##### 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, 2011

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  x    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 |  | x                                                |  | Accelerated Filer         |  |  ̈
|                        |  |                                                  | 
|Non-Accelerated Filer   |  |  ̈  (Do not check if a smaller reporting company) |  | 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 29, 2011, there were 130,067,574 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, 2011 and 2010, and December 31, 2010                             |    |      | 3  | 
|              |  |                                                                                                            
|              |  | Consolidated Statements of Income for the three and six months ended June 30, 2011 and
2010                 |    |      | 4  | 
|              |  |                                                                                                            
|              |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and
2010                       |    |      | 5  | 
|              |  |                                                                                                            
|              |  | Consolidated Statements of Changes in Shareholders Equity for the six months ended June 30, 2011 and
 2010 |    |      | 7  | 
|              |  |                                                                                                            
|              |  | Notes to the Consolidated Financial Statements                                                              |    |      | 8  | 
|              |  |                                                                                                            
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                       |    |      | 39 | 
|              |  |                                                                                                            
|Item 3        |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |    |      | 55 | 
|              |  |                                                                                                            
|Item 4        |  | Controls and Procedures                                                                                     |    |      | 57 | 
|              |  |                                                                                                            
|PART II.      |  | OTHER INFORMATION                                                                                           |    |      |    | 
|              |  |                                                                                                            
|Item 1        |  | Legal Proceedings                                                                                           |    |      | 57 | 
|              |  |                                                                                                            
|Item 1A       |  | Risk Factors                                                                                                |    |      | 59 | 
|              |  |                                                                                                            
|Item 2        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |    |      | 61 | 
|              |  |                                                                                                            
|Item 3        |  | Defaults Upon Senior Securities                                                                             |    |      | 61 | 
|              |  |                                                                                                            
|Item 4        |  | Reserved                                                                                                    |    |      | 61 | 
|              |  |                                                                                                            
|Item 5        |  | Other Information                                                                                           |    |      | 61 | 
|              |  |                                                                                                            
|Item 6        |  | Exhibits                                                                                                    |    |      | 62 | 
|              | 
|SIGNATURES    |  |                                                                                                             | 63 |     
|              | 
|EXHIBIT INDEX |  |                                                                                                             | 64 |     



2



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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 30,2011                      |            |   | December 31,2010 |   |            | June 30,2010 | 
|                                                                                                                                                                      |  | (in thousands, except share data) |           
|Assets                                                                                                                                                                |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Cash and due from banks                                                                                                                                               |  | $                                 | 211,953    |   |                  | $ | 200,646    |              |  | $ | 200,520    |  
|Unrestricted short-term investments                                                                                                                                   |  |                                   | 29,135     |   |                  |   | 52,252     |              |  |   | 120,021    |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Cash and cash equivalents                                                                                                                                             |  |                                   | 241,088    |   |                  |   | 252,898    |              |  |   | 320,541    |  
|Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the
consolidated variable interest entities  |  |                                   | 4,946      |   |                  |   | 7,260      |              |  |   | 6,062      |  
|Restricted short-term investments                                                                                                                                     |  |                                   | 48,660     |   |                  |   | 34,435     |              |  |   | 100        |  
|Securities available for sale                                                                                                                                         |  |                                   | 2,615,203  |   |                  |   | 2,408,943  |              |  |   | 2,140,318  |  
|Securities held to maturity (fair values approximate $8,544; $8,668; and $8,800)                                                                                      |  |                                   | 8,544      |   |                  |   | 8,668      |              |  |   | 8,800      |  
|Loans and leases, net of unearned income                                                                                                                              |  |                                   | 9,431,453  |   |                  |   | 9,417,801  |              |  |   | 9,555,737  |  
|Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable
interest entities                      |  |                                   | 204,734    |   |                  |   | 215,396    |              |  |   | 231,319    |  
|Less: Allowance for loan and lease losses                                                                                                                             |  |                                   | 189,292    |   |                  |   | 191,834    |              |  |   | 185,795    |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Net loans and leases                                                                                                                                                  |  |                                   | 9,446,895  |   |                  |   | 9,441,363  |              |  |   | 9,601,261  |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Premises and equipment, net                                                                                                                                           |  |                                   | 165,161    |   |                  |   | 165,557    |              |  |   | 163,183    |  
|Other real estate and foreclosed assets                                                                                                                               |  |                                   | 29,426     |   |                  |   | 19,962     |              |  |   | 17,379     |  
|Accrued income receivable                                                                                                                                             |  |                                   | 35,084     |   |                  |   | 36,121     |              |  |   | 35,142     |  
|Bank-owned life insurance                                                                                                                                             |  |                                   | 358,967    |   |                  |   | 359,579    |              |  |   | 352,010    |  
|Goodwill                                                                                                                                                              |  |                                   | 1,018,031  |   |                  |   | 1,018,031  |              |  |   | 1,018,031  |  
|Intangible assets with finite lives                                                                                                                                   |  |                                   | 29,779     |   |                  |   | 34,076     |              |  |   | 38,770     |  
|Other assets                                                                                                                                                          |  |                                   | 155,960    |   |                  |   | 167,192    |              |  |   | 189,936    |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Assets                                                                                                                                                          |  | $                                 | 14,157,744 |   |                  | $ | 13,954,085 |              |  | $ | 13,891,533 |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Liabilities and Shareholders Equity                                                                                                                                  |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Deposits:                                                                                                                                                             |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Demand                                                                                                                                                                |  | $                                 | 1,421,947  |   |                  | $ | 1,372,235  |              |  | $ | 1,321,411  |  
|Interest-bearing demand                                                                                                                                               |  |                                   | 3,598,052  |   |                  |   | 3,646,714  |              |  |   | 3,481,397  |  
|Savings                                                                                                                                                               |  |                                   | 807,117    |   |                  |   | 767,852    |              |  |   | 778,600    |  
|Time                                                                                                                                                                  |  |                                   | 2,052,626  |   |                  |   | 2,168,503  |              |  |   | 2,390,652  |  
|Time of $100 or more                                                                                                                                                  |  |                                   | 1,522,773  |   |                  |   | 1,235,903  |              |  |   | 1,197,887  |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total deposits                                                                                                                                                        |  |                                   | 9,402,515  |   |                  |   | 9,191,207  |              |  |   | 9,169,947  |  
|Federal Home Loan Bank short-term borrowings                                                                                                                          |  |                                   | 400,000    |   |                  |   | 300,000    |              |  |   | 0          |  
|Other short-term borrowings                                                                                                                                           |  |                                   | 635,183    |   |                  |   | 770,623    |              |  |   | 619,439    |  
|Federal Home Loan Bank long-term borrowings                                                                                                                           |  |                                   | 715,517    |   |                  |   | 801,620    |              |  |   | 967,674    |  
|Other long-term debt                                                                                                                                                  |  |                                   | 176,034    |   |                  |   | 176,038    |              |  |   | 176,042    |  
|Junior subordinated debentures                                                                                                                                        |  |                                   | 323,125    |   |                  |   | 322,880    |              |  |   | 322,605    |  
|Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna's general
credit                                    |  |                                   | 184,708    |   |                  |   | 207,036    |              |  |   | 222,960    |  
|Accrued interest, taxes, and expenses payable                                                                                                                         |  |                                   | 48,343     |   |                  |   | 46,449     |              |  |   | 49,902     |  
|Deferred taxes                                                                                                                                                        |  |                                   | 41,020     |   |                  |   | 33,729     |              |  |   | 56,783     |  
|Other liabilities                                                                                                                                                     |  |                                   | 208,397    |   |                  |   | 119,701    |              |  |   | 213,730    |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Liabilities                                                                                                                                                     |  |                                   | 12,134,842 |   |                  |   | 11,969,283 |              |  |   | 11,799,082 |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Shareholders equity:                                                                                                                                                 |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Outstanding: 0 at June 30, 2011and
December 31, 2010 and 100,000 at June 30, 2010             |  |                                   | 0          |   |                  |   | 0          |              |  |   | 97,745     |  
|Common stock, $2.00 par value, 400,000,000 shares authorized. Issued: 130,070,101 at June 30, 2011;129,965,635 at
December 31, 2010; and 129,694,801 at June 30, 2010 |  |                                   | 260,140    |   |                  |   | 259,931    |              |  |   | 259,390    |  
|Treasury stock, at cost. 2,527 at June 30, 2011and 0 at December 31, 2010 and June 30,
2010                                                                           |  |                                   | (24        | ) |                  |   | 0          |              |  |   | 0          |  
|Additional paid-in capital                                                                                                                                            |  |                                   | 1,298,109  |   |                  |   | 1,301,042  |              |  |   | 1,299,498  |  
|Retained earnings                                                                                                                                                     |  |                                   | 498,881    |   |                  |   | 481,964    |              |  |   | 470,874    |  
|Accumulated other comprehensive loss, net of taxes of $18,925; $32,526; and $19,470, respectively                                                                     |  |                                   | (34,204    | ) |                  |   | (58,135    | )            |  |   | (35,056    | )
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Shareholders Equity                                                                                                                                            |  |                                   | 2,022,902  |   |                  |   | 1,984,802  |              |  |   | 2,092,451  |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  
|Total Liabilities and Shareholders Equity                                                                                                                            |  | $                                 | 14,157,744 |   |                  | $ | 13,954,085 |              |  | $ | 13,891,533 |  
|                                                                                                                                                                      |  |                                   |            |   |                  |   |            |              |  |   |            |  

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



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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, |  
|                                                                        |  | 2011                                  |         |   | 2010                     |   |         | 2011 |  |   | 2010    |  
|                                                                        |  | (in thousands, except per share data) |        
|Interest Income:                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loans and leases, including fees                                        |  | $                                     | 127,199 |   |                          | $ | 136,252 |      |  | $ | 253,998 |   |  | $ | 272,481 |  
|Securities:                                                             |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Taxable                                                                 |  |                                       | 15,026  |   |                          |   | 13,458  |      |  |   | 30,706  |   |  |   | 27,487  |  
|Tax-exempt                                                              |  |                                       | 4,034   |   |                          |   | 3,371   |      |  |   | 7,985   |   |  |   | 7,061   |  
|Dividends                                                               |  |                                       | 996     |   |                          |   | 962     |      |  |   | 2,018   |   |  |   | 1,937   |  
|Short-term investments                                                  |  |                                       | 23      |   |                          |   | 39      |      |  |   | 52      |   |  |   | 73      |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total interest income                                                   |  |                                       | 147,278 |   |                          |   | 154,082 |      |  |   | 294,759 |   |  |   | 309,039 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest Expense:                                                       |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Deposits:                                                               |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest-bearing demand and savings                                     |  |                                       | 5,624   |   |                          |   | 5,980   |      |  |   | 11,436  |   |  |   | 11,691  |  
|Time                                                                    |  |                                       | 14,109  |   |                          |   | 21,072  |      |  |   | 29,290  |   |  |   | 43,794  |  
|Federal Home Loan Bank short-term borrowings                            |  |                                       | 3,030   |   |                          |   | 0       |      |  |   | 5,338   |   |  |   | 38      |  
|Other short-term borrowings                                             |  |                                       | 1,837   |   |                          |   | 536     |      |  |   | 3,734   |   |  |   | 1,295   |  
|Federal Home Loan Bank long-term borrowings                             |  |                                       | 7,799   |   |                          |   | 11,098  |      |  |   | 15,883  |   |  |   | 20,696  |  
|Other long-term debt                                                    |  |                                       | 8,793   |   |                          |   | 9,165   |      |  |   | 17,969  |   |  |   | 17,003  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total interest expense                                                  |  |                                       | 41,192  |   |                          |   | 47,851  |      |  |   | 83,650  |   |  |   | 94,517  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net interest income                                                     |  |                                       | 106,086 |   |                          |   | 106,231 |      |  |   | 211,109 |   |  |   | 214,522 |  
|Provision for loan and lease losses                                     |  |                                       | 28,000  |   |                          |   | 43,000  |      |  |   | 63,000  |   |  |   | 88,000  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net interest income, after provision for loan and lease losses          |  |                                       | 78,086  |   |                          |   | 63,231  |      |  |   | 148,109 |   |  |   | 126,522 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Income:                                                     |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Service charges on deposit accounts                                     |  |                                       | 8,077   |   |                          |   | 8,886   |      |  |   | 15,833  |   |  |   | 16,955  |  
|Vehicle origination and servicing fees                                  |  |                                       | 1,996   |   |                          |   | 1,887   |      |  |   | 3,899   |   |  |   | 3,484   |  
|Asset management fees                                                   |  |                                       | 7,125   |   |                          |   | 7,513   |      |  |   | 14,286  |   |  |   | 14,626  |  
|Income from fiduciary-related activities                                |  |                                       | 1,853   |   |                          |   | 1,787   |      |  |   | 3,688   |   |  |   | 3,591   |  
|Commissions on brokerage, life insurance, and annuity sales             |  |                                       | 2,356   |   |                          |   | 2,000   |      |  |   | 4,610   |   |  |   | 3,660   |  
|Commissions on property and casualty insurance sales                    |  |                                       | 3,468   |   |                          |   | 2,879   |      |  |   | 7,453   |   |  |   | 6,281   |  
|Other commissions and fees                                              |  |                                       | 6,518   |   |                          |   | 6,113   |      |  |   | 12,506  |   |  |   | 11,612  |  
|Income from bank-owned life insurance                                   |  |                                       | 1,149   |   |                          |   | 1,341   |      |  |   | 2,255   |   |  |   | 2,631   |  
|Net gain on sale of loans and leases                                    |  |                                       | 2,419   |   |                          |   | 2,766   |      |  |   | 6,470   |   |  |   | 4,733   |  
|Net realized gain on sales of securities                                |  |                                       | 1,060   |   |                          |   | 4,299   |      |  |   | 2,930   |   |  |   | 10,892  |  
|Total other-than-temporary impairment, net of recoveries                |  |                                       | (2,380  | ) |                          |   | (3,566  | )    |  |   | (4,366  | ) |  |   | (4,123  | )
|Portion of loss recognized in other comprehensive income (before taxes) |  |                                       | 1,767   |   |                          |   | 1,386   |      |  |   | 1,521   |   |  |   | 1,386   |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net impairment losses recognized in earnings                            |  |                                       | (613    | ) |                          |   | (2,180  | )    |  |   | (2,845  | ) |  |   | (2,737  | )
|Other                                                                   |  |                                       | 1,646   |   |                          |   | 980     |      |  |   | 3,436   |   |  |   | 1,225   |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest income                                                |  |                                       | 37,054  |   |                          |   | 38,271  |      |  |   | 74,521  |   |  |   | 76,953  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Expenses:                                                   |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Salaries and employee benefits                                          |  |                                       | 53,412  |   |                          |   | 49,259  |      |  |   | 104,404 |   |  |   | 97,394  |  
|Occupancy                                                               |  |                                       | 8,861   |   |                          |   | 8,510   |      |  |   | 18,516  |   |  |   | 18,351  |  
|Furniture and equipment                                                 |  |                                       | 3,239   |   |                          |   | 3,409   |      |  |   | 6,305   |   |  |   | 7,086   |  
|Advertising and marketing                                               |  |                                       | 3,139   |   |                          |   | 3,115   |      |  |   | 5,486   |   |  |   | 5,896   |  
|FDIC insurance                                                          |  |                                       | 5,406   |   |                          |   | 4,575   |      |  |   | 8,787   |   |  |   | 8,784   |  
|Legal fees                                                              |  |                                       | 2,723   |   |                          |   | 1,836   |      |  |   | 5,317   |   |  |   | 3,600   |  
|Amortization of intangible assets                                       |  |                                       | 2,133   |   |                          |   | 2,360   |      |  |   | 4,296   |   |  |   | 4,743   |  
|Vehicle lease disposal                                                  |  |                                       | 2,620   |   |                          |   | 3,844   |      |  |   | 5,057   |   |  |   | 7,171   |  
|Other                                                                   |  |                                       | 19,624  |   |                          |   | 19,255  |      |  |   | 38,871  |   |  |   | 37,442  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest expenses                                              |  |                                       | 101,157 |   |                          |   | 96,163  |      |  |   | 197,039 |   |  |   | 190,467 |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes                                              |  |                                       | 13,983  |   |                          |   | 5,339   |      |  |   | 25,591  |   |  |   | 13,008  |  
|Provision for (benefit from) income taxes                               |  |                                       | 2,928   |   |                          |   | (52     | )    |  |   | 4,775   |   |  |   | 114     |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net Income                                                              |  |                                       | 11,055  |   |                          |   | 5,391   |      |  |   | 20,816  |   |  |   | 12,894  |  
|Preferred stock dividends and accretion                                 |  |                                       | 0       |   |                          |   | 6,754   |      |  |   | 0       |   |  |   | 10,942  |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net Income (Loss) Applicable to Common Shareholders                     |  | $                                     | 11,055  |   |                          | $ | (1,363  | )    |  | $ | 20,816  |   |  | $ | 1,952   |  
|                                                                        |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share:                                              |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                   |  | $                                     | 0.09    |   |                          | $ | (0.01   | )    |  | $ | 0.16    |   |  | $ | 0.02    |  
|Diluted                                                                 |  | $                                     | 0.09    |   |                          | $ | (0.01   | )    |  | $ | 0.16    |   |  | $ | 0.02    |  
|Cash dividends per common share                                         |  | $                                     | 0.02    |   |                          | $ | 0.01    |      |  | $ | 0.03    |   |  | $ | 0.02    |  
|Average common shares outstanding:                                      |  |                                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                   |  |                                       | 129,761 |   |                          |   | 129,630 |      |  |   | 129,744 |   |  |   | 112,207 |  
|Diluted                                                                 |  |                                       | 129,832 |   |                          |   | 129,630 |      |  |   | 129,826 |   |  |   | 112,233 |  

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, |         
|                                                                                                                                            |  | 2011                     |          |   | 2010 |  
|                                                                                                                                            |  | (in thousands)           |         
|Cash Flows from Operating Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net income                                                                                                                                  |  | $                        | 20,816   |   |      | $ | 12,894   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                           |  |                          |          |   |      |   |          |  
|Depreciation, amortization, and accretion                                                                                                   |  |                          | 16,812   |   |      |   | 13,082   |  
|Provision for loan and lease losses                                                                                                         |  |                          | 63,000   |   |      |   | 88,000   |  
|Realized gain on available-for-sale securities, net                                                                                         |  |                          | (85      | ) |      |   | (8,155   | )
|Deferred income taxes                                                                                                                       |  |                          | (6,433   | ) |      |   | (22,168  | )
|Gain on sale of loans and leases                                                                                                            |  |                          | (6,470   | ) |      |   | (4,733   | )
|(Gain) loss on sale of other real estate and foreclosed assets                                                                              |  |                          | (461     | ) |      |   | 1,493    |  
|Mortgage loans originated for sale                                                                                                          |  |                          | (143,143 | ) |      |   | (155,011 | )
|Proceeds from sale of mortgage loans originated for sale                                                                                    |  |                          | 145,951  |   |      |   | 150,727  |  
|Payments received on loans and leases transferred from held for sale to held for investment, net of advances on home equity lines
of credit |  |                          | 75,363   |   |      |   | 71,641   |  
|Increase in cash surrender value of bank-owned life insurance                                                                               |  |                          | (1,315   | ) |      |   | (2,259   | )
|Decrease in accrued interest receivable                                                                                                     |  |                          | 1,037    |   |      |   | 1,651    |  
|(Decrease) increase in accrued interest payable                                                                                             |  |                          | (722     | ) |      |   | 1,337    |  
|Increase in accrued expenses and taxes payable                                                                                              |  |                          | 2,616    |   |      |   | 841      |  
|Other, net                                                                                                                                  |  |                          | 12,646   |   |      |   | (3,285   | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash provided by operating activities                                                                                                   |  |                          | 179,612  |   |      |   | 146,055  |  
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Cash Flows from Investing Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net (increase) decrease in restricted short-term investments                                                                                |  |                          | (11,911  | ) |      |   | 1,529    |  
|Activity in available-for-sale securities:                                                                                                  |  |                          |          |   |      |   |          |  
|Sales                                                                                                                                       |  |                          | 146,929  |   |      |   | 231,241  |  
|Maturities, repayments, and calls                                                                                                           |  |                          | 269,266  |   |      |   | 317,120  |  
|Purchases                                                                                                                                   |  |                          | (503,955 | ) |      |   | (694,554 | )
|Net (increase) decrease in loans and leases                                                                                                 |  |                          | (167,053 | ) |      |   | 141,253  |  
|Purchase of bank-owned life insurance                                                                                                       |  |                          | (2,350   | ) |      |   | 0        |  
|Proceeds from bank-owned life insurance                                                                                                     |  |                          | 4,277    |   |      |   | 5,622    |  
|Proceeds from sale of foreclosed assets                                                                                                     |  |                          | 17,817   |   |      |   | 16,200   |  
|Additions to premises and equipment, net                                                                                                    |  |                          | (6,110   | ) |      |   | (4,761   | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                                                                                         |  |                          | (253,090 | ) |      |   | 13,650   |  
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Cash Flows from Financing Activities:                                                                                                       |  |                          |          |   |      |   |          |  
|Net increase in deposits                                                                                                                    |  |                          | 211,308  |   |      |   | 195,584  |  
|Net decrease in other short-term borrowings                                                                                                 |  |                          | (135,440 | ) |      |   | (421,264 | )
|Net increase (decrease) in short-term FHLB borrowings                                                                                       |  |                          | 100,000  |   |      |   | (100,000 | )
|Proceeds from long-term FHLB borrowings                                                                                                     |  |                          | 0        |   |      |   | 150,000  |  
|Repayment of long-term FHLB borrowings                                                                                                      |  |                          | (85,221  | ) |      |   | (105,095 | )
|Proceeds from issuance of long-term debt                                                                                                    |  |                          | 0        |   |      |   | 47,749   |  
|Repayment of long-term debt                                                                                                                 |  |                          | (22,332  | ) |      |   | (16,984  | )
|Proceeds from issuance of common stock                                                                                                      |  |                          | 2,545    |   |      |   | 328,636  |  
|Redemption of preferred stock                                                                                                               |  |                          | 0        |   |      |   | (200,000 | )
|Purchase of treasury stock                                                                                                                  |  |                          | (24      | ) |      |   | 0        |  
|Redemption of warrant                                                                                                                       |  |                          | (5,269   | ) |      |   | 0        |  
|Cash dividends paid                                                                                                                         |  |                          | (3,899   | ) |      |   | (8,996   | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                                                         |  |                          | 61,668   |   |      |   | (130,370 | )
|                                                                                                                                            |  |                          |          |   |      |   |          |  



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                                                                                                                                                 |  |   | (11,810 | ) |  |   | 29,335  |  
|Cash and cash equivalents at January 1                                                                                                                                                  |  |   | 252,898 |   |  |   | 291,206 |  
|                                                                                                                                                                                        |  |   |         |   |  |   |         |  
|Cash and cash equivalents at June 30                                                                                                                                                    |  | $ | 241,088 |   |  | $ | 320,541 |  
|                                                                                                                                                                                        |  |   |         |   |  |   |         |  
|Supplemental Disclosure of Cash Flow Information                                                                                                                                        |  |   |         |   |  |   |         |  
|Cash paid for interest on deposits and borrowings                                                                                                                                       |  | $ | 84,372  |   |  | $ | 93,143  |  
|Income tax payments                                                                                                                                                                     |  |   | 2,784   |   |  |   | 19,412  |  
|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 |  | $ | 0       |   |  | $ | 7,537   |  
|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                     |  |   | 0       |   |  |   | 248,333 |  
|Real estate acquired in settlement of loans                                                                                                                                             |  |   | 23,375  |   |  |   | 11,553  |  
|Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna's general
credit at January 1, 2010                                   |  |   | 0       |   |  |   | 239,936 |  
|Securities purchased not settled                                                                                                                                                        |  |   | 78,268  |   |  |   | 99,475  |  
|Accretion of preferred stock discount                                                                                                                                                   |  |   | 0       |   |  |   | 5,386   |  
|Home equity line of credit loans transferred from held for sale to held for investment                                                                                                  |  |   | 0       |   |  |   | 434,897 |  
|Cumulative-effect adjustment to retained earnings relating to the consolidation of variable interest entities                                                                           |  |   | 0       |   |  |   | (5,805  | )
|Adjustment to accumulated other comprehensive income relating to the consolidation of variable interest entities                                                                        |  |   | 0       |   |  |   | (6,922  | )

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



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except share data)



|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------- | -------- | - | -------------------- |  | ----------- | ----------- |  | - | ------------- |  |  | ------------------------ | --- | - | ---------------- | - | --------- | --------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | --------- | -
|                                                                                                                   |  | PreferredStock |          |   | Shares ofCommonStock |  |             | CommonStock |  |   | TreasuryStock |  |  | AdditionalPaid-inCapital |     |   | RetainedEarnings |   |           | AccumulatedOtherComprehensiveLoss |  |   | Total   |  
|Balance at January 1, 2010                                                                                         |  | $              | 292,359  |   |                      |  | 86,473,612  |             |  | $ | 172,947       |  |  | $                        | 0   |   |                  | $ | 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 loss 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       |  |  | $                        | 0   |   |                  | $ | 1,299,498 |                                   |  | $ | 470,874 |   |  | $ | (35,056 | ) |  | $ | 2,092,451 |  
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Balance at January 1, 2011                                                                                         |  | $              | 0        |   |                      |  | 129,965,635 |             |  | $ | 259,931       |  |  | $                        | 0   |   |                  | $ | 1,301,042 |                                   |  | $ | 481,964 |   |  | $ | (58,135 | ) |  | $ | 1,984,802 |  
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Comprehensive income:                                                                                              |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Net income                                                                                                         |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   | 20,816  |   |  |   |         |   |  |   | 20,816    |  
|Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of $54    |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   | 29,970  |   |  |   | 29,970    |  
|Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $558        |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   | (963    | ) |  |   | (963      | )
|Change in unrealized loss on cash flow hedges, net of taxes of $2,513                                              |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   | (4,775  | ) |  |   | (4,775    | )
|Adjustment to postretirement benefit obligations, net of taxes of $162                                             |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   | (301    | ) |  |   | (301      | )
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Total comprehensive income                                                                                         |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   | 44,747    |  
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Issuance of common stock and options under employee benefit plans                                                  |  |                |          |   |                      |  | 104,466     |             |  |   | 209           |  |  |                          |     |   |                  |   | 2,336     |                                   |  |   |         |   |  |   |         |   |  |   | 2,545     |  
|Treasury stock purchased                                                                                           |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          | (24 | ) |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   | (24       | )
|Redemption of warrant                                                                                              |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   | (5,269    | )                                 |  |   |         |   |  |   |         |   |  |   | (5,269    | )
|Cash dividends paid on common stock ($0.03 per share)                                                              |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   | (3,899  | ) |  |   |         |   |  |   | (3,899    | )
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  
|Balance at June 30, 2011                                                                                           |  | $              | 0        |   |                      |  | 130,070,101 |             |  | $ | 260,140       |  |  | $                        | (24 | ) |                  | $ | 1,298,109 |                                   |  | $ | 498,881 |   |  | $ | (34,204 | ) |  | $ | 2,022,902 |  
|                                                                                                                   |  |                |          |   |                      |  |             |             |  |   |               |  |  |                          |     |   |                  |   |           |                                   |  |   |         |   |  |   |         |   |  |   |           |  

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



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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)

NOTE 1. Accounting Policies

The information contained in this report is unaudited. In the opinion of management, the information reflects all
normal recurring adjustments necessary for a fair statement of results for the periods ended June 30, 2011 and 2010. Certain prior-year amounts have been reclassified to conform to current period classifications and are not material to
previously issued financial statements. 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-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 Susquehannas Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Recently Adopted Accounting Guidance

In January 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standard Update (ASU) 2011-01, Receivables (Topic 310)  Deferral of the Effective
Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This ASU temporarily delays new disclosure requirements for troubled debt restructuring activity until July 1, 2011. Adoption of this guidance has not had a
material impact on results of operations or financial condition.

In December 2010, FASB issued ASU 2010-29, Business
Combinations (Topic 805)  Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU specify that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period
only. The amendments in this ASU also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This ASU was effective prospectively for business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In December 2010, FASB issued ASU 2010-28, Intangibles  Goodwill and Other (Topic 350)  When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts, a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there
are any adverse qualitative factors indicating that an impairment may exist. This ASU was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Adoption of this guidance has not had a material
impact on results of operations or financial condition.

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 ASU 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 were effective for periods ending on
or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period were effective for periods beginning on or after December 15, 2010. Adoption of this guidance has not had 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 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 were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this ASU has not had a material impact on results of operations or financial condition.

Recently Issued Accounting Guidance

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220)  Presentation of Comprehensive Income.This ASU requires an entity that reports items of other comprehensive income to
present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option in
current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. This guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on results of operations or financial condition.

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted. This guidance is to be applied
prospectively and is effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. Adoption of this guidance is not expected to have a material impact on results of operations or financial
condition.

In April 2011, FASB issued ASU 2011-03, Transfer and Servicing (Topic 860)  Reconsideration of Effective
Control for Repurchase Agreements.This ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even
in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The
guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Adoption of this guidance is not expected to have a material impact on
results of operations or financial condition.

In April 2011, FASB issued ASU 2011-02, Receivables (Topic 310)  A
Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU clarifies which loan modifications constitute troubled debt restructurings for purposes of recording an impairment loss and for disclosure of
troubled debt restructurings. This guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or only after the beginning of the fiscal year of adoption.
Early application is permitted. In addition, ASU 2011-02 requires that an entity disclose the information required by ASU 2010-20, Receivables (Topic 310)  Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses, which was previously deferred by ASU 2011-01. These disclosure requirements are effective for interim and annual periods beginning on or after June 15, 2011. Adoption of this guidance is not expected to 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)



NOTE 2. Pending Acquisitions

Agreement to Acquire Tower Bancorp, Inc.

On June 20, 2011, Susquehanna announced the signing of a definitive agreement under which Susquehanna agreed to acquire all
outstanding shares of Tower Bancorp, Inc. (Tower) common stock in a stock and cash transaction. The transaction, with an approximate total value of $343,000, is expected to be completed on or around February 17, 2012. Under the terms of
the agreement, Tower shareholders will have the option of receiving either 3.4696 shares of Susquehanna common stock or $28.00 in cash for each share of Tower common stock, with $88,000 of the aggregate consideration being paid in cash. The
transaction will enhance Susquehannas already strong presence in central and southeastern Pennsylvania and will significantly increase its market share in the Pennsylvania counties of Chester, Dauphin, and Franklin. Additionally, the merger
will give Susquehanna branch presence in the Pennsylvania counties of Lebanon, Fulton, and Centre.

The boards of directors of
both Susquehanna and Tower have approved the transaction. Completion of the transaction is subject to customary closing conditions, including regulatory approvals and the approval of shareholders of both companies.

Agreement to Acquire Abington Bancorp, Inc.

On January 26, 2011, Susquehanna announced the signing of a definitive agreement under which Susquehanna agreed to acquire all outstanding shares of common stock of Abington Bancorp, Inc.
(Abington) in a stock-for-stock transaction. The transaction, with an approximate total value of $268,000, is expected to be completed on or around October 1, 2011. Under the terms of the agreement, Abington shareholders will receive
1.32 shares of Susquehanna common stock for each share of Abington common stock. The locations of Abingtons bank branches provide a natural extension of Susquehannas network in the greater Philadelphia area.

The boards of directors and shareholders of both Susquehanna and Abington have approved the transaction. Completion of the transaction is
subject to customary closing conditions, including regulatory approvals.



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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. Investment Securities

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



|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|------------------------------------------------- |  | ------------- | --------- |  | -------------------- | - | ------ | --------------------- |  | - | --------- |  |  | - | --------- | 
|At June 30, 2011                                  |  | AmortizedCost |           |  | GrossUnrealizedGains |   |        | GrossUnrealizedLosses |  |   | FairValue | 
|Available-for-Sale:                               |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|U.S. Government agencies                          |  | $             | 299,024   |  |                      | $ | 2,750  |                       |  | $ | 9         |  |  | $ | 301,765   | 
|Obligations of states and political subdivisions  |  |               | 400,450   |  |                      |   | 11,205 |                       |  |   | 1,274     |  |  |   | 410,381   | 
|Agency residential mortgage-backed securities     |  |               | 1,511,189 |  |                      |   | 29,047 |                       |  |   | 1,314     |  |  |   | 1,538,922 | 
|Non-agency residential mortgage-backed securities |  |               | 91,187    |  |                      |   | 0      |                       |  |   | 7,508     |  |  |   | 83,679    | 
|Commercial mortgage-backed securities             |  |               | 66,331    |  |                      |   | 2,749  |                       |  |   | 0         |  |  |   | 69,080    | 
|Other structured financial products               |  |               | 24,755    |  |                      |   | 0      |                       |  |   | 10,622    |  |  |   | 14,133    | 
|Other debt securities                             |  |               | 49,135    |  |                      |   | 629    |                       |  |   | 452       |  |  |   | 49,312    | 
|Equity securities of the Federal Home Loan Bank   |  |               | 73,079    |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 73,079    | 
|Equity securities of the Federal Reserve Bank     |  |               | 50,225    |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 50,225    | 
|Other equity securities                           |  |               | 24,935    |  |                      |   | 429    |                       |  |   | 737       |  |  |   | 24,627    | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Total available-for-sale securities               |  | $             | 2,590,310 |  |                      | $ | 46,809 |                       |  | $ | 21,916    |  |  | $ | 2,615,203 | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Held-to-Maturity:                                 |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Other                                             |  | $             | 4,570     |  |                      | $ | 0      |                       |  | $ | 0         |  |  | $ | 4,570     | 
|State and municipal                               |  |               | 3,974     |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 3,974     | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Total held-to-maturity securities                 |  | $             | 8,544     |  |                      | $ | 0      |                       |  | $ | 0         |  |  | $ | 8,544     | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|                                                  |  |               |           | 
|At December 31, 2010                              |  | AmortizedCost |           |  | GrossUnrealizedGains |   |        | GrossUnrealizedLosses |  |   | FairValue | 
|Available-for-Sale:                               |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|U.S. Government agencies                          |  | $             | 268,828   |  |                      | $ | 2,230  |                       |  | $ | 2,883     |  |  | $ | 268,175   | 
|Obligations of states and political subdivisions  |  |               | 397,777   |  |                      |   | 4,869  |                       |  |   | 5,986     |  |  |   | 396,660   | 
|Agency residential mortgage-backed securities     |  |               | 1,321,771 |  |                      |   | 19,671 |                       |  |   | 17,873    |  |  |   | 1,323,569 | 
|Non-agency residential mortgage-backed securities |  |               | 129,206   |  |                      |   | 32     |                       |  |   | 12,427    |  |  |   | 116,811   | 
|Commercial mortgage-backed securities             |  |               | 99,501    |  |                      |   | 5,341  |                       |  |   | 0         |  |  |   | 104,842   | 
|Other structured financial products               |  |               | 24,680    |  |                      |   | 0      |                       |  |   | 12,177    |  |  |   | 12,503    | 
|Other debt securities                             |  |               | 41,842    |  |                      |   | 88     |                       |  |   | 930       |  |  |   | 41,000    | 
|Equity securities of the Federal Home Loan Bank   |  |               | 71,065    |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 71,065    | 
|Equity securities of the Federal Reserve Bank     |  |               | 50,225    |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 50,225    | 
|Other equity securities                           |  |               | 24,689    |  |                      |   | 251    |                       |  |   | 847       |  |  |   | 24,093    | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Total available-for-sale securities               |  | $             | 2,429,584 |  |                      | $ | 32,482 |                       |  | $ | 53,123    |  |  | $ | 2,408,943 | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Held-to-Maturity:                                 |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Other                                             |  | $             | 4,560     |  |                      | $ | 0      |                       |  | $ | 0         |  |  | $ | 4,560     | 
|State and municipal                               |  |               | 4,108     |  |                      |   | 0      |                       |  |   | 0         |  |  |   | 4,108     | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 
|Total held-to-maturity securities                 |  | $             | 8,668     |  |                      | $ | 0      |                       |  | $ | 0         |  |  | $ | 8,668     | 
|                                                  |  |               |           |  |                      |   |        |                       |  |   |           |  |  |   |           | 

At June 30, 2011 and December 31, 2010, investment securities with carrying values of
$1,572,885 and $1,561,964, respectively, were pledged to secure public funds and for other purposes as required by law.

The
amortized cost and fair value of U.S. Government agencies, obligations of states and political subdivisions, synthetic collateralized debt obligations, other structured financial products, other debt securities, and residential and commercial
mortgage-backed securities, at June 30, 2011, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.



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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)



|                                      |  |               |           |  |           |   |           | 
|------------------------------------- |  | ------------- | --------- |  | --------- | - | --------- | 
|                                      |  | June 30, 2011 |          
|                                      |  | AmortizedCost |           |  | FairValue |  
|Securities available for sale:        |  |               |           |  |           |   |           | 
|Within one year                       |  | $             | 30,108    |  |           | $ | 30,927    | 
|After one year but within five years  |  |               | 320,322   |  |           |   | 324,341   | 
|After five years but within ten years |  |               | 398,420   |  |           |   | 406,409   | 
|After ten years                       |  |               | 1,693,221 |  |           |   | 1,705,595 | 
|                                      |  |               |           |  |           |   |           | 
|Total securities available for sale   |  | $             | 2,442,071 |  |           | $ | 2,467,272 | 
|                                      |  |               |           |  |           |   |           | 
|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                       |  |               | 8,544     |  |           |   | 8,544     | 
|                                      |  |               |           |  |           |   |           | 
|Total securities held to maturity     |  | $             | 8,544     |  |           | $ | 8,544     | 
|                                      |  |               |           |  |           |   |           | 

Gross realized gains and gross realized losses on available-for-sale securities transactions are
summarized below. These gains and losses were recognized using the specific identification method and were included in noninterest income.



|                                |  |                               |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------- |  | ----------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                |  | Available-for-sale Securities |       
|                                |  | Three Months Ended June 30,   |        |   | Six Months Ended June 30, |  
|                                |  | 2011                          |        |   | 2010                      |   |        | 2011 |  |   | 2010   |  
|Gross gains                     |  | $                             | 2,890  |   |                           | $ | 4,388  |      |  | $ | 6,492  |   |  | $ | 11,015 |  
|Gross losses                    |  |                               | (1,830 | ) |                           |   | (89    | )    |  |   | (3,562 | ) |  |   | (123   | )
|Other-than-temporary impairment |  |                               | (613   | ) |                           |   | (2,180 | )    |  |   | (2,845 | ) |  |   | (2,737 | )
|                                |  |                               |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net gain                        |  | $                             | 447    |   |                           | $ | 2,119  |      |  | $ | 85     |   |  | $ | 8,155  |  
|                                |  |                               |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

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, 2011 and December 31, 2010.



|                                                  |  |                     |         |  |                   |   |       |           |  |   |                  |  |  |           |        |  |                  |   |         |  |  |   |        | 
|------------------------------------------------- |  | ------------------- | ------- |  | ----------------- | - | ----- | --------- |  | - | ---------------- |  |  | --------- | ------ |  | ---------------- | - | ------- |  |  | - | ------ | 
|June 30, 2011                                     |  | Less than 12 Months |         |  | 12 Months or More |   |       | Total     | 
|                                                  |  | FairValue           |         |  | UnrealizedLosses  |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |        |  | UnrealizedLosses |  
|U.S. Government agencies                          |  | $                   | 2,974   |  |                   | $ | 9     |           |  | $ | 0                |  |  | $         | 0      |  |                  | $ | 2,974   |  |  | $ | 9      | 
|Obligations of states and political subdivisions  |  |                     | 58,456  |  |                   |   | 1,206 |           |  |   | 1,091            |  |  |           | 68     |  |                  |   | 59,547  |  |  |   | 1,274  | 
|Agency residential mortgage-backed securities     |  |                     | 212,947 |  |                   |   | 1,314 |           |  |   | 0                |  |  |           | 0      |  |                  |   | 212,947 |  |  |   | 1,314  | 
|Non-agency residential mortgage-backed securities |  |                     | 11,771  |  |                   |   | 175   |           |  |   | 71,908           |  |  |           | 7,333  |  |                  |   | 83,679  |  |  |   | 7,508  | 
|Other structured financial products               |  |                     | 0       |  |                   |   | 0     |           |  |   | 14,133           |  |  |           | 10,622 |  |                  |   | 14,133  |  |  |   | 10,622 | 
|Other debt securities                             |  |                     | 27,773  |  |                   |   | 326   |           |  |   | 1,661            |  |  |           | 126    |  |                  |   | 29,434  |  |  |   | 452    | 
|Other equity securities                           |  |                     | 726     |  |                   |   | 168   |           |  |   | 2,377            |  |  |           | 569    |  |                  |   | 3,103   |  |  |   | 737    | 
|                                                  |  |                     |         |  |                   |   |       |           |  |   |                  |  |  |           |        |  |                  |   |         |  |  |   |        | 
|                                                  |  | $                   | 314,647 |  |                   | $ | 3,198 |           |  | $ | 91,170           |  |  | $         | 18,718 |  |                  | $ | 405,817 |  |  | $ | 21,916 | 
|                                                  |  |                     |         |  |                   |   |       |           |  |   |                  |  |  |           |        |  |                  |   |         |  |  |   |        | 



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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)



|                                                  |  |                     |         |  |                   |   |        |           |  |   |                  |  |  |           |        |  |                  |   |           |  |  |   |        | 
|------------------------------------------------- |  | ------------------- | ------- |  | ----------------- | - | ------ | --------- |  | - | ---------------- |  |  | --------- | ------ |  | ---------------- | - | --------- |  |  | - | ------ | 
|December 31, 2010                                 |  | Less than 12 Months |         |  | 12 Months or More |   |        | Total     | 
|                                                  |  | FairValue           |         |  | UnrealizedLosses  |   |        | FairValue |  |   | UnrealizedLosses |  |  | FairValue |        |  | UnrealizedLosses |  
|U. S. Government agencies                         |  | $                   | 114,618 |  |                   | $ | 2,883  |           |  | $ | 0                |  |  | $         | 0      |  |                  | $ | 114,618   |  |  | $ | 2,883  | 
|Obligations of states and political subdivisions  |  |                     | 147,732 |  |                   |   | 5,483  |           |  |   | 6,215            |  |  |           | 503    |  |                  |   | 153,947   |  |  |   | 5,986  | 
|Agency residential mortgage-backed securities     |  |                     | 642,864 |  |                   |   | 17,873 |           |  |   | 0                |  |  |           | 0      |  |                  |   | 642,864   |  |  |   | 17,873 | 
|Non-agency residential mortgage-backed securities |  |                     | 5,664   |  |                   |   | 124    |           |  |   | 109,272          |  |  |           | 12,303 |  |                  |   | 114,936   |  |  |   | 12,427 | 
|Other structured financial products               |  |                     | 0       |  |                   |   | 0      |           |  |   | 12,503           |  |  |           | 12,177 |  |                  |   | 12,503    |  |  |   | 12,177 | 
|Other debt securities                             |  |                     | 15,120  |  |                   |   | 630    |           |  |   | 1,480            |  |  |           | 300    |  |                  |   | 16,600    |  |  |   | 930    | 
|Other equity securities                           |  |                     | 666     |  |                   |   | 210    |           |  |   | 2,103            |  |  |           | 637    |  |                  |   | 2,769     |  |  |   | 847    | 
|                                                  |  |                     |         |  |                   |   |        |           |  |   |                  |  |  |           |        |  |                  |   |           |  |  |   |        | 
|                                                  |  | $                   | 926,664 |  |                   | $ | 27,203 |           |  | $ | 131,573          |  |  | $         | 25,920 |  |                  | $ | 1,058,237 |  |  | $ | 53,123 | 
|                                                  |  |                     |         |  |                   |   |        |           |  |   |                  |  |  |           |        |  |                  |   |           |  |  |   |        | 

Non-agency residential mortgage-backed securities(All of the 14 securities are in a loss
position, and nine of the securities are rated below investment grade). None of Susquehanna's non-agency residential mortgage-backed securities include subprime or Alt-A components. Management has analyzed the assets underlying these issues with
respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace
and not credit quality. However, Susquehannas analysis also concluded that three of these securities were other-than-temporarily impaired, and Susquehanna recorded other-than-temporary impairment losses as presented in the following table.

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

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



|                                                                                                                  |  |                            |       |  |                          |   |       |      |  |   |       |  |  |   |       | 
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- |  | ------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                                                                  |  | Three months endedJune 30, |       |  | Six months endedJune 30, |  
|                                                                                                                  |  | 2011                       |       |  | 2010                     |   |       | 2011 |  |   | 2010  | 
|Balance - beginning of period                                                                                     |  | $                          | 3,969 |  |                          | $ | 0     |      |  | $ | 1,737 |  |  | $ | 0     | 
|Additions:                                                                                                        |  |                            |       |  |                          |   |       |      |  |   |       |  |  |   |       | 
|Amount related to credit losses for which an other-than-temporary impairment was not previously recognized        |  |                            | 613   |  |                          | $ | 1,737 |      |  | $ | 2,576 |  |  | $ | 1,737 | 
|Additional amount related to credit losses for which an other-than-temporary impairment was previously recognized |  |                            | 0     |  |                          |   | 0     |      |  |   | 269   |  |  |   | 0     | 
|                                                                                                                  |  |                            |       |  |                          |   |       |      |  |   |       |  |  |   |       | 
|Balance - end of period                                                                                           |  | $                          | 4,582 |  |                          | $ | 1,737 |      |  | $ | 4,582 |  |  | $ | 1,737 | 
|                                                                                                                  |  |                            |       |  |                          |   |       |      |  |   |       |  |  |   |       | 

Susquehanna estimated the portion of loss attributable to credit using a discounted cash flow model.
Susquehanna, in conjunction with an independent third-party, estimated the expected cash flows of the underlying collateral using internal credit risk, interest rate risk, and prepayment risk models that incorporated managements best estimate
of current key assumptions, such as default rates, loss severity, and prepayment rates. Assumptions used can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower
characteristics, and collateral type. The distribution of underlying cash flows is determined in accordance with the securitys indenture. Expected principal and interest cash flows on an other-than-temporarily impaired debt security are
discounted using the book yield of that debt security.



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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)



Based on the expected cash flows derived from the model, Susquehanna expects to recover
the aggregate unrealized loss in accumulated other comprehensive income ($963 at June 30, 2011). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:



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



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

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

Other structured financial products.Other structured financial products are
comprised of pooled trust preferred securities. All four of these securities are in unrealized loss positions with an aggregate unrealized loss of $10,622 and are rated below investment grade. Management has analyzed the assets underlying these
securities with respect to interest deferrals and defaults, collateral coverage, and current levels of subordination and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace
and not credit quality.

Susquehanna determines whether it expects to recover the entire amortized cost basis by comparing the
present value of the expected cash flows to be collected with the amortized cost basis. To make this comparison, Susquehanna works with a third-party financial advisory firm to determine (a) the estimation of cash flows, (b) the
application of the cash flows to the percent owned, and (c) the assessment of other-than-temporary impairment.

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

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

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

The discount rate that is applied to the projected cash flows for the specific class is calculated using a spread to the current swap
curve. The swap curve gives a market perspective of the term structure of interest rates and on credit spreads. The determination of the discount rate used in Susquehannas valuation is based upon the referenced swap curve plus an additional
credit spread based upon the credit rating of the class. Lower rated classes would have a wider implied credit spread. These multiple discount rates are then applied to the projected cash flows in determining the estimated value.



14



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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)



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

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



|                                                                              |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |         |  
|----------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|As of June 30, 2011                                                           |  | Pooled Trust #1 |         |   | Pooled Trust #2 |   |         | Pooled Trust #3 |  |   | Pooled Trust #4 |  
|Class                                                                         |  |                 | B       |   |                 |   | B       |                 |  |   | B               |   |  |   | A2L     |  
|Class face value                                                              |  | $               | 35,000  |   |                 | $ | 57,840  |                 |  | $ | 87,309          |   |  | $ | 45,500  |  
|                                                                              |  |                 |         |  
|Book value                                                                    |  | $               | 3,000   |   |                 | $ | 7,032   |                 |  | $ | 7,973           |   |  | $ | 6,750   |  
|Fair value                                                                    |  |                 | 1,880   |   |                 |   | 3,997   |                 |  |   | 4,547           |   |  |   | 3,709   |  
|                                                                              |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |         |  
|Unrealized loss                                                               |  | $               | (1,120  | ) |                 | $ | (3,035  | )               |  | $ | (3,426          | ) |  | $ | (3,041  | )
|                                                                              |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |         |  
|Present value of expected cash flows for all tranches within the Pooled Trust |  | $               | 463,202 |   |                 | $ | 403,145 |                 |  | $ | 661,743         |   |  | $ | 386,475 |  
|Aggregate face value of Susquehannas tranche and all senior tranches (1)     |  |                 | 369,846 |   |                 |   | 356,122 |                 |  |   | 541,503         |   |  |   | 345,717 |  
|Lowest credit rating assigned                                                 |  |                 | CCC-    |   |                 |   | Caa3    |                 |  |   | Ca              |   |  |   | CCC-    |  
|Original collateral                                                           |  | $               | 623,984 |   |                 | $ | 501,470 |                 |  | $ | 700,535         |   |  | $ | 487,680 |  
|Performing collateral                                                         |  |                 | 391,728 |   |                 |   | 300,200 |                 |  |   | 507,406         |   |  |   | 315,700 |  
|Actual defaults                                                               |  |                 | 3,000   |   |                 |   | 27,580  |                 |  |   | 93,500          |   |  |   | 61,500  |  
|Actual deferrals                                                              |  |                 | 77,400  |   |                 |   | 144,690 |                 |  |   | 98,900          |   |  |   | 93,480  |  
|Projected future defaults                                                     |  |                 | 62,829  |   |                 |   | 90,695  |                 |  |   | 51,406          |   |  |   | 59,880  |  
|Actual defaults as a % of original collateral                                 |  |                 | 0.5     | % |                 |   | 5.5     | %               |  |   | 13.3            | % |  |   | 12.6    | %
|Actual deferrals as a % of original collateral (2)                            |  |                 | 12.4    |   |                 |   | 28.9    |                 |  |   | 14.1            |   |  |   | 19.2    |  
|                                                                              |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |         |  
|Actual defaults and deferrals as a % of original collateral                   |  |                 | 12.9    | % |                 |   | 34.4    | %               |  |   | 27.4            | % |  |   | 31.8    | %
|                                                                              |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |         |  
|Projected future defaults as a % of original collateral (3)                   |  |                 | 10.1    | % |                 |   | 18.1    | %               |  |   | 7.3             | % |  |   | 12.3    | %
|Actual institutions deferring and defaulted as a % of total institutions      |  |                 | 13.4    |   |                 |   | 37.5    |                 |  |   | 31.1            |   |  |   | 38.0    |  
|Projected future defaults as a % of performing collateral plus deferrals      |  |                 | 13.4    |   |                 |   | 20.4    |                 |  |   | 8.5             |   |  |   | 14.6    |  



|(1) | Susquehanna determines whether it expects to recover the entire amortized cost basis by comparing the present value of the expected cash flows to be collected with the
amortized cost basis, using documented assumptions. As of June 30, 2011, the present value of the current estimated cash flows is equal to or greater than the face amount of Susquehannas specific class plus all senior classes and
consequently, there is no other-than-temporary impairment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes current interest deferrals for the quarter for those institutions deferring as of the date of the assessment of the other-than-temporary impairment. Current
deferrals are assumed to continue for the full twenty quarters if the institutions are not projected to default prior to that time.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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)



|(3) | Includes those institutions that are performing but are not projected to continue to perform and includes those institutions that are currently deferring interest that
are projected to default, based upon third- party proprietary valuation methodology used to determine future defaults. Creditworthiness of each underlying issue in the collateralized debt obligation is determined using publicly available data.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

NOTE 4. Loans and Leases

Loans and Leases, Net of Unearned Income



|                                                                   |  |              |           |  |                  |   |           | 
|------------------------------------------------------------------ |  | ------------ | --------- |  | ---------------- | - | --------- | 
|                                                                   |  | June 30,2011 |           |  | December 31,2010 |  
|Commercial, financial, and agricultural                            |  | $            | 1,793,490 |  |                  | $ | 1,816,519 | 
|Real estate - construction                                         |  |              | 775,096   |  |                  |   | 877,223   | 
|Real estate secured - residential                                  |  |              | 2,704,802 |  |                  |   | 2,666,692 | 
|Real estate secured - commercial                                   |  |              | 2,999,986 |  |                  |   | 2,998,176 | 
|Consumer                                                           |  |              | 665,602   |  |                  |   | 603,084   | 
|Leases                                                             |  |              | 697,211   |  |                  |   | 671,503   | 
|                                                                   |  |              |           |  |                  |   |           | 
|Total loans and leases                                             |  | $            | 9,636,187 |  |                  | $ | 9,633,197 | 
|                                                                   |  |              |           |  |                  |   |           | 
|Nonaccrual loans and leases                                        |  | $            | 190,733   |  |                  | $ | 196,895   | 
|Loans and leases contractually past due 90 days and still accruing |  |              | 18,268    |  |                  |   | 20,588    | 
|Troubled debt restructurings                                       |  |              | 62,143    |  |                  |   | 114,566   | 

Net Investment in Direct Financing Leases



|                                      |  |              |         |   |                  |   |         |  
|------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                      |  | June 30,2011 |         |   | December 31,2010 |  
|Minimum lease payments receivable     |  | $            | 487,297 |   |                  | $ | 461,569 |  
|Estimated residual value of leases    |  |              | 276,625 |   |                  |   | 276,911 |  
|Unearned income under lease contracts |  |              | (66,711 | ) |                  |   | (66,977 | )
|                                      |  |              |         |   |                  |   |         |  
|Total leases                          |  | $            | 697,211 |   |                  | $ | 671,503 |  
|                                      |  |              |         |   |                  |   |         |  



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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)



Allowance for Credit Losses and Recorded Investment in Financing Receivables

Three Months Ended June 30, 2011



|                             |  |            |         |   |                           |   |        |                                 |  |   |                                |   |  |          |         |   |        |   |       |             |  |   |        |   |  |   |     |  |  |   |         |  
|---------------------------- |  | ---------- | ------- | - | ------------------------- | - | ------ | ------------------------------- |  | - | ------------------------------ | - |  | -------- | ------- | - | ------ | - | ----- | ----------- |  | - | ------ | - |  | - | --- |  |  | - | ------- | -
|                             |  | Commercial |         |   | Real Estate -Construction |   |        | Real EstateSecured -Residential |  |   | Real EstateSecured -Commercial |   |  | Consumer |         |   | Leases |   |       | Unallocated |  |   | Total  |  
|Allowance for credit losses: |  |            |         |   |                           |   |        |                                 |  |   |                                |   |  |          |         |   |        |   |       |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance at April 1, 2011     |  | $          | 31,139  |   |                           | $ | 47,724 |                                 |  | $ | 28,909                         |   |  | $        | 73,856  |   |        | $ | 2,675 |             |  | $ | 8,876  |   |  | $ | 54  |  |  | $ | 193,233 |  
|Charge-offs                  |  |            | (10,048 | ) |                           |   | (8,978 | )                               |  |   | (5,648                         | ) |  |          | (10,654 | ) |        |   | (386  | )           |  |   | (1,397 | ) |  |   |     |  |  |   | (37,111 | )
|Recoveries                   |  |            | 910     |   |                           |   | 2,626  |                                 |  |   | 606                            |   |  |          | 187     |   |        |   | 319   |             |  |   | 522    |   |  |   |     |  |  |   | 5,170   |  
|Provision                    |  |            | 7,357   |   |                           |   | 3,060  |                                 |  |   | 6,123                          |   |  |          | 9,165   |   |        |   | 147   |             |  |   | 2,090  |   |  |   | 58  |  |  |   | 28,000  |  
|                             |  |            |         |   |                           |   |        |                                 |  |   |                                |   |  |          |         |   |        |   |       |             |  |   |        |   |  |   |     |  |  |   |         |  
|Balance at June 30, 2011     |  | $          | 29,358  |   |                           | $ | 44,432 |                                 |  | $ | 29,990                         |   |  | $        | 72,554  |   |        | $ | 2,755 |             |  | $ | 10,091 |   |  | $ | 112 |  |  | $ | 189,292 |  
|                             |  |            |         |   |                           |   |        |                                 |  |   |                                |   |  |          |         |   |        |   |       |             |  |   |        |   |  |   |     |  |  |   |         |  

Six Months Ended June 30, 2011



|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|------------------------------------- |  | ---------- | --------- | - | ------------------------- | - | ------- | ------------------------------- |  | - | ------------------------------ | - |  | -------- | --------- | - | ------ | - | ------- | ----------- |  | - | ------- | - |  | - | --- |  |  | - | --------- | -
|                                      |  | Commercial |           |   | Real Estate -Construction |   |         | Real EstateSecured -Residential |  |   | Real EstateSecured -Commercial |   |  | Consumer |           |   | Leases |   |         | Unallocated |  |   | Total   |  
|Allowance for credit losses:          |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Balance at January 1, 2011            |  | $          | 31,608    |   |                           | $ | 50,250  |                                 |  | $ | 28,320                         |   |  | $        | 70,137    |   |        | $ | 2,841   |             |  | $ | 8,643   |   |  | $ | 35  |  |  | $ | 191,834   |  
|Charge-offs                           |  |            | (14,941   | ) |                           |   | (19,962 | )                               |  |   | (10,128                        | ) |  |          | (26,734   | ) |        |   | (2,692  | )           |  |   | (3,140  | ) |  |   | 0   |  |  |   | (77,597   | )
|Recoveries                            |  |            | 2,103     |   |                           |   | 5,456   |                                 |  |   | 1,283                          |   |  |          | 1,825     |   |        |   | 546     |             |  |   | 842     |   |  |   | 0   |  |  |   | 12,055    |  
|Provision                             |  |            | 10,588    |   |                           |   | 8,688   |                                 |  |   | 10,515                         |   |  |          | 27,326    |   |        |   | 2,060   |             |  |   | 3,746   |   |  |   | 77  |  |  |   | 63,000    |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Balance at June 30, 2011              |  | $          | 29,358    |   |                           | $ | 44,432  |                                 |  | $ | 29,990                         |   |  | $        | 72,554    |   |        | $ | 2,755   |             |  | $ | 10,091  |   |  | $ | 112 |  |  | $ | 189,292   |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Balance at June 30, 2011:             |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Individually evaluated for impairment |  | $          | 3,535     |   |                           | $ | 3,212   |                                 |  | $ | 2,995                          |   |  | $        | 9,271     |   |        | $ | 0       |             |  | $ | 0       |   |  |   |     |  |  | $ | 19,013    |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Collectively evaluated for impairment |  | $          | 25,823    |   |                           | $ | 41,220  |                                 |  | $ | 26,995                         |   |  | $        | 63,283    |   |        | $ | 2,755   |             |  | $ | 10,091  |   |  | $ | 112 |  |  | $ | 170,279   |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Financing receivables:                |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Balance at June 30, 2011              |  | $          | 1,793,490 |   |                           | $ | 775,096 |                                 |  | $ | 2,704,802                      |   |  | $        | 2,999,986 |   |        | $ | 665,602 |             |  | $ | 697,211 |   |  |   |     |  |  | $ | 9,636,187 |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Balance at June 30, 2011:             |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Individually evaluated for impairment |  | $          | 21,983    |   |                           | $ | 44,062  |                                 |  | $ | 32,417                         |   |  | $        | 94,117    |   |        | $ | 148     |             |  | $ | 0       |   |  |   |     |  |  | $ | 192,727   |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  
|Collectively evaluated for impairment |  | $          | 1,771,507 |   |                           | $ | 731,034 |                                 |  | $ | 2,672,385                      |   |  | $        | 2,905,869 |   |        | $ | 665,454 |             |  | $ | 697,211 |   |  |   |     |  |  | $ | 9,443,460 |  
|                                      |  |            |           |   |                           |   |         |                                 |  |   |                                |   |  |          |           |   |        |   |         |             |  |   |         |   |  |   |     |  |  |   |           |  



17



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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)



Credit Quality Indicators at June 30, 2011

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade



|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|------------------- |  | ---------- | --------- |  | ----------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------ |  |  | - | --------- | 
|                    |  | Commercial |           |  | Real Estate -Construction (1) |   |         | Real Estate -Secured -Commercial (2) |  |   | TotalCommercialCredit Exposure | 
|Grade:              |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|Pass (3)            |  | $          | 1,670,777 |  |                               | $ | 526,220 |                                      |  | $ | 3,165,710                      |  |  | $ | 5,362,707 | 
|Special mention (4) |  |            | 49,968    |  |                               |   | 70,959  |                                      |  |   | 169,929                        |  |  |   | 290,856   | 
|Substandard (5)     |  |            | 72,745    |  |                               |   | 99,462  |                                      |  |   | 274,930                        |  |  |   | 447,137   | 
|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|Total               |  | $          | 1,793,490 |  |                               | $ | 696,641 |                                      |  | $ | 3,610,569                      |  |  | $ | 6,100,700 | 
|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 

Other Credit Exposure

Credit-risk Profile based on Payment Activity



|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 
|----------------- |  | --------------------------------- | --------- |  | -------- | - | ------- | ------ |  | - | ------------------------- |  |  | - | --------- | 
|                  |  | Real Estate -Secured -Residential |           |  | Consumer |   |         | Leases |  |   | Total OtherCreditExposure | 
|Performing        |  | $                                 | 2,136,236 |  |          | $ | 665,099 |        |  | $ | 692,961                   |  |  | $ | 3,494,296 | 
|Nonperforming (6) |  |                                   | 36,438    |  |          |   | 503     |        |  |   | 4,250                     |  |  |   | 41,191    | 
|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 
|Total             |  | $                                 | 2,172,674 |  |          | $ | 665,602 |        |  | $ | 697,211                   |  |  | $ | 3,535,487 | 
|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 

Credit Quality Indicators at December 31, 2010

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade



|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|------------------- |  | ---------- | --------- |  | ----------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------ |  |  | - | --------- | 
|                    |  | Commercial |           |  | Real Estate -Construction (1) |   |         | Real Estate -Secured -Commercial (2) |  |   | TotalCommercialCredit Exposure | 
|Grade:              |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|Pass (3)            |  | $          | 1,677,506 |  |                               | $ | 612,330 |                                      |  | $ | 3,134,762                      |  |  | $ | 5,424,598 | 
|Special mention (4) |  |            | 59,988    |  |                               |   | 64,283  |                                      |  |   | 201,833                        |  |  |   | 326,104   | 
|Substandard (5)     |  |            | 79,025    |  |                               |   | 125,672 |                                      |  |   | 280,287                        |  |  |   | 484,984   | 
|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 
|Total               |  | $          | 1,816,519 |  |                               | $ | 802,285 |                                      |  | $ | 3,616,882                      |  |  | $ | 6,235,686 | 
|                    |  |            |           |  |                               |   |         |                                      |  |   |                                |  |  |   |           | 

Other Credit Exposure

Credit-risk Profile based on Payment Activity



|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 
|----------------- |  | --------------------------------- | --------- |  | -------- | - | ------- | ------ |  | - | ------------------------- |  |  | - | --------- | 
|                  |  | Real Estate -Secured -Residential |           |  | Consumer |   |         | Leases |  |   | Total OtherCreditExposure | 
|Performing        |  | $                                 | 2,085,067 |  |          | $ | 600,627 |        |  | $ | 667,936                   |  |  | $ | 3,353,630 | 
|Nonperforming (6) |  |                                   | 37,857    |  |          |   | 2,457   |        |  |   | 3,567                     |  |  |   | 43,881    | 
|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 
|Total             |  | $                                 | 2,122,924 |  |          | $ | 603,084 |        |  | $ | 671,503                   |  |  | $ | 3,397,511 | 
|                  |  |                                   |           |  |          |   |         |        |  |   |                           |  |  |   |           | 



|(1) | Includes only construction loans granted to commercial customers. Construction loans for individuals are included in Real Estate  Secured  Residential,
below.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes loans obtained for commercial purposes that are also secured by residential real estate.
|--- | -------------------------------------------------------------------------------------------------

|(3) | Includes loans of acceptable risk. Possibility of loss is considered unlikely.
|--- | ------------------------------------------------------------------------------

|(4) | Includes loans considered potentially weak; however, no loss of principal or interest is anticipated.
|--- | -----------------------------------------------------------------------------------------------------



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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)



|(5) | Includes loans that are inadequately protected by the current net-worth and paying capacity of the borrower or by the collateral pledged, if any. Loss of principal or
interest is considered reasonably possible or likely.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes loans that are on non-accrual status or past due 90 days or more.
|--- | --------------------------------------------------------------------------

Age Analysis of Past Due Financing Receivables as of June 30, 2011

Financing Receivables that are Accruing



|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |        |  |                           |   |           |  |  |   |           | 
|--------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ------ | ------------------- |  | - | ------------- |  |  | ------- | ------ |  | ------------------------- | - | --------- |  |  | - | --------- | 
|                                  |  | 30-59 DaysPast Due |        |  | 60-89 DaysPast Due |   |        | Greater than90 Days |  |   | TotalPast Due |  |  | Current |        |  | TotalFinancingReceivables |  
|Commercial                        |  | $                  | 6,011  |  |                    | $ | 2,206  |                     |  | $ | 1,466         |  |  | $       | 9,683  |  |                           | $ | 1,765,587 |  |  | $ | 1,775,270 | 
|Real estate - construction        |  |                    | 232    |  |                    |   | 3,181  |                     |  |   | 3,124         |  |  |         | 6,537  |  |                           |   | 724,254   |  |  |   | 730,791   | 
|Real estate secured - residential |  |                    | 5,302  |  |                    |   | 2,204  |                     |  |   | 7,074         |  |  |         | 14,581 |  |                           |   | 2,639,174 |  |  |   | 2,653,755 | 
|Real estate secured - commercial  |  |                    | 8,443  |  |                    |   | 7,088  |                     |  |   | 5,667         |  |  |         | 21,197 |  |                           |   | 2,905,444 |  |  |   | 2,926,641 | 
|Consumer                          |  |                    | 4,543  |  |                    |   | 1,313  |                     |  |   | 503           |  |  |         | 6,358  |  |                           |   | 659,244   |  |  |   | 665,602   | 
|Leases                            |  |                    | 2,039  |  |                    |   | 1,157  |                     |  |   | 434           |  |  |         | 3,631  |  |                           |   | 689,764   |  |  |   | 693,395   | 
|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |        |  |                           |   |           |  |  |   |           | 
|Total                             |  | $                  | 26,570 |  |                    | $ | 17,149 |                     |  | $ | 18,268        |  |  | $       | 61,987 |  |                           | $ | 9,383,467 |  |  | $ | 9,445,454 | 
|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |        |  |                           |   |           |  |  |   |           | 
|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |        |  |                           |   |           |  |  |   |           | 

Financing Receivables that are Nonaccruing



|                                  |  |                    |       |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 
|--------------------------------- |  | ------------------ | ----- |  | ------------------ | - | ----- | ------------------- |  | - | ------------- |  |  | ------- | ------- |  | ------------------------- | - | ------ |  |  | - | ------- | 
|                                  |  | 30-59 DaysPast Due |       |  | 60-89 DaysPast Due |   |       | Greater than90 Days |  |   | TotalPast Due |  |  | Current |         |  | TotalFinancingReceivables |  
|Commercial                        |  | $                  | 0     |  |                    | $ | 123   |                     |  | $ | 10,112        |  |  | $       | 10,235  |  |                           | $ | 7,984  |  |  | $ | 18,219  | 
|Real estate - construction        |  |                    | 0     |  |                    |   | 0     |                     |  |   | 42,532        |  |  |         | 42,532  |  |                           |   | 1,773  |  |  |   | 44,305  | 
|Real estate secured - residential |  |                    | 1,354 |  |                    |   | 1,654 |                     |  |   | 46,905        |  |  |         | 49,913  |  |                           |   | 1,134  |  |  |   | 51,047  | 
|Real estate secured - commercial  |  |                    | 1,297 |  |                    |   | 809   |                     |  |   | 35,582        |  |  |         | 37,687  |  |                           |   | 35,659 |  |  |   | 73,346  | 
|Leases                            |  |                    | 0     |  |                    |   | 49    |                     |  |   | 2,227         |  |  |         | 2,277   |  |                           |   | 1,539  |  |  |   | 3,816   | 
|                                  |  |                    |       |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 
|Total                             |  | $                  | 2,651 |  |                    | $ | 2,635 |                     |  | $ | 137,358       |  |  | $       | 142,644 |  |                           | $ | 48,089 |  |  | $ | 190,733 | 
|                                  |  |                    |       |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 



19



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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)



Age Analysis of Past Due Financing Receivables, as of December 31, 2010

Financing Receivables that are Accruing



|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |         |  |                           |   |           |  |  |   |           | 
|--------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ------ | ------------------- |  | - | ------------- |  |  | ------- | ------- |  | ------------------------- | - | --------- |  |  | - | --------- | 
|                                  |  | 30-59 DaysPast Due |        |  | 60-89 DaysPast Due |   |        | Greater than90 Days |  |   | TotalPast Due |  |  | Current |         |  | TotalFinancingReceivables |  
|Commercial                        |  | $                  | 12,808 |  |                    | $ | 5,190  |                     |  | $ | 947           |  |  | $       | 18,945  |  |                           | $ | 1,777,563 |  |  | $ | 1,796,507 | 
|Real estate - construction        |  |                    | 2,466  |  |                    |   | 2,845  |                     |  |   | 751           |  |  |         | 6,062   |  |                           |   | 813,382   |  |  |   | 819,444   | 
|Real estate secured - residential |  |                    | 18,466 |  |                    |   | 6,923  |                     |  |   | 12,724        |  |  |         | 38,113  |  |                           |   | 2,577,605 |  |  |   | 2,615,719 | 
|Real estate secured - commercial  |  |                    | 12,324 |  |                    |   | 8,384  |                     |  |   | 2,961         |  |  |         | 23,669  |  |                           |   | 2,909,195 |  |  |   | 2,932,863 | 
|Consumer                          |  |                    | 6,385  |  |                    |   | 828    |                     |  |   | 2,455         |  |  |         | 9,668   |  |                           |   | 593,415   |  |  |   | 603,083   | 
|Leases                            |  |                    | 5,274  |  |                    |   | 3,126  |                     |  |   | 750           |  |  |         | 9,150   |  |                           |   | 659,536   |  |  |   | 668,686   | 
|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |         |  |                           |   |           |  |  |   |           | 
|Total                             |  | $                  | 57,723 |  |                    | $ | 27,296 |                     |  | $ | 20,588        |  |  | $       | 105,607 |  |                           | $ | 9,330,696 |  |  | $ | 9,436,302 | 
|                                  |  |                    |        |  |                    |   |        |                     |  |   |               |  |  |         |         |  |                           |   |           |  |  |   |           | 

Financing Receivables that are Nonaccruing



|                                  |  |                    |        |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 
|--------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ----- | ------------------- |  | - | ------------- |  |  | ------- | ------- |  | ------------------------- | - | ------ |  |  | - | ------- | 
|                                  |  | 30-59 DaysPast Due |        |  | 60-89 DaysPast Due |   |       | Greater than90 Days |  |   | TotalPast Due |  |  | Current |         |  | TotalFinancingReceivables |  
|Commercial                        |  | $                  | 1,392  |  |                    | $ | 365   |                     |  | $ | 14,227        |  |  | $       | 15,983  |  |                           | $ | 4,029  |  |  | $ | 20,012  | 
|Real estate - construction        |  |                    | 2,418  |  |                    |   | 2,513 |                     |  |   | 45,417        |  |  |         | 50,348  |  |                           |   | 7,431  |  |  |   | 57,779  | 
|Real estate secured - residential |  |                    | 2,196  |  |                    |   | 615   |                     |  |   | 36,479        |  |  |         | 39,290  |  |                           |   | 11,683 |  |  |   | 50,973  | 
|Real estate secured - commercial  |  |                    | 8,812  |  |                    |   | 4,666 |                     |  |   | 38,947        |  |  |         | 52,425  |  |                           |   | 12,888 |  |  |   | 65,313  | 
|Consumer                          |  |                    | 0      |  |                    |   | 0     |                     |  |   | 0             |  |  |         | 0       |  |                           |   | 1      |  |  |   | 1       | 
|Leases                            |  |                    | 0      |  |                    |   | 178   |                     |  |   | 1,461         |  |  |         | 1,639   |  |                           |   | 1,178  |  |  |   | 2,817   | 
|                                  |  |                    |        |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 
|Total                             |  | $                  | 14,818 |  |                    | $ | 8,337 |                     |  | $ | 136,531       |  |  | $       | 159,685 |  |                           | $ | 37,210 |  |  | $ | 196,895 | 
|                                  |  |                    |        |  |                    |   |       |                     |  |   |               |  |  |         |         |  |                           |   |        |  |  |   |         | 



20



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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)



Impaired Loans at June 30, 2011



|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|---------------------------------------------- |  | ---------------------- | ------- | --- | ---------------- | - | ------ | ----------------------------- |  | - | ------------------------ |  |  | - | ----- | 
|                                               |  | UnpaidPrincipalBalance |         |     | RelatedAllowance |   |        | AverageUnpaidPrincipalBalance |  |   | InterestIncomeRecognized | 
|Impaired loans without a related reserve:      |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  | $                      | 10,824  |     |                  |   |        |                               |  | $ | 13,419                   |  |  | $ | 134   | 
|Real estate - construction                     |  |                        | 11,824  |     |                  |   |        |                               |  |   | 24,644                   |  |  |   | 137   | 
|Real estate secured - residential              |  |                        | 18,602  |     |                  |   |        |                               |  |   | 15,501                   |  |  |   | 267   | 
|Real estate secured - commercial               |  |                        | 38,397  |     |                  |   |        |                               |  |   | 45,200                   |  |  |   | 448   | 
|Consumer                                       |  |                        | 148     |     |                  |   |        |                               |  |   | 74                       |  |  |   | 4     | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans without a related reserve |  |                        | 79,795  | (1) |                  |   |        |                               |  |   | 98,838                   |  |  |   | 990   | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Impaired loans with a related reserve:         |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  |                        | 11,159  |     |                  | $ | 3,535  |                               |  |   | 11,092                   |  |  |   | 135   | 
|Real estate - construction                     |  |                        | 32,238  |     |                  |   | 3,212  |                               |  |   | 28,453                   |  |  |   | 91    | 
|Real estate secured - residential              |  |                        | 13,815  |     |                  |   | 2,995  |                               |  |   | 17,540                   |  |  |   | 260   | 
|Real estate secured - commercial               |  |                        | 55,720  |     |                  |   | 9,271  |                               |  |   | 65,729                   |  |  |   | 808   | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans with a related reserve    |  |                        | 112,932 | (2) |                  |   | 19,013 |                               |  |   | 122,814                  |  |  |   | 1,294 | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans:                          |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  |                        | 21,983  |     |                  |   | 3,535  |                               |  |   | 24,511                   |  |  |   | 269   | 
|Real estate - construction                     |  |                        | 44,062  |     |                  |   | 3,212  |                               |  |   | 53,097                   |  |  |   | 228   | 
|Real estate secured - residential              |  |                        | 32,417  |     |                  |   | 2,995  |                               |  |   | 33,041                   |  |  |   | 527   | 
|Real estate secured - commercial               |  |                        | 94,117  |     |                  |   | 9,271  |                               |  |   | 110,929                  |  |  |   | 1,256 | 
|Consumer                                       |  |                        | 148     |     |                  |   | 0      |                               |  |   | 74                       |  |  |   | 4     | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans                           |  | $                      | 192,727 |     |                  | $ | 19,013 |                               |  | $ | 221,652                  |  |  | $ | 2,284 | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 



|(1) | $32,894 of the $79,795 total impaired loans without a related reserve represents loans which had been written down to the fair value of the collateral through direct
charge-offs of $49,914.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Charge-offs related to these loans totaled $37,204.
|--- | ---------------------------------------------------



21



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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)



Impaired Loans at December 31, 2010



|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|---------------------------------------------- |  | ---------------------- | ------- | --- | ---------------- | - | ------ | ----------------------------- |  | - | ------------------------ |  |  | - | ----- | 
|                                               |  | UnpaidPrincipalBalance |         |     | RelatedAllowance |   |        | AverageUnpaidPrincipalBalance |  |   | InterestIncomeRecognized | 
|Impaired loans without a related reserve:      |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  | $                      | 10,071  |     |                  |   |        |                               |  | $ | 24,816                   |  |  | $ | 907   | 
|Real estate - construction                     |  |                        | 31,827  |     |                  |   |        |                               |  |   | 43,857                   |  |  |   | 652   | 
|Real estate secured - residential              |  |                        | 10,624  |     |                  |   |        |                               |  |   | 10,703                   |  |  |   | 594   | 
|Real estate secured - commercial               |  |                        | 59,953  |     |                  |   |        |                               |  |   | 50,434                   |  |  |   | 1,591 | 
|Consumer                                       |  |                        | 264     |     |                  |   |        |                               |  |   | 100                      |  |  |   | 3     | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans without a related reserve |  |                        | 112,739 | (1) |                  |   |        |                               |  |   | 129,910                  |  |  |   | 3,747 | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Impaired loans with a related reserve:         |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  |                        | 15,497  |     |                  | $ | 6,343  |                               |  |   | 20,078                   |  |  |   | 406   | 
|Real estate - construction                     |  |                        | 31,483  |     |                  |   | 6,986  |                               |  |   | 39,053                   |  |  |   | 307   | 
|Real estate secured - residential              |  |                        | 16,331  |     |                  |   | 3,273  |                               |  |   | 13,245                   |  |  |   | 470   | 
|Real estate secured - commercial               |  |                        | 70,606  |     |                  |   | 13,627 |                               |  |   | 60,766                   |  |  |   | 1,747 | 
|Consumer                                       |  |                        | 198     |     |                  |   | 68     |                               |  |   | 222                      |  |  |   | 13    | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans with a related reserve    |  |                        | 134,115 | (2) |                  |   | 30,297 |                               |  |   | 133,364                  |  |  |   | 2,943 | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans:                          |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Commercial, financial, and agricultural        |  |                        | 25,568  |     |                  |   | 6,343  |                               |  |   | 44,894                   |  |  |   | 1,313 | 
|Real estate - construction                     |  |                        | 63,310  |     |                  |   | 6,986  |                               |  |   | 82,910                   |  |  |   | 959   | 
|Real estate secured - residential              |  |                        | 26,955  |     |                  |   | 3,273  |                               |  |   | 23,948                   |  |  |   | 1,064 | 
|Real estate secured - commercial               |  |                        | 130,559 |     |                  |   | 13,627 |                               |  |   | 111,200                  |  |  |   | 3,338 | 
|Consumer                                       |  |                        | 462     |     |                  |   | 68     |                               |  |   | 322                      |  |  |   | 16    | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 
|Total impaired loans                           |  | $                      | 246,854 |     |                  | $ | 30,297 |                               |  | $ | 263,274                  |  |  | $ | 6,690 | 
|                                               |  |                        |         |     |                  |   |        |                               |  |   |                          |  |  |   |       | 



|(1) | $67,496 of the $112,739 total impaired loans without a related reserve represents loans which had been written down to the fair value of the collateral through direct
charge-offs of $65,617.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Charge-offs related to these loans totaled $39,962.
|--- | ---------------------------------------------------

Financing Receivables on Nonaccrual Status



|                                        |  |              |         |  |                  |   |         | 
|--------------------------------------- |  | ------------ | ------- |  | ---------------- | - | ------- | 
|                                        |  | June 30,2011 |         |  | December 31,2010 |  
|Commercial, financial, and agricultural |  | $            | 18,219  |  |                  | $ | 20,012  | 
|Real estate - construction              |  |              | 44,305  |  |                  |   | 57,779  | 
|Real estate secured - residential       |  |              | 51,047  |  |                  |   | 50,973  | 
|Real estate secured - commercial        |  |              | 73,346  |  |                  |   | 65,313  | 
|Consumer                                |  |              | 0       |  |                  |   | 1       | 
|Leases                                  |  |              | 3,816   |  |                  |   | 2,817   | 
|                                        |  |              |         |  |                  |   |         | 
|Total nonaccrual financing receivables  |  | $            | 190,733 |  |                  | $ | 196,895 | 
|                                        |  |              |         |  |                  |   |         | 

NOTE 5. 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 tests in the second quarter of 2011 and determined that the fair value of each of
its reporting units exceeded its book value and that there was no goodwill impairment.



22



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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)



Bank Reporting Unit

Goodwill assigned to the bank reporting unit at both May 31, 2011 and 2010 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 information pertaining to recent non-distressed sales of financial institutions in Susquehanna's market. Susquehanna considered two key ratios to measure goodwill of the bank reporting unit for impairment: price
to book and price to tangible book. In keeping with the investment communitys current valuations of financial institutions, Susquehanna gave no consideration to the price to earnings ratio. The following table shows the ratios used at
May 31, 2011 and 2010.



|                       |  |              |       |  |              |  |       | 
|---------------------- |  | ------------ | ----- |  | ------------ |  | ----- | 
|                       |  | Annual       |       |  | Annual       | 
|Ratio                  |  | May 31, 2011 |       |  | May 31, 2010 | 
|Price to book          |  |              | 1.36X |  |              |  | 1.41X | 
|Price to tangible book |  |              | 1.60X |  |              |  | 1.60X | 

Fair value of the bank reporting unit exceeded carrying value by 13.0% at May 31, 2011 and by 14.2%
at May 31, 2010.

Wealth Management Reporting Unit

Goodwill assigned to the wealth management reporting unit at both May 31, 2011 and 2010 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, 2011 and 2010.



|                                      |  |              |      |   |              |  |      |  
|------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | -
|                                      |  | Annual       |      |   | Annual       | 
|Factor                                |  | May 31, 2011 |      |   | May 31, 2010 | 
|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 59.7% at May 31, 2011
and by 53.6% at May 31, 2010.

Property and Casualty Insurance Reporting Unit

Goodwill assigned to the property and casualty insurance reporting unit at both May 31, 2011 and 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, 2011 and 2010.



|                         |  |              |       |  |              |  |       | 
|------------------------ |  | ------------ | ----- |  | ------------ |  | ----- | 
|                         |  | Annual       |       |  | Annual       | 
|Ratio                    |  | May 31, 2011 |       |  | May 31, 2010 | 
|Average price to book    |  |              | 1.23X |  |              |  | 1.06X | 
|Median price to earnings |  |              | 13.8X |  |              |  | 8.5X  | 

Fair value of the property and casualty insurance reporting unit exceeded carrying value by 48.4% at
May 31, 2011 and by 33.9% at May 31, 2010.



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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 6. Borrowings

Other short-term borrowings



|                                            |  |              |         |  |                  |   |         | 
|------------------------------------------- |  | ------------ | ------- |  | ---------------- | - | ------- | 
|                                            |  | June 30,2011 |         |  | December 31,2010 |  
|Securities sold under repurchase agreements |  | $            | 305,981 |  |                  | $ | 306,423 | 
|Federal funds purchased                     |  |              | 323,000 |  |                  |   | 458,000 | 
|Treasury tax and loan notes                 |  |              | 6,202   |  |                  |   | 6,200   | 
|                                            |  |              |         |  |                  |   |         | 
|Total other short-term borrowings           |  | $            | 635,183 |  |                  | $ | 770,623 | 
|                                            |  |              |         |  |                  |   |         | 

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, 2011 and 2010.

Basic earnings per common share



|                                             |  |                             |         |  |                           |   |         |      |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | --------------------------- | ------- |  | ------------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                             |  | Three Months Ended June 30, |         |  | Six Months Ended June 30, |  
|                                             |  | 2011                        |         |  | 2010                      |   |         | 2011 |  |   | 2010    | 
|Net income applicable to common shareholders |  | $                           | 11,055  |  |                           | $ | (1,363  | )    |  | $ | 20,816  |  |  | $ | 1,952   | 
|Average common shares outstanding            |  |                             | 129,761 |  |                           |   | 129,630 |      |  |   | 129,744 |  |  |   | 112,207 | 
|Basic earnings per common share              |  | $                           | 0.09    |  |                           | $ | (0.01   | )    |  | $ | 0.16    |  |  | $ | 0.02    | 

Diluted earnings per common share



|                                                |  |                             |         |  |                           |   |         |      |  |   |         |  |  |   |         | 
|----------------------------------------------- |  | --------------------------- | ------- |  | ------------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                |  | Three Months Ended June 30, |         |  | Six Months Ended June 30, |  
|                                                |  | 2011                        |         |  | 2010                      |   |         | 2011 |  |   | 2010    | 
|Net income available to common shareholders     |  | $                           | 11,055  |  |                           | $ | (1,363  | )    |  | $ | 20,816  |  |  | $ | 1,952   | 
|Average common shares outstanding               |  |                             | 129,761 |  |                           |   | 129,630 |      |  |   | 129,744 |  |  |   | 112,207 | 
|Dilutive potential common shares                |  |                             | 71      |  |                           |   | 0       |      |  |   | 82      |  |  |   | 26      | 
|                                                |  |                             |         |  |                           |   |         |      |  |   |         |  |  |   |         | 
|Total diluted average common shares outstanding |  |                             | 129,832 |  |                           |   | 129,630 |      |  |   | 129,826 |  |  |   | 112,233 | 
|                                                |  |                             |         |  |                           |   |         |      |  |   |         |  |  |   |         | 
|Diluted earnings per common share               |  | $                           | 0.09    |  |                           | $ | (0.01   | )    |  | $ | 0.16    |  |  | $ | 0.02    | 

For the three months ended June 30, 2011 and 2010, average options to purchase 2,373 shares and
2,301 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, 2011 and 2010, warrants to purchase 0
shares and 3,028 shares of common stock, respectively, were outstanding but were not included in the computation of diluted EPS because the warrants' common stock equivalents were antidilutive.

For the six months ended June 30, 2011 and 2010, average options to purchase 2,157 shares and 2,075 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, 2011 and 2010, warrants to purchase 0 shares and 3,028 shares of common
stock, respectively, 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)



NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost



|                                              |  |                             |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 
|--------------------------------------------- |  | --------------------------- | ------ | - | ------------------------------------- | - | ------ | ---------------------------- |  | - | ---- |  |  | ---- | --- |  | ---- | - | --- |  |  | - | --- | 
|                                              |  | Three Months Ended June 30, |       
|                                              |  | Pension Benefits            |        |   | Supplemental ExecutiveRetirement Plan |   |        | OtherPostretirement Benefits | 
|                                              |  | 2011                        |        |   | 2010                                  |   |        | 2011                         |  |   | 2010 |  |  | 2011 |     |  | 2010 |  
|Service cost                                  |  | $                           | 1,248  |   |                                       | $ | 1,401  |                              |  | $ | 31   |  |  | $    | 33  |  |      | $ | 194 |  |  | $ | 191 | 
|Interest cost                                 |  |                             | 1,694  |   |                                       |   | 1,589  |                              |  |   | 71   |  |  |      | 73  |  |      |   | 185 |  |  |   | 193 | 
|Expected return on plan assets                |  |                             | (2,563 | ) |                                       |   | (2,437 | )                            |  |   | 0    |  |  |      | 0   |  |      |   | 0   |  |  |   | 0   | 
|Amortization of prior service cost            |  |                             | 6      |   |                                       |   | 6      |                              |  |   | 29   |  |  |      | 29  |  |      |   | 16  |  |  |   | 16  | 
|Amortization of transition obligation (asset) |  |                             | 0      |   |                                       |   | 0      |                              |  |   | 0    |  |  |      | 0   |  |      |   | 28  |  |  |   | 28  | 
|Amortization of net actuarial loss            |  |                             | 1,020  |   |                                       |   | 595    |                              |  |   | 36   |  |  |      | 25  |  |      |   | 0   |  |  |   | 0   | 
|Curtailments/settlements                      |  |                             | 0      |   |                                       |   | 0      |                              |  |   | 0    |  |  |      | 0   |  |      |   | 0   |  |  |   | 0   | 
|                                              |  |                             |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 
|Net periodic benefit cost                     |  | $                           | 1,405  |   |                                       | $ | 1,154  |                              |  | $ | 167  |  |  | $    | 160 |  |      | $ | 423 |  |  | $ | 428 | 
|                                              |  |                             |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 



|                                              |  |                           |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 
|--------------------------------------------- |  | ------------------------- | ------ | - | ------------------------------------- | - | ------ | ---------------------------- |  | - | ---- |  |  | ---- | --- |  | ---- | - | --- |  |  | - | --- | 
|                                              |  | Six Months Ended June 30, |       
|                                              |  | Pension Benefits          |        |   | Supplemental ExecutiveRetirement Plan |   |        | OtherPostretirement Benefits | 
|                                              |  | 2011                      |        |   | 2010                                  |   |        | 2011                         |  |   | 2010 |  |  | 2011 |     |  | 2010 |  
|Service cost                                  |  | $                         | 2,496  |   |                                       | $ | 2,802  |                              |  | $ | 62   |  |  | $    | 66  |  |      | $ | 388 |  |  | $ | 382 | 
|Interest cost                                 |  |                           | 3,388  |   |                                       |   | 3,178  |                              |  |   | 142  |  |  |      | 146 |  |      |   | 370 |  |  |   | 386 | 
|Expected return on plan assets                |  |                           | (5,126 | ) |                                       |   | (4,874 | )                            |  |   | 0    |  |  |      | 0   |  |      |   | 0   |  |  |   | 0   | 
|Amortization of prior service cost            |  |                           | 12     |   |                                       |   | 12     |                              |  |   | 58   |  |  |      | 58  |  |      |   | 32  |  |  |   | 32  | 
|Amortization of transition obligation (asset) |  |                           | 0      |   |                                       |   | 0      |                              |  |   | 0    |  |  |      | 0   |  |      |   | 56  |  |  |   | 56  | 
|Amortization of net actuarial loss            |  |                           | 2,040  |   |                                       |   | 1,190  |                              |  |   | 72   |  |  |      | 50  |  |      |   | 0   |  |  |   | 0   | 
|Curtailments/settlements                      |  |                           | 0      |   |                                       |   | 0      |                              |  |   | 0    |  |  |      | 0   |  |      |   | 0   |  |  |   | 0   | 
|                                              |  |                           |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 
|Net periodic benefit cost                     |  | $                         | 2,810  |   |                                       | $ | 2,308  |                              |  | $ | 334  |  |  | $    | 320 |  |      | $ | 846 |  |  | $ | 856 | 
|                                              |  |                           |        |   |                                       |   |        |                              |  |   |      |  |  |      |     |  |      |   |     |  |  |   |     | 

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to contribute $191 to its pension plans and $690 to its other postretirement
benefit plan in 2011. As of June 30, 2011, $96 of contributions have been made to its pension plans, and $345 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $95 to
fund its pension plans in 2011, for a total of $191, and an additional $345 to its other postretirement benefit plan, for a total of $690.

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



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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)



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. All derivatives are recorded at fair value.

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, 2011, Susquehanna had eight interest rate swaps with an aggregate notional amount of $667,227 that were designated as cash flow hedges of
interest-rate risk. One of these interest rate swaps, with a notional amount of $42,227 and a fair value of $98, relates to a consolidated variable interest entity.

The effective portion of changes in the fair value of derivatives designated and qualifying 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 2011, 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.

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 the next 12 months, Susquehanna estimates that $17,856 will be reclassified as an increase to interest expense.

Non-designated Derivatives

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.

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, 2011, Susquehanna had 86 derivative transactions related to this program with an aggregate notional amount of $495,811. For the first six months of 2011, Susquehanna recognized a net loss of $34
related to changes in fair value of the derivatives in this program. 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.

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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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)



| |  |  | 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2011, the fair value of derivatives in a net liability position, which includes accrued interest and any credit
valuation adjustments related to these agreements, was $40,712. At June 30, 2011, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $48,560. If Susquehanna had
breached any of the above provisions at June 30, 2011, 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 Instruments | 
|                                                                |  | June 30, 2011                         | 
|                                                                |  | Asset Derivatives                     |  |            | Liability Derivatives | 
|                                                                |  | Balance Sheet
Location                |  | Fair Value |                       |  | Balance Sheet
Location |                   | Fair Value |  
|Derivatives designated as hedging instruments                   |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Interest rate contracts                                         |  | Other assets                          |  | $          | 98                    |  |                        | Other liabilities |            | $ | 37,544 | 
|Derivatives not designated or qualifying as hedging instruments |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Interest rate contracts                                         |  | Other assets                          |  |            | 17,022                |  |                        | Other liabilities |            |   | 16,399 | 
|                                                                |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Total derivatives                                               |  |                                       |  | $          | 17,120                |  |                        |                   |            | $ | 53,943 | 
|                                                                |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|                                                                | 
|                                                                |  | December 31, 2010                     | 
|                                                                |  | Asset Derivatives                     |  |            | Liability Derivatives | 
|                                                                |  | Balance Sheet
Location                |  | Fair Value |                       |  | Balance Sheet
Location |                   | Fair Value |  
|Derivatives designated as hedging instruments                   |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Interest rate contracts                                         |  | Other assets                          |  | $          | 181                   |  |                        | Other liabilities |            | $ | 31,793 | 
|Derivatives not designated or qualifying as hedging instruments |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Interest rate contracts                                         |  | Other assets                          |  |            | 17,167                |  |                        | Other liabilities |            |   | 16,767 | 
|                                                                |  |                                       |  |            |                       |  |                        |                   |            |   |        | 
|Total derivatives                                               |  |                                       |  | $          | 17,348                |  |                        |                   |            | $ | 48,560 | 
|                                                                |  |                                       |  |            |                       |  |                        |                   |            |   |        | 



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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, 2011



|                                                                |  |                                                   |               |   |                                                             |   |                  |                                                           |  |   |                                                         |   |                                                       |               |  |   |     |  
|--------------------------------------------------------------- |  | ------------------------------------------------- | ------------- | - | ----------------------------------------------------------- | - | ---------------- | --------------------------------------------------------- |  | - | ------------------------------------------------------- | - | ----------------------------------------------------- | ------------- |  | - | --- | -
|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 GainRecognized inIncome(IneffectivePortion) |              
|Interest rate contracts:                                        |  | $                                                 | (8,610        | ) |                                                             |   | Interest expense |                                                           |  | $ | (6,149                                                  | ) |                                                       | Other expense |  | $ | 321 |  
|                                                                |  |                                                   |              
|Derivatives not designated or qualifying
as hedging instruments |  | Location of LossRecognized inIncome onDerivatives |               |   | Amount of LossRecognized inIncome onDerivatives             |   |                  |                                                           | 
|Interest rate contracts:                                        |  |                                                   | Other income  |   |                                                             | $ | (374             | )                                                         | 
|                                                                |  |                                                   | Other expense |   |                                                             |   | (121             | )                                                         | 
|Three months ended June 30, 2010                                |  |                                                   |               |   |                                                             |   |                 
|                                                                |  |                                                   |               |   |                                                            
|Derivatives in cash flow hedging
relationships                  |  | Amount of LossRecognized inOCI                    |               |   | 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 or qualifying
as hedging instruments |  | Location of LossRecognized inIncome onDerivatives |               |   | Amount of GainRecognized inIncome onDerivatives             |   |                  |                                                           | 
|Interest rate contracts:                                        |  |                                                   | Other income  |   |                                                             | $ | 625              |                                                           | 
|                                                                |  |                                                   |               |   |                                                            
|Six months ended June 30, 2011                                  |  |                                                   |               |   |                                                             |   |                  |                                                           |  |   |                                                         |   |                                                       |              
|                                                                |  |                                                   |               |   |                                                            
|Derivatives in cash flow hedging
relationships                  |  | Amount of LossRecognizedin
OCI                    |               |   | Location of LossReclassified fromAccumulated OCIinto Income |   |                  | Amount of LossReclassified fromAccumulated OCIinto Income |  |   | Location of GainRecognized inIncome(IneffectivePortion) |   | Amount of GainRecognized inIncome(IneffectivePortion) |              
|Interest rate contracts:                                        |  | $                                                 | (4,775        | ) |                                                             |   | Interest expense |                                                           |  | $ | (7,625                                                  | ) |                                                       | Other expense |  | $ | 218 |  
|                                                                |  |                                                   |              
|Derivatives not designated or qualifying
as hedging instruments |  | Location of LossRecognized inIncome onDerivatives |               |   | Amount of Gain(Loss) Recognizedin Income onDerivatives      |   |                  |                                                           | 
|Interest rate contracts:                                        |  |                                                   | Other income  |   |                                                             | $ | 515              |                                                           | 
|                                                                |  |                                                   | Other expense |   |                                                             |   | (123             | )                                                         | 



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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, 2010



|                                                                |  |                                                   |              |   |                                                             |   |                  |                                                           |  |   |                                                         |   |                                                       |               |  |   |      |  
|--------------------------------------------------------------- |  | ------------------------------------------------- | ------------ | - | ----------------------------------------------------------- | - | ---------------- | --------------------------------------------------------- |  | - | ------------------------------------------------------- | - | ----------------------------------------------------- | ------------- |  | - | ---- | -
|Derivatives in cash flow hedging
relationships                  |  | Amount of LossRecognized inOCI                    |              |   | Location of LossReclassified fromAccumulated OCIinto Income |   |                  | Amount of LossReclassified fromAccumulatedOCI into 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 or qualifying
as hedging instruments |  | Location of GainRecognized inIncome onDerivatives |              |   | Amount of GainRecognized inIncome onDerivatives             |   |                  |                                                           | 
|Interest rate contracts:                                        |  |                                                   | Other income |   |                                                             | $ | 71               |                                                           | 

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 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.

The following table presents quantitative information about delinquencies, net credit losses, and components of loan and
lease sales serviced by Susquehanna, including securitization transactions.



|                                   |  |                   |           |  |                   |   |           |                                |  |   |                   |  |  |                                  |         |  |      |   |        |  |  |   |        |  
|---------------------------------- |  | ----------------- | --------- |  | ----------------- | - | --------- | ------------------------------ |  | - | ----------------- |  |  | -------------------------------- | ------- |  | ---- | - | ------ |  |  | - | ------ | -
|                                   |  |                   |           |  |                   |   |           |                                |  |   |                   |  |  | For the Six MonthsEnded June 30, |        
|                                   |  | Principal Balance |           |  | Risk Assets (1)   |   |           | Net Credit Losses (Recoveries) | 
|                                   |  | June 30, 2011     |           |  | December 31, 2010 |   |           | June 30, 2011                  |  |   | December 31, 2010 |  |  | 2011                             |         |  | 2010 |  
|Loans and leases held in portfolio |  | $                 | 9,431,453 |  |                   | $ | 9,417,801 |                                |  | $ | 236,954           |  |  | $                                | 235,972 |  |      | $ | 65,542 |  |  | $ | 74,573 |  
|Home equity loans held by VIEs     |  |                   | 204,734   |  |                   |   | 215,396   |                                |  |   | 4,329             |  |  |                                  | 5,511   |  |      |   | 207    |  |  |   | 456    |  
|Leases serviced for others         |  |                   | 48        |  |                   |   | 2,548     |                                |  |   | 10                |  |  |                                  | 11      |  |      |   | 1      |  |  |   | (12    | )
|                                   |  |                   |           |  |                   |   |           |                                |  |   |                   |  |  |                                  |         |  |      |   |        |  |  |   |        |  
|Total loans and leases serviced    |  | $                 | 9,636,235 |  |                   | $ | 9,635,745 |                                |  | $ | 241,293           |  |  | $                                | 241,494 |  |      | $ | 65,750 |  |  | $ | 75,017 |  
|                                   |  |                   |           |  |                   |   |           |                                |  |   |                   |  |  |                                  |         |  |      |   |        |  |  |   |        |  



|(1) | Includes nonaccrual loans and leases, foreclosed real estate, 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:



|                          |      |                             |       |      |                           |   |       |  |  |      |        |  |  |   |        | 
|------------------------- | ---- | --------------------------- | ----- | ---- | ------------------------- | - | ----- |  |  | ---- | ------ |  |  | - | ------ | 
|Home Equity Loans         |      | Three Months Ended June 30, |       |      | Six Months Ended June 30, |  
|                          | 2011 |                             |       | 2010 |                           |   | 2011  |  |  | 2010 |       
|Additional draws conveyed |      | $                           | 7,294 |      |                           | $ | 9,141 |  |  | $    | 15,102 |  |  | $ | 17,513 | 
|Servicing fees received   |      |                             | 228   |      |                           |   | 255   |  |  |      | 459    |  |  |   | 515    | 
|Other cash flows received |      |                             | 842   |      |                           |   | 1,430 |  |  |      | 2,482  |  |  |   | 2,634  | 

NOTE 11. Fair Value Disclosures

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

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



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

Securities

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

Derivatives

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



|                                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|--------------------------------------------------- |  | ------------- | --------- |  | ---------------------------------------------------------------- | - | ----- | ------------------------------------------- |  | - | --------------------------------------- |  |  | - | ------ | 
|                                                    |  |               |           |  | Fair Value Measurements at Reporting Date Using                  |  
|Description                                         |  | June 30, 2011 |           |  | 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                            |  | $             | 301,765   |  |                                                                  | $ | 0     |                                             |  | $ | 301,765                                 |  |  | $ | 0      | 
|Obligations of states and political subdivisions    |  |               | 410,381   |  |                                                                  |   |       |                                             |  |   | 410,381                                 |  |  |   |        | 
|Agency residential mortgage-backed securities       |  |               | 1,538,922 |  |                                                                  |   |       |                                             |  |   | 1,538,922                               |  |  |   |        | 
|Non-agency residential mortgage-backed securities   |  |               | 83,679    |  |                                                                  |   |       |                                             |  |   | 83,679                                  |  |  |   |        | 
|Commercial mortgage-backed securities               |  |               | 69,080    |  |                                                                  |   |       |                                             |  |   | 69,080                                  |  |  |   |        | 
|Other structured financial products                 |  |               | 14,133    |  |                                                                  |   |       |                                             |  |   | 0                                       |  |  |   | 14,133 | 
|Other debt securities                               |  |               | 49,312    |  |                                                                  |   |       |                                             |  |   | 49,312                                  |  |  |   |        | 
|Equity securities of the FHLB                       |  |               | 73,079    |  |                                                                  |   |       |                                             |  |   | 73,079                                  |  |  |   |        | 
|Equity securities of the FRB                        |  |               | 50,225    |  |                                                                  |   |       |                                             |  |   | 50,225                                  |  |  |   |        | 
|Other equity securities                             |  |               | 24,627    |  |                                                                  |   | 2,491 |                                             |  |   | 18,737                                  |  |  |   | 3,399  | 
|Derivatives: (1)                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Designated as hedging instruments                   |  |               | 98        |  |                                                                  |   |       |                                             |  |   | 98                                      |  |  |   |        | 
|Not designated or qualifying as hedging instruments |  |               | 17,022    |  |                                                                  |   |       |                                             |  |   | 17,022                                  |  |  |   |        | 
|                                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Total                                               |  | $             | 2,632,323 |  |                                                                  | $ | 2,491 |                                             |  | $ | 2,612,300                               |  |  | $ | 17,532 | 
|                                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Liabilities                                         |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Derivatives: (2)                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Designated as hedging instruments                   |  | $             | 37,544    |  |                                                                  | $ | 0     |                                             |  | $ | 37,544                                  |  |  | $ | 0      | 
|Not designated or qualifying as hedging instruments |  |               | 16,399    |  |                                                                  |   |       |                                             |  |   | 16,399                                  |  |  |   |        | 
|                                                    |  |               |           |  |                                                                  |   |       |                                             |  |   |                                         |  |  |   |        | 
|Total                                               |  | $             | 53,943    |  |                                                                  | $ | 0     |                                             |  | $ | 53,943                                  |  |  | $ | 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, 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                            |  | $                 | 268,175   |  |                                                                  | $ | 0     |                                             |  | $ | 268,175                                  |  |  | $ | 0      | 
|Obligations of states and political subdivisions    |  |                   | 396,660   |  |                                                                  |   |       |                                             |  |   | 396,660                                  |  |  |   |        | 
|Agency residential mortgage-backed securities       |  |                   | 1,323,569 |  |                                                                  |   |       |                                             |  |   | 1,323,569                                |  |  |   |        | 
|Non-agency residential mortgage-backed securities   |  |                   | 116,811   |  |                                                                  |   |       |                                             |  |   | 116,811                                  |  |  |   |        | 
|Commercial mortgage-backed securities               |  |                   | 104,842   |  |                                                                  |   |       |                                             |  |   | 104,842                                  |  |  |   |        | 
|Other structured financial products                 |  |                   | 12,503    |  |                                                                  |   |       |                                             |  |   | 0                                        |  |  |   | 12,503 | 
|Other debt securities                               |  |                   | 41,000    |  |                                                                  |   |       |                                             |  |   | 41,000                                   |  |  |   |        | 
|Equity securities of the FHLB                       |  |                   | 71,065    |  |                                                                  |   |       |                                             |  |   | 71,065                                   |  |  |   |        | 
|Equity securities of the FRB                        |  |                   | 50,225    |  |                                                                  |   |       |                                             |  |   | 50,225                                   |  |  |   |        | 
|Other equity securities                             |  |                   | 24,093    |  |                                                                  |   | 2,446 |                                             |  |   | 18,266                                   |  |  |   | 3,381  | 
|Derivatives: (1)                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Designated as hedging instruments                   |  |                   | 181       |  |                                                                  |   |       |                                             |  |   | 181                                      |  |  |   |        | 
|Not designated or qualifying as hedging instruments |  |                   | 17,167    |  |                                                                  |   |       |                                             |  |   | 17,167                                   |  |  |   |        | 
|                                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Total                                               |  | $                 | 2,426,291 |  |                                                                  | $ | 2,446 |                                             |  | $ | 2,407,961                                |  |  | $ | 15,884 | 
|                                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Liabilities                                         |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Derivatives: (2)                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Designated as hedging instruments                   |  | $                 | 31,793    |  |                                                                  | $ | 0     |                                             |  | $ | 31,793                                   |  |  | $ | 0      | 
|Not designated or qualifying as hedging instruments |  |                   | 16,767    |  |                                                                  |   |       |                                             |  |   | 16,767                                   |  |  |   |        | 
|                                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 
|Total                                               |  | $                 | 48,560    |  |                                                                  | $ | 0     |                                             |  | $ | 48,560                                   |  |  | $ | 0      | 
|                                                    |  |                   |           |  |                                                                  |   |       |                                             |  |   |                                          |  |  |   |        | 



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

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



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

Fair Value
Measurements Using Significant Unobservable Inputs (Level 3)



|                                                      |  |                               |       |   |                                        |   |       |                                  |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ----------------------------- | ----- | - | -------------------------------------- | - | ----- | -------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Available-for-sale Securities |       |   |                                        |  
|                                                      |  | EquitySecurities              |       |   |                                        |   |       | OtherStructuredFinancialProducts |  |   | Total  |  
|Balance at April 1, 2011                              |  | $                             | 3,399 |   |                                        |   |       |                                  |  | $ | 13,992 |   |  | $ | 17,391 |  
|Total gains or losses (realized/unrealized):          |  |                               |       |   |                                        |   |       |                                  |  |   |        |   |  |   |        |  
|Included in other comprehensive income (before taxes) |  |                               | 0     |   |                                        |   |       |                                  |  |   | 141    |   |  |   | 141    |  
|                                                      |  |                               |       |   |                                        |   |       |                                  |  |   |        |   |  |   |        |  
|Balance at June 30, 2011                              |  | $                             | 3,399 |   |                                        |   |       |                                  |  | $ | 14,133 |   |  | $ | 17,532 |  
|                                                      |  |                               |       |   |                                        |   |       |                                  |  |   |        |   |  |   |        |  
|                                                      |  |                              
|                                                      |  | 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 |  
|                                                      |  |                               |       |   |                                        |   |       |                                  |  |   |        |   |  |   |        |  

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



34



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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 Using Significant Unobservable Inputs (Level 3)



|                                                                        |  |                               |       |   |                                        |   |       |                                  |  |   |                                                |   |  |                     |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------------- | ----- | - | -------------------------------------- | - | ----- | -------------------------------- |  | - | ---------------------------------------------- | - |  | ------------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                        |  | Available-for-sale Securities |       |   |                                        |   |       |                                  |  |   |                                                |  
|                                                                        |  | EquitySecurities              |       |   |                                        |   |       | OtherStructuredFinancialProducts |  |   |                                                |   |  |                     |        |   | Total |  
|Balance at January 1, 2011                                              |  | $                             | 3,381 |   |                                        |   |       |                                  |  | $ | 12,503                                         |   |  |                     |        |   |       |   |         |   |  | $ | 15,884  |  
|Total gains or losses (realized/unrealized):                            |  |                               |       |   |                                        |   |       |                                  |  |   |                                                |   |  |                     |        |   |       |   |         |   |  |   |         |  
|Included in other comprehensive income (before taxes)                   |  |                               | 18    |   |                                        |   |       |                                  |  |   | 1,630                                          |   |  |                     |        |   |       |   |         |   |  |   | 1,648   |  
|                                                                        |  |                               |       |   |                                        |   |       |                                  |  |   |                                                |   |  |                     |        |   |       |   |         |   |  |   |         |  
|Balance at June 30, 2011                                                |  | $                             | 3,399 |   |                                        |   |       |                                  |  | $ | 14,133                                         |   |  |                     |        |   |       |   |         |   |  | $ | 17,532  |  
|                                                                        |  |                               |       |   |                                        |   |       |                                  |  |   |                                                |   |  |                     |        |   |       |   |         |   |  |   |         |  
|                                                                        |  |                               |      
|                                                                        |  | Available-for-sale Securities |       |   |                                        |   |       |                                  | 
|                                                                        |  | EquitySecurities              |       |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  |   | Non-agencyResidentialMortgage-backedSecurities |   |  | 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                                         |   |  | $                   | 0      |   |       | $ | 0       |   |  | $ | 16,085  |  
|                                                                        |  |                               |       |   |                                        |   |       |                                  |  |   |                                                |   |  |                     |        |   |       |   |         |   |  |   |         |  



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

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

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

Foreclosed Real Estate

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



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



|                       |  |               |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 
|---------------------- |  | ------------- | ------- |  | ------------------------------------------------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | - | ------- | 
|Description            |  | June 30, 2011 |         |  | QuotedPricesin ActiveMarkets
forIdenticalInstruments(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Impaired loans         |  | $             | 93,919  |  |                                                               | $ | 0 |                                           |  | $ | 0                                       |  |  | $ | 93,919  | 
|Foreclosed real estate |  |               | 27,953  |  |                                                               |   | 0 |                                           |  |   | 0                                       |  |  |   | 27,953  | 
|                       |  |               |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 
|                       |  | $             | 121,872 |  |                                                               | $ | 0 |                                           |  | $ | 0                                       |  |  | $ | 121,872 | 
|                       |  |               |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 

Specific reserves for the first six months of 2011 were reduced by $11,285. These specific reserves were
taken into consideration when the required level of the allowance for loan and lease losses was determined at June 30, 2011.



|                       |  |                   |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 
|---------------------- |  | ----------------- | ------- |  | ------------------------------------------------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | - | ------- | 
|Description            |  | December 31, 2010 |         |  | QuotedPricesin ActiveMarkets
forIdenticalInstruments(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Impaired loans         |  | $                 | 103,818 |  |                                                               | $ | 0 |                                           |  | $ | 0                                       |  |  | $ | 103,818 | 
|Foreclosed real estate |  |                   | 18,489  |  |                                                               |   | 0 |                                           |  |   | 0                                       |  |  |   | 18,489  | 
|                       |  |                   |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 
|                       |  | $                 | 122,307 |  |                                                               | $ | 0 |                                           |  | $ | 0                                       |  |  | $ | 122,307 | 
|                       |  |                   |         |  |                                                               |   |   |                                           |  |   |                                         |  |  |   |         | 

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

Additional
Disclosures about Fair Value of Financial Instruments

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

Cash and due from banks
and short-term investments

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

Investment securities

Refer to the above discussion on securities.

Loans and leases

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



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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)



Deposits

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

Short-term borrowings

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

FHLB borrowings and long-term debt

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

Derivatives

Refer to the above discussion on derivatives.

Off-balance-sheet items

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

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



|                        |  |                |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|----------------------- |  | -------------- | --------- |  | ----------------- | - | --------- | -------------- |  | - | ---------- |  |  | - | --------- | 
|                        |  | June 30, 2011  |           |  | December 31, 2010 |  
|                        |  | CarryingAmount |           |  | Fair Value        |   |           | CarryingAmount |  |   | Fair Value | 
|Financial assets:       |  |                |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|Cash and due from banks |  | $              | 211,953   |  |                   | $ | 211,953   |                |  | $ | 200,646    |  |  | $ | 200,646   | 
|Short-term investments  |  |                | 82,741    |  |                   |   | 82,741    |                |  |   | 93,947     |  |  |   | 93,947    | 
|Investment securities   |  |                | 2,623,747 |  |                   |   | 2,623,747 |                |  |   | 2,417,611  |  |  |   | 2,417,611 | 
|Loans and leases        |  |                | 9,446,895 |  |                   |   | 9,343,075 |                |  |   | 9,441,363  |  |  |   | 9,492,108 | 
|Derivatives             |  |                | 17,120    |  |                   |   | 17,120    |                |  |   | 17,348     |  |  |   | 17,348    | 
|Financial liabilities:  |  |                |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|Deposits                |  |                | 9,402,515 |  |                   |   | 9,192,063 |                |  |   | 9,191,207  |  |  |   | 9,265,942 | 
|Short-term borrowings   |  |                | 635,183   |  |                   |   | 635,183   |                |  |   | 770,623    |  |  |   | 770,623   | 
|FHLB borrowings         |  |                | 1,115,517 |  |                   |   | 1,176,119 |                |  |   | 1,101,620  |  |  |   | 1,167,743 | 
|Long-term debt          |  |                | 683,867   |  |                   |   | 677,031   |                |  |   | 705,954    |  |  |   | 683,628   | 
|Derivatives             |  |                | 53,943    |  |                   |   | 53,943    |                |  |   | 48,560     |  |  |   | 48,560    | 

NOTE 12. Share-based Compensation

On April 7, 2011, Susquehannas Compensation Committee granted to certain employees nonqualified stock
options to purchase an aggregate of 248 shares of common stock with an exercise price of $9.77. The following table presents the assumptions used in the Black-Scholes-Merton model to estimate the fair values of options granted in 2011 and 2010, and
the resultant fair values.



|                         |  |      |       |   |      |   |       |  
|------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|                         |  | 2011 |       |   | 2010 |  
|Volatility               |  |      | 37.09 | % |      |   | 32.50 | %
|Expected dividend yield  |  |      | 4.00  | % |      |   | 4.00  | %
|Expected term (in years) |  |      | 7.0   |   |      |   | 7.0   |  
|Risk-free interest rate  |  |      | 2.97  | % |      |   | 2.39  | %
|Fair value               |  | $    | 2.61  |   |      | $ | 1.85  |  



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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 addition, on May 17, 2011, Susquehannas Compensation Committee granted an
aggregate of 40 shares of restricted stock with a grant date fair value of $8.65 per share to Susquehannas directors and an aggregate of 158 restricted shares and restricted stock units with a weighted-average grant date fair value of $8.71
per share or unit to certain senior officers.

NOTE 13. 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, 2011, 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, 2011. The actual effective rate for the reporting period ended
June 30, 2011 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.

NOTE 14. Loss Contingency

In September 2010, Lehman Brothers Special Financing Inc. (LBSF) filed suit in the United States Bankruptcy
Court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate holders who received distributions from the trustees, including Susquehanna,
to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate collateralized debt obligation transactions (CDO). In June 2007, two affiliates of Susquehanna each purchased $5,000 in AAA rated
Class A Notes of a CDO offered by Lehman Brothers Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with LBSF. Lehman Brothers Holdings Inc. (LBHI) guaranteed LBSFs obligations
to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an Event of Default under the indenture occurred, and the trustee declared the notes to be immediately due and payable. Susquehanna was repaid its principal
on the notes in September 2008. This legal proceeding is in the early stages of discovery; thus it is not yet possible for Susquehanna to estimate potential loss, if any. Management, after consultation with legal counsel, currently does not
anticipate that the aggregate liability, if any, arising out of this proceeding, will have a material adverse effect on Susquehannas financial position, or cash flows, although, at the present time, management is not in a position to determine
whether such proceeding will have a material adverse effect on Susquehannas results of operations in any future quarterly reporting period.



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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, general economic conditions, the impact of new regulations on our business, our potential exposures to various types of market risks, such as interest rate risk and credit
risk; whether our allowance for loan and lease losses is adequate to meet probable loan and lease losses; whether we will be required to sell available-for-sale securities that are in an unrealized loss position; our ability to achieve loan growth;
our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to maintain market share through monitoring our time-deposit portfolio; and our ability to achieve our 2011 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 regional real estate values;
| | - |  | -----------------------------------------------



| |  |  | 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 international, 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 effectively and economically;
| | - |  | ----------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------



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



| |  |  | the effects on the economy regarding the U.S. governments response to the debt ceiling;
| | - |  | ----------------------------------------------------------------------------------------



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



| |  |  | the timing of the consummation of the pending mergers with each of Tower Bancorp, Inc. and Abington Bancorp, Inc., or failure to consummate either or
both of the mergers; 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.
(VFAM), Stratton Management Company and subsidiary (Stratton), and The Addis Group, LLC (Addis).

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 2011 have been impacted by a number of
issues related to this downturn, including an elevated (when viewed from an historical perspective) provision for loan and lease losses and related credit costs. We have, however, strong liquidity, and our capital ratios are well in excess of
regulatory minimums to be considered well-capitalized.

We are closely watching the new regulatory changes that
will be implemented in the coming months and years as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). We have set up a committee of senior officers to review the new rules as they are published,
and our management team is prepared to update our procedures as necessary.



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##### Table of Contents

The FDIC has recently approved two rules amending its deposit assessment regulations. As a
result, our FDIC insurance premium for the second quarter of 2011 increased $2.0 million, or 60%, when compared to the first quarter of 2011. The Federal Reserve Bank has also issued a final rule establishing standards for interchange fees, as
required by Dodd-Frank. When this rule goes into effect in October 2011, our interchange fee revenue will be reduced by approximately $1.5 million quarterly. There may be additional regulations enacted that could result in increased costs and
decreased revenues.

With certain of these factors in mind, we have updated our 2011 financial goals as follows:

Updated Financial Goals for 2011 (1)



|                           |  |                  |      |   |                 |  |      |  
|-------------------------- |  | ---------------- | ---- | - | --------------- |  | ---- | -
|                           |  | Original Targets |      |   | Updated Targets | 
|Net interest margin        |  |                  | 3.60 | % |                 |  | 3.60 | %
|Loan growth                |  |                  | 4.0  | % |                 |  | 3.0  | %
|Deposit growth             |  |                  | 4.0  | % |                 |  | 5.0  | %
|Noninterest income growth  |  |                  | -1.0 | % |                 |  | -2.0 | %
|Noninterest expense growth |  |                  | 0.0  | % |                 |  | 2.0  | %
|Tax rate                   |  |                  | 24.0 | % |                 |  | 18.0 | %



|(1) | These targets do not include the effects of the Abington acquisition subsequent to the merger date nor any merger related costs that may be incurred in the second half
of 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pending Acquisitions

Agreement to Acquire Tower Bancorp, Inc.

On June 20, 2011, we
announced the signing of a definitive agreement under which we agreed to acquire all outstanding shares of Tower Bancorp, Inc. common stock in a stock and cash transaction. The transaction, with an approximate total value of $343.0 million, is
expected to be completed on or around February 17, 2012. Under the terms of the agreement, Tower shareholders will have the option of receiving either 3.4696 shares of Susquehanna common stock or $28.00 in cash for each share of Tower common
stock, with $88.0 million of the aggregate consideration being paid in cash. The transaction will enhance our already strong presence in central and southeastern Pennsylvania and will significantly increase our market share in the Pennsylvania
counties of Chester, Dauphin, and Franklin. Additionally, the merger will give us branch presence in the Pennsylvania counties of Lebanon, Fulton, and Centre.

The boards of directors of both Susquehanna and Tower have approved the transaction. Completion of the transaction is subject to customary closing conditions, including regulatory approvals and the
approval of shareholders of both companies.

Agreement to Acquire Abington Bancorp, Inc.

On January 26, 2011, we announced the signing of a definitive agreement under which we agreed to acquire all outstanding shares of
common stock of Abington Bancorp, Inc. in a stock-for-stock transaction. The transaction, with an approximate total value of $268.0 million, is expected to be completed on or around October 1, 2011. Under the terms of the agreement, Abington
shareholders will receive 1.32 shares of Susquehanna common stock for each share of Abington common stock. The locations of Abingtons bank branches provide a natural extension of our network in the greater Philadelphia area.

The boards of directors and shareholders of both Susquehanna and Abington have approved the transaction. Completion of the transaction is
subject to customary closing conditions, including regulatory approvals.



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##### Table of Contents

Results of Operations

Summary of 2011 Compared to 2010

Net income available to common
shareholders for the second quarter of 2011 was $11.1 million, an increase of $12.4 million when compared to net loss applicable to common shareholders of $1.4 million for the second quarter of 2010. The $1.4 million net loss applicable to common
shareholders for the second quarter of 2010 includes $6.8 million in preferred stock dividends and accretion relating to our participation in the U.S. Treasurys Troubled Asset Relief Program (TARP) Capital Purchase Program. Net
interest income of $106.1 million for the second quarter of 2011 was relatively unchanged from net interest income of $106.2 million for the second quarter of 2010. The provision for loan and lease losses decreased 34.9% to $28.0 million for the
second quarter of 2011, from $43.0 million for the second quarter of 2010. Noninterest income decreased 3.2%, to $37.1 million for the second quarter of 2011, from $38.3 million for the second quarter of 2010. Noninterest expenses increased 5.2%, to
$101.2 million for the second quarter of 2011, from $96.2 million for the second quarter of 2010.

Net income available
to common shareholders for the first six months of 2011 was $20.8 million, an increase of $18.8 million when compared to net income available to common shareholders of $2.0 million for the first six months of 2010. The $2.0 million net income
available to common shareholders for the first six months of 2010 includes $10.9 million in preferred stock dividends and accretion relating to our participation in the TARP Capital Purchase Program. Net interest income decreased 1.6%, to $211.1
million for the first six months of 2011, from $214.5 million for the first six months of 2010. The provision for loan and lease losses decreased 28.4%, to $63.0 million for the first six months of 2011, from $88.0 million for the first six months
of 2010. Noninterest income decreased 3.2%, to $74.5 million for the first six months of 2011, from $77.0 million for the first six months of 2010. Noninterest expenses increased 3.5%, to $197.0 million for the first six months of 2011, from
$190.5 million for the first six months of 2010.

Additional information is as follows:



|                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                      |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                      |  | 2011                       |       |   | 2010                     |   |       | 2011 |  |   | 2010  |  
|Diluted Earnings per Common Share     |  | $                          | 0.09  |   |                          | $ | (0.01 | )    |  | $ | 0.16  |   |  | $ | 0.02  |  
|Return on Average Assets              |  |                            | 0.32  | % |                          |   | 0.16  | %    |  |   | 0.30  | % |  |   | 0.19  | %
|Return on Average Equity              |  |                            | 2.22  | % |                          |   | 1.01  | %    |  |   | 2.11  | % |  |   | 1.25  | %
|Return on Average Tangible Equity (1) |  |                            | 5.24  | % |                          |   | 2.57  | %    |  |   | 5.05  | % |  |   | 3.15  | %
|Efficiency Ratio                      |  |                            | 68.90 | % |                          |   | 65.09 | %    |  |   | 67.28 | % |  |   | 63.89 | %
|Net Interest Margin                   |  |                            | 3.62  | % |                          |   | 3.69  | %    |  |   | 3.62  | % |  |   | 3.75  | %



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

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, | 
|                                                                       |  | 2011                       |      |   | 2010                     |  |      | 2011 |  |  | 2010 |  
|Return on average equity (GAAP basis)                                  |  |                            | 2.22 | % |                          |  | 1.01 | %    |  |  | 2.11 | % |  |  | 1.25 | %
|Effect of excluding average intangible assets and related amortization |  |                            | 3.02 | % |                          |  | 1.56 | %    |  |  | 2.94 | % |  |  | 1.90 | %
|Return on average tangible equity                                      |  |                            | 5.24 | % |                          |  | 2.57 | %    |  |  | 5.05 | % |  |  | 3.15 | %



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differentialtaxable equivalent basis



|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|----------------------------------------------------- |  | --------------------------------------------- | ---------- | - | --------------------------------------------- | - | ------- | -------- |  |  | -------------- |  |  | -------- | ---------- | - | -------- | - | ------- |  |  |  | ---- | 
|                                                      |  | For the Three-Month Period EndedJune 30, 2011 |            |   | For the Three-Month Period EndedJune 30, 2010 |  
|                                                      |  | AverageBalance                                |            |   | Interest                                      |   |         | Rate (%) |  |  | AverageBalance |  |  | Interest |            |   | Rate (%) |  
|Assets                                                |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Short-term investments                                |  | $                                             | 78,447     |   |                                               | $ | 23      |          |  |  | 0.12           |  |  | $        | 95,959     |   |          | $ | 39      |  |  |  | 0.16 | 
|Investment securities:                                |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Taxable                                               |  |                                               | 2,064,971  |   |                                               |   | 16,022  |          |  |  | 3.11           |  |  |          | 1,579,983  |   |          |   | 14,420  |  |  |  | 3.66 | 
|Tax-advantaged                                        |  |                                               | 408,130    |   |                                               |   | 6,206   |          |  |  | 6.10           |  |  |          | 329,841    |   |          |   | 5,187   |  |  |  | 6.31 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total investment securities                           |  |                                               | 2,473,101  |   |                                               |   | 22,228  |          |  |  | 3.61           |  |  |          | 1,909,824  |   |          |   | 19,607  |  |  |  | 4.12 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Loans and leases, (net):                              |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Taxable                                               |  |                                               | 9,315,101  |   |                                               |   | 124,424 |          |  |  | 5.36           |  |  |          | 9,618,981  |   |          |   | 133,599 |  |  |  | 5.57 | 
|Tax-advantaged                                        |  |                                               | 305,219    |   |                                               |   | 4,270   |          |  |  | 5.61           |  |  |          | 261,170    |   |          |   | 4,082   |  |  |  | 6.27 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total loans and leases                                |  |                                               | 9,620,320  |   |                                               |   | 128,694 |          |  |  | 5.37           |  |  |          | 9,880,151  |   |          |   | 137,681 |  |  |  | 5.59 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total interest-earning assets                         |  |                                               | 12,171,868 |   |                                               |   | 150,945 |          |  |  | 4.97           |  |  |          | 11,885,934 |   |          |   | 157,327 |  |  |  | 5.31 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Allowance for loan and lease losses                   |  |                                               | (200,983   | ) |                                               |   |         |          |  |  |                |  |  |          | (182,985   | ) |          |   |         |  |  |  |      | 
|Other non-earning assets                              |  |                                               | 2,064,823  |   |                                               |   |         |          |  |  |                |  |  |          | 2,124,506  |   |          |   |         |  |  |  |      | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total assets                                          |  | $                                             | 14,035,708 |   |                                               |   |         |          |  |  |                |  |  | $        | 13,827,455 |   |          |   |         |  |  |  |      | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Liabilities                                           |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Deposits:                                             |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Interest-bearing demand                               |  | $                                             | 3,652,558  |   |                                               |   | 5,324   |          |  |  | 0.58           |  |  | $        | 3,445,011  |   |          |   | 5,679   |  |  |  | 0.66 | 
|Savings                                               |  |                                               | 806,682    |   |                                               |   | 300     |          |  |  | 0.15           |  |  |          | 778,373    |   |          |   | 301     |  |  |  | 0.16 | 
|Time                                                  |  |                                               | 3,500,813  |   |                                               |   | 14,109  |          |  |  | 1.62           |  |  |          | 3,699,050  |   |          |   | 21,072  |  |  |  | 2.28 | 
|Short-term borrowings                                 |  |                                               | 667,856    |   |                                               |   | 1,837   |          |  |  | 1.10           |  |  |          | 503,082    |   |          |   | 536     |  |  |  | 0.43 | 
|FHLB borrowings                                       |  |                                               | 1,115,754  |   |                                               |   | 10,829  |          |  |  | 3.89           |  |  |          | 1,024,326  |   |          |   | 11,098  |  |  |  | 4.35 | 
|Long-term debt                                        |  |                                               | 690,573    |   |                                               |   | 8,793   |          |  |  | 5.11           |  |  |          | 726,994    |   |          |   | 9,165   |  |  |  | 5.06 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total interest-bearing liabilities                    |  |                                               | 10,434,236 |   |                                               |   | 41,192  |          |  |  | 1.58           |  |  |          | 10,176,836 |   |          |   | 47,851  |  |  |  | 1.89 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Demand deposits                                       |  |                                               | 1,381,708  |   |                                               |   |         |          |  |  |                |  |  |          | 1,291,607  |   |          |   |         |  |  |  |      | 
|Other liabilities                                     |  |                                               | 219,369    |   |                                               |   |         |          |  |  |                |  |  |          | 221,338    |   |          |   |         |  |  |  |      | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total liabilities                                     |  |                                               | 12,035,313 |   |                                               |   |         |          |  |  |                |  |  |          | 11,689,781 |   |          |   |         |  |  |  |      | 
|Shareholders equity                                  |  |                                               | 2,000,395  |   |                                               |   |         |          |  |  |                |  |  |          | 2,137,674  |   |          |   |         |  |  |  |      | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total liabilities and shareholders equity            |  | $                                             | 14,035,708 |   |                                               |   |         |          |  |  |                |  |  | $        | 13,827,455 |   |          |   |         |  |  |  |      | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Net interest income / yield on average earning assets |  |                                               |            |   |                                               | $ | 109,753 |          |  |  | 3.62           |  |  |          |            |   |          | $ | 109,476 |  |  |  | 3.69 | 
|                                                      |  |                                               |            |   |                                               |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 

(1) 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.



43



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differentialtaxable equivalent basis



|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|----------------------------------------------------- |  | ------------------------------------------- | ---------- | - | ------------------------------------------- | - | ------- | -------- |  |  | -------------- |  |  | -------- | ---------- | - | -------- | - | ------- |  |  |  | ---- | 
|                                                      |  | For the Six-Month Period EndedJune 30, 2011 |            |   | For the Six-Month Period EndedJune 30, 2010 |  
|                                                      |  | AverageBalance                              |            |   | Interest                                    |   |         | Rate (%) |  |  | AverageBalance |  |  | Interest |            |   | Rate (%) |  
|Assets                                                |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Short-term investments                                |  | $                                           | 78,896     |   |                                             | $ | 52      |          |  |  | 0.13           |  |  | $        | 88,490     |   |          | $ | 73      |  |  |  | 0.17 | 
|Investment securities:                                |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Taxable                                               |  |                                             | 2,072,186  |   |                                             |   | 32,724  |          |  |  | 3.18           |  |  |          | 1,539,668  |   |          |   | 29,424  |  |  |  | 3.85 | 
|Tax-advantaged                                        |  |                                             | 403,239    |   |                                             |   | 12,285  |          |  |  | 6.14           |  |  |          | 336,618    |   |          |   | 10,863  |  |  |  | 6.51 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total investment securities                           |  |                                             | 2,475,425  |   |                                             |   | 45,009  |          |  |  | 3.67           |  |  |          | 1,876,286  |   |          |   | 40,287  |  |  |  | 4.33 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Loans and leases, (net):                              |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Taxable                                               |  |                                             | 9,303,458  |   |                                             |   | 248,532 |          |  |  | 5.39           |  |  |          | 9,676,952  |   |          |   | 267,226 |  |  |  | 5.57 | 
|Tax-advantaged                                        |  |                                             | 298,851    |   |                                             |   | 8,409   |          |  |  | 5.67           |  |  |          | 259,727    |   |          |   | 8,085   |  |  |  | 6.28 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total loans and leases                                |  |                                             | 9,602,309  |   |                                             |   | 256,941 |          |  |  | 5.40           |  |  |          | 9,936,679  |   |          |   | 275,311 |  |  |  | 5.59 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total interest-earning assets                         |  |                                             | 12,156,630 |   |                                             |   | 302,002 |          |  |  | 5.01           |  |  |          | 11,901,455 |   |          |   | 315,671 |  |  |  | 5.35 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Allowance for loan and lease losses                   |  |                                             | (196,125   | ) |                                             |   |         |          |  |  |                |  |  |          | (178,960   | ) |          |   |         |  |  |  |      | 
|Other non-earning assets                              |  |                                             | 2,040,417  |   |                                             |   |         |          |  |  |                |  |  |          | 2,093,304  |   |          |   |         |  |  |  |      | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total assets                                          |  | $                                           | 14,000,922 |   |                                             |   |         |          |  |  |                |  |  | $        | 13,815,799 |   |          |   |         |  |  |  |      | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Liabilities                                           |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Deposits:                                             |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Interest-bearing demand                               |  | $                                           | 3,669,649  |   |                                             |   | 10,843  |          |  |  | 0.60           |  |  | $        | 3,399,548  |   |          |   | 11,104  |  |  |  | 0.66 | 
|Savings                                               |  |                                             | 793,655    |   |                                             |   | 593     |          |  |  | 0.15           |  |  |          | 764,728    |   |          |   | 587     |  |  |  | 0.15 | 
|Time                                                  |  |                                             | 3,468,520  |   |                                             |   | 29,290  |          |  |  | 1.70           |  |  |          | 3,719,618  |   |          |   | 43,794  |  |  |  | 2.37 | 
|Short-term borrowings                                 |  |                                             | 707,588    |   |                                             |   | 3,734   |          |  |  | 1.06           |  |  |          | 659,370    |   |          |   | 1,295   |  |  |  | 0.40 | 
|FHLB borrowings                                       |  |                                             | 1,108,100  |   |                                             |   | 21,221  |          |  |  | 3.86           |  |  |          | 1,000,170  |   |          |   | 20,734  |  |  |  | 4.18 | 
|Long-term debt                                        |  |                                             | 695,522    |   |                                             |   | 17,969  |          |  |  | 5.21           |  |  |          | 710,689    |   |          |   | 17,003  |  |  |  | 4.82 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total interest-bearing liabilities                    |  |                                             | 10,443,034 |   |                                             |   | 83,650  |          |  |  | 1.62           |  |  |          | 10,254,123 |   |          |   | 94,517  |  |  |  | 1.86 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Demand deposits                                       |  |                                             | 1,360,757  |   |                                             |   |         |          |  |  |                |  |  |          | 1,257,885  |   |          |   |         |  |  |  |      | 
|Other liabilities                                     |  |                                             | 205,107    |   |                                             |   |         |          |  |  |                |  |  |          | 221,252    |   |          |   |         |  |  |  |      | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total liabilities                                     |  |                                             | 12,008,898 |   |                                             |   |         |          |  |  |                |  |  |          | 11,733,260 |   |          |   |         |  |  |  |      | 
|Shareholders equity                                  |  |                                             | 1,992,024  |   |                                             |   |         |          |  |  |                |  |  |          | 2,082,539  |   |          |   |         |  |  |  |      | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Total liabilities and shareholders equity            |  | $                                           | 14,000,922 |   |                                             |   |         |          |  |  |                |  |  | $        | 13,815,799 |   |          |   |         |  |  |  |      | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 
|Net interest income / yield on average earning assets |  |                                             |            |   |                                             | $ | 218,352 |          |  |  | 3.62           |  |  |          |            |   |          | $ | 221,154 |  |  |  | 3.75 | 
|                                                      |  |                                             |            |   |                                             |   |         |          |  |  |                |  |  |          |            |   |          |   |         |  |  |  |      | 

(1) 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.

Net Interest
Income-Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which 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. (Net interest income as a percentage of net interest income plus
noninterest



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income was 74.1% for the quarter ended June 30, 2011 and 73.5% for the quarter ended June 30, 2010. Net interest income as a percentage of net interest income plus noninterest income
was 73.9% for the six months ended June 30, 2011 and 73.6% for the six months ended June 30, 2010.) 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 above 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.

For the second quarter of 2011, net interest income of $106.1 million was relatively
unchanged from net interest income of $106.2 million for the same period in 2010. The net interest margin, however, decreased 7 basis points, from 3.69% for the second quarter of 2010 to 3.62% for the second quarter of 2011. The comparative decrease
in net interest margin was primarily the result of declining interest rates coupled with an asset-sensitive balance sheet. Offsetting this decline in margin was a $285.9 million, or 2.4%, increase in average earning assets.

For the six months ended June 30, 2011, net interest income decreased to $211.1 million, as compared to net interest income of
$214.5 million for the same period in 2010. The decrease of $3.4 million in our net interest income for the first six months of 2011, as compared to the first six months of 2010, was primarily the result of a 13 basis point decrease in net interest
margin due to a decline in interest rates coupled with our asset-sensitive balance sheet. Partially offsetting this decline in margin was a $255.2 million, or 2.1%, increase in average earning assets.

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. Detailed information about the allowance for loan and lease losses is presented in Table 2.

Although we continued to experience a challenging operating environment for the first six months of 2011, we also continued to see signs
of stabilization. Net charge-offs for the second quarter of 2011 decreased to $31.9 million, or 1.33% of average loans and leases, when compared to net charge-offs for the second quarter of 2010 of $36.0, or 1.46% of average loans and leases. Net
charge-offs for the six months ended June 30, 2011 decreased to $65.5 million, or 1.38% of average loans and leases, when compared to net charge-offs for the six months ended June 30, 2010 of $74.6, or 1.51% of average loans and leases. In
addition, on a linked-quarter basis, net charge-offs for the first quarter of 2011 were $33.6 million, net charge-offs for the fourth quarter of 2010 were $34.3 million, and net-charge-offs for the third quarter of 2010 were $34.7 million.
Nonaccrual loans and troubled debt restructurings also declined during this period. As a result, we decreased the provision for loan and lease losses from $88.0 million for the first six months of 2010 to $63.0 million for the first six months of
2011.

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, 2011.



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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, 2011.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses



|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------ |  | -------------------------- | --------- | - | ------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                         |  | Three Months EndedJune 30, |           |   | Six Months EndedJune 30, |  
|                                                                         |  | 2011                       |           |   | 2010                     |   |           | 2011 |  |   | 2010      |  
|                                                                         |  | (dollars in thousands)     |          
|Balance - Beginning of period                                            |  | $                          | 193,233   |   |                          | $ | 178,819   |      |  | $ | 191,834   |   |  | $ | 172,368   |  
|Additions                                                                |  |                            | 28,000    |   |                          |   | 43,000    |      |  |   | 63,000    |   |  |   | 88,000    |  
|Charge-offs:                                                             |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                            | (10,048   | ) |                          |   | (9,197    | )    |  |   | (14,941   | ) |  |   | (14,233   | )
|Real estate - construction                                               |  |                            | (8,978    | ) |                          |   | (13,275   | )    |  |   | (19,962   | ) |  |   | (25,958   | )
|Real estate secured - residential                                        |  |                            | (5,648    | ) |                          |   | (3,465    | )    |  |   | (10,128   | ) |  |   | (9,602    | )
|Real estate secured - commercial                                         |  |                            | (10,654   | ) |                          |   | (11,845   | )    |  |   | (26,734   | ) |  |   | (26,573   | )
|Consumer                                                                 |  |                            | (386      | ) |                          |   | (1,137    | )    |  |   | (2,692    | ) |  |   | (2,234    | )
|Leases                                                                   |  |                            | (1,397    | ) |                          |   | (2,347    | )    |  |   | (3,140    | ) |  |   | (5,010    | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total charge-offs                                                        |  |                            | (37,111   | ) |                          |   | (41,266   | )    |  |   | (77,597   | ) |  |   | (83,610   | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Recoveries:                                                              |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                            | 910       |   |                          |   | 1,496     |      |  |   | 2,103     |   |  |   | 2,740     |  
|Real estate - construction                                               |  |                            | 2,626     |   |                          |   | 1,477     |      |  |   | 5,456     |   |  |   | 2,847     |  
|Real estate secured - residential                                        |  |                            | 606       |   |                          |   | 403       |      |  |   | 1,283     |   |  |   | 557       |  
|Real estate secured - commercial                                         |  |                            | 187       |   |                          |   | 1,314     |      |  |   | 1,825     |   |  |   | 1,512     |  
|Consumer                                                                 |  |                            | 319       |   |                          |   | 366       |      |  |   | 546       |   |  |   | 841       |  
|Leases                                                                   |  |                            | 522       |   |                          |   | 186       |      |  |   | 842       |   |  |   | 540       |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total recoveries                                                         |  |                            | 5,170     |   |                          |   | 5,242     |      |  |   | 12,055    |   |  |   | 9,037     |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                                          |  |                            | (31,941   | ) |                          |   | (36,024   | )    |  |   | (65,542   | ) |  |   | (74,573   | )
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Balance - Period end                                                     |  | $                          | 189,292   |   |                          | $ | 185,795   |      |  | $ | 189,292   |   |  | $ | 185,795   |  
|                                                                         |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs as a percentage of average loans and leases (annualized) |  |                            | 1.33      | % |                          |   | 1.46      | %    |  |   | 1.38      | % |  |   | 1.51      | %
|Allowance as a percentage of period-end loans and leases                 |  |                            | 1.96      | % |                          |   | 1.90      | %    |  |   | 1.96      | % |  |   | 1.90      | %
|Average loans and leases                                                 |  | $                          | 9,620,320 |   |                          | $ | 9,880,151 |      |  | $ | 9,602,309 |   |  | $ | 9,936,679 |  
|Period-end loans and leases                                              |  |                            | 9,636,187 |   |                          |   | 9,787,056 |      |  |   | 9,636,187 |   |  |   | 9,787,056 |  

Noninterest Income

Second Quarter 2011 Compared to Second Quarter 2010

Noninterest income, as
a percentage of net interest income plus noninterest income, was 25.9% for the second quarter of 2011 and 26.5% for the second quarter of 2010.

Noninterest income decreased $1.2 million, or 3.2%, for the second quarter of 2011, as compared to the second quarter of 2010. This net decrease was primarily the result of the following:



| |  |  | Decreased net realized gains on securities(excluding other-than-temporary impairment) of $3.2 million; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Decreased other-than-temporary impairment of securities related to credit losses of $1.6 million.
| | - |  | -------------------------------------------------------------------------------------------------



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Net realized gains on securities. During the second quarter of 2011, we realized net
gains of $1.1 million on the sale of securities with an aggregate book value of $57.5 million. During the second quarter of 2010, we realized net gains of $4.3 million on the sale of securities with an aggregate book value of $76.4 million.

Other-than-temporary impairment of securities related to credit losses.During the second quarter of 2011, we
recognized a $0.6 million other-than-temporary impairment loss related to a non-agency residential mortgage-backed security. During the second quarter of 2010, we recognized a $2.2 million of other-than-temporary impairment loss related to a
non-agency residential mortgage-backed security and five financial institution equity securities.

Six Months ended
June 30, 2011 Compared to Six Months ended June 30, 2010

Noninterest income, as a percentage of net interest
income plus noninterest income, was 26.1% for the six months ended June 30, 2011 and 26.4% for the six month ended June 30, 2010.

Noninterest income decreased $2.4 million, or 3.2%, for the six-month period ended June 30, 2011, as compared to the six-month period ended June 30, 2010. This net decrease was primarily the
result of the following:



| |  |  | Increased commissions on property and casualty insurance salesof $1.2 million;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Increased gains on the sale of loans and leasesof $1.7 million;
| | - |  | ---------------------------------------------------------------



| |  |  | Decreased net realized gain on securities(excluding other-than-temporary impairment) of $8.0 million; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Increased otherof $2.2 million.
| | - |  | -------------------------------

Commissions on property and casualty insurance sales.The 18.7% increase primarily was the result of increased volume at Addis.

Gains on sales of loans and leases.The 36.7% increase primarily is the result of increased gains on the sale of Small Business
Administration loans and increased volumes of mortgages loans sold.

Net realized gain on securities. During the first
six months of 2011, we realized a net gain of $2.9 million on the sale of securities with an aggregate book value of $144.0 million. During the first six months of 2010, we realized a net gain of $10.9 million on the sale of securities with an
aggregate book value of $220.3 million.

Other. During the first six months of 2011, we realized a net gain on the
sales of foreclosed real estate of $0.5 million. During the first six months of 2010, we realized a net loss on the sales of foreclosed real estate of $1.5 million.

Noninterest Expenses

Second Quarter 2011 Compared to Second
Quarter 2010

Noninterest expenses increased $5.0 million, or 5.2%, from $96.2 million for the second quarter of 2010, to
$101.2 million for the second quarter of 2011. This net increase was primarily the result of a net increase in salaries and employee benefitsof $4.2 million, which we attribute to increased incentive share-based compensation, annual merit
increases, and a reduction in open positions.

Six Months ended June 30, 2011 Compared to Six Months ended
June 30, 2010

Noninterest expenses increased $6.6 million, or 3.5%, from $190.5 million for the six-month period
ended June 30, 2010, to $197.0 million for the six-month period ended June 30, 2011. This net increase was primarily the result of a net increase in salaries and employee benefitsof $7.0 million, which we attribute to increased
incentive share-based compensation, annual merit increases, and a reduction in open positions.



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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, 2011, 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, 2011. The actual effective rate for the reporting period ended June 30, 2011 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, 2011 Compared to December 31,
2010

Total assets at June 30, 2011 were $14.2 billion, relatively unchanged from December 31, 2010 when
total assets were $14.0 billion. Total loans at June 30, 2011 were $9.6 billion, also relatively unchanged from December 31, 2010. Total equity capital was $2.0 billion at June 30, 2011, or $15.55 per share and $2.0 billion, or $15.27
per share, at December 31, 2010.

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

At June 30, 2011, 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. 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 3. 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

For information about our loan portfolio,
refer to Note 4. Loans and Leases to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.



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Risk Assets

Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets



|                                                                                                |  |                        |         |   |                  |   |         |              |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------- | -
|                                                                                                |  | June 30,2011           |         |   | December 31,2010 |   |         | June 30,2010 | 
|                                                                                                |  | (dollars in thousands) |        
|Nonperforming assets:                                                                           |  |                        |         |   |                  |   |         |              |  |   |         |  
|Nonaccrual loans and leases:                                                                    |  |                        |         |   |                  |   |         |              |  |   |         |  
|Commercial, financial, and agricultural                                                         |  | $                      | 18,219  |   |                  | $ | 20,012  |              |  | $ | 24,917  |  
|Real estate - construction                                                                      |  |                        | 44,305  |   |                  |   | 57,779  |              |  |   | 89,476  |  
|Real estate secured - residential                                                               |  |                        | 51,047  |   |                  |   | 50,973  |              |  |   | 48,213  |  
|Real estate secured - commercial                                                                |  |                        | 73,346  |   |                  |   | 65,313  |              |  |   | 70,785  |  
|Consumer                                                                                        |  |                        | 0       |   |                  |   | 1       |              |  |   | 4       |  
|Leases                                                                                          |  |                        | 3,816   |   |                  |   | 2,817   |              |  |   | 3,983   |  
|                                                                                                |  |                        |         |   |                  |   |         |              |  |   |         |  
|Total nonaccrual loans and leases                                                               |  |                        | 190,733 |   |                  |   | 196,895 |              |  |   | 237,378 |  
|Foreclosed real estate                                                                          |  |                        | 27,953  |   |                  |   | 18,489  |              |  |   | 17,379  |  
|                                                                                                |  |                        |         |   |                  |   |         |              |  |   |         |  
|Total nonperforming assets                                                                      |  | $                      | 218,686 |   |                  | $ | 215,384 |              |  | $ | 254,757 |  
|                                                                                                |  |                        |         |   |                  |   |         |              |  |   |         |  
|Nonperforming assets as a percentage of period-end loans and leases plus foreclosed real estate |  |                        | 2.26    | % |                  |   | 2.23    | %            |  |   | 2.60    | %
|Allowance for loan and lease losses as a percentage of nonaccrual loans and leases              |  |                        | 99      | % |                  |   | 97      | %            |  |   | 78      | %
|Loans and leases contractually past due 90 days and still accruing                              |  | $                      | 18,268  |   |                  | $ | 20,588  |              |  | $ | 13,039  |  
|Troubled debt restructurings                                                                    |  |                        | 62,143  |   |                  |   | 114,566 |              |  |   | 79,595  |  

Nonperforming assets increased from $215.4 million at December 31, 2010 to $218.7 million at
June 30, 2011. The slight net increase was primarily the result of the effects of the continuing economic downturn on our borrowers. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus foreclosed real
estate increased from 2.23% at December 31, 2010 to 2.26% at June 30, 2011.

Troubled debt restructurings decreased
$52.5 million, from $114.6 million at December 31, 2010 to $62.1 million at June 30, 2011. Of this decline, loans aggregating $8.7 million were transferred to nonaccrual status, loans aggregating $12.0 million were charged-off, loans
aggregating $19.1 million were paid off, and loans aggregating $6.5 million were newly restructured. Loans aggregating $19.2 million were returned to accruing status as they have been performing under the restructured terms at market interest rates.

Of the $192.7 million of impaired loans (nonaccrual, non-consumer loan relationships greater than $0.5 million plus accruing
restructured loans), $79.8 million, or 41.4%, had no related reserve (refer to Note 4. 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.

At June 30, 2011, real estate  construction loans comprised only 8.0% of our total loan and lease portfolio, but accounted for 23.2% of nonaccrual loans and leases and 23.5% of our allowance
for loan and lease losses. In addition, for the six months ended June 30, 2011, this loan type accounted for 22.1% of total net charge-offs. As a result, we consider 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.
| | - |  | ---------------------------------------------------------------------------------------------



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



|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|----------------- |  | ----------------------- | ------- |  | ---------------------- |  | ----- | ------------------ |  |  | --------------------------------- | - |  | ---------- | --- | - | ---------------------------- |  | ---- | ------------------ |  |  | ----------- | - |  |  | ---- | - |  |  | --- | -
|Category          |  | Balance atJune 30, 2011 |         |  | % of TotalConstruction |  |       | Past Due30-89 Days |  |  | Past Due90 Days andStill Accruing |   |  | Nonaccrual |     |   | OtherInternallyMonitored (1) |  |      | NetCharge-offs (2) |  |  | Reserve (3) |  
|                  |  | (dollars is thousands)  |        
|1-4 Family:       |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Construction      |  | $                       | 172,998 |  |                        |  | 22.3  | %                  |  |  | 0.1                               | % |  |            | 1.8 | % |                              |  | 12.3 | %                  |  |  | 18.1        | % |  |  | 10.5 | % |  |  | 6.5 | %
|Land development  |  |                         | 184,539 |  |                        |  | 23.8  |                    |  |  | 0.4                               |   |  |            | 0.0 |   |                              |  | 0.4  |                    |  |  | 15.9        |   |  |  | 1.5  |   |  |  | 5.9 |  
|Raw land          |  |                         | 6,126   |  |                        |  | 0.8   |                    |  |  | 37.0                              |   |  |            | 0.0 |   |                              |  | 0.1  |                    |  |  | 5.4         |   |  |  | 24.4 |   |  |  | 7.6 |  
|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|                  |  |                         | 363,663 |  |                        |  | 46.9  |                    |  |  | 0.9                               |   |  |            | 0.9 |   |                              |  | 6.1  |                    |  |  | 16.8        |   |  |  | 6.5  |   |  |  | 6.2 |  
|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|All Other:        |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Construction:     |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Investor          |  |                         | 164,478 |  |                        |  | 21.2  |                    |  |  | 0.0                               |   |  |            | 0.0 |   |                              |  | 0.2  |                    |  |  | 2.5         |   |  |  | 6.5  |   |  |  | 5.6 |  
|Owner-occupied    |  |                         | 17,394  |  |                        |  | 2.2   |                    |  |  | 1.3                               |   |  |            | 0.0 |   |                              |  | 0.0  |                    |  |  | 0.0         |   |  |  | 1.5  |   |  |  | 4.8 |  
|Land development: |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Investor          |  |                         | 175,032 |  |                        |  | 22.6  |                    |  |  | 0.0                               |   |  |            | 0.0 |   |                              |  | 7.5  |                    |  |  | 27.5        |   |  |  | 9.1  |   |  |  | 4.3 |  
|Owner-occupied    |  |                         | 15,374  |  |                        |  | 2.0   |                    |  |  | 0.0                               |   |  |            | 0.0 |   |                              |  | 0.0  |                    |  |  | 5.5         |   |  |  | 0.2  |   |  |  | 6.1 |  
|Raw land:         |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Investor          |  |                         | 38,665  |  |                        |  | 5.0   |                    |  |  | 0.0                               |   |  |            | 0.0 |   |                              |  | 22.8 |                    |  |  | 18.6        |   |  |  | 4.3  |   |  |  | 8.2 |  
|Owner-occupied    |  |                         | 490     |  |                        |  | 0.1   |                    |  |  | 0.0                               |   |  |            | 0.0 |   |                              |  | 0.0  |                    |  |  | 0.0         |   |  |  | 0.0  |   |  |  | 0.5 |  
|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|                  |  |                         | 411,433 |  |                        |  | 53.1  |                    |  |  | 0.1                               |   |  |            | 0.0 |   |                              |  | 5.4  |                    |  |  | 14.7        |   |  |  | 7.0  |   |  |  | 5.3 |  
|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  
|Total             |  | $                       | 775,096 |  |                        |  | 100.0 |                    |  |  | 0.4                               |   |  |            | 0.4 |   |                              |  | 5.7  |                    |  |  | 15.7        |   |  |  | 6.7  |   |  |  | 5.7 |  
|                  |  |                         |         |  |                        |  |       |                    |  |  |                                   |   |  |            |     |   |                              |  |      |                    |  |  |             |   |  |  |      |   |  |  |     |  



|(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, 2011 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, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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



|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|----------------- |  | ----------------------- | -------- |  | -------------------------- | ---------- | ---- | - | ------------ |  | ---- | ----- |  |  | ---- | - |  |  | ---- | -
|                  |  | Balance
atJune 30, 2011 |          |  | Geographical Location by % |           
|Category          |  |                         | Maryland |  |                            | New Jersey |      |   | Pennsylvania |  |      | Other | 
|                  |  | (dollars in thousands)  |         
|1-4 Family:       |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Construction      |  | $                       | 172,998  |  |                            |            | 53.7 | % |              |  | 4.3  | %     |  |  | 36.9 | % |  |  | 5.1  | %
|Land development  |  |                         | 184,539  |  |                            |            | 46.7 |   |              |  | 5.7  |       |  |  | 37.5 |   |  |  | 10.1 |  
|Raw land          |  |                         | 6,126    |  |                            |            | 37.1 |   |              |  | 3.1  |       |  |  | 59.8 |   |  |  | 0.0  |  
|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|                  |  |                         | 363,663  |  |                            |            | 49.9 |   |              |  | 5.0  |       |  |  | 37.6 |   |  |  | 7.6  |  
|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|All Other:        |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Construction:     |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Investor          |  |                         | 164,478  |  |                            |            | 34.5 |   |              |  | 15.7 |       |  |  | 48.1 |   |  |  | 1.8  |  
|Owner-occupied    |  |                         | 17,394   |  |                            |            | 15.7 |   |              |  | 16.5 |       |  |  | 67.8 |   |  |  | 0.0  |  
|Land development: |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Investor          |  |                         | 175,032  |  |                            |            | 20.0 |   |              |  | 2.2  |       |  |  | 57.3 |   |  |  | 20.5 |  
|Owner-occupied    |  |                         | 15,374   |  |                            |            | 75.7 |   |              |  | 0.0  |       |  |  | 24.3 |   |  |  | 0.0  |  
|Raw land:         |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Investor          |  |                         | 38,665   |  |                            |            | 22.2 |   |              |  | 13.2 |       |  |  | 64.0 |   |  |  | 0.6  |  
|Owner-occupied    |  |                         | 490      |  |                            |            | 87.3 |   |              |  | 0.0  |       |  |  | 12.7 |   |  |  | 0.0  |  
|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|                  |  |                         | 411,433  |  |                            |            | 28.0 |   |              |  | 9.2  |       |  |  | 53.4 |   |  |  | 9.5  |  
|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  
|Total             |  | $                       | 775,096  |  |                            |            | 38.2 |   |              |  | 7.2  |       |  |  | 46.0 |   |  |  | 8.6  |  
|                  |  |                         |          |  |                            |            |      |   |              |  |      |       |  |  |      |   |  |  |      |  



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



|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|----------------- |  | ----------------------- | ------- |  | ------------------------------------------------ |  | ---- | ------------------------------ |  |  | ---- | -
|Category          |  | Balance atJune 30, 2011 |         |  | Global DebtCoverage RatioLess than 1.1 Times (1) |  |      | Average Loanto Value (current) | 
|                  |  | (dollars in thousands)  |         |  |                                                  | 
|1-4 Family:       |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|Construction      |  | $                       | 172,998 |  |                                                  |  | 25.4 | %                              |  |  | 78.5 | %
|Land development  |  |                         | 184,539 |  |                                                  |  | 6.6  |                                |  |  | 67.8 |  
|Raw land          |  |                         | 6,126   |  |                                                  |  | 14.1 |                                |  |  | 70.8 |  
|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|                  |  |                         | 363,663 |  |                                                  |  | 15.7 |                                |  |  | 74.4 |  
|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|All Other:        |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|Construction:     |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|Investor          |  |                         | 164,478 |  |                                                  |  | 0.5  |                                |  |  | 71.5 |  
|Owner-occupied    |  |                         | 17,394  |  |                                                  |  | 0.0  |                                |  |  | 64.2 |  
|Land development: |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|Investor          |  |                         | 175,032 |  |                                                  |  | 27.2 |                                |  |  | 65.9 |  
|Owner-occupied    |  |                         | 15,374  |  |                                                  |  | 29.8 |                                |  |  | 57.4 |  
|Raw land:         |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|Investor          |  |                         | 38,665  |  |                                                  |  | 20.1 |                                |  |  | 72.2 |  
|Owner-occupied    |  |                         | 490     |  |                                                  |  | 0.0  |                                |  |  | 85.7 |  
|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|                  |  |                         | 411,433 |  |                                                  |  | 15.1 |                                |  |  | 68.1 |  
|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  
|                  |  | $                       | 775,096 |  |                                                  |  | 15.4 |                                |  |  | 71.5 |  
|                  |  |                         |         |  |                                                  |  |      |                                |  |  |      |  



|(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 conduct
quarterly portfolio reviews of real estate  construction loan relationships in excess of $0.75 million in order to identify potential problem loans. For those loan relationships under $0.75 million, the evaluation of risk is based upon
delinquency. The review of loans in excess of $0.75 million consists of:



| |  |  | Determining whether the projects economics are achievable within a time frame such that the available cash flow of this and all of the projects
of the borrower/guarantor (whether financed or not financed by Susquehanna) is sufficient to pay the required payments of interest plus principal during a rolling fifteen- month projection.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Determining, based on a review of external sources, the viability/absorption of the projects and whether they align with the borrower/guarantors
expectations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing quarterly to assess whether the expectations of the borrower/guarantor and the externally supplied information on the market are aligned to
determine if the previous assumptions are still valid or need to be adjusted to meet the expectations that Susquehanna be fully repaid.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During this process, we also review the liquidity of any guarantors (the secondary source for continuance of the project) to determine if their liquidity will support any extension of the project due to
slower than expected absorption (units leased or sold). If the result of any of the determinations set forth above is negative, we consider the loan to be impaired, and it is included in our evaluation of the allowance for loan and lease losses. If
a loan is determined to be impaired, the net realizable value of the loan is calculated by using a current appraisal, and the short fall is charged off. All charged-off loans become part of the calculation for the loan and lease loss reserve.



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Although our impairment and charge-off analyses take into consideration the guarantors
demonstrated ability and willingness to service the debt, we do not carry any impaired loans at values in excess of the current appraisal due to the loan having a guarantor. Our evaluation of guarantors includes examining their financial wherewithal
and their reputation and willingness to work with their lenders. Since the beginning of the global economic slowdown in 2007, we have consistently assessed the probability for completion of a project by determining the guarantors liquidity and
the cash flow generated by the project based upon current absorption.

Charge-offs are taken in the quarter that we determine
that the loan is impaired. We exercise our rights under the full extent of the law to pursue all assets of the borrower and guarantors.

Guarantors are required to provide us with copies of annual financial statements and tax returns, including all schedules. These financial statements and tax returns are analyzed using variables such as
total debt obligation including contingent liabilities (an analysis of those contingent liabilities, the ability to service third-party debt, and whether the cash that is left will support our loan), and a review of financial statements to determine
living expenses. These results are part of a fifteen-month rolling projection of the borrowers and the guarantors cash flow. With respect to a potential problem loan, the rolling fifteen-month cash flow projection requires verification
of all cash or liquid investments each quarter. In addition, we require that these statements are generally current to within one year.

We believe that we are well-equipped to evaluate the guarantors of loans. Approximately 70% of the real estate borrowers have been our customers for over ten years and in the market for at least 15 years.
Most of our employee lenders have been lenders within their specific markets for 15 or more years, and those whose experience is less than that time period are supervised by people who have the experience. Therefore, we have a strong historical
perspective as to how borrowers performed in the last major recession of 1988 to 1993. For those borrowers/guarantors that do not have the history dating back to the last major recession, third-party credit checks are used to determine their history
and, when appropriate, how they have performed when real estate projects have not gone as expected.

We continue to
aggressively review our portfolio, contact customers to evaluate their financial situation, and where necessary, to work with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We believe
that the remainder of 2011 will be challenging, with the volatility of key commodity prices and its impact on 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 tests in the second quarter of 2011 and determined that the fair value of each of our
reporting units exceeded its book value, and there was no goodwill impairment. For additional information about goodwill, refer to Note 5. Goodwill to the financial statements appearing in Part I, Item 1, of this Quarterly Report
on Form 10-Q.

Deposits

Total deposits increased 2.3%, or $211.3 million, from December 31, 2010 to June 30, 2011. Within this category, core deposits such as demand, interest-bearing demand, and savings changed 3.6%,
(1.3%), and 5.1%, respectively. Time deposits less than $0.1 million decreased 5.3%, or $115.9 million, from December 31, 2010 to June 30, 2011. This decrease, in part, reflects the results of our continuing plan to improve our mix of
deposits by



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allowing high-cost, single-service certificates of deposit to run off. However, we also want to maintain market share at appropriate levels, and we will monitor and manage this portfolio to avoid
excessive runoff. Time deposits greater than $0.1 million increased 23.2%, or $286.9 million, from December 31, 2010 to June 30, 2011. This increase is primarily the result of the acquisition of brokered certificates of deposit at very
favorable rates.

Shareholders Equity

Repurchase of Warrant from the U.S. Treasury

On January 19, 2011, we
repurchased the warrant that was issued to the U. S. Treasury on December 12, 2008 in conjunction with our participation in the TARP Capital Purchase Program. The warrant entitled the U.S. Treasury to purchase up to 3.0 million shares of
Susquehannas common stock at a price of $14.86 per share. We paid $5.3 million to the Treasury to repurchase the warrant. The repurchase of the warrant concluded our participation in the Capital Purchase Program.

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.

In September 2010, the Basel Committee on Banking Supervision released revisions to recommended capital requirements, which are referred
to as Basel III. Our capital ratios are well in excess of these new requirements. These new ratio requirements are still considered preliminary, and there is a prolonged implementation time frame. We will monitor any proposed clarifications of these
benchmarks.

Our capital ratios are as follows:

Table 8. Regulatory Capital Ratios



|                               |  |                  |       |   |                           |  |      |                                         |  |  |      |  
|------------------------------ |  | ---------------- | ----- | - | ------------------------- |  | ---- | --------------------------------------- |  |  | ---- | -
|                               |  | At June 30, 2011 |       |   | Well-capitalizedThreshold |  |      | PreliminaryMinimumBasel IIIRequirements | 
|Tangible Common Ratio (1)      |  |                  | 7.75  | % |                           |  | N/A  |                                         |  |  | N/A  |  
|Tier 1 Common Ratio            |  |                  | 9.65  | % |                           |  | N/A  |                                         |  |  | 7.0  | %
|Leverage Ratio                 |  |                  | 10.37 | % |                           |  | 5.0  | %                                       |  |  | 4.0  | %
|Tier 1 Capital Ratio           |  |                  | 12.68 | % |                           |  | 6.0  | %                                       |  |  | 8.5  | %
|Total Risk-based Capital Ratio |  |                  | 14.75 | % |                           |  | 10.0 | %                                       |  |  | 10.5 | %



|(1) | Includes deferred tax liability of $41.0 million associated with intangibles.
|--- | -----------------------------------------------------------------------------

Loss Contingency

In September 2010, Lehman Brothers Special
Financing Inc. (LBSF) filed suit in the United States Bankruptcy Court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate
holders who received distributions from the trustees, including Susquehanna, to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate collateralized debt obligation transactions (CDO). In June 2007,
two of our affiliates each purchased $5.0



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million in AAA rated Class A Notes of a CDO offered by Lehman Brothers Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with LBSF. Lehman
Brothers Holdings Inc. (LBHI) guaranteed LBSFs obligations to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an Event of Default under the indenture occurred, and the trustee declared the notes
to be immediately due and payable. Susquehanna was repaid its principal on the notes in September 2008. This legal proceeding is in the early stages of discovery; thus it is not yet possible for us to estimate potential loss, if
any. Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of this proceeding, will have a material adverse effect on our financial position, or cash flows, although,
at the present time, management is not in a position to determine whether such proceeding will have a material adverse effect on our results of operations in any future quarterly reporting period.

Recently Adopted or Issued Accounting Guidance

For information about the impact that recently adopted or issued accounting guidance will have on our financial statements, refer to Note 1. Accounting Policies 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.

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, 2011, our bank subsidiary had approximately $655.3 million available under a collateralized line of credit with the Federal Home Loan Bank
of Pittsburgh; and approximately $526.3 million more would have been available provided that additional collateral had been pledged. Furthermore, at June 30, 2011, we had unused federal funds lines of $943.0 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, 2011, we had unused collateralized availability of $985.1 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 $29.1 million at June 30, 2011 and represented additional sources of liquidity.

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



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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, 2011, our asset/liability position was 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.

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.



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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.

Shareholder Litigation Related to the Merger with Abington

On
March 17, 2011, a putative class action lawsuit was filed in the Court of Common Pleas, Montgomery County, Pennsylvania, against the directors of Abington and Susquehanna, RSD Capital vs. Robert W. White, et al., C.A.
No. 2011-06590. The lawsuit in Montgomery County alleged that the named Abington directors, in approving the Merger Agreement, tortiously interfered with a contractual relationship between Abington and its shareholders and interfered
with a prospective economic advantage of the Abington shareholders. The Complaint also purported to allege that Susquehanna also tortiously interfered with the same contract and alleged prospective economic advantage. Plaintiffs in the
Montgomery County lawsuit, among other things, requested an unspecified amount of monetary damages as well as a temporary restraining order with respect to consummation of the merger. The defendants filed Preliminary Objection seeking the
dismissal of the complaint. On April 13, 2011, the court sustained defendants Preliminary Objections to the complaint, and entered an order dismissing the action against all defendants with prejudice. The period for Plaintiff to appeal
the courts order has not yet expired.

On March 25, 2011, a putative class action lawsuit was filed by separate
plaintiffs in the Court of Common Pleas, Philadelphia County, Pennsylvania, against Abington, Abingtons directors (other than Jack J. Sandoski) and Susquehanna, Exum, et al. vs. Robert W. White, et al., C.A.
No. 110302814. These Plaintiffs had previously made a demand on Abingtons Board of Directors to initiate suit on behalf of Abington and the demand was denied by a committee of Abingtons Board of Directors. The lawsuit in
Philadelphia County, which was also brought as a shareholders derivative suit on behalf of Abington, alleged, among other things, that the Abington Board of Directors breached its fiduciary duties in connection with its approval of the Merger
Agreement in that the consideration offered to Abingtons shareholders in the Merger was alleged to be inadequate and the process used to negotiate the Merger Agreement was alleged to be unfair, and that such breaches of fiduciary duty were
exacerbated by preclusive transaction protection devices. The lawsuit also alleged that the disclosure provided in the joint proxy statement/prospectus of Susquehanna and Abington, dated March 18, 2011 (the Joint Proxy
Statement/Prospectus) and included in the registration statement on Form S-4 filed by Susquehanna with the Securities and Exchange Commission (the SEC) (File No. 333-172626), failed to provide required material information
necessary for Abingtons shareholders to make a fully informed decision concerning the Merger Agreement and the transactions contemplated thereby. The Philadelphia County complaint also alleged that Susquehanna aided and abetted the Abington
Board of Directors in breaching its fiduciary duties. The plaintiffs in Philadelphia County requested, among other things, an unspecified amount of monetary damages and injunctive relief.



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On April 12, 2011, the Plaintiffs in the Philadelphia County lawsuit filed a
Stipulation of Dismissal to dismiss Susquehanna from the action. On April 25, 2011, solely to avoid the costs, risks and uncertainties inherent in litigation and without admitting any of the allegations in the Complaint, Abington and the other
named defendants entered into a Memorandum of Understanding (MOU) with the plaintiffs in the Philadelphia County lawsuit. Susquehanna was also a party to the MOU. Under the terms of the MOU, Abington, the other named defendants,
Susquehanna and the plaintiffs have agreed to settle the lawsuit subject to court approval. If the court approves the settlement contemplated in the memorandum, the lawsuit will be dismissed with prejudice. In connection with the
settlement, plaintiffs intend to seek an award of attorneys fees and expenses not to exceed $250,000 subject to court approval, and Abington has agreed not to oppose plaintiffs application. The amount of the fee award to class
counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration to be paid in the merger. If the settlement is finally approved by the court, it is anticipated that it will resolve and
release all claims in all actions that were or could have been brought challenging any aspect of the Merger, the Merger Agreement, and any disclosure made in connection therewith. There can be no assurance that the parties will ultimately enter
in to a stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be
terminated.

Shareholder Litigation Related to the Merger with Tower

On July 1, 2011, a verified shareholder derivative complaint was filed in the Court of Common Pleas of Dauphin County, Pennsylvania,
against Tower, the members of its board of directors, and Susquehanna. The complaint in the lawsuit, Stephen Bushansky v. Andrew S. Samuel, et al., C.A. No. 2011-cv-6519 (EQ), asserts that the members of Towers board of directors
(Individual Defendants) breached their fiduciary duties by causing the Tower to enter into the merger and further asserts that Susquehanna aided and abetted those alleged breaches of duties. The complaint seeks, among other relief, an
order declaring that the Individual Defendants breached their fiduciary duties, awarding damages on behalf of Tower for the alleged breaches of fiduciary duties by the Individual Defendants (including punitive and actual damages, plaintiffs
counsels fees and experts fees) and enjoining the merger and the use of any defensive measures under the merger agreement or rescinding the merger (if consummated). On July 21, 2011, Mr. Bushansky served a written demand (the
Bushansky Demand) on Towers board of directors alleging that the transaction was unfair, that the Individual Defendants breached their fiduciary duties and requesting that the Individual Defendants terminate the transaction as
structured.

On July 8, 2011, a purported shareholder of Tower, James T. Duffey, served a written demand (Duffey
Demand) on Towers board of directors requesting that the board remedy its alleged failure to engage in an independent and fair process surrounding the merger and requesting the formation of a special committee to renegotiate the terms of
the merger. Tower has acknowledged receipt of the Duffey Demand and is in the process of reviewing the request.

On
July 25, 2011, a purported shareholder of Tower, Edgar L. Johnston, Jr., served a written demand (Johnston Demand) on Towers board of directors requesting that the board remedy its alleged failure to engage in an independent
and fair process surrounding the merger. Tower has acknowledged receipt of the Johnston Demand and is in the process of reviewing the request.

While these cases are in their early stages, Susquehanna believes that the lawsuit and demands are without merit, and intends to defend them vigorously.

Other Legal Proceedings

From time to time, Susquehanna receives subpoenas and other requests for information from various federal and state governmental and regulatory authorities in connection with certain industry-wide,
company-specific or other investigations or proceedings. Susquehannas policy is to fully cooperate with such inquiries. Susquehanna



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and certain of its subsidiaries have been named as defendants in various legal actions arising in connection with Susquehannas business activities. Management, after consultation with
legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of legal proceedings or regulatory matters will have a material adverse effect on Susquehannas financial position or cash flows, although, at the
present time, management is not in a position to determine whether any pending or threatened matters will have a material adverse effect on Susquehannas results of operations in any future quarterly reporting period.

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, 2010. In addition to those risk factors, Susquehanna
shareholders carefully should consider the following additional risk factors:

A downgrade of the United States credit rating
could have a material adverse effect on our business, financial condition and results of operations.

In recent
months, each of Moodys Investors Service, Standard & Poors Corp. and Fitch Ratings has publicly warned of the possibility of a downgrade to the United States credit rating. On August 5, 2011, S&P downgraded its rating
of the United States debt to AA+. Each of Moodys and Fitch has maintained its rating of U.S. debt at AAA. Any credit downgrade (whether by S&P, Moodys, or Fitch), and the attendant perceived risk that the United States may
not pay its debt obligations when due, could have a material adverse effect on financial markets and economic conditions in the United States and throughout the world. In turn, this could have a material adverse effect on our business,
financial condition and results of operations. In particular, these events could have a material adverse effect on the value and liquidity of financial assets, including assets in our investment portfolio. Our investment portfolio at
June 30, 2011 is described in NOTE 3. Investment Securities to our consolidated financial statements in this report and included $1.8 billion of U.S. government agency securities and agency residential mortgage-backed
securities.

Risks relating to our Shareholders in Connection with the Merger with Tower

Changes in the price of our common stock prior to completion of the merger of Tower with and into Susquehanna (the Tower
Merger) may require that we adjust the exchange ratio, which would have an incremental dilutive effect on the ownership interests of each Susquehanna shareholder in the combined company following the Tower Merger.

The merger agreement between Susquehanna and Tower (the Tower Merger Agreement) provides that Tower
shareholders will have the opportunity to elect to receive in exchange for each share of Tower common stock they own immediately prior to completion of the Tower Merger a cash payment of $28.00 or the right to receive a number of shares of
Susquehanna common stock equal to an Exchange Ratio. At the time the Tower Merger Agreement was signed, the Exchange Ratio was set at 3.4696.

If the average closing price of Susquehanna common stock for the twenty consecutive trading days ending on the third day immediately prior to the closing date is less than $6.46 (representing a 20%
decline from a starting price of $8.07) and if the decline on a percentage basis in the average closing price of Susquehanna common stock from $8.07 is at least 20% more than the change in the Nasdaq Bank Index (as measured by comparing its closing
price on June 20, 2011, the date of the Tower Merger Agreement, to the closing price on the date of measurement), referred to herein as a threshold decline in the Susquehanna stock price, Tower will have the right to terminate the Tower Merger
Agreement. If Tower provides notice that it has elected to exercise this termination right, Susquehanna may increase the Exchange Ratio so that the aforementioned conditions would not be triggered, and the Tower Merger Agreement will remain in
effect.

Any such adjustment to the Exchange Ratio would increase the total number of shares of Susquehanna common stock
issued to Tower shareholders, which would have a dilutive effect on the relative ownership interest of each Susquehanna shareholder in the combined company. Accordingly, at the time of the Special Meeting, our shareholders will not be able to assess
whether and to what extent Susquehanna common stock issued in the Tower Merger will impact their relative holdings in the combined company following the Tower Merger.



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The required regulatory approvals and filings may not be obtained or completed, may
delay the date of completion of the Tower Merger or may contain materially burdensome conditions.

Susquehanna and
Tower will be required to complete and obtain regulatory approval with respect to certain filings and/or applications regarding the Tower Merger. These approvals and filings may include, among other items, applications and notices filed with the
Board of Governors of the Federal Reserve System, filings and approvals under the securities or Blue Sky laws of various states, approval of the listing of Susquehannas common stock on The Nasdaq Global Select Market, approval of
the Tower Merger by the Pennsylvania Department of Banking and/or related filings pursuant to the Pennsylvania Banking Code, as amended, notices filed with the Maryland Office of the Commissioner of Financial Regulation, and such other relevant
filings, registrations, authorizations or approvals as may be required by a governmental or regulatory entity. Such filings and approvals must be completed prior to effecting the Tower Merger. Susquehanna and Tower have agreed to use their
reasonable best efforts to complete these filings and obtain these approvals; however, satisfying any requirements of regulatory agencies may delay the date of completion of the Tower Merger or such approval may not be obtained at all. In
addition, you should be aware that, as in any transaction, it is possible that, among other things, restrictions on Susquehanna after the Tower Merger may be sought by governmental agencies as a condition to obtaining the required regulatory
approvals and these conditions could be materially burdensome to Susquehanna following the closing of the Tower Merger. We cannot assure you as to whether these regulatory approvals will be received, the timing of the approvals or whether any
conditions will be imposed.

Failure to complete the Tower Merger could negatively affect the market price of our common stock.

If the Tower Merger is not completed for any reason, we will be subject to a number of material risks, including the
following:



| |  |  | the market price of our common stock may decline to the extent that the current market price of our shares reflects a market assumption that the Tower
Merger will be completed;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs relating to the Tower Merger, such as legal, accounting and financial advisory fees, and, in specified circumstances, termination fees, must be
paid even if the Tower Merger is not completed; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the diversion of managements attention from the day-to-day business operations and the potential disruption to our employees and business
relationships during the period before the completion of the Tower Merger may make it difficult to regain financial and market positions if the Tower Merger does not occur.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Susquehanna and Tower will be subject to business uncertainties and contractual restrictions while the Tower Merger is pending.

Uncertainties about the effect of the Tower Merger on our and Towers businesses may have an adverse effect on
each company. These uncertainties may also impair Towers ability to attract, retain and motivate strategic personnel until the Tower Merger is consummated, and could cause Towers customers and others that deal with Tower to
seek to change existing business relationship, which could negatively impact Susquehanna upon consummation of the Tower Merger. In addition, the Tower Merger Agreement restricts us from taking certain specified actions without Towers
consent until the Tower Merger is consummated. These restrictions may prevent us from pursuing or taking advantage of attractive business opportunities that may arise prior to the completion of the Tower Merger.

Both the proposed merger with Tower and the merger with Abington are pending concurrently, which may increase the risks associated
with each of these mergers as well as place a strain on our financial and personnel resources that could adversely impact our business.



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On May 6, 2011, shareholders of Susquehanna and Abington approved the merger with
Abington, which is expected to close on or around October 1, 2011. The merger with Tower is expected to close during the first quarter of 2012. While the Tower and Abington mergers are pending concurrently, these mergers will cause Susquehanna
to continue to incur significant expenditures and will require substantial attention and effort from our management and other personnel. Our current and planned operations, personnel, facility size and configuration, systems and internal procedures
and controls might be inefficient or inadequate to supports these efforts at the same time. In addition, the risks associated with each of these mergers, as described herein, in our Joint Proxy/Registration Statement on Form S-4 filed with the SEC
on March 18, 2011, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, may increase while both mergers are pending. The increased risks and obligations associated with the concurrently pending mergers could
place a strain our financial position and personnel resources, which may adversely affect our stock price, revenues, results of operations and/or financial condition.

Risks Relating to Combined Operations Following the Tower Merger

Susquehanna may fail to realize the cost savings estimated for the Tower Merger.

The success of the Tower Merger will depend, in part, on Susquehannas ability to realize the estimated cost savings from combining
Towers business with ours. Our management estimated at the time the proposed Tower Merger was announced that it expects to achieve total cost savings of approximately $30 million. While we continue to believe these cost savings estimates are
achievable as of the date of filing of this Quarterly Report on Form 10-Q, it is possible that the potential cost savings could turn out to be more difficult to achieve than originally anticipated. The cost savings estimates also depend on the
ability to combine the businesses of Susquehanna and Tower in a manner that permits those cost savings to be realized. If the estimates of Susquehanna and Tower turn out to be incorrect or we are not able to successfully combine with Tower, the
anticipated cost savings may not be realized fully or at all, or may take longer to realize than expected.

Unanticipated costs relating to the Tower Merger could reduce Susquehannas future earnings per share.

We believe that we have reasonably estimated the likely incremental costs of the combined operations of Susquehanna and Tower following
the Merger. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as unanticipated costs to integrate the two businesses, increased personnel costs or
increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of Susquehanna following the Tower Merger. In addition, if actual costs are
materially different than expected costs, the Merger could have a significant dilutive effect on our earnings per share.

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.



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Item 6. Exhibits.

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



|     |  |                                                                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.1  |  | Agreement and Plan of Merger between Susquehanna and Tower Bancorp, Inc., dated June 20, 2011, incorporated by reference to Exhibit 2.1 of Susquehannas Current Report on
Form 8-K, filed June 21, 2011.
|     | 
|3.1  |  | Amended and Restated Articles of Incorporation, dated May 6, 2011, is filed herewith as Exhibit 3.1.                                                                                                     
|     | 
|3.2  |  | Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehannas Current Report on Form 8-K, filed March 2,
2011.                                        
|     | 
|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 are 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 5, 2011 |  |  |  | /s/    WILLIAM J.
REUTER                                        
|               |  |  |  | William J. Reuter                                               
|               |  |  |  | Chairman and Chief Executive Officer                            
|               |  | 
|August 5, 2011 |  |  |  | /s/    DREW K.
HOSTETTER                                        
|               |  |  |  | Drew K. Hostetter                                               
|               |  |  |  | Executive Vice President, Treasurer, and Chief Financial Officer



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EXHIBIT INDEX



|                |  |                                                                                                                                                                                                          
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Numbers |  | Description and Method of Filing                                                                                                                                                                         
|                | 
|2.1             |  | Agreement and Plan of Merger between Susquehanna and Tower Bancorp, Inc., dated June 20, 2011, incorporated by reference to Exhibit 2.1 of Susquehannas Current Report on Form
8-K, filed June 21, 2011.
|                | 
|3.1             |  | Amended and Restated Articles of Incorporation, dated May 6, 2011, is filed herewith as Exhibit 3.1.                                                                                                     
|                | 
|3.2             |  | Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehannas Current Report on Form 8-K, filed March 2,
2011.                                        
|                | 
|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 are filed herewith as Exhibit 32.                                                                                                                                            



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