities              |       |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  |   | Non-agencyResidentialMortgage-backed
Securities |   |  | Interest-onlyStrips |        |   | 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)                                     |  |  |  |  |  |                               |       |   |                                        |   | (557  | )                                |  |   |                                                 |   |  |                     |        |   |       |   |         |   |  |   | (557    | )
|Included in other comprehensive income (before taxes)                   |  |  |  |  |  |                               | (525  | ) |                                        |   | 802   |                                  |  |   | (3,160                                          | ) |  |                     |        |   |       |   |         |   |  |   | (2,883  | )
|                                                                        |  |  |  |  |  |                               |       |   |                                        |   |       |                                  |  |   |                                                 |   |  |                     |        |   |       |   |         |   |  |   |         |  
|Balance at June 30, 2010                                                |  |  |  |  |  | $                             | 3,556 |   |                                        | $ | 1,576 |                                  |  | $ | 10,953                                          |   |  | $                   |       |   |       | $ |        |   |  | $ | 16,085  |  
|                                                                        |  |  |  |  |  |                               |       |   |                                        |   |       |                                  |  |   |                                                 |   |  |                     |        |   |       |   |         |   |  |   |         |  



|                                                      |  |                               |        |   |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------------- | ------ | - | -------------------------------------- | - | ----- | -------------------------------- |  | ----------------------------------------------- | ------ | -------------------------------------------- | - | ----- | ---------------------- | - | ---- | ------------------- |  | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                      |  | Available-for-sale Securities |        |   |                                        |   |       |                                  | 
|                                                      |  | EquitySecurities              |        |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  | Non-agencyResidentialMortgage-
backedSecurities |        | Obligationsof State andPoliticalSubdivisions |   |       | U.S.GovernmentAgencies |   |      | Interest-onlyStrips |  |   | Total   |     
|Balance at January 1, 2009                            |  | $                             | 5,169  |   |                                        | $ | 1,200 |                                  |  | $                                               | 3,968  |                                              | $ | 2,787 |                        | $ | 440  |                     |  | $ | 31,751  |      |  | $ | 17,565 |   |  | $ | 62,880  |  
|Total gains or losses (realized/unrealized)           |  |                               |        |   |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|Other-than-temporary impairment (1)                   |  |                               |        |   |                                        |   | (937  | )                                |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   | (937    | )
|Included in other comprehensive income (before taxes) |  |                               | 4      |   |                                        |   | 1,250 |                                  |  |                                                 | 8,103  |                                              |   | 8     |                        |   |      |                     |  |   |         |      |  |   | 2,794  |   |  |   | 12,159  |  
|Purchases, issuances, and settlements                 |  |                               | (1,092 | ) |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   | (2,339 | ) |  |   | (3,431  | )
|Transfers in and/or out of Level 3                    |  |                               |        |   |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   | (440 | )(2)                |  |   | (31,751 | )(2) |  |   | 0      |   |  |   | (32,191 | )
|                                                      |  |                               |        |   |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|Balance at June 30, 2009                              |  | $                             | 4,081  |   |                                        | $ | 1,513 |                                  |  | $                                               | 12,071 |                                              | $ | 2,795 |                        | $ | 0    |                     |  | $ | 0       |      |  | $ | 18,020 |   |  | $ | 38,480  |  
|                                                      |  |                               |        |   |                                        |   |       |                                  |  |                                                 |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  



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



|(2) | Represents four securities transferred from Level 3 to Level 2 as a result of enhanced valuation methodologies.
|--- | ---------------------------------------------------------------------------------------------------------------

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, all 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.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



Foreclosed Assets

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 June 30, 2010 and
December 31, 2009, on the consolidated balance sheets and by the valuation hierarchy.



|                                                                                                                                                                                                                                     |  |                   |         |                                                               |   |                                           |  |                                        |   |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | ------------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | -------
|Description                                                                                                                                                                                                                          |  | June 30, 2010     |         | QuotedPrices inActiveMarkets forIdenticalInstruments(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Impaired loans                                                                                                                                                                                                                       |  | $                 | 108,651 |                                                               | $ | 0                                         |  | $                                      | 0 |  | $ | 108,651
|Foreclosed assets                                                                                                                                                                                                                    |  |                   | 17,379  |                                                               |   | 0                                         |  |                                        | 0 |  |   | 17,379 
|                                                                                                                                                                                                                                     |  |                   |         |                                                               |   |                                           |  |                                        |   |  |   |        
|                                                                                                                                                                                                                                     |  | $                 | 126,030 |                                                               | $ | 0                                         |  | $                                      | 0 |  | $ | 126,030
|                                                                                                                                                                                                                                     |  |                   |         |                                                               |   |                                           |  |                                        |   |  |   |        
|                                                                                                                                                                                                                                    
|Specific reserves for the first six months of 2010 were reduced by $2,297. These specific reserves were taken into consideration when the
required level of the allowance for loan and lease losses was determined at June 30, 2010.
|                                                                                                                                                                                                                                     |  |                   |         |                                                              
|Description                                                                                                                                                                                                                          |  | December 31, 2009 |         | QuotedPrices inActiveMarkets forIdenticalInstruments(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Impaired loans                                                                                                                                                                                                                       |  | $                 | 95,430  |                                                               | $ | 0                                         |  | $                                      | 0 |  | $ | 95,430 
|Foreclosed assets                                                                                                                                                                                                                    |  |                   | 24,292  |                                                               |   | 0                                         |  |                                        | 0 |  |   | 24,292 
|                                                                                                                                                                                                                                     |  |                   |         |                                                               |   |                                           |  |                                        |   |  |   |        
|                                                                                                                                                                                                                                     |  | $                 | 119,722 |                                                               | $ | 0                                         |  | $                                      | 0 |  | $ | 119,722
|                                                                                                                                                                                                                                     |  |                   |         |                                                               |   |                                           |  |                                        |   |  |   |        

Specific reserves identified during 2009 totaled
$35,030. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at December 31, 2009.

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.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share data)



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:



|                        |  |                |           |                   |   |                |  |            |           |  |   |          
|----------------------- |  | -------------- | --------- | ----------------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                        |  | June 30, 2010  |           | December 31, 2009
|                        |  | CarryingAmount |           | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial assets:       |  |                |           |                   |   |                |  |            |           |  |   |          
|Cash and due from banks |  | $              | 200,520   |                   | $ | 200,520        |  | $          | 203,240   |  | $ | 203,240  
|Short-term investments  |  |                | 126,183   |                   |   | 126,183        |  |            | 88,120    |  |   | 88,120   
|Investment securities   |  |                | 2,149,118 |                   |   | 2,149,118      |  |            | 1,875,267 |  |   | 1,875,267
|Loans and leases        |  |                | 9,601,261 |                   |   | 9,700,792      |  |            | 9,654,911 |  |   | 9,808,728
|Financial liabilities:  |  |                |           |                   |   |                |  |            |           |  |   |          
|Deposits                |  |                | 9,169,947 |                   |   | 9,220,088      |  |            | 8,974,363 |  |   | 8,838,190
|Short-term borrowings   |  |                | 619,439   |                   |   | 619,439        |  |            | 1,040,703 |  |   | 1,040,703
|FHLB borrowings         |  |                | 967,674   |                   |   | 1,038,242      |  |            | 1,023,817 |  |   | 1,091,796
|Long-term debt          |  |                | 721,607   |                   |   | 680,907        |  |            | 448,374   |  |   | 381,618  

Note 12. Income Taxes

Susquehannas provision for income taxes during interim reporting periods historically has been calculated by
applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding significant, unusual or infrequently occurring items) for the reporting period. For the reporting
period ended June 30, 2010, Susquehanna has computed its provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. Susquehanna determined that, as small changes in estimated
ordinary income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended June 30, 2010. The actual effective rate for the
reporting period ended June 30, 2010 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate below statutory rates for the interim reporting periods.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

Managements discussion and analysis of the significant changes in the consolidated results of operations, financial condition, and
cash flows of Susquehanna Bancshares, Inc. and its subsidiaries is set forth below for the periods indicated. Unless the context requires otherwise, the terms Susquehanna, we, us, and our refer to
Susquehanna Bancshares, Inc. and its subsidiaries.

Certain statements in this document may be considered to be
forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words expect, estimate, project,
anticipate, should, intend, probability, risk, target, objective, and similar expressions or variations on such expressions. In particular, this document includes
forward-looking statements relating, but not limited to, expectations regarding Susquehannas future operating results or financial condition; expectations regarding a redemption of the remaining securities issued to the U.S. Treasury;
Susquehannas potential exposures to various types of market risks, such as interest rate risk and credit risk; whether Susquehannas allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to
maintain loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to monitor the impact of the recession moving into the commercial and industrial, commercial real estate, and consumer segments;
the impact of a breach by Auto Lenders Liquidation Center, Inc. (Auto Lenders) on residual loss exposure; our ability to collect all amounts due under our outstanding synthetic collateralized debt obligations; and our ability to achieve
our 2010 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that
have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:



| |  |  | adverse changes in our loan and lease portfolios and the resulting credit-risk-related losses and expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | adverse changes in the automobile industry;
| | - |  | -------------------------------------------



| |  |  | interest rate fluctuations which could increase our cost of funds or decrease our yield on earning assets and therefore reduce our net interest income;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreases in our loan and lease quality and origination volume;
| | - |  | ---------------------------------------------------------------



| |  |  | the adequacy of loss reserves;
| | - |  | ------------------------------



| |  |  | impairment of goodwill or other assets;
| | - |  | ---------------------------------------



| |  |  | the loss of certain key officers, which could adversely impact our business;
| | - |  | ----------------------------------------------------------------------------



| |  |  | continued relationships with major customers;
| | - |  | ---------------------------------------------



| |  |  | the ability to continue to grow our business internally and through acquisition and successful integration of bank and non-bank entities while
controlling our costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse national and regional economic and business conditions;
| | - |  | ---------------------------------------------------------------



| |  |  | compliance with laws and regulatory requirements of federal and state agencies;
| | - |  | -------------------------------------------------------------------------------



| |  |  | competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our
profitability;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to hedge certain risks economically;
| | - |  | ------------------------------------------------



30



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##### Table of Contents

| |  |  | our ability to effectively implement technology-driven products and services;
| | - |  | -----------------------------------------------------------------------------



| |  |  | changes in consumer confidence, spending and savings habits relative to the bank and non-bank financial services we provide;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | greater reliance on wholesale funding if our loan growth has outpaced our deposit growth, and we have no current access to securitization markets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in legal or regulatory requirements or the results of regulatory examinations that could adversely impact our business and financial condition
and restrict growth;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of federal laws and related rules and regulations on our business operations and competitiveness, including the impact of executive
compensation restrictions, which may affect our ability to retain and recruit executives in competition with other firms that do not operate under those restrictions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future legislative or administrative changes to the TARP Capital Purchase Program;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the effects of and changes in trade, monetary and fiscal policies, and laws, including interest rate policies of the Federal Reserve Board;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of and changes in the rate of Federal Deposit Insurance Corporation premiums; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our success in managing the risks involved in the foregoing.
| | - |  | ------------------------------------------------------------

We encourage readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of
future performance. Forward-looking statements speak only as of the date they are made. We do not intend to update publicly any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements
are made or to reflect the occurrence of unanticipated events except as required by law.

The following discussion and
analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of Susquehannas financial condition, changes in financial condition, and results of operations, should be
read in conjunction with the financial statements, notes, and other information contained in this document.

The following
information refers to Susquehanna and its wholly owned subsidiaries: Boston Service Company, Inc., (t/a Hann Financial Service Corporation) (Hann), Susquehanna Bank and subsidiaries, Valley Forge Asset Management Corp. and subsidiaries
(VFAM), Stratton Management Company, LLC and subsidiary (Stratton), and The Addis Group, LLC.

Availability of Information

Our web-site address is www.susquehanna.net. We make available free of charge, through the Investor Relations section of our web
site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities
and Exchange Commission. We include our web-site address in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Executive Overview

The prolonged economic downturn continues to impact customers in our markets, as well as our own financial performance. Our results for
the first six months of 2010 have been impacted by a number of issues related to the recession, including an elevated provision for loan and lease losses and related credit costs, as a result of deterioration in credit quality. We have, however,
strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered well-capitalized. With these factors in mind, we have updated our 2010 financial goals as follows:

Updated Financial Goals for 2010

Our updated financial goals for 2010 are as follows:



|                                          |  |                  |   |  |                 |  
|----------------------------------------- |  | ---------------- | - |  | --------------- | -
|                                          |  | Original Targets |   |  | Updated Targets |  
|Net interest margin                       |  | 3.75             | % |  | 3.70            | %
|Loan growth                               |  | 6.0              | % |  | 1.0             | %
|Deposit growth                            |  | 4.0              | % |  | 2.0             | %
|Noninterest income growth                 |  | -14.0            | % |  | -12.0           | %
|Noninterest expense growth                |  | -1.0             | % |  | 0.0             | %
|Tax rate                                  |  | 25.0             | % |  | Not meaningful  |  
|Preferred dividend and discount accretion |  | $16.8 million    |   |  | $13.7 million   |  



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##### Table of Contents

Results of Operations

Summary of 2010 Compared to 2009

Net loss applicable to common shareholders for the second quarter of 2010 was $1.4 million, an improvement of $10.5 million from net loss
applicable to common shareholders of $11.9 million for the second quarter of 2009. Net interest income increased 6.1%, to $106.2 million for the second quarter of 2010, from $100.1 million for the second quarter of 2009. The provision for loan and
lease losses decreased 14.0% to $43.0 million for the second quarter of 2010, from $50.0 million for the second quarter of 2009. Noninterest income increased 10.0%, to $38.3 million for the second quarter of 2010, from $34.8 million for the second
quarter of 2009. Noninterest expenses decreased 6.8%, to $96.2 million for the second quarter of 2010, from $103.2 million for the second quarter of 2009.

Net income applicable to common shareholders for the first six months of 2010 was $2.0 million, an increase of $12.1 million from net
loss applicable to common shareholders of $10.1 million for the first six months of 2009. Net interest income increased 9.8%, to $214.5 million for the first six months of 2010, from $195.4 million for the first six months of 2009. The provision for
loan and lease losses increased 3.5% to $88.0 million for the first six months of 2010, from $85.0 million for the first six months of 2009. Noninterest income was $77.0 million for the first six months of 2010, relatively unchanged from the first
six months of 2009 when net interest income was also $77.0 million. Noninterest expenses decreased 3.8%, to $190.4 million for the first six months of 2010, from $198.0 million for the first six months of 2009.

Additional information is as follows:



|                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                      |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                      |  | 2010                       |       |   | 2009                     |   |       | 2010 |  |   | 2009  |  
|Diluted Earnings per Common Share     |  | $                          | (0.01 | ) |                          | $ | (0.14 | )    |  | $ | 0.02  |   |  | $ | (0.12 | )
|Return on Average Assets              |  |                            | 0.16  | % |                          |   | -0.23 | %    |  |   | 0.19  | % |  |   | -0.03 | %
|Return on Average Equity              |  |                            | 1.01  | % |                          |   | -1.60 | %    |  |   | 1.25  | % |  |   | -0.18 | %
|Return on Average Tangible Equity (1) |  |                            | 2.57  | % |                          |   | -2.76 | %    |  |   | 3.15  | % |  |   | 0.39  | %
|Efficiency Ratio                      |  |                            | 65.09 | % |                          |   | 74.64 | %    |  |   | 63.89 | % |  |   | 70.97 | %
|Net Interest Margin                   |  |                            | 3.69  | % |                          |   | 3.52  | %    |  |   | 3.75  | % |  |   | 3.46  | %



|(1) | Supplemental Reporting of Non-GAAP-based Financial Measures
|--- | -----------------------------------------------------------



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Return on average tangible equity is a non-GAAP-based financial measure calculated using
non-GAAP amounts. The most directly comparable measure is return on average equity, which is calculated using GAAP-based amounts. We calculate return on average tangible equity by excluding the balance of intangible assets and their related
amortization expense from our calculation of return on average equity. Management uses the return on average tangible equity in order to review our core operating results. Management believes that this is a better measure of our performance. In
addition, this is consistent with the treatment by bank regulatory agencies, which excludes goodwill and other intangible assets from the calculation of risk-based capital ratios. A reconciliation of return on average equity to return on average
tangible equity is set forth below.



|                                                                       |  |                            |   |  |                          |   |  |      |   |  |       |  
|---------------------------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ----- | -
|                                                                       |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                                                       |  | 2010                       |   |  | 2009                     |   |  | 2010 |   |  | 2009  |  
|Return on average equity (GAAP basis)                                  |  | 1.01                       | % |  | -1.60                    | % |  | 1.25 | % |  | -0.18 | %
|Effect of excluding average intangible assets and related amortization |  | 1.56                       | % |  | -1.16                    | % |  | 1.90 | % |  | 0.57  | %
|Return on average tangible equity                                      |  | 2.57                       | % |  | -2.76                    | % |  | 3.15 | % |  | 0.39  | %



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Susquehanna Bancshares, Inc. and Subsidiaries

Table 1 - Distribution of Assets, Liabilities and Shareholders Equity

(dollars in thousands)

Interest rates and
interest differentialtaxable equivalent basis



|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|----------------------------------------------------- |  | --------------------------------------------- | ---------- | --------------------------------------------- | -------- | - | -------- |  | -------------- |  | - | ---------- | - | -------- | - | ------- |  | ----
|                                                      |  | For the Three-Month Period EndedJune 30, 2010 |            | For the Three-Month Period EndedJune 30, 2009
|                                                      |  | AverageBalance                                |            |                                               | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest   |   | Rate (%)
|Assets                                                |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Short-term investments                                |  | $                                             | 95,959     |                                               |          | $ | 39       |  | 0.16           |  | $ | 106,007    |   |          | $ | 188     |  | 0.71
|Investment securities:                                |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                               | 1,579,983  |                                               |          |   | 14,420   |  | 3.66           |  |   | 1,515,498  |   |          |   | 18,940  |  | 5.01
|Tax-advantaged                                        |  |                                               | 329,841    |                                               |          |   | 5,187    |  | 6.31           |  |   | 347,668    |   |          |   | 5,751   |  | 6.63
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total investment securities                           |  |                                               | 1,909,824  |                                               |          |   | 19,607   |  | 4.12           |  |   | 1,863,166  |   |          |   | 24,691  |  | 5.32
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Loans and leases, (net):                              |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                               | 9,618,981  |                                               |          |   | 133,599  |  | 5.57           |  |   | 9,602,816  |   |          |   | 136,322 |  | 5.69
|Tax-advantaged                                        |  |                                               | 261,170    |                                               |          |   | 4,082    |  | 6.27           |  |   | 219,631    |   |          |   | 3,706   |  | 6.77
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total loans and leases                                |  |                                               | 9,880,151  |                                               |          |   | 137,681  |  | 5.59           |  |   | 9,822,447  |   |          |   | 140,028 |  | 5.72
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-earning assets                         |  |                                               | 11,885,934 |                                               |          |   | 157,327  |  | 5.31           |  |   | 11,791,620 |   |          |   | 164,907 |  | 5.61
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Allowance for loan and lease losses                   |  |                                               | (182,985   | )                                             |          |   |          |  |                |  |   | (132,740   | ) |          |   |         |  |     
|Other non-earning assets                              |  |                                               | 2,124,506  |                                               |          |   |          |  |                |  |   | 2,061,656  |   |          |   |         |  |     
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total assets                                          |  | $                                             | 13,827,455 |                                               |          |   |          |  |                |  | $ | 13,720,536 |   |          |   |         |  |     
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Liabilities                                           |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Deposits:                                             |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Interest-bearing demand                               |  | $                                             | 3,445,011  |                                               |          |   | 5,679    |  | 0.66           |  | $ | 2,825,359  |   |          |   | 5,785   |  | 0.82
|Savings                                               |  |                                               | 778,373    |                                               |          |   | 301      |  | 0.16           |  |   | 742,607    |   |          |   | 388     |  | 0.21
|Time                                                  |  |                                               | 3,699,050  |                                               |          |   | 21,072   |  | 2.28           |  |   | 4,281,599  |   |          |   | 36,241  |  | 3.40
|Short-term borrowings                                 |  |                                               | 503,082    |                                               |          |   | 536      |  | 0.43           |  |   | 931,512    |   |          |   | 1,070   |  | 0.46
|FHLB borrowings                                       |  |                                               | 1,024,326  |                                               |          |   | 11,098   |  | 4.35           |  |   | 1,053,123  |   |          |   | 10,093  |  | 3.84
|Long-term debt                                        |  |                                               | 726,994    |                                               |          |   | 9,165    |  | 5.06           |  |   | 448,568    |   |          |   | 7,913   |  | 7.08
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-bearing liabilities                    |  |                                               | 10,176,836 |                                               |          |   | 47,851   |  | 1.89           |  |   | 10,282,768 |   |          |   | 61,490  |  | 2.40
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Demand deposits                                       |  |                                               | 1,291,607  |                                               |          |   |          |  |                |  |   | 1,225,629  |   |          |   |         |  |     
|Other liabilities                                     |  |                                               | 221,338    |                                               |          |   |          |  |                |  |   | 262,894    |   |          |   |         |  |     
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities                                     |  |                                               | 11,689,781 |                                               |          |   |          |  |                |  |   | 11,771,291 |   |          |   |         |  |     
|Shareholders equity                                  |  |                                               | 2,137,674  |                                               |          |   |          |  |                |  |   | 1,949,245  |   |          |   |         |  |     
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                             | 13,827,455 |                                               |          |   |          |  |                |  | $ | 13,720,536 |   |          |   |         |  |     
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Net interest income / yield on average earning assets |  |                                               |            |                                               |          | $ | 109,476  |  | 3.69           |  |   |            |   |          | $ | 103,417 |  | 3.52
|                                                      |  |                                               |            |                                               |          |   |          |  |                |  |   |            |   |          |   |         |  |     

Additional Information

Average loan balances include non-accrual loans.

Tax-exempt income has been adjusted to a tax-equivalent basis using a marginal rate of 35%.

For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical
cost, adjusted for amortization of premiums and accretion of discounts.



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Susquehanna Bancshares, Inc. and Subsidiaries

Table 1 - Distribution of Assets, Liabilities and Shareholders Equity (continued)

(dollars in thousands)

Interest rates and
interest differentialtaxable equivalent basis





|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|----------------------------------------------------- |  | ------------------------------------------- | ---------- | ------------------------------------------- | -------- | - | -------- |  | -------------- |  | - | ---------- | - | -------- | - | ------- |  | ----
|                                                      |  | For the Six-Month Period EndedJune 30, 2010 |            | For the Six-Month Period EndedJune 30, 2009
|                                                      |  | AverageBalance                              |            |                                             | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest   |   | Rate (%)
|Assets                                                |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Short-term investments                                |  | $                                           | 88,490     |                                             |          | $ | 73       |  | 0.17           |  | $ | 114,269    |   |          | $ | 475     |  | 0.84
|Investment securities:                                |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                             | 1,539,668  |                                             |          |   | 29,424   |  | 3.85           |  |   | 1,560,947  |   |          |   | 39,522  |  | 5.11
|Tax-advantaged                                        |  |                                             | 336,618    |                                             |          |   | 10,863   |  | 6.51           |  |   | 345,177    |   |          |   | 11,415  |  | 6.67
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total investment securities                           |  |                                             | 1,876,286  |                                             |          |   | 40,287   |  | 4.33           |  |   | 1,906,124  |   |          |   | 50,937  |  | 5.39
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Loans and leases, (net):                              |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                             | 9,676,952  |                                             |          |   | 267,226  |  | 5.57           |  |   | 9,529,093  |   |          |   | 270,979 |  | 5.73
|Tax-advantaged                                        |  |                                             | 259,727    |                                             |          |   | 8,085    |  | 6.28           |  |   | 220,158    |   |          |   | 7,340   |  | 6.72
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total loans and leases                                |  |                                             | 9,936,679  |                                             |          |   | 275,311  |  | 5.59           |  |   | 9,749,251  |   |          |   | 278,319 |  | 5.76
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-earning assets                         |  |                                             | 11,901,455 |                                             |          |   | 315,671  |  | 5.35           |  |   | 11,769,644 |   |          |   | 329,731 |  | 5.65
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Allowance for loan and lease losses                   |  |                                             | (178,960   | )                                           |          |   |          |  |                |  |   | (125,413   | ) |          |   |         |  |     
|Other non-earning assets                              |  |                                             | 2,093,304  |                                             |          |   |          |  |                |  |   | 2,050,455  |   |          |   |         |  |     
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total assets                                          |  | $                                           | 13,815,799 |                                             |          |   |          |  |                |  | $ | 13,694,686 |   |          |   |         |  |     
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Liabilities                                           |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Deposits:                                             |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Interest-bearing demand                               |  | $                                           | 3,399,548  |                                             |          |   | 11,104   |  | 0.66           |  | $ | 2,750,482  |   |          |   | 12,603  |  | 0.92
|Savings                                               |  |                                             | 764,728    |                                             |          |   | 587      |  | 0.15           |  |   | 725,683    |   |          |   | 1,108   |  | 0.31
|Time                                                  |  |                                             | 3,719,618  |                                             |          |   | 43,794   |  | 2.37           |  |   | 4,424,441  |   |          |   | 75,938  |  | 3.46
|Short-term borrowings                                 |  |                                             | 659,370    |                                             |          |   | 1,295    |  | 0.40           |  |   | 883,222    |   |          |   | 2,135   |  | 0.49
|FHLB borrowings                                       |  |                                             | 1,000,170  |                                             |          |   | 20,734   |  | 4.18           |  |   | 1,053,624  |   |          |   | 20,153  |  | 3.86
|Long-term debt                                        |  |                                             | 710,689    |                                             |          |   | 17,003   |  | 4.82           |  |   | 448,194    |   |          |   | 15,855  |  | 7.13
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-bearing liabilities                    |  |                                             | 10,254,123 |                                             |          |   | 94,517   |  | 1.86           |  |   | 10,285,646 |   |          |   | 127,792 |  | 2.51
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Demand deposits                                       |  |                                             | 1,257,885  |                                             |          |   |          |  |                |  |   | 1,208,200  |   |          |   |         |  |     
|Other liabilities                                     |  |                                             | 221,252    |                                             |          |   |          |  |                |  |   | 254,561    |   |          |   |         |  |     
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities                                     |  |                                             | 11,733,260 |                                             |          |   |          |  |                |  |   | 11,748,407 |   |          |   |         |  |     
|Shareholders equity                                  |  |                                             | 2,082,539  |                                             |          |   |          |  |                |  |   | 1,946,279  |   |          |   |         |  |     
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                           | 13,815,799 |                                             |          |   |          |  |                |  | $ | 13,694,686 |   |          |   |         |  |     
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Net interest income / yield on average earning assets |  |                                             |            |                                             |          | $ | 221,154  |  | 3.75           |  |   |            |   |          | $ | 201,939 |  | 3.46
|                                                      |  |                                             |            |                                             |          |   |          |  |                |  |   |            |   |          |   |         |  |     

Additional Information

Average loan balances include non-accrual loans.

Tax-exempt income has been adjusted to a tax-equivalent basis using a marginal rate of 35%.

For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical
cost, adjusted for amortization of premiums and accretion of discounts.



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##### Table of Contents

Net Interest Income-Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased to $106.2 million for the second quarter of 2010, as
compared to $100.1 million for the same period in 2009. For the six months ended June 30, 2010, net interest income increased to $214.5 million, as compared to $195.4 million for the same period in 2009.

Net interest income as a percentage of net interest income plus noninterest income was 73.5% for the quarter ended June 30, 2010 and
74.2% for the quarter ended June 30, 2009. Net interest income as a percentage of net interest income plus noninterest income was 73.6% for the six months ended June 30, 2010 and 71.7% for the six months ended June 30, 2009.

Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest
expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans, investment securities, and short-term investments. The amount of interest income is dependent upon many
factors, including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and the levels of non-performing loans. The cost of funds varies with the amount of funds necessary to support
earning assets, the rates paid to attract and hold deposits, the rates paid on borrowed funds, and the levels of noninterest-bearing demand deposits and equity capital.

Table 1 presents average balances, taxable equivalent interest income and expense, and yields earned or paid on these assets and
liabilities. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates.

The $6.1 million increase in our net interest income for the second quarter of 2010, as compared to the second quarter of 2009, was
primarily the result of a 15.0% increase in average core deposits, which lowered our cost of funds by 51 basis points, while our yield on average earning assets only declined by 30 basis points.

The $19.1 million increase in our net interest income for the first six months of 2010, as compared to the first six months of 2009, was
primarily the result of a 15.8% increase in average core deposits, which lowered our cost of funds by 65 basis points, while our yield on average earning assets only declined 30 basis points.

Variances do occur in the net interest margin, as an exact repricing of assets and liabilities is not possible. A further
explanation of the impact of asset and liability repricing is found in Item 3, Quantitative and Qualitative Disclosures About Market Risk.

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate
to absorb managements estimate of probable incurred losses in the loan and lease portfolio. Our provision for loan and lease losses is based upon managements quarterly review of the loan and lease portfolio. The purpose of the review is
to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets we serve.

As was the case throughout 2009, we continued to experience a challenging operating environment for the first six months of 2010. Given
the economic pressures that continue to impact some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $38.0 million increase in nonaccrual loans and
leases since June 30, 2009 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $43.0 million for the second quarter of 2010, and $50.0 million for the second quarter of 2009. The
provision was $88.0 million for the first six months of 2010 and $85.0 million for the first six months of 2009.



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##### Table of Contents

We have seen some signs of stabilization, however, when comparing results on a
linked-quarter basis. Net charge-offs for the second quarter of 2010 were $36.0 million, down from $38.5 million for the first quarter of 2010. Furthermore, our $43.0 million provision for loan and lease losses for the second quarter of 2010 was
less than the $45.0 million provision for the first quarter of 2010.

Net charge-offs for the second quarter of 2010
increased to $36.0 million, or 1.46% of average loans and leases, when compared to net charge-offs for the second quarter of 2009 of $24.6 million, or 1.01% of average loans and leases. Net charge-offs for the first six months of 2010 increased to
$74.6 million, or 1.51% of average loans and leases, when compared to net charge-offs for the first six months of 2009 of $41.2 million, or 0.85% of average loans and leases. Furthermore, for the six months ended June 30, 2010, 64.6% of net
charge-offs came from the real estate  construction and real estate  commercial portfolios as real estate demand and values in some of our market areas are under considerable downward pressure. For additional information about our real
estate  construction loan portfolio, refer to Tables 3, 4, 5, and 6 appearing in Financial Condition,Risk Assets in this Quarterly Report on Form 10-Q.

The allowance for loan and lease losses was 1.90% of period-end loans and leases, or $185.8 million, at June 30, 2010; 1.75%
of period-end loans and leases, or $172.4 million, at December 31, 2009; and 1.59% of period-end loans and leases, or $157.5 million, at June 30, 2009.

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during
uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics
of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at June 30, 2010. There can be no assurance, however, that we will not sustain loan
and lease losses in future periods that could be greater than the size of the allowance at June 30, 2010.



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Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses



|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------ |  | -------------------------- | --------- | - | ------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                         |  | Three Months EndedJune 30, |           |   | Six Months
EndedJune 30, |  
|                                                                         |  | 2010                       |           |   | 2009                     |   |           | 2010 |  |   | 2009      |  
|                                                                         |  | (dollars in thousands)     |          
|Balance - Beginning of period                                            |  | $                          | 178,819   |   |                          | $ | 132,164   |      |  | $ | 172,368   |   |  | $ | 113,749   |  
|Additions                                                                |  |                            | 43,000    |   |                          |   | 50,000    |      |  |   | 88,000    |   |  |   | 85,000    |  
|Charge-offs:                                                             |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                            | (9,197    | ) |                          |   | (6,810    | )    |  |   | (14,233   | ) |  |   | (11,807   | )
|Real estate - construction                                               |  |                            | (13,275   | ) |                          |   | (13,317   | )    |  |   | (25,958   | ) |  |   | (20,392   | )
|Real estate secured - residential                                        |  |                            | (3,465    | ) |                          |   | (1,160    | )    |  |   | (9,602    | ) |  |   | (3,248    | )
|Real estate secured - commercial                                         |  |                            | (11,845   | ) |                          |   | (3,034    | )    |  |   | (26,573   | ) |  |   | (3,800    | )
|Consumer                                                                 |  |                            | (1,137    | ) |                          |   | (560      | )    |  |   | (2,234    | ) |  |   | (1,875    | )
|Leases                                                                   |  |                            | (2,347    | ) |                          |   | (1,967    | )    |  |   | (5,010    | ) |  |   | (4,745    | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total charge-offs                                                        |  |                            | (41,266   | ) |                          |   | (26,848   | )    |  |   | (83,610   | ) |  |   | (45,867   | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Recoveries:                                                              |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                            | 1,496     |   |                          |   | 1,209     |      |  |   | 2,740     |   |  |   | 1,879     |  
|Real estate - construction                                               |  |                            | 1,477     |   |                          |   | 5         |      |  |   | 2,847     |   |  |   | 5         |  
|Real estate secured - residential                                        |  |                            | 403       |   |                          |   | 161       |      |  |   | 557       |   |  |   | 203       |  
|Real estate secured - commercial                                         |  |                            | 1,314     |   |                          |   | 200       |      |  |   | 1,512     |   |  |   | 1,453     |  
|Consumer                                                                 |  |                            | 366       |   |                          |   | 296       |      |  |   | 841       |   |  |   | 597       |  
|Leases                                                                   |  |                            | 186       |   |                          |   | 330       |      |  |   | 540       |   |  |   | 498       |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total recoveries                                                         |  |                            | 5,242     |   |                          |   | 2,201     |      |  |   | 9,037     |   |  |   | 4,635     |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                                          |  |                            | (36,024   | ) |                          |   | (24,647   | )    |  |   | (74,573   | ) |  |   | (41,232   | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Balance - Period end                                                     |  | $                          | 185,795   |   |                          | $ | 157,517   |      |  | $ | 185,795   |   |  | $ | 157,517   |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs as a percentage of average loans and leases (annualized) |  |                            | 1.46      | % |                          |   | 1.01      | %    |  |   | 1.51      | % |  |   | 0.85      | %
|Allowance as a percentage of period-end loans and leases                 |  |                            | 1.90      | % |                          |   | 1.59      | %    |  |   | 1.90      | % |  |   | 1.59      | %
|                                                                         |  |                            |           |  
|Average loans and leases                                                 |  | $                          | 9,880,151 |   |                          | $ | 9,822,447 |      |  | $ | 9,936,679 |   |  | $ | 9,749,251 |  
|Period-end loans and leases                                              |  |                            | 9,787,056 |   |                          |   | 9,916,618 |      |  |   | 9,787,056 |   |  |   | 9,916,618 |  

Noninterest Income

Second Quarter 2010 Compared to Second Quarter 2009

Noninterest income, as a percentage of net interest income plus noninterest income, was 26.5% for the second quarter of 2010, and 25.8%
for the second quarter of 2009.

Noninterest income increased $3.5 million, or 10.0%, for the second quarter of 2010, over the
second quarter of 2009. This net increase was primarily a result of the following:



| |  |  | Increased asset management fees of $1.3 million; and
| | - |  | ----------------------------------------------------



| |  |  | Increased net realized gains on securities(net of other-than-temporary impairment losses) of $2.7 million.
| | - |  | ----------------------------------------------------------------------------------------------------------

Asset management fees.The 20.9% increase primarily was due to some recovery in the stock market, resulting in
higher mutual fund management fees and an increase in more profitable institutional customers as a percentage of the total customer base.



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##### Table of Contents

Net realized gains on securities.During the second quarter of 2010, we sold
securities with an aggregate book value of $76.4 million for a net gain of $4.3 million. During the second quarter of 2009, we sold securities with an aggregate book value of $12.7 million for a net gain of 0.3 million.

Furthermore, during the second quarter of 2010, we recognized in earnings other-than-temporary impairment losses totaling $2.2 million.
During the second quarter of 2009, we recognized in earnings other-than-temporary impairment losses totaling $0.9 million.

Six Months ended June 30, 2010 Compared to Six Months ended June 30, 2009

Noninterest income, as a percentage of net interest income plus noninterest income, was 26.4% for the six-month period ended June 30,
2010, and 28.3% for the six-month period ended June 30, 2009.

Noninterest income for the six months ended June 30,
2010 was $77.0 million, relatively unchanged from the six months ended June 30, 2009 when noninterest income was also $77.0 million. There were, however, noteworthy changes within several categories as follows:



| |  |  | Decreased service charges on deposit accounts of $2.0 million;
| | - |  | --------------------------------------------------------------



| |  |  | Increased asset management fees of $2.4 million;
| | - |  | ------------------------------------------------



| |  |  | Increased net realized gains on securities (net of other-than-temporary impairment losses) of $8.7 million; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Decreased other of $8.2 million.
| | - |  | --------------------------------

Service charges on deposit accounts.The 10.5% decrease primarily was the result of changes in customers behavior regarding
overdrafts.

Asset management fees.The 20.0% increase primarily was due to some recovery in the stock
market, resulting in higher mutual fund management fees and an increase in more profitable institutional customers as a percentage of the total customer base.

Net realized gains on securities.During the first six months of 2010, we sold securities with an aggregate book value of $220.3
million for a net gain of $10.9 million. During the first six months of 2009, we sold securities with an aggregate book value of $12.9 million for a net gain of $0.4 million.

Furthermore, during the first six months of 2010, we recognized in earnings other-than-temporary impairment losses totaling $2.7 million.
During the first six months of 2009, we recognized in earnings other-than-temporary impairment losses totaling $0.9 million.

Other.In the first quarter of 2009, we recognized a net gain of $6.9 million on the sale of our Central Atlantic Services
merchant accounts.

In addition, as a result of changes in U.S.GAAP that were effective January 1, 2010 relating to the
accounting for transfers of financial assets, we no longer recognize net excess servicing fee income in noninterest income. Net excess servicing fee income for the first six months of 2009 was $2.2 million.



39



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##### Table of Contents

Noninterest Expenses

Second Quarter 2010 Compared to Second Quarter 2009

Noninterest expenses decreased $7.0 million, or 6.8%, from $103.2 million for the second quarter of 2009, to $96.2 million for the second
quarter of 2010. The decrease is primarily the result of a $6.2 million FDIC special assessment in the second quarter of 2009.

Six Months ended June 30, 2010 Compared to Six Months ended June 30, 2009

Noninterest expenses decreased $7.5 million, or 3.8%, from $198.0 million for the first six months of 2009, to $190.5 million for the
first six months of 2010. The decrease is primarily the result of a $6.2 million FDIC special assessment in the second quarter of 2009.

Income Taxes

Our
provision for income taxes during interim reporting periods historically has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding
significant, unusual or infrequently occurring items) for the reporting period. For the reporting period ended June 30, 2010, we have computed our provision for income taxes based on the actual effective tax rate for the year-to-date by
applying the discrete method. We determined that, as small changes in estimated ordinary income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate
for the reporting period ended June 30, 2010. The actual effective rate for the reporting period ended June 30, 2010 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an
effective rate below statutory rates for the interim reporting periods.

Financial Condition

Summary of June 30, 2010 Compared to December 31, 2009

Total assets at June 30, 2010 were $13.9 billion, an increase of $202.3 million when compared to total assets at December 31,
2009. Total loans decreased $40.2 million, and total deposits increased $195.6 million from December 31, 2009. Equity capital was $2.1 billion at June 30, 2010, or $15.38 per common share, and $2.0 billion, or $19.53 per common share, at
December 31, 2009.

Fair Value Measurements and The Fair Value Option for Financial Assets and Financial Liabilities

At June 30, 2010, we 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. Furthermore, non-financial assets and non-financial liabilities have not been measured at fair value because we have made the determination that the impact on our
financial statements would be minimal. For additional information about our financial assets and financial liabilities carried at fair value, refer to Note 11. Fair Value Disclosures to the financial statements appearing in Part I,
Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

For information about our investment securities portfolio, refer to Note 2. Investment Securities and Note 11.
Fair Value Disclosures to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

As a result of the adoption of new accounting guidance relating to variable interest entities, we, as the primary beneficiary of two
securitization trusts, were required to consolidate the trusts as of January 1, 2010.



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At June 30, 2010, the aggregate balance of the loans held by the trusts that can be used only to settle
obligations of the trusts was $231.3 million. In addition, during the first quarter of 2010, we concluded that, due to recent changes in accounting guidance and market conditions, it was highly unlikely that the home equity line of credit loans held
for sale would be sold and securitized. Therefore, on March 31, 2010, Susquehanna transferred $434.9 million of home equity line of credit loans held for sale to held for investment.

Our experience in recent months indicates that many consumers and businesses in our markets are proceeding cautiously in the current
economic environment. In some cases, they appear to be delaying or changing plans for taking on additional debt, and, as a result there has been a reduced demand for loans among credit-worthy borrowers. As a result, loans and leases, net of unearned
income and excluding the loans of the securitization trusts discussed above, decreased 2.8%, from $9.8 billion at December 31, 2009 to $9.6 billion at June 30, 2010. Commercial, financial, and agricultural loans declined by $158.8 million
(including charge-offs of $14.2 million), while real estate construction loans, which we consider to be higher-risk loans, declined by $167.6 million (including charge-offs of $26.0 million). The decline in real estate construction loans was
primarily due to our continuing plan to decrease that portfolio, thereby reducing our exposure in a segment that has been particularly stressed during this recession.

Risk Assets

Total nonperforming assets increased $10.9 million, from December 31, 2009 to June 30, 2010, as presented in Table 3.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets



|                                                                                                 |  |                        |         |   |                  |   |         |              |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------- | -
|                                                                                                 |  | June 30,2010           |         |   | December 31,2009 |   |         | June 30,2009 | 
|                                                                                                 |  | (dollars in thousands) |        
|Nonperforming assets:                                                                            |  |                        |         |  
|Nonaccrual loans and leases:                                                                     |  |                        |         |   |                  |   |         |              |  |   |         |  
|Commercial, financial, and agricultural                                                          |  | $                      | 24,917  |   |                  | $ | 20,282  |              |  | $ | 21,814  |  
|Real estate - construction                                                                       |  |                        | 89,476  |   |                  |   | 97,717  |              |  |   | 94,798  |  
|Real estate secured - residential                                                                |  |                        | 48,213  |   |                  |   | 37,254  |              |  |   | 30,650  |  
|Real estate secured - commercial                                                                 |  |                        | 70,785  |   |                  |   | 59,181  |              |  |   | 49,710  |  
|Consumer                                                                                         |  |                        | 4       |   |                  |   | 27      |              |  |   | 127     |  
|Leases                                                                                           |  |                        | 3,983   |   |                  |   | 5,093   |              |  |   | 2,255   |  
|                                                                                                 |  |                        |         |   |                  |   |         |              |  |   |         |  
|Total nonaccrual loans and leases                                                                |  |                        | 237,378 |   |                  |   | 219,554 |              |  |   | 199,354 |  
|Other real estate owned                                                                          |  |                        | 17,379  |   |                  |   | 24,292  |              |  |   | 25,809  |  
|                                                                                                 |  |                        |         |   |                  |   |         |              |  |   |         |  
|Total nonperforming assets                                                                       |  | $                      | 254,757 |   |                  | $ | 243,846 |              |  | $ | 225,163 |  
|                                                                                                 |  |                        |         |   |                  |   |         |              |  |   |         |  
|Nonperforming assets as a percentage of period-end loans and leases plus other real estate owned |  |                        | 2.60    | % |                  |   | 2.48    | %            |  |   | 2.26    | %
|Allowance for loan and lease losses as a percentage of nonaccrual loans and leases               |  |                        | 78      | % |                  |   | 79      | %            |  |   | 79      | %
|                                                                                                 |  |                        |        
|Loans and leases contractually past due 90 days and still accruing                               |  | $                      | 13,039  |   |                  | $ | 14,820  |              |  | $ | 24,263  |  
|Restructured loans                                                                               |  |                        | 79,595  |   |                  |   | 58,244  |              |  |   | 30,799  |  

Nonaccrual loans and
leases increased from $219.6 million at December 31, 2009, to $237.4 million at June 30, 2010. The net increase was primarily the result of the effects of the continuing economic deterioration on our borrowers. Consequently, total
nonperforming assets as a percentage of period-end loans and leases plus other real estate owned increased from 2.48% at December 31, 2009 to 2.60% at June 30, 2010.

Of the $268.7 million of impaired loans (nonaccrual, non-consumer loan relationships greater than $0.5 million plus accruing restructured
loans), $127.3 million, or 47.4%, had no related reserve (refer to Note 3. Loans and Leases  Impaired Loans to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.)The
determination that no related reserve for collateral-dependent loans was required was based on the net realizable value of the underlying collateral.



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At June 30, 2010, 37.7% of nonaccrual loans and leases were in our real estate 
construction portfolio, as real estate demand and values in some of our market areas are under considerable downward pressure. We consider these real-estate construction loans to be higher-risk loans. Additional information about our real estate
 construction loan portfolio is presented in Tables 4, 5, and 6. Categories within these tables are defined as follows:



| |  |  | Construction loans  loans used to fund vertical construction for residential and non-residential structures;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Land development loans  loans secured by land for which the approvals for site improvements have been obtained, the site improvements are in
progress, or the site improvements have been completed; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Raw land  loans secured by land for which there are neither approvals nor site improvements.
| | - |  | ---------------------------------------------------------------------------------------------

Table 4 - Construction, Land Development, and Other Land Loans - Portfolio Status



|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|----------------- |  | ---------------------- | ------- | ---------------------- | ----- | - | ------------------ | --- | - | --------------------------------- | --- | - | ---------- | ---- | - | ---------------------------- | ---- | - | ------------------ | ---- | - | ----------- | --- | -
|Category          |  | Balance atJune 30,2010 |         | % of TotalConstruction |       |   | Past Due30-89 Days |     |   | Past Due 90Days andStill Accruing |     |   | Nonaccrual |      |   | OtherInternallyMonitored (1) |      |   | NetCharge-offs (2) |      |   | Reserve (3) |    
|                  |  | (dollars is thousands) |        
|1-4 Family:       |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Construction      |  | $                      | 226,841 |                        | 24.0  | % |                    | 0.2 | % |                                   | 0.5 | % |            | 16.8 | % |                              | 17.3 | % |                    | 5.4  | % |             | 6.4 | %
|Land development  |  |                        | 204,116 |                        | 21.5  |   |                    | 0.2 |   |                                   | 0.2 |   |            | 0.3  |   |                              | 17.7 |   |                    | 13.1 |   |             | 4.5 |  
|Raw land          |  |                        | 4,715   |                        | 0.5   |   |                    | 0.0 |   |                                   | 0.0 |   |            | 0.2  |   |                              | 48.1 |   |                    | 27.1 |   |             | 7.0 |  
|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|                  |  |                        | 435,672 |                        | 46.0  |   |                    | 0.2 |   |                                   | 0.3 |   |            | 8.9  |   |                              | 17.8 |   |                    | 9.4  |   |             | 5.5 |  
|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|All Other:        |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Construction:     |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                        | 213,941 |                        | 22.6  |   |                    | 0.0 |   |                                   | 0.0 |   |            | 9.8  |   |                              | 3.2  |   |                    | 2.2  |   |             | 5.6 |  
|Owner-occupied    |  |                        | 4,831   |                        | 0.5   |   |                    | 0.0 |   |                                   | 0.0 |   |            | 19.7 |   |                              | 5.3  |   |                    | 4.5  |   |             | 9.0 |  
|Land development: |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                        | 232,125 |                        | 24.5  |   |                    | 0.6 |   |                                   | 0.0 |   |            | 10.3 |   |                              | 21.9 |   |                    | 0.6  |   |             | 4.7 |  
|Owner-occupied    |  |                        | 9,682   |                        | 1.0   |   |                    | 0.0 |   |                                   | 0.0 |   |            | 0.0  |   |                              | 9.8  |   |                    | 13.6 |   |             | 3.9 |  
|Raw land:         |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                        | 49,958  |                        | 5.3   |   |                    | 0.0 |   |                                   | 0.0 |   |            | 9.6  |   |                              | 29.5 |   |                    | 22.1 |   |             | 4.1 |  
|Owner-occupied    |  |                        | 864     |                        | 0.1   |   |                    | 0.0 |   |                                   | 0.0 |   |            | 28.3 |   |                              | 0.0  |   |                    | 0.0  |   |             | 3.7 |  
|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|                  |  |                        | 511,401 |                        | 54.0  |   |                    | 0.3 |   |                                   | 0.0 |   |            | 9.9  |   |                              | 14.4 |   |                    | 4.1  |   |             | 5.1 |  
|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Total             |  | $                      | 947,073 |                        | 100.0 |   |                    | 0.2 |   |                                   | 0.2 |   |            | 9.5  |   |                              | 16.0 |   |                    | 6.6  |   |             | 5.3 |  
|                  |  |                        |         |                        |       |   |                    |     |   |                                   |     |   |            |      |   |                              |      |   |                    |      |   |             |     |  



|(1) | represents loans with initial signs of some financial weakness and potential problem loans that are on our internally monitored loan list, excluding nonaccrual and
past-due loans reflected in the prior three columns.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | represents the amount of net charge-offs in each category for the last twelve months divided by the category loan balance at June 30, 2010 plus the net
charge-offs.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at June 30, 2010.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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Table 5 - Construction, Land Development, and Other Land Loans - Collateral Locations



|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|----------------- |  | ----------------------- | ------- | -------------------------- | ---------- | - |  | ------------ | - |  | ----- | - |  | ----
|Category          |  | Balance
atJune 30, 2010 |         | Geographical Location by %
|                  |  | Maryland                |         |                            | New Jersey |   |  | Pennsylvania |   |  | Other
|                  |  | (dollars in thousands) 
|1-4 Family:       |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Construction      |  | $                       | 226,841 |                            | 51.7       | % |  | 11.2         | % |  | 34.3  | % |  | 2.8 
|Land development  |  |                         | 204,116 |                            | 53.7       |   |  | 5.9          |   |  | 32.4  |   |  | 8.1 
|Raw land          |  |                         | 4,715   |                            | 48.3       |   |  | 4.0          |   |  | 47.6  |   |  | 0.0 
|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|                  |  |                         | 435,672 |                            | 52.6       |   |  | 8.6          |   |  | 33.5  |   |  | 5.2 
|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|All Other:        |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Construction:     |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Investor          |  |                         | 213,941 |                            | 17.0       |   |  | 18.3         |   |  | 57.1  |   |  | 7.6 
|Owner-occupied    |  |                         | 4,831   |                            | 19.9       |   |  | 24.9         |   |  | 55.2  |   |  | 0.0 
|Land development: |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Investor          |  |                         | 232,125 |                            | 24.1       |   |  | 2.3          |   |  | 55.4  |   |  | 18.2
|Owner-occupied    |  |                         | 9,682   |                            | 51.8       |   |  | 0.0          |   |  | 48.2  |   |  | 0.0 
|Raw land:         |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Investor          |  |                         | 49,958  |                            | 23.0       |   |  | 11.6         |   |  | 65.0  |   |  | 0.5 
|Owner-occupied    |  |                         | 864     |                            | 52.9       |   |  | 28.3         |   |  | 18.8  |   |  | 0.0 
|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|                  |  |                         | 511,401 |                            | 21.5       |   |  | 10.1         |   |  | 56.8  |   |  | 11.5
|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     
|Total             |  | $                       | 947,073 |                            | 35.8       |   |  | 9.5          |   |  | 46.1  |   |  | 8.6 
|                  |  |                         |         |                            |            |   |  |              |   |  |       |   |  |     



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Table 6 - Construction, Land Development, and Other Land Loans - Portfolio Characteristics



|                  |  |                          |         |                                                  |      |   |                                |      |  
|----------------- |  | ------------------------ | ------- | ------------------------------------------------ | ---- | - | ------------------------------ | ---- | -
|Category          |  | Balance atJune 
30, 2010 |         | Global DebtCoverage RatioLess than 1.1 Times (1) |      |   | AverageLoan (current) to Value |     
|                  |  | (dollars in thousands)   |         |                                                  |      |  
|1-4 Family:       |  |                          |         |                                                  |      |   |                                |      |  
|Construction      |  | $                        | 226,841 |                                                  | 34.9 | % |                                | 70.2 | %
|Land development  |  |                          | 204,116 |                                                  | 15.2 |   |                                | 69.0 |  
|Raw land          |  |                          | 4,715   |                                                  | 0.0  |   |                                | 66.1 |  
|                  |  |                          |         |                                                  |      |   |                                |      |  
|                  |  |                          | 435,672 |                                                  | 25.3 |   |                                | 69.6 |  
|                  |  |                          |         |                                                  |      |   |                                |      |  
|All Other:        |  |                          |         |                                                  |      |   |                                |      |  
|Construction:     |  |                          |         |                                                  |      |   |                                |      |  
|Investor          |  |                          | 213,941 |                                                  | 12.4 |   |                                | 68.9 |  
|Owner-occupied    |  |                          | 4,831   |                                                  | 0.0  |   |                                | 80.6 |  
|Land development: |  |                          |         |                                                  |      |   |                                |      |  
|Investor          |  |                          | 232,125 |                                                  | 34.7 |   |                                | 74.4 |  
|Owner-occupied    |  |                          | 9,682   |                                                  | 0.0  |   |                                | 76.0 |  
|Raw land:         |  |                          |         |                                                  |      |   |                                |      |  
|Investor          |  |                          | 49,958  |                                                  | 40.5 |   |                                | 84.1 |  
|Owner-occupied    |  |                          | 864     |                                                  | 11.3 |   |                                | 93.8 |  
|                  |  |                          |         |                                                  |      |   |                                |      |  
|                  |  |                          | 511,401 |                                                  | 25.2 |   |                                | 75.1 |  
|                  |  |                          |         |                                                  |      |   |                                |      |  
|                  |  | $                        | 947,073 |                                                  | 25.3 |   |                                | 72.2 |  
|                  |  |                          |         |                                                  |      |   |                                |      |  



|(1) | Global debt coverage ratio is calculated by analyzing the combined cash flows of the borrower, its related entities, and the guarantors (if any). The final global cash
flow is divided by the global debt service for the same entities to determine the coverage ratio.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have been
aggressively reviewing our portfolio, contacting customers to evaluate their financial situation and, where necessary, working with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We
continue to believe that the remainder of 2010 will be challenging, with the effects of the recession moving into the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper
monitoring systems in place to recognize issues in an appropriate time frame and to minimize the effect on our earnings.

Goodwill

We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may
be an impairment. This test, which requires significant judgment and analysis, involves discounted cash flows and market-price multiples of non-distressed financial institutions.

We performed our annual goodwill impairment test in the second quarter of 2010, and determined that the fair value of each of our
reporting units exceeded its book value, and there was no goodwill impairment. However, given the continuing difficulties in the economy and overall market conditions, we will assess the need for interim goodwill impairment tests.

For additional information about goodwill, refer to Note 4. Goodwill to the financial statements appearing in Part
I, Item 1, of this Quarterly Report on Form 10-Q.



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Deposits

Total deposits increased 2.2%, or $195.6 million, from December 31, 2009 to June 30, 2010. Within this category, core deposits
such as demand, interest-bearing demand, and savings increased 4.8%, 6.7%, and 4.7%, respectively. We attribute these increases to customers seeking safety and security while maintaining ready access to their funds. Time deposits less than $0.1
million decreased 5.9%, or $150.2 million, from December 31, 2009 to June 30, 2010. This decrease, in part, reflects the results of our continuing plan to improve our mix of deposits by allowing high-cost, single-service certificates of
deposit to run off. Time deposits greater than $0.1 million increased 2.8%, or $32.0 million, from December 31, 2009 to June 30, 2010. This increase is primarily the result of the acquisition of brokered certificates of deposit at very
favorable rates.

Borrowings

We have temporarily used the proceeds from our common stock offering to pay down short-term borrowings.

11% Junior Subordinated Deferrable Interest Debentures, Series II

On March 16, 2010, Susquehanna Capital II, a Delaware statutory trust, sold to the public $50.0 million aggregate principal amount of
11% Cumulative Trust Preferred Securities, Series II and used the proceeds from those sales to fund its purchase of $50.0 million of 11% Junior Subordinated Deferrable Interest Debentures, Series II issued by Susquehanna. The subordinated debentures
are unsecured and rank equally in right of payment with our existing series of junior subordinated debt securities. Interest on the subordinated debentures is payable semi-annually in arrears on each March 23 and September 23, beginning
September 23, 2010, unless we defer payment. We may elect to redeem any or all of the subordinated debentures at any time on or after March 23, 2015. The maturity date of the subordinated debentures is March 23, 2040.

Shareholders Equity

Preferred Stock

On April 21, 2010, we redeemed $200.0 million of the outstanding $300.0 million of our Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program in December 2008. The redemption price included $200.0 million of the original investment amount plus approximately $1.8 million of
accrued and unpaid dividends. The preferred stock that we redeemed in the second quarter of 2010 for $200.0 million had a carrying value of $195.2 million (net of a $4.8 million unaccreted discount). As a result of the redemption, we
accelerated the accretion of the discount, which reduced net income applicable to common shareholders by $4.8 million in the second quarter of 2010.

The U.S. Treasury continues to own $100.0 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as a warrant
giving the U.S. Treasury the right to purchase up to 3.0 million shares of our common stock at a price of $14.86 per share. We do not expect to redeem the remaining $100.0 million of preferred stock until there is sustained economic recovery
and related improvement in our credit metrics.

Common Stock

On March 15, 2010, we completed an offering of 43.1 million shares of our common stock, par value $2.00 per share, at a public
offering price of $8.00 per share. Proceeds from the offering, net of underwriting discounts and commissions of $17.3 million and expenses of $0.4 million, totaled $327.3 million.



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Capital Adequacy

Capital elements are segmented into two tiers. Tier 1 capital represents shareholders equity plus junior subordinated debentures,
reduced by excludable intangibles. Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses and the allowance for credit losses on off-balance-sheet credit exposures equal to 1.25% of
risk-adjusted assets, and 45% of the unrealized gain on equity securities. The sum of Tier 1 capital and Tier 2 capital is total risk-based capital. Tier 1 common and tangible common equity include only common equity.

Our capital ratios are as follows:



|                               |  |                  |   |  |                            |  
|------------------------------ |  | ---------------- | - |  | -------------------------- | -
|                               |  | At June 30, 2010 |   |  | Well-Capitalized Threshold |  
|Tangible Common Ratio (1)      |  | 7.64             | % |  | N/A                        |  
|Tier 1 Common Ratio            |  | 9.24             | % |  | N/A                        |  
|Leverage Ratio                 |  | 11.02            | % |  | 5.0                        | %
|Tier 1 Capital Ratio           |  | 13.16            | % |  | 6.0                        | %
|Total Risk-based Capital Ratio |  | 15.50            | % |  | 10.0                       | %



|(1) | Includes deferred tax liability of $42.3 million associated with intangibles.
|--- | -----------------------------------------------------------------------------

Securitizations and Variable Interest Entities

We have used the securitization of financial assets as a source of funding and a means to manage capital. Hann and our bank subsidiary
sold beneficial interests in automobile leases and related vehicles and home equity loans to securitization trusts. These transactions were accounted for as sales, and a net gain or loss was recognized at the time of the initial sale. Due to recent
market conditions, no securitizations have occurred since 2007, and we do not anticipate that any will occur in the near future.

For additional information concerning the characteristics of securitization transactions, including the gain or loss from sale, and
descriptions of prior years securitization transactions, see the following sections of our Annual Report on Form 10-K for the year ended December 31, 2009:



| |  |  | Securitization Transactions on pages 57 through 63;
| | - |  | -----------------------------------------------------



| |  |  | Note 1. Summary of Significant Accounting Policies under the captions Asset Securitizations and Servicing Fees under
Securitization Transactions, Agency Agreements, and Lease Sales on pages 79 and 80; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Note 21. Securitization Activity on pages 110 through 113.
| | - |  | ------------------------------------------------------------

Also see Note 10. Securitizations and Variable Interest Entities to the financial statements appearing in Part I,
Item 1, of this Quarterly Report on Form 10-Q.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

The types of market risk exposures generally faced by banking entities include equity market price risk, liquidity risk, interest rate
risk, foreign currency risk, and commodity price risk.

Due to the nature of our operations, foreign currency and commodity
price risk are not significant to us. However, in addition to general banking risks, we have other risks that are related to vehicle leasing and asset securitizations.

Equity Market Price Risk

Equity market price risk is the risk related to market fluctuations of equity prices in the securities markets. While we do not have
significant risk in our investment portfolio, market price fluctuations may affect fee income generated through our asset management operations. Generally, our fee structure is based on the market value of assets being managed at specific time
frames. When market values decline, our fee income also declines.



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Liquidity Risk

The maintenance of adequate liquidity  the ability to meet the cash requirements of our customers and other financial commitments
 is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources  purchased funds, repurchase agreements, and deposit accounts  allows us to avoid undue concentration in any single
financial market and also to avoid heavy funding requirements within short periods of time. At June 30, 2010, our bank subsidiary had approximately $1.0 billion available under a collateralized line of credit with the Federal Home Loan Bank of
Pittsburgh; and approximately $604.9 million more would have been available provided that additional collateral had been pledged. Furthermore, at June 30, 2010, we had unused federal funds lines of $798.0 million.

In addition, we have pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment
securities to obtain collateralized borrowing availability at the Federal Reserves Discount Window. At June 30, 2010, we had unused collateralized availability of $954.9 million.

Liquidity, however, is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into
consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $120.0 million at June 30, 2010 and represented additional sources of liquidity.

Management believes these sources of liquidity are sufficient to support our banking operations.

Interest Rate Risk

The
management of interest rate risk focuses on controlling the risk to net interest income and the associated net interest margin as the result of changing market rates and spreads. Interest rate sensitivity is the matching or mismatching of the
repricing and rate structure of the interest-bearing assets and liabilities. Our goal is to control risk exposure to changing rates within managements accepted guidelines to maintain an acceptable level of risk exposure in support of
consistent earnings.

We employ a variety of methods to monitor interest rate risk. These methods include basic gap analysis,
which points to directional exposure, routine rate shock simulation, and evaluation of the change in economic value of equity. Board-directed guidelines have been adopted for both the rate shock simulations and economic value of equity exposure
limits. By dividing the assets and liabilities into three groups, fixed rate, floating rate and those which reprice only at our discretion, strategies are developed to control the exposure to interest rate fluctuations.

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income
and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the
most recent interest rate shock analysis, we were within the Boards approved guidelines at an up 300 basis point shock. At June 30, 2010, our asset/liability position was slightly asset sensitive.

Derivative Financial Instruments and Hedging Activities

Our interest rate risk management strategy involves hedging the repricing characteristics of certain assets and liabilities so as to
mitigate adverse effects on our net interest margin and cash flows from changes in interest rates. While we do not participate in speculative derivatives trading, we consider it prudent to use certain derivative instruments to add stability to our
interest income and expense, to modify the duration of specific assets and liabilities, and to manage our exposure to interest rate movements.

Additionally, we execute derivative instruments in the form of interest rate swaps with commercial banking customers to facilitate their
respective risk management strategies. Those derivatives are immediately hedged by offsetting derivative contracts, such that we minimize our net risk exposure resulting from such transactions. We do not use credit default swaps in our investment or
hedging operations.



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For additional information about our derivative financial instruments, refer to
Note 9. Derivative Financial Instruments and Note 11. Fair Value Disclosures to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Vehicle Leasing Residual Value Risk

In an effort to manage the vehicle residual value risk arising from the auto leasing business of Hann and our bank subsidiary, Hann and
the bank have entered into arrangements with Auto Lenders pursuant to which Hann or the bank, as applicable, effectively transferred to Auto Lenders all residual value risk of its respective auto lease portfolio, and all residual value risk on any
new leases originated over the term of the applicable agreement. Auto Lenders, which was formed in 1990, is a used-vehicle remarketer with four retail locations in New Jersey and has access to various wholesale facilities throughout the country.
Under these arrangements, Auto Lenders agrees to purchase the beneficial interest in all vehicles returned by the obligors at the scheduled expiration of the related leases for a purchase price equal to the stated residual value of such vehicles.
Stated residual values of new leases are set in accordance with the standards approved in advance by Auto Lenders. Under a servicing agreement with Auto Lenders, Hann also agrees to make monthly guaranty payments to Auto Lenders based upon a
negotiated schedule covering a three-year period. At the end of each year, the servicing agreement may be renewed by the mutual agreement of the parties for an additional one-year term, beyond the current three-year term, subject to renegotiation of
the payments for the additional year. During the renewal process, we periodically obtain competitive quotes from third parties to determine the best remarketing and/or residual guarantee alternatives for Hann and our bank subsidiary.



|Item 4. | Controls and Procedures.
|------- | ------------------------



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

Susquehannas management, with the participation of Susquehannas Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of Susquehannas disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Susquehanna believes that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



|(b) | Change in Internal Control Over Financial Reporting
|--- | ---------------------------------------------------

No change in Susquehannas internal control over financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Susquehannas internal control over financial reporting.

PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

There
are no material proceedings to which Susquehanna or any of our subsidiaries are a party or by which, to Susquehannas knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against
Susquehanna or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.



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|Item 1A. | Risk Factors.
|-------- | -------------

There have
been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | Reserved
|------- | --------



|Item 5. | Other Information.
|------- | ------------------

None.



|Item 6. | Exhibits.
|------- | ---------

The Exhibits
filed as part of this report are as follows:



|     |  |                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
|     | 
|32   |  | Section 1350 Certifications is filed herewith as Exhibit 32.                                        



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



|               |  |  |  |                                                                                   
|-------------- |  |  |  | ----------------------------------------------------------------------------------
|               |  |  |  | SUSQUEHANNA BANCSHARES, INC.                                                      
|               |  | 
|August 6, 2010 |  |  |  | /s/ William J. Reuter                                                             
|               |  |  |  | William J. Reuter Chairman
and Chief Executive Officer                            
|               |  | 
|August 6, 2010 |  |  |  | /s/ Drew K. Hostetter                                                             
|               |  |  |  | Drew K. Hostetter Executive
Vice President, Treasurer, and Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX





|                |  |                                                                                                     
|--------------- |  | ----------------------------------------------------------------------------------------------------
|Exhibit
Numbers |  | Description and Method of Filing                                                                    
|                | 
|31.1            |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
|                | 
|31.2            |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
|                | 
|32              |  | Section 1350 Certifications is filed herewith as Exhibit 32.                                        



51