##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



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 0-10674



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Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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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 is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes  x    No ̈



Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.



46,508,702
shares of common stock, par value $2.00 per share, as of October 28, 2004.



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##### Table of Contents

SUSQUEHANNA BANCSHARES, INC.



TABLE OF
CONTENTS



|              |  |                                                                                                                              |  |   
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I.       |  | FINANCIAL INFORMATION                                                                                                        |  |   
|              |  |                                                                                                                             
|Item 1        |  | Financial Statements                                                                                                         |  |   
|              |  |                                                                                                                             
|              |  | Consolidated Balance Sheets  as of September 30, 2004 and 2003 (unaudited), and December 31, 2003                           |  | 3 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Income  for the three and nine months ended September 30, 2004 and 2003 (unaudited)              |  | 4 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Cash Flows - for the nine months ended September 30, 2004 and 2003 (unaudited)                    |  | 5 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2004 and 2003 (unaudited) |  | 7 
|              |  |                                                                                                                             
|              |  | Notes to the Consolidated Financial Statements (unaudited)                                                                   |  | 8 
|              |  |                                                                                                                             
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 15
|              |  |                                                                                                                             
|Item 3        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                   |  | 30
|              |  |                                                                                                                             
|Item 4        |  | Controls and Procedures                                                                                                      |  | 38
|              |  |                                                                                                                             
|PART II.      |  | OTHER INFORMATION                                                                                                            |  |   
|              |  |                                                                                                                             
|Item 6        |  | Exhibits and Reports on Form 8-K                                                                                             |  | 39
|              | 
|SIGNATURES    |  | 40                                                                                                                          
|              | 
|EXHIBIT INDEX |  | 41                                                                                                                          



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



Susquehanna Bancshares, Inc. and Subsidiaries



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | --------------- | - | --------- | ---------------- |  | - | --------- | -
|                                                                                                                                                                             |  | September 302004                  |           | December 312003 |   |           | September 302003 | 
|                                                                                                                                                                             |  | (in thousands, except share data) |          
|Assets                                                                                                                                                                       |  |                                   |           |                 |   |           |                  |  |   |           |  
|Cash and due from banks                                                                                                                                                      |  | $                                 | 182,857   |                 | $ | 176,240   |                  |  | $ | 164,444   |  
|Short-term investments:                                                                                                                                                      |  |                                   |           |                 |   |           |                  |  |   |           |  
|Restricted                                                                                                                                                                   |  |                                   | 26,637    |                 |   | 44,817    |                  |  |   | 57,798    |  
|Unrestricted                                                                                                                                                                 |  |                                   | 26,952    |                 |   | 34,145    |                  |  |   | 38,641    |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Total short-term investments                                                                                                                                                 |  |                                   | 53,589    |                 |   | 78,962    |                  |  |   | 96,439    |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Securities available for sale                                                                                                                                                |  |                                   | 1,289,222 |                 |   | 983,882   |                  |  |   | 1,018,747 |  
|Securities held to maturity (fair values approximate $4,602, $4,340 and $3,784)                                                                                              |  |                                   | 4,602     |                 |   | 4,340     |                  |  |   | 3,784     |  
|Loans and leases, net of unearned income                                                                                                                                     |  |                                   | 5,166,137 |                 |   | 4,263,272 |                  |  |   | 4,147,957 |  
|Less: Allowance for loan and lease losses                                                                                                                                    |  |                                   | 52,468    |                 |   | 42,672    |                  |  |   | 41,513    |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Net loans and leases                                                                                                                                                         |  |                                   | 5,113,669 |                 |   | 4,220,600 |                  |  |   | 4,106,444 |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Premises and equipment, net                                                                                                                                                  |  |                                   | 80,399    |                 |   | 62,961    |                  |  |   | 59,959    |  
|Foreclosed assets                                                                                                                                                            |  |                                   | 1,210     |                 |   | 2,893     |                  |  |   | 2,081     |  
|Accrued income receivable                                                                                                                                                    |  |                                   | 21,711    |                 |   | 17,494    |                  |  |   | 17,192    |  
|Bank-owned life insurance                                                                                                                                                    |  |                                   | 247,336   |                 |   | 200,555   |                  |  |   | 179,625   |  
|Goodwill                                                                                                                                                                     |  |                                   | 239,432   |                 |   | 59,123    |                  |  |   | 59,123    |  
|Intangible assets with finite lives                                                                                                                                          |  |                                   | 12,640    |                 |   | 4,372     |                  |  |   | 4,529     |  
|Investment in unconsolidated subsidiaries                                                                                                                                    |  |                                   | 62,541    |                 |   | 42,717    |                  |  |   | 41,168    |  
|Other assets                                                                                                                                                                 |  |                                   | 140,648   |                 |   | 98,968    |                  |  |   | 99,877    |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|                                                                                                                                                                             |  | $                                 | 7,449,856 |                 | $ | 5,953,107 |                  |  | $ | 5,853,412 |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                         |  |                                   |           |                 |   |           |                  |  |   |           |  
|Deposits:                                                                                                                                                                    |  |                                   |           |                 |   |           |                  |  |   |           |  
|Demand                                                                                                                                                                       |  | $                                 | 817,744   |                 | $ | 724,474   |                  |  | $ | 688,897   |  
|Interest-bearing demand                                                                                                                                                      |  |                                   | 1,811,651 |                 |   | 1,295,593 |                  |  |   | 1,185,433 |  
|Savings                                                                                                                                                                      |  |                                   | 574,339   |                 |   | 508,889   |                  |  |   | 503,349   |  
|Time                                                                                                                                                                         |  |                                   | 1,375,371 |                 |   | 1,251,058 |                  |  |   | 1,250,593 |  
|Time of $100 or more                                                                                                                                                         |  |                                   | 506,465   |                 |   | 354,453   |                  |  |   | 344,446   |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Total deposits                                                                                                                                                               |  |                                   | 5,085,570 |                 |   | 4,134,467 |                  |  |   | 3,972,718 |  
|Short-term borrowings                                                                                                                                                        |  |                                   | 460,820   |                 |   | 355,553   |                  |  |   | 427,032   |  
|FHLB borrowings                                                                                                                                                              |  |                                   | 750,049   |                 |   | 613,850   |                  |  |   | 603,105   |  
|Long-term debt                                                                                                                                                               |  |                                   | 200,000   |                 |   | 130,000   |                  |  |   | 130,000   |  
|Junior subordinated debentures                                                                                                                                               |  |                                   | 23,397    |                 |   | 0         |                  |  |   | 0         |  
|Accrued interest, taxes, and expenses payable                                                                                                                                |  |                                   | 58,185    |                 |   | 35,791    |                  |  |   | 37,987    |  
|Deferred taxes                                                                                                                                                               |  |                                   | 94,431    |                 |   | 104,281   |                  |  |   | 93,865    |  
|Other liabilities                                                                                                                                                            |  |                                   | 30,991    |                 |   | 31,783    |                  |  |   | 47,496    |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Total liabilities                                                                                                                                                            |  |                                   | 6,703,443 |                 |   | 5,405,725 |                  |  |   | 5,312,203 |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Shareholders equity:                                                                                                                                                        |  |                                   |           |                 |   |           |                  |  |   |           |  
|Common stock, $2.00 par value, 100,000,000 shares authorized; Issued: 46,504,941 at Septembr 30, 2004; 39,861,317 at December 31, 2003; and
39,828,643 at September 30, 2003 |  |                                   | 93,010    |                 |   | 79,723    |                  |  |   | 79,657    |  
|Additional paid-in capital                                                                                                                                                   |  |                                   | 225,021   |                 |   | 66,264    |                  |  |   | 65,714    |  
|Retained earnings                                                                                                                                                            |  |                                   | 426,607   |                 |   | 403,450   |                  |  |   | 398,198   |  
|Accumulated other comprehensive income (loss), net of taxes of $956, ($1,107), and ($1,271)                                                                                  |  |                                   | 1,775     |                 |   | (2,055    | )                |  |   | (2,360    | )
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|Total shareholders equity                                                                                                                                                   |  |                                   | 746,413   |                 |   | 547,382   |                  |  |   | 541,209   |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  
|                                                                                                                                                                             |  | $                                 | 7,449,856 |                 | $ | 5,953,107 |                  |  | $ | 5,853,412 |  
|                                                                                                                                                                             |  |                                   |           |                 |   |           |                  |  |   |           |  



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



|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|-------------------------------------------------------------- |  | ------------------------------ | ------ | ----------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                                               |  | Three Months EndedSeptember 30 |        | Nine Months EndedSeptember 30
|(in thousands, except per share data)                          |  | 2004                           |        | 2003                          |   | 2004   |  | 2003
|Interest Income:                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Loans and leases, including fees                               |  | $                              | 74,255 |                               | $ | 61,165 |  | $    | 198,790 |  | $ | 184,000
|Securities:                                                    |  |                                |        |                               |   |        |  |      |         |  |   |        
|Taxable                                                        |  |                                | 11,761 |                               |   | 6,526  |  |      | 29,174  |  |   | 28,380 
|Tax-exempt                                                     |  |                                | 508    |                               |   | 322    |  |      | 1,067   |  |   | 1,156  
|Dividends                                                      |  |                                | 765    |                               |   | 249    |  |      | 1,655   |  |   | 898    
|Short-term investments                                         |  |                                | 159    |                               |   | 180    |  |      | 543     |  |   | 542    
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Total interest income                                          |  |                                | 87,448 |                               |   | 68,442 |  |      | 231,229 |  |   | 214,976
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Interest Expense:                                              |  |                                |        |                               |   |        |  |      |         |  |   |        
|Deposits:                                                      |  |                                |        |                               |   |        |  |      |         |  |   |        
|Interest-bearing demand                                        |  |                                | 5,092  |                               |   | 2,115  |  |      | 11,452  |  |   | 7,258  
|Savings                                                        |  |                                | 655    |                               |   | 399    |  |      | 1,487   |  |   | 1,608  
|Time                                                           |  |                                | 12,554 |                               |   | 12,340 |  |      | 35,977  |  |   | 39,439 
|Short-term borrowings                                          |  |                                | 1,228  |                               |   | 950    |  |      | 2,646   |  |   | 2,718  
|FHLB borrowings                                                |  |                                | 5,946  |                               |   | 5,419  |  |      | 16,254  |  |   | 17,054 
|Long-term debt                                                 |  |                                | 3,561  |                               |   | 2,398  |  |      | 8,965   |  |   | 7,780  
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Total interest expense                                         |  |                                | 29,036 |                               |   | 23,621 |  |      | 76,781  |  |   | 75,857 
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Net interest income                                            |  |                                | 58,412 |                               |   | 44,821 |  |      | 154,448 |  |   | 139,119
|Provision for loan and lease losses                            |  |                                | 2,783  |                               |   | 2,665  |  |      | 6,590   |  |   | 7,545  
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Net interest income, after provision for loan and lease losses |  |                                | 55,629 |                               |   | 42,156 |  |      | 147,858 |  |   | 131,574
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Noninterest Income:                                            |  |                                |        |                               |   |        |  |      |         |  |   |        
|Service charges on deposit accounts                            |  |                                | 5,955  |                               |   | 5,283  |  |      | 16,270  |  |   | 14,573 
|Vehicle origination, servicing, and securitization fees        |  |                                | 4,894  |                               |   | 6,550  |  |      | 15,575  |  |   | 21,120 
|Asset management fees                                          |  |                                | 3,784  |                               |   | 2,570  |  |      | 10,478  |  |   | 7,369  
|Income from fiduciary-related activities                       |  |                                | 1,434  |                               |   | 1,442  |  |      | 4,260   |  |   | 4,390  
|Commissions on brokerage, life insurance, and annuity sales    |  |                                | 943    |                               |   | 735    |  |      | 2,999   |  |   | 1,511  
|Commissions on property and casualty insurance sales           |  |                                | 2,101  |                               |   | 1,860  |  |      | 6,690   |  |   | 6,092  
|Income from bank-owned life insurance                          |  |                                | 2,430  |                               |   | 1,864  |  |      | 6,694   |  |   | 4,939  
|Net gain on sale of loans and leases                           |  |                                | 977    |                               |   | 3,888  |  |      | 7,625   |  |   | 8,828  
|Net gain on securities                                         |  |                                | 3,770  |                               |   | 1,926  |  |      | 4,338   |  |   | 2,110  
|Other                                                          |  |                                | 3,834  |                               |   | 2,562  |  |      | 9,621   |  |   | 8,163  
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Total noninterest income                                       |  |                                | 30,122 |                               |   | 28,680 |  |      | 84,550  |  |   | 79,095 
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Noninterest Expenses:                                          |  |                                |        |                               |   |        |  |      |         |  |   |        
|Salaries and employee benefits                                 |  |                                | 28,331 |                               |   | 23,699 |  |      | 78,127  |  |   | 68,401 
|Occupancy                                                      |  |                                | 4,160  |                               |   | 3,357  |  |      | 11,544  |  |   | 10,256 
|Furniture and equipment                                        |  |                                | 2,388  |                               |   | 1,985  |  |      | 6,675   |  |   | 6,454  
|Amortization of intangible assets                              |  |                                | 413    |                               |   | 157    |  |      | 792     |  |   | 470    
|Vehicle residual value                                         |  |                                | 1,663  |                               |   | 1,758  |  |      | 4,053   |  |   | 4,833  
|Vehicle delivery and preparation                               |  |                                | 4,596  |                               |   | 3,531  |  |      | 11,291  |  |   | 9,116  
|Other                                                          |  |                                | 17,951 |                               |   | 13,862 |  |      | 47,685  |  |   | 42,055 
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Total noninterest expenses                                     |  |                                | 59,502 |                               |   | 48,349 |  |      | 160,167 |  |   | 141,585
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Income before income taxes                                     |  |                                | 26,249 |                               |   | 22,487 |  |      | 72,241  |  |   | 69,084 
|Provision for income taxes                                     |  |                                | 7,743  |                               |   | 6,513  |  |      | 21,310  |  |   | 20,725 
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Net Income                                                     |  | $                              | 18,506 |                               | $ | 15,974 |  | $    | 50,931  |  | $ | 48,359 
|                                                               |  |                                |        |                               |   |        |  |      |         |  |   |        
|Earnings per share:                                            |  |                                |        |                               |   |        |  |      |         |  |   |        
|Basic                                                          |  | $                              | 0.40   |                               | $ | 0.40   |  | $    | 1.20    |  | $ | 1.22   
|Diluted                                                        |  | $                              | 0.40   |                               | $ | 0.40   |  | $    | 1.19    |  | $ | 1.21   
|Cash dividends                                                 |  | $                              | 0.22   |                               | $ | 0.22   |  | $    | 0.66    |  | $ | 0.64   
|Average shares outstanding:                                    |  |                                |        |                               |   |        |  |      |         |  |   |        
|Basic                                                          |  |                                | 46,478 |                               |   | 39,789 |  |      | 42,596  |  |   | 39,712 
|Diluted                                                        |  |                                | 46,711 |                               |   | 40,127 |  |      | 42,883  |  |   | 39,998 

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 CASH FLOWS



(Dollars in thousands)



|                                                                                  |  |      |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|Nine months ended September 30,                                                   |  | 2004 |          |   | 2003 |  
|Cash Flows from Operating Activities:                                             |  |      |          |   |      |   |          |  
|Net income                                                                        |  | $    | 50,931   |   |      | $ | 48,359   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |          |   |      |   |          |  
|Depreciation, amortization, and accretion                                         |  |      | 11,920   |   |      |   | 19,573   |  
|Provision for loan and lease losses                                               |  |      | 6,590    |   |      |   | 7,545    |  
|Realized gain on sales of available-for-sale securities, net                      |  |      | (4,338   | ) |      |   | (2,110   | )
|Deferred income taxes                                                             |  |      | (9,850   | ) |      |   | 8,197    |  
|Gain on sale of loans and leases                                                  |  |      | (7,625   | ) |      |   | (8,828   | )
|Gain on sale of other real estate owned                                           |  |      | (441     | ) |      |   | (254     | )
|Mortgage loans originated for sale                                                |  |      | (100,547 | ) |      |   | (162,102 | )
|Proceeds from sale of mortgage loans originated for sale                          |  |      | 102,772  |   |      |   | 168,620  |  
|Leases acquired/originated for sale                                               |  |      | (194,852 | ) |      |   | (123,619 | )
|Proceeds from sale of leases acquired/originated for sale                         |  |      | 179,971  |   |      |   | 115,584  |  
|Increase in cash surrender value of bank-owned life insurance                     |  |      | (6,694   | ) |      |   | (4,939   | )
|Net gain on sale of branch deposits                                               |  |      | (1,068   | ) |      |   | 0        |  
|(Increase) decrease in accrued interest receivable                                |  |      | (4,217   | ) |      |   | 3,387    |  
|Increase (decrease) in accrued interest payable                                   |  |      | 2,768    |   |      |   | (4,454   | )
|Increase in accrued expenses and taxes payable                                    |  |      | 21,681   |   |      |   | 6,200    |  
|Other, net                                                                        |  |      | (7,646   | ) |      |   | 33,700   |  
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |      | 39,355   |   |      |   | 104,859  |  
|                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Investing Activities:                                             |  |      |          |   |      |   |          |  
|Net (increase) decrease in restricted short-term investments                      |  |      | 18,180   |   |      |   | (27,187  | )
|Activity in available-for-sale securities:                                        |  |      |          |   |      |   |          |  
|Sales                                                                             |  |      | 207,159  |   |      |   | 118,046  |  
|Maturities, repayments and calls                                                  |  |      | 356,958  |   |      |   | 743,382  |  
|Purchases                                                                         |  |      | (554,884 | ) |      |   | (789,785 | )
|Net increase in loans and leases                                                  |  |      | (266,442 | ) |      |   | (327,598 | )
|Purchase of bank-owned life insurance                                             |  |      | (29,900  | ) |      |   | (50,000  | )
|Acquisition of Patriot, net of cash acquired                                      |  |      | (28,709  | ) |      |   | 0        |  
|Capitalized acquisition costs                                                     |  |      | (7,569   | ) |      |   | 0        |  
|Sale of branch deposits, net of premium received                                  |  |      | (8,949   | ) |      |   | 0        |  
|Additions to premises and equipment                                               |  |      | (11,229  | ) |      |   | (5,154   | )
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash used for investing activities                                            |  |      | (325,385 | ) |      |   | (338,296 | )
|                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Financing Activities:                                             |  |      |          |   |      |   |          |  
|Net increase in deposits                                                          |  |      | 312,323  |   |      |   | 141,403  |  
|Net increase in short-term borrowings                                             |  |      | 105,266  |   |      |   | 129,004  |  
|Net increase (decrease) in FHLB borrowings                                        |  |      | (177,529 | ) |      |   | 59,939   |  
|Repayment of long-term debt                                                       |  |      | (5,000   | ) |      |   | (50,000  | )
|Proceeds from issuance of long-term debt                                          |  |      | 74,356   |   |      |   | 0        |  
|Proceeds from issuance of common stock                                            |  |      | 3,812    |   |      |   | 3,236    |  
|Cash dividends paid                                                               |  |      | (27,774  | ) |      |   | (25,405  | )
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |      | 285,454  |   |      |   | 258,177  |  
|                                                                                  |  |      |          |   |      |   |          |  



5



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries



CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



|                                                      |  |   |           |   |  |   |         |  
|----------------------------------------------------- |  | - | --------- | - |  | - | ------- | -
|Net change in cash and cash equivalents               |  |   | (576      | ) |  |   | 24,740  |  
|Cash and cash equivalents at January 1                |  |   | 210,385   |   |  |   | 178,345 |  
|                                                      |  |   |           |   |  |   |         |  
|Cash and cash equivalents at September 30             |  | $ | 209,809   |   |  | $ | 203,085 |  
|                                                      |  |   |           |   |  |   |         |  
|Cash and cash equivalents:                            |  |   |           |   |  |   |         |  
|Cash and due from banks                               |  | $ | 182,857   |   |  | $ | 164,444 |  
|Unrestricted short-term investments                   |  |   | 26,952    |   |  |   | 38,641  |  
|                                                      |  |   |           |   |  |   |         |  
|Cash and cash equivalents at September 30             |  | $ | 209,809   |   |  | $ | 203,085 |  
|                                                      |  |   |           |   |  |   |         |  
|Supplemental Disclosure of Cash Flow Information      |  |   |           |   |  |   |         |  
|                                                      |  |  
|Cash paid for interest on deposits and borrowings     |  | $ | 74,013    |   |  | $ | 80,311  |  
|Income tax payments (refunds)                         |  | $ | (3,151    | ) |  | $ | (10,426 | )
|                                                      |  |  
|Supplemental Schedule of Noncash Investing Activities |  |   |           |   |  |   |         |  
|                                                      |  |  
|Real estate acquired in settlement of loans           |  | $ | 1,154     |   |  | $ | 1,963   |  
|                                                      |  |  
|Acquisition of Patriot Bank Corp.                     |  |   |           |   |  |   |         |  
|Common stock issued                                   |  | $ | 166,454   |   |  | $ | 0       |  
|Fair value of assets acquired (noncash)               |  | $ | 1,138,122 |   |  | $ | 0       |  
|Liabilities assumed                                   |  | $ | 985,922   |   |  | $ | 0       |  



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



6



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Susquehanna Bancshares, Inc. and Subsidiaries



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(Dollars in thousands, except share data)



|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ----------- | ------ | ------------------------ | - | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ------- | - |  | - | ------- | -
|Nine months ended September 30                                                                                       |  | Shares ofCommonStock |  | CommonStock |        | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |        
|Balance at January 1, 2003                                                                                           |  | 39,638,447           |  | $           | 79,277 |                          | $ | 62,858           |  | $ | 375,244                                    |   |  | $     | 16,476  |   |  | $ | 533,855 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Comprehensive income:                                                                                                |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Net income                                                                                                           |  |                      |  |             |        |                          |   |                  |  |   | 48,359                                     |   |  |       |         |   |  |   | 48,359  |  
|Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effect |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | (14,887 | ) |  |   | (14,887 | )
|Change in unrealized gain on recorded interest in securitized assets, net of taxes                                   |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | (3,949  | ) |  |   | (3,949  | )
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Total comprehensive income                                                                                           |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   | 29,523  |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Common stock issued under employee benefit plans (includes related tax benefit of $659)                              |  | 190,196              |  |             | 380    |                          |   | 2,856            |  |   |                                            |   |  |       |         |   |  |   | 3,236   |  
|Cash dividends declared ($0.64 per share)                                                                            |  |                      |  |             |        |                          |   |                  |  |   | (25,405                                    | ) |  |       |         |   |  |   | (25,405 | )
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Balance at September 30, 2003                                                                                        |  | 39,828,643           |  | $           | 79,657 |                          | $ | 65,714           |  | $ | 398,198                                    |   |  | $     | (2,360  | ) |  | $ | 541,209 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Balance at January 1, 2004                                                                                           |  | 39,861,317           |  | $           | 79,723 |                          | $ | 66,264           |  | $ | 403,450                                    |   |  | $     | (2,055  | ) |  | $ | 547,382 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Comprehensive income:                                                                                                |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Net income                                                                                                           |  |                      |  |             |        |                          |   |                  |  |   | 50,931                                     |   |  |       |         |   |  |   | 50,931  |  
|Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effect |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | 4,554   |   |  |   | 4,554   |  
|Change in unrealized gain on recorded interest in securitized assets, net of tax effect                              |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | (724    | ) |  |   | (724    | )
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Total comprehensive income                                                                                           |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   | 54,761  |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Common stock issued in acquisition                                                                                   |  | 6,402,074            |  |             | 12,804 |                          |   | 155,428          |  |   |                                            |   |  |       |         |   |  |   | 168,232 |  
|Common stock issued under employee benefit plans (includes related tax benefit of $786)                              |  | 241,550              |  |             | 483    |                          |   | 3,329            |  |   |                                            |   |  |       |         |   |  |   | 3,812   |  
|Cash dividends declared ($0.66 per share)                                                                            |  |                      |  |             |        |                          |   |                  |  |   | (27,774                                    | ) |  |       |         |   |  |   | (27,774 | )
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Balance at September 30, 2004                                                                                        |  | 46,504,941           |  | $           | 93,010 |                          | $ | 225,021          |  | $ | 426,607                                    |   |  | $     | 1,775   |   |  | $ | 746,413 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  



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

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



NOTE 1. Accounting Policies



The information contained in this report is unaudited and is subject to year-end adjustments. Certain prior year amounts have been reclassified to conform
with current period classifications. The adjustments had no effect on gross revenues, gross expenses or net income. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods
ended September 30, 2004 and 2003.



The accounting policies of
Susquehanna Bancshares, Inc. and Subsidiaries, 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 58 through 66 of the Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.



Recent Accounting
Pronouncements.



In May 2004, the Financial
Accounting Standards Board staff issued FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This FSP provides guidance on the accounting for the
effect of the Medicare Prescription Act of 2003 for employers that sponsor post- retirement health care plans that provide prescription drug benefits. The FSP also requires those employers to provide certain disclosure regarding the effect of the
federal subsidy provided by the Act. This FSP is effective for the first interim or annual period beginning after June 14, 2004. Adoption of this FSP had no material effect on financial condition or results of operations.



In December 2003, the Financial Accounting Standards Board issued FAS No. 132
(revised 2003), Employers Disclosure about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106. This statement improves financial statement disclosures for defined benefit plans by
requiring additional disclosures to those in the original Statement No. 132 about assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. With
certain exceptions, this statement was effective for fiscal years ending after December 15, 2003. Susquehanna adopted this statement as of December 31, 2003, and the additional interim pension and other postretirement benefit disclosures are
included in Note 8 to these financial statements.



In addition,
in December 2003, the Financial Accounting Standards Board reissued FIN 46 (FIN 46R) with certain modifications and clarifications. Application of this guidance was effective for interests in certain Variable Interest Entities (VIEs), commonly
referred to as special-purpose entities (SPEs) as of December 31, 2003. Application for all other types of

entities was required for periods ending after
March 15, 2004, unless previously applied. Considering these modifications and clarifications, management has determined that consolidation of Susquehannas VIE was still not required.



NOTE 2. Acquisitions



Patriot Bank Corp.



On June 10, 2004, Susquehanna acquired 100% of the outstanding voting shares of Patriot Bank Corp., a financial services company with total assets in
excess of $1.0 billion, and the holding company for Patriot Bank. The results of Patriots operations have been included in the consolidated financial statements since that date. Concurrent with the closing, Susquehanna merged Patriot Bank into
Equity Bank, a wholly owned Susquehanna subsidiary. The combined bank, with assets of approximately $2.1 billion, is now known as Susquehanna Patriot Bank, headquartered in Marlton, New Jersey, and operates 36 banking centers in eastern Pennsylvania

and southern New Jersey. The transaction enhances Susquehannas strong presence in Pennsylvania, particularly in the high-growth counties of Berks,
Chester, Lehigh, Montgomery, and Northampton.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



Under the terms of the merger, each
share of Patriot common stock was exchanged for 1.143 shares of Susquehanna common stock, $30.00 in cash, or a combination thereof, resulting in the issuance of 6,402 shares of Susquehanna common stock and a cash payment of $40,739, net of tax
benefit. The total purchase price was $208,517. The value of the common shares issued was determined based on the market price of Susquehanna common shares at the close of business immediately prior to the announcement.



The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.



|                                             |  |   |          
|-------------------------------------------- |  | - | ---------
|Assets                                       |  |   |          
|Cash and cash equivalents                    |  | $ | 13,804   
|Securities                                   |  |   | 303,584  
|Loans and leases, net of allowance of $9,149 |  |   | 642,322  
|Premises and other equipment                 |  |   | 11,728   
|Goodwill and other intangibles               |  |   | 188,285  
|Other assets                                 |  |   | 43,106   
|                                             |  |   |          
|Total assets acquired                        |  | $ | 1,202,829
|                                             |  |   |          
|Liabilities                                  |  |   |          
|Deposits                                     |  | $ | 648,797  
|Borrowings                                   |  |   | 337,125  
|Other Liabilities                            |  |   | 8,390    
|                                             |  |   |          
|Total liabilities assumed                    |  |   | 994,312  
|                                             |  |   |          
|Net assets acquired                          |  | $ | 208,517  
|                                             |  |   |          



Of the $188,285 of
acquired intangible assets, $7,976 was assigned to core deposit intangibles that will be amortized over 10 years.



Presented below is certain unaudited pro forma information for the three and nine month periods ended September 30, 2004 and 2003 as if Patriot had been
acquired on January 1, 2004 and 2003 with respect to the nine-month periods ended September 30, 2004

and 2003, and as if Patriot had been acquired at the
beginning of each interim period presented with respect to the three-month period ended September 30, 2003. These results combine the historical results of Patriot, including the termination of certain employee

benefit programs and costs incurred in connection with the merger, with Susquehannas consolidated statements of income and, while certain adjustments were made for
the estimated impact of purchase accounting adjustments, they are not necessarily indicative of

what would have occurred had the acquisition taken place on
the indicated dates.



|            |  |                                |        |                               |   |        |  |      |        |  |   |       
|----------- |  | ------------------------------ | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|            |  | Three Months EndedSeptember 30 |        | Nine Months EndedSeptember 30
|            |  | 2004 Actual                    |        | 2003                          |   | 2004   |  | 2003
|Net income  |  | $                              | 18,506 |                               | $ | 18,593 |  | $    | 44,627 |  | $ | 57,078
|Basic EPS   |  | $                              | 0.40   |                               | $ | 0.40   |  | $    | 0.96   |  | $ | 1.24  
|Diluted EPS |  | $                              | 0.40   |                               | $ | 0.40   |  | $    | 0.96   |  | $ | 1.23  



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



NOTE 3. Investment Securities



The amortized costs and fair values of securities were as follows:



|                            |  |                    |           |                   |   |                |  |            |         |  |   |        
|--------------------------- |  | ------------------ | --------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                            |  | September 30, 2004 |           | December 31, 2003
|                            |  | Amortized cost     |           | Fair value        |   | Amortized cost |  | Fair value
|Available-for-sale:         |  |                    |           |                   |   |                |  |            |         |  |   |        
|U.S. Treasury               |  | $                  | 0         |                   | $ | 0              |  | $          | 200     |  | $ | 202    
|U.S. Government agencies    |  |                    | 240,757   |                   |   | 240,942        |  |            | 84,352  |  |   | 84,679 
|State & municipal           |  |                    | 39,476    |                   |   | 40,899         |  |            | 18,123  |  |   | 18,793 
|Mortgage-backed             |  |                    | 939,981   |                   |   | 941,650        |  |            | 836,962 |  |   | 832,248
|Other debt securities       |  |                    | 7,368     |                   |   | 7,439          |  |            | 7,342   |  |   | 7,409  
|Equities                    |  |                    | 57,882    |                   |   | 58,292         |  |            | 40,151  |  |   | 40,551 
|                            |  |                    |           |                   |   |                |  |            |         |  |   |        
|                            |  |                    | 1,285,464 |                   |   | 1,289,222      |  |            | 987,130 |  |   | 983,882
|Held-to-maturity:           |  |                    |           |                   |   |                |  |            |         |  |   |        
|State & municipal           |  |                    | 4,602     |                   |   | 4,602          |  |            | 4,340   |  |   | 4,340  
|                            |  |                    |           |                   |   |                |  |            |         |  |   |        
|Total investment securities |  | $                  | 1,290,066 |                   | $ | 1,293,824      |  | $          | 991,470 |  | $ | 988,222
|                            |  |                    |           |                   |   |                |  |            |         |  |   |        



NOTE 4. Loans and Leases



Loans and leases, net of unearned
income, were as follows:



|                                                                                              |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                              |  | September 30,2004 |           |   | December 31,2003 |  
|Commercial, financial, and agricultural                                                       |  | $                 | 724,719   |   |                  | $ | 621,438   |  
|Real estate - construction                                                                    |  |                   | 654,702   |   |                  |   | 549,672   |  
|Real estate secured - residential                                                             |  |                   | 1,611,456 |   |                  |   | 1,306,371 |  
|Real estate secured - commercial                                                              |  |                   | 1,246,638 |   |                  |   | 1,016,360 |  
|Consumer                                                                                      |  |                   | 356,620   |   |                  |   | 337,989   |  
|Leases                                                                                        |  |                   | 572,002   |   |                  |   | 431,442   |  
|                                                                                              |  |                   |           |   |                  |   |           |  
|Total loans and leases                                                                        |  | $                 | 5,166,137 |   |                  | $ | 4,263,272 |  
|                                                                                              |  |                   |           |   |                  |   |           |  
|                                                                                              |  |                  
|The net investment in direct financing leases was as follows:                                 |  |                   |           |   |                  |   |           |  
|Minimum lease payments receivable                                                             |  | $                 | 344,155   |   |                  | $ | 236,423   |  
|Estimated residual value of leases                                                            |  |                   | 291,128   |   |                  |   | 235,828   |  
|Unearned income under lease contracts                                                         |  |                   | (63,281   | ) |                  |   | (40,809   | )
|                                                                                              |  |                   |           |   |                  |   |           |  
|Total leases                                                                                  |  | $                 | 572,002   |   |                  | $ | 431,442   |  
|                                                                                              |  |                   |           |   |                  |   |           |  
|                                                                                              |  |                  
|An analysis of impaired loans, as of September 30, 2004 and December 31, 2003, is as follows: |  |                   |           |   |                  |   |           |  
|                                                                                              |  |                  
|Impaired loans without a related reserve                                                      |  | $                 | 2,903     |   |                  | $ | 2,232     |  
|Impaired loans with a reserve                                                                 |  |                   | 3,309     |   |                  |   | 7,423     |  
|                                                                                              |  |                   |           |   |                  |   |           |  
|Total impaired loans                                                                          |  | $                 | 6,212     |   |                  | $ | 9,655     |  
|                                                                                              |  |                   |           |   |                  |   |           |  
|Reserve for impaired loans                                                                    |  | $                 | 844       |   |                  | $ | 1,657     |  
|                                                                                              |  |                   |           |   |                  |   |           |  



An analysis of impaired loans, for the
three and nine month periods ended September 30, 2004 and 2003, is as follows:



|                                               |  |                                 |       |      |   |      
|---------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                               |  | Three Months endedSeptember 30,
|                                               |  | 2004                            |       | 2003
|Average balance of impaired loans              |  | $                               | 7,065 |      | $ | 9,248
|Interest income on impaired loans (cash-basis) |  |                                 | 13    |      |   | 20   

|                                               |  |                                |       |      |   |      
|---------------------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                                               | 
|                                               |  | Nine Months endedSeptember 30,
|                                               |  | 2004                           |       | 2003
|Average balance of impaired loans              |  | $                              | 8,178 |      | $ | 7,708
|Interest income on impaired loans (cash-basis) |  |                                | 84    |      |   | 59   



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



NOTE 5. Borrowings



Short-term borrowings were as follows:



|                                            |  |                   |         |                  |   |        
|------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                            |  | September 30,2004 |         | December 31,2003
|Securities sold under repurchase agreements |  | $                 | 344,773 |                  | $ | 295,512
|Federal funds purchased                     |  |                   | 113,500 |                  |   | 55,250 
|Treasury tax and loan notes                 |  |                   | 2,547   |                  |   | 4,791  
|                                            |  |                   |         |                  |   |        
|Total short-term borrowings                 |  | $                 | 460,820 |                  | $ | 355,553
|                                            |  |                   |         |                  |   |        
|Long-term debt was as follows:              |  |                   |         |                  |   |        
|Subsidiaries:                               |  |                   |         |                  |   |        
|Term notes due July, 2004                   |  | $                 | 0       |                  | $ | 5,000  
|Parent:                                     |  |                   |         |                  |   |        
|                                            |  |                  
|Subordinated notes due February, 2005       |  |                   | 50,000  |                  |   | 50,000 
|Subordinated notes due November, 2012       |  |                   | 75,000  |                  |   | 75,000 
|Subordinated notes due May, 2014            |  |                   | 75,000  |                  |   | 0      
|Junior subordinated notes callable 2007     |  |                   | 23,397  |                  |   | 0      
|                                            |  |                   |         |                  |   |        
|Total long-term debt                        |  | $                 | 223,397 |                  | $ | 130,000
|                                            |  |                   |         |                  |   |        



On May 3, 2004,
Susquehanna completed the private placement of $75,000 aggregate principal amount of 4.75% fixed rate/floating rate subordinated notes due May 1, 2014. Susquehanna used the net proceeds from the offering to fund the cash portion of the Patriot
acquisition and the remaining balance to increase its liquidity and capital position in anticipation of future growth and for general corporate purposes. The notes qualify as Tier 2 Capital under the capital guidelines established by the Federal
Reserve Board and were offered and sold by Susquehanna to several initial purchasers, who then resold the notes only to qualified institutional buyers in accordance with Rule 144A of the Securities Act of 1933, as amended, and Regulation
S.



The notes bear interest at a fixed rate of 4.75% per annum
through and including May 1, 2009 and convert to a floating rate thereafter until maturity, based on the US dollar three-month LIBOR plus 1.82%. Beginning May 1, 2009, Susquehanna, upon consultation with the Federal Reserve Board, has the right to
redeem the notes at a redemption price of 100% of the principal amount of the notes plus any accrued interest.



In addition, as part of the Patriot acquisition, Susquehanna assumed $20,500 in junior subordinated debt issued to Patriot Capital Trust I and Patriot
Capital Trust II. The aggregate fair value of this debt at the date of acquisition was $23,554. The $15,500 in debentures issued to Patriot Capital Trust I bear interest at 10.30% and are callable on or after July 1, 2007. If these debentures are
not called, they must be redeemed upon maturity in 2027. The $5,000 in debentures issued to Patriot Capital Trust II bear interest at the 180-day LIBOR plus 3.70%, and the rate at September 30, 2004 was 5.31%. The debentures are callable on

any April 22 or October 22 after April 22, 2007. If these debentures are not called, they must be redeemed upon maturity in 2032.



NOTE 6. Earnings per Share (shares in thousands)



The following tables set forth the calculation of basic and diluted earnings
per share for the three months and nine months ended September 30, 2004 and 2003.



|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|--------------------------------------------------------------- |  | --------------------------------------- | ------ | ------ | ------ | --------------- | - | ------ |  | ------ | ------ | --------------- | ------ |  | - | ----
|                                                                |  | For the three months ended September 30
|                                                                |  | 2004                                    |        | 2003  
|                                                                |  | Income                                  |        | Shares |        | Per ShareAmount |   | Income |  | Shares |        | Per ShareAmount
|Basic Earnings per Share:                                       |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders                         |  | $                                       | 18,506 |        | 46,478 |                 | $ | 0.40   |  | $      | 15,974 |                 | 39,789 |  | $ | 0.40
|                                                                |  |                                         |        |        |        |                
|Effect of Diluted Securities:                                   |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Stock options outstanding                                       |  |                                         |        |        | 233    |                 |   |        |  |        |        |                 | 338    |  |   |     
|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Diluted Earnings per Share:                                     |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders and assuming conversion |  | $                                       | 18,506 |        | 46,711 |                 | $ | 0.40   |  | $      | 15,974 |                 | 40,127 |  | $ | 0.40
|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     



For the three months
ended September 30, 2004 and 2003, average options to purchase 362 and 0 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options exercise prices were greater than the average market
price of the common shares; and the options were, therefore, antidilutive.



11



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|--------------------------------------------------------------- |  | -------------------------------------- | ------ | ------ | ------ | --------------- | - | ------ |  | ------ | ------ | --------------- | ------ |  | - | ----
|                                                                |  | For the nine months ended September 30
|                                                                |  | 2004                                   |        | 2003  
|                                                                |  | Income                                 |        | Shares |        | Per ShareAmount |   | Income |  | Shares |        | Per ShareAmount
|Basic Earnings per Share:                                       |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders                         |  | $                                      | 50,931 |        | 42,596 |                 | $ | 1.20   |  | $      | 48,359 |                 | 39,712 |  | $ | 1.22
|                                                                |  |                                        |        |        |        |                
|Effect of Diluted Securities:                                   |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Stock options outstanding                                       |  |                                        |        |        | 287    |                 |   |        |  |        |        |                 | 286    |  |   |     
|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Diluted Earnings per Share:                                     |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders and assuming conversion |  | $                                      | 50,931 |        | 42,883 |                 | $ | 1.19   |  | $      | 48,359 |                 | 39,998 |  | $ | 1.21
|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     



For the nine months
ended September 30, 2004 and 2003, average options to purchase 362 and 460 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options exercise prices were greater than the average market
price of the common shares; and the options were, therefore, antidilutive.



NOTE 7. Stock-Based Compensation



Susquehannas stock-based compensation plan is accounted for using the intrinsic value method set forth in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees and related Interpretations.
Under APB 25, no compensation expense is recognized, as the exercise price of Susquehannas stock options is equal to the fair market value of its common stock on the date of grant.



Pursuant to FAS No. 123, Accounting for Stock-Based Compensation, as amended by FAS No. 148, Accounting
for Stock-Based Compensation - Transitions and Disclosure, disclosure requirements, pro forma net income, and earnings per share are presented in the following table as if compensation cost for stock options was determined under the fair value
method and amortized to expense over the options vesting periods. On January 21, 2004, options to purchase 136 shares of common stock were granted to employees and directors, with an exercise price of $25.14 per share on the date of grant;
and, on June 10, 2004, options to purchase 7 shares of common stock were granted to directors, with an exercise price of $25.47. In addition, on June 30, 2004, 20 shares of common stock were purchased under Susquehannas Employee Stock Purchase
Plan at a price of $22.51 per share.



|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | ------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                                                                            |  | For the three months endedSeptember 30 |        | For the nine months endedSeptember 30
|                                                                                                                                            |  | 2004                                   |        | 2003                                  |   | 2004   |  | 2003
|Net income, as reported                                                                                                                     |  | $                                      | 18,506 |                                       | $ | 15,974 |  | $    | 50,931 |  | $ | 48,359
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                        | 238    |                                       |   | 212    |  |      | 718    |  |   | 576   
|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Pro forma net income                                                                                                                        |  | $                                      | 18,268 |                                       | $ | 15,762 |  | $    | 50,213 |  | $ | 47,783
|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Earnings per share:                                                                                                                         |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Basic - as reported                                                                                                                         |  | $                                      | 0.40   |                                       | $ | 0.40   |  | $    | 1.20   |  | $ | 1.22  
|Basic - pro forma                                                                                                                           |  | $                                      | 0.39   |                                       | $ | 0.40   |  | $    | 1.18   |  | $ | 1.20  
|                                                                                                                                            |  |                                        |        |                                      
|Diluted - as reported                                                                                                                       |  | $                                      | 0.40   |                                       | $ | 0.40   |  | $    | 1.19   |  | $ | 1.21  
|Diluted - pro forma                                                                                                                         |  | $                                      | 0.39   |                                       | $ | 0.39   |  | $    | 1.17   |  | $ | 1.19  



12



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



NOTE 8. Benefit Plans



Components of Net Periodic Benefit Cost



|                                              |  |                                 |        |   |                |   |      |      |  |      |     |  |   |     |  
|--------------------------------------------- |  | ------------------------------- | ------ | - | -------------- | - | ---- | ---- |  | ---- | --- |  | - | --- | -
|                                              |  | Three months ended September 30 |       
|                                              |  | Pension Benefits                |        |   | Other Benefits |  
|                                              |  | 2004                            |        |   | 2003           |   |      | 2004 |  | 2003 |    
|Service cost                                  |  | $                               | 739    |   |                | $ | 560  |      |  | $    | 121 |  | $ | 48  |  
|Interest cost                                 |  |                                 | 755    |   |                |   | 837  |      |  |      | 102 |  |   | 64  |  
|Expected return on plan assets                |  |                                 | (1,104 | ) |                |   | (978 | )    |  |      | 0   |  |   | 0   |  
|Amortization of prior service cost            |  |                                 | (20    | ) |                |   | (59  | )    |  |      | 12  |  |   | 12  |  
|Amortization of transition obligation (asset) |  |                                 | (51    | ) |                |   | (17  | )    |  |      | 29  |  |   | 28  |  
|Amortization of net actuarial (gain) or loss  |  |                                 | 42     |   |                |   | 135  |      |  |      | 16  |  |   | (12 | )
|                                              |  |                                 |        |   |                |   |      |      |  |      |     |  |   |     |  
|Net periodic benefit cost                     |  | $                               | 361    |   |                | $ | 478  |      |  | $    | 280 |  | $ | 140 |  
|                                              |  |                                 |        |   |                |   |      |      |  |      |     |  |   |     |  



|                                              |  |                                |        |   |                |   |        |      |  |      |     |  |   |     |  
|--------------------------------------------- |  | ------------------------------ | ------ | - | -------------- | - | ------ | ---- |  | ---- | --- |  | - | --- | -
|                                              |  | Nine months ended September 30 |       
|                                              |  | Pension Benefits               |        |   | Other Benefits |  
|                                              |  | 2004                           |        |   | 2003           |   |        | 2004 |  | 2003 |    
|Service cost                                  |  | $                              | 2,079  |   |                | $ | 1,680  |      |  | $    | 229 |  | $ | 144 |  
|Interest cost                                 |  |                                | 2,667  |   |                |   | 2,511  |      |  |      | 242 |  |   | 192 |  
|Expected return on plan assets                |  |                                | (3,310 | ) |                |   | (2,934 | )    |  |      | 0   |  |   | 0   |  
|Amortization of prior service cost            |  |                                | (44    | ) |                |   | (177   | )    |  |      | 36  |  |   | 36  |  
|Amortization of transition obligation (asset) |  |                                | (51    | ) |                |   | (51    | )    |  |      | 85  |  |   | 84  |  
|Amortization of net actuarial (gain) or loss  |  |                                | 268    |   |                |   | 405    |      |  |      | 0   |  |   | (36 | )
|                                              |  |                                |        |   |                |   |        |      |  |      |     |  |   |     |  
|Net periodic benefit cost                     |  | $                              | 1,609  |   |                | $ | 1,434  |      |  | $    | 592 |  | $ | 420 |  
|                                              |  |                                |        |   |                |   |        |      |  |      |     |  |   |     |  



Employer Contributions



Susquehanna previously
disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $0 to its pension plans and $277 to its other postretirement benefit plan in 2004. As of September 30, 2004, $0 of contributions have been
made to its pension plans, and $177 of contributions have been made to its other postretirement benefit plan. Susquehanna does not anticipate any changes to its 2004 projections.



NOTE 9. Goodwill and Other Intangible Assets



The change in the carrying amount of goodwill for the nine months ended September 30, 2004, is as follows:



|                                                                                   |  |   |         |  
|---------------------------------------------------------------------------------- |  | - | ------- | -
|Balance as of January 1, 2004                                                      |  | $ | 59,123  |  
|                                                                                   | 
|Goodwill acquired through the Patriot acquisition, deemed to be non-tax deductible |  |   | 180,759 |  
|Subsequent adjustments relating to the Patriot acquisition, net                    |  |   | (450    | )
|                                                                                   |  |   |         |  
|Balance as of September 30, 2004                                                   |  | $ | 239,432 |  
|                                                                                   |  |   |         |  



In addition, $7,976
was assigned to core deposit intangibles and will be amortized over 10 years. The estimated amortization expense for 2004 for this intangible is $465. The estimated amortization expense for the next five years is as follows:



|                            |  |   |    
|--------------------------- |  | - | ---
|For the year ended 12/31/05 |  | $ | 798
|For the year ended 12/31/06 |  | $ | 798
|For the year ended 12/31/07 |  | $ | 798
|For the year ended 12/31/08 |  | $ | 798
|For the year ended 12/31/09 |  | $ | 798



13



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



Note 10. Securitization Activity



Since 2001, Susquehanna has sold the beneficial interests in automobile
leases in securitization transactions. In all those securitizations, Susquehanna retained servicing responsibilities and subordinated interests. Susquehanna receives annual servicing fees approximating 1.0% of the outstanding balance and rights to
future cash flows arising after the investors have received the return for which they contracted. Susquehanna recognizes no servicing asset, as servicing income approximates servicing costs. Susquehanna enters into securitization transactions
primarily to achieve low-cost funding for the growth of its auto portfolio, and not primarily to maximize its ongoing servicing fee revenue. Susquehanna monitors its servicing costs to ensure that future costs do not exceed servicing income. If
servicing costs were to exceed servicing income, Susquehanna would record the present value of that liability as an expense.



The investors and the securitization trusts have no recourse to Susquehannas other assets, except retained interests, for failure of debtors to pay
when due. Susquehannas retained interests are subordinate to investors interests. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets.



As a result of a June 2004 clean-up call, the reimbursement obligations under
the 2001 transaction to a lender under a letter of credit facility have terminated. At June 30, 2004, Susquehanna was no longer obligated to make payments in an amount up to $20,500 under this letter of credit.



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



|                                   |  |                    |           |                                        |   |                   |  |      |       |      |   |       |  |   |     |  |   |    
|---------------------------------- |  | ------------------ | --------- | -------------------------------------- | - | ----------------- |  | ---- | ----- | ---- | - | ----- |  | - | --- |  | - | ---
|                                   |  | As of September 30 |           | For the Nine Months Ended September 30
|                                   |  | Principal Balance  |           | Past Due 30 Days or More               |   | Net Credit Losses
|                                   |  | 2004               |           | 2003                                   |   | 2004              |  | 2003 |       | 2004 |   | 2003 
|Total leases and loans serviced    |  | $                  | 1,612,452 |                                        | $ | 1,518,266         |  | $    | 3,768 |      | $ | 3,814 |  | $ | 260 |  | $ | 433
|Less:                              |  |                    |           |                                        |   |                   |  |      |       |      |   |       |  |   |     |  |   |    
|Leases securitized                 |  |                    | 399,748   |                                        |   | 324,774           |  |      | 406   |      |   | 176   |  |   | 114 |  |   | 77 
|Leases serviced for others (1)     |  |                    | 751,933   |                                        |   | 886,949           |  |      | 2,795 |      |   | 3,160 |  |   | 100 |  |   | 253
|                                   |  |                    |           |                                        |   |                   |  |      |       |      |   |       |  |   |     |  |   |    
|Leases and loans held in portfolio |  | $                  | 460,771   |                                        | $ | 306,543           |  | $    | 567   |      | $ | 478   |  | $ | 46  |  | $ | 103
|                                   |  |                    |           |                                        |   |                   |  |      |       |      |   |       |  |   |     |  |   |    

---

|(1) | Amounts include the sale-leaseback transaction and agency arrangements.
|--- | -----------------------------------------------------------------------



Certain cash flows received from the structured entities associated with the lease securitizations described above are as follows:



|                                                |  |                                |       |                               |   |       |  |      |         |  |   |        
|----------------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ----- |  | ---- | ------- |  | - | -------
|                                                |  | Three Months EndedSeptember 30 |       | Nine Months EndedSeptember 30
|                                                |  | 2004                           |       | 2003                          |   | 2004  |  | 2003
|Proceeds from lease securitizations             |  | $                              | 0     |                               | $ | 0     |  | $    | 179,971 |  | $ | 115,584
|Amounts derecognized                            |  |                                | 0     |                               |   | 0     |  |      | 194,852 |  |   | 123,619
|Servicing fees received                         |  |                                | 1,421 |                               |   | 1,231 |  |      | 2,846   |  |   | 2,164  
|Other cash flows received on retained interests |  |                                | 2,176 |                               |   | 51    |  |      | 3,411   |  |   | 4,081  



Set forth below is a
summary of the fair values of the interest-only strips, key economic assumptions used to arrive at the fair values, and the sensitivity of the September 30, 2004 fair values to immediate 10% and 20% adverse changes in those assumptions. The
sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not
be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption: in reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.



As of September 30, 2004



|                                                 |  |            |       |                                  |    |                        |      |   |                                |      |   |                        |      |  
|------------------------------------------------ |  | ---------- | ----- | -------------------------------- | -- | ---------------------- | ---- | - | ------------------------------ | ---- | - | ---------------------- | ---- | -
|                                                 |  | Fair Value |       | Weighted-averageLife (in months) |    | MonthlyPrepaymentSpeed |      |   | ExpectedCumulativeCreditLosses |      |   | AnnualDiscountRate (1) |     
|Automobile Leases                                |  |            |       |                                  |    |                        |      |   |                                |      |   |                        |      |  
|                                                 |  |            |       |                                  |   
|2003 Revolving transaction - Interest-Only Strip |  | $          | 4,287 |                                  | 31 |                        | 0.40 | % |                                | 0.10 | % |                        | 3.14 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | 0    |   |                                | 0    |   |                        | 34   |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        | 17   |   |                                | 0    |   |                        | 68   |  
|2003 transaction - Interest-Only Strip           |  |            | 4,827 |                                  | 16 |                        | 0.25 | % |                                | 0.10 | % |                        | 2.65 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | 0    |   |                                | 0    |   |                        | 17   |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        | 0    |   |                                | 0    |   |                        | 34   |  

---

|(1) | The annual discount rate used is derived from the interpolated Treasury swap rate as of the reporting date.
|--- | -----------------------------------------------------------------------------------------------------------



14



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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. Susquehanna Bancshares, Inc. and its subsidiaries are collectively referred to as Susquehanna, we, us, and our.



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
Susquehannas potential exposures to various types of market risks, such as interest rate risk; credit risk; whether Susquehannas allowance for loan and lease losses is adequate to meet probable loan and leases losses; the impact of a
breach by Auto Lenders Liquidation Center, Inc. (Auto Lenders) on residual loss exposure; the likelihood of an occurrence of an Early Amortization Event; expectations regarding our branding strategy and internal realignment plans and
their potential impact on our efficiency ratios and earnings; and the impact on Susquehanna of its ability to maintain contingent vehicle liability insurance coverage in vicarious liability states. 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;
| | - | -----------------------------------------------------------------------------------------------------------



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



| |  | continued levels of our loan and lease quality and origination volume;
| | - | ----------------------------------------------------------------------



| |  | the adequacy of the allowance for loan and lease losses;
| | - | --------------------------------------------------------



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



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



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



15



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##### Table of Contents

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



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



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



| |  | the inability to hedge certain risks 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; 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 the parent company and its wholly owned subsidiaries: Boston Service Company, Inc., (t/a
Hann Financial Service Corporation) (Hann), Conestoga Management Company, Farmers First Bank and subsidiaries (Farmers), Farmers & Merchants Bank and Trust and subsidiaries (F&M), First American Bank of
Pennsylvania (FAB), First Susquehanna Bank & Trust (First Susquehanna), WNB Bank (WNB), Citizens Bank of Southern Pennsylvania (Citizens), Susquehanna Patriot Bank and subsidiaries
(Susquehanna Patriot), Susquehanna Bank and subsidiaries (SB), Susque-Bancshares Life Insurance Co. (SBLIC), Valley Forge Asset Management Corporation (VFAM), and The Addis Group, LLC
(Addis).



Availability of Information



Our website address is www.susqbanc.com. We make
available free of charge, through the Investor Relations section of our website, 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 website address in this Quarterly Report on Form 10-Q only as an inactive textual reference and do not intend it to be an active
link to our website.



16



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##### Table of Contents

Subsequent Events



On October 1, 2004, we announced our decision to unify our financial services affiliates under a common master brand. Each
affiliate will adopt the master brand Susquehanna and will incorporate Susquehanna into its legal and market name. Along with a name and brand identity change, we will combine our eight banking subsidiaries into three. The branding and
realignment will provide customers access to more banking offices and will create banks of greater size, allowing us to increase our presence in target markets. In addition, our realignment also should help to streamline the application of
increasingly complex regulatory requirements and should provide operational and administrative efficiencies by reducing redundancies. We anticipate limited staff reductions as a result of operational and administrative consolidations.



On October 28, 2004, we completed an exchange offer relating to our
outstanding $75.0 million 4.75% fixed rate/floating rate subordinated notes due 2014 (the Outstanding 2014 Notes), pursuant to which we exchanged all of such Outstanding 2014 Notes, which notes were originally issued under a supplemental
indenture dated as of May 3, 2004 to an indenture dated as of November 4, 2002, between us and J.P. Morgan Trust Company, National Association, for an identical form of notes that were registered under the Securities Exchange Act of 1934, as
amended. See Financial Condition-Borrowings.



Results of Operations



Acquisition of Patriot Bank Corp.



On June 10, 2004, we completed our acquisition of Patriot
Bank Corp (Patriot). The acquisition was accounted for under the purchase method, and all transactions since that date are included in our consolidated financial statements.



Summary of 2004 Compared to 2003



Net income for the third quarter of 2004 was $18.5 million, a 15.9% increase from net income of $16.0 million in the third quarter of 2003. For the first
nine months of 2004, net income was $50.9 million, a 5.3% increase over net income of $48.4 million for the first nine months of 2003.



During the third quarter of 2004, our net interest income increased by 30.3% from net income during the third quarter of 2003. Noninterest income
continued to improve and increased by 5.0% for the third quarter of 2004 from the third quarter of 2003. Noninterest income represented 34.0% of total revenues for the third quarter of 2004 and 39.0% for the third quarter of 2003. Noninterest
expenses increased 23.1% from the comparable period in 2003.



During the first nine months of 2004, our net interest income increased by 11.0%, and noninterest income increased by 6.9% from the comparable period in 2003. Noninterest income represented 35.4% of total revenues for the first nine months
of 2004 and 36.2% for the first nine months of 2003. Noninterest expenses increased 13.1% from the comparable period in 2003.



17



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##### Table of Contents

Additional information is as follows:



|                                      |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                      |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                      |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003  |  
|Diluted Earnings per Share            |  | $                               | 0.40  |   |                                | $ | 0.40  |      |  | $ | 1.19  |   |  | $ | 1.21  |  
|Return on Average Assets              |  |                                 | 1.00  | % |                                |   | 1.09  | %    |  |   | 1.04  | % |  |   | 1.14  | %
|Return on Average Equity              |  |                                 | 10.07 | % |                                |   | 11.77 | %    |  |   | 10.91 | % |  |   | 12.03 | %
|Return on Average Tangible Equity (1) |  |                                 | 15.60 | % |                                |   | 13.39 | %    |  |   | 13.91 | % |  |   | 13.65 | %
|Efficiency Ratio                      |  |                                 | 66.67 | % |                                |   | 65.32 | %    |  |   | 66.52 | % |  |   | 64.38 | %
|Efficiency Ratio Excluding Hann (1)   |  |                                 | 59.07 | % |                                |   | 63.17 | %    |  |   | 62.31 | % |  |   | 62.70 | %



(1) Supplemental Reporting of
Non-GAAP Financial Measures



Susquehanna has presented a
return on average tangible equity, which is a non-GAAP financial measure and is most directly comparable to the GAAP measurement of return on average equity. For purposes of computing return on average tangible equity, we have excluded the balance
of intangible assets and their related amortization expense from our calculation of return on average tangible equity to allow us to review the core operating results of our company. 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 tangible equity to return on average equity is set forth below.



|                                                                       |  |       |   |  |       |   |  |       |   |  |       |  
|---------------------------------------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|Return on average equity (GAAP basis)                                  |  | 10.07 | % |  | 11.77 | % |  | 10.91 | % |  | 12.03 | %
|Effect of excluding average intangible assets and related amortization |  | 5.53  | % |  | 1.62  | % |  | 3.00  | % |  | 1.62  | %
|Return on average tangible equity                                      |  | 15.60 | % |  | 13.39 | % |  | 13.91 | % |  | 13.65 | %



Susquehanna has
presented an efficiency ratio excluding Hann, which is a non-GAAP financial measure and is most directly comparable to the GAAP presentation of efficiency ratio. We measure our efficiency ratio by dividing noninterest expenses by the sum of net
interest income, on a FTE basis, and noninterest income. The presentation of an efficiency ratio excluding Hann is computed as the efficiency ratio excluding the effects of our auto leasing subsidiary, Hann. Management believes this to be a
preferred measurement because it excludes the volatility of full-term ratios, securitization gains, and residual values of Hann and provides more focused visibility into our core business activities. A reconciliation of efficiency ratio excluding
Hann to efficiency ratio is set forth below.



|                                |  |       |   |  |       |   |  |       |   |  |       |  
|------------------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|Efficiency ratio (GAAP basis)   |  | 66.67 | % |  | 65.32 | % |  | 66.52 | % |  | 64.38 | %
|Effect of excluding Hann        |  | 7.60  | % |  | 2.15  | % |  | 4.21  | % |  | 1.68  | %
|Efficiency ratio excluding Hann |  | 59.07 | % |  | 63.17 | % |  | 62.31 | % |  | 62.70 | %



The following
discussion details the factors that contributed to these results.



Net
Interest Income  Taxable Equivalent Basis



Our
major source of operating revenues is net interest income, which increased to $58.4 million in the third quarter of 2004, from $44.8 million for the same period in 2003. For the nine months ended September 30, 2004, net interest income was $154.4
million compared with $139.1 million for the same period in 2003.



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##### Table of Contents

Net interest income as a percentage of net interest income plus other income was 66.0% for the quarter
ended September 30, 2004 and 61.0% for the quarter ended September 30, 2003. Net interest income as a percentage of net interest income plus other income was 64.6% for the nine months ended September 30, 2004 and 63.8% for the nine months ended
September 30, 2003.



Net interest income is the income that
remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans and leases, income
from investment securities, and income from 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 levels of non-performing assets. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds, and the levels of non-interest bearing
demand deposits and equity capital.



Table 1 presents average
balances, taxable equivalent interest income, interest expenses, 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.



Net interest income for the third quarter of 2004 increased $13.6 million over the third quarter of 2003. Average earning assets in the third quarter of 2004 increased $1.2 billion over the same period in 2003, with
average loans and leases increasing $1.1 billion, average investment securities increasing $202.4 million, and lower yielding, short-term investments decreasing $32.4 million. Average interest-bearing liabilities increased $1.2 billion, with average
interest-bearing deposits increasing $934.4 million, and average borrowings increasing $220.3 million. In addition, average non-interest bearing demand deposits increased $160.3 million in the third quarter of 2004 over the third quarter of 2003.



The increase in net interest income for the third quarter of
2004 was primarily the result of the net contribution from interest-earning assets and interest-bearing liabilities acquired from Patriot. In addition, since we are an asset-sensitive institution, where assets reprice more quickly than liabilities,
we have benefited from the recent increases in interest rates; and our net interest margin increased to 3.63% in the third quarter of 2004, from 3.43% in the third quarter of 2003. Yields on average earning assets increased while the average cost of
funds continued to decline, improving our spread. The yield on average earning assets increased 20 basis points, while the average cost of funds declined 6 basis points. The improvement in the yield on average earning assets can be mainly attributed
to lower prepayments in our mortgage-backed securities portfolio and the accompanying slowdown in premium amortization.



Net interest income for the nine months ended September 30, 2004 increased $16.3 million compared to the same period in 2003. Average earning assets for
the first nine months of 2004 increased $693.8 million over the same period in 2003, with average loans and leases increasing $704.7 million, average investment securities decreasing $12.7 million, and lower yielding, short-term investments
increasing $1.8 million. Average interest-bearing liabilities increased



19



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##### Table of Contents

$649.1 million, with average interest-bearing deposits increasing $575.6 million, and average borrowings increasing $73.5
million. In addition, average noninterest bearing demand deposits increased $131.4 million for the first nine months of 2004 compared with the first nine months of 2003.



The increase in net interest income for the nine months ended September 30, 2004, was primarily the result of the net
contribution from interest-earning assets and interest-bearing liabilities acquired from Patriot. However, despite the increase in yields on average earning assets for the third quarter of 2004, year-to-date yields on average earning assets declined
slightly more than the average cost of funds. The yield on average earning assets declined 31 basis points, while the average cost of funds declined only 28 basis points. As a result, our net interest margin decreased to 3.58% for the first nine
months of 2004, from 3.66% for the first nine months of 2003.



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.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)



Interest rates and interest differential - taxable equivalent basis



|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|----------------------------------------------------- |  | --------------------------------------------------- | --------- | --------------------------------------------------- | -------- | - | -------- |  | -------------- |  | - | --------- | - | -------- | - | ------ |  | ----
|                                                      |  | For the Three Month Period Ended September 30, 2004 |           | For the Three Month Period Ended September 30, 2003
|                                                      |  | AverageBalance                                      |           |                                                     | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest  |   | Rate (%)
|Assets                                                |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Short - term investments                              |  | $                                                   | 56,212    |                                                     |          | $ | 160      |  | 1.13           |  | $ | 88,651    |   |          | $ | 180    |  | 0.81
|Investment securities:                                |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Taxable                                               |  |                                                     | 1,306,170 |                                                     |          |   | 12,525   |  | 3.81           |  |   | 1,120,148 |   |          |   | 6,775  |  | 2.40
|Tax - advantaged                                      |  |                                                     | 43,971    |                                                     |          |   | 781      |  | 7.07           |  |   | 27,580    |   |          |   | 497    |  | 7.15
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total investment securities                           |  |                                                     | 1,350,141 |                                                     |          |   | 13,306   |  | 3.92           |  |   | 1,147,728 |   |          |   | 7,272  |  | 2.51
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Loans and leases, (net):                              |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Taxable                                               |  |                                                     | 4,996,775 |                                                     |          |   | 73,448   |  | 5.85           |  |   | 3,954,132 |   |          |   | 60,529 |  | 6.07
|Tax - advantaged                                      |  |                                                     | 80,350    |                                                     |          |   | 1,242    |  | 6.15           |  |   | 57,458    |   |          |   | 978    |  | 6.76
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total loans and leases                                |  |                                                     | 5,077,125 |                                                     |          |   | 74,690   |  | 5.85           |  |   | 4,011,590 |   |          |   | 61,507 |  | 6.08
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total interest - earning assets                       |  |                                                     | 6,483,478 |                                                     |          | $ | 88,156   |  | 5.41           |  |   | 5,247,969 |   |          | $ | 68,959 |  | 5.21
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Allowance for loan and lease losses                   |  |                                                     | (53,562   | )                                                   |          |   |          |  |                |  |   | (40,954   | ) |          |   |        |  |     
|Other non - earning assets                            |  |                                                     | 930,719   |                                                     |          |   |          |  |                |  |   | 598,986   |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total assets                                          |  | $                                                   | 7,360,635 |                                                     |          |   |          |  |                |  | $ | 5,806,001 |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Liabilities                                           |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Deposits:                                             |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Interest - bearing demand                             |  | $                                                   | 1,822,372 |                                                     |          | $ | 5,092    |  | 1.11           |  | $ | 1,204,135 |   |          | $ | 2,115  |  | 0.70
|Savings                                               |  |                                                     | 589,745   |                                                     |          |   | 655      |  | 0.44           |  |   | 505,371   |   |          |   | 399    |  | 0.31
|Time                                                  |  |                                                     | 1,843,671 |                                                     |          |   | 12,554   |  | 2.71           |  |   | 1,581,929 |   |          |   | 12,340 |  | 3.09
|Short - term borrowings                               |  |                                                     | 417,090   |                                                     |          |   | 1,229    |  | 1.17           |  |   | 409,120   |   |          |   | 950    |  | 0.92
|FHLB borrowings                                       |  |                                                     | 732,242   |                                                     |          |   | 5,946    |  | 3.23           |  |   | 611,116   |   |          |   | 5,419  |  | 3.52
|Long - term debt                                      |  |                                                     | 224,451   |                                                     |          |   | 3,560    |  | 6.31           |  |   | 133,261   |   |          |   | 2,398  |  | 7.14
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total interest - bearing liabilities                  |  |                                                     | 5,629,571 |                                                     |          | $ | 29,036   |  | 2.05           |  |   | 4,444,932 |   |          | $ | 23,621 |  | 2.11
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Demand deposits                                       |  |                                                     | 824,583   |                                                     |          |   |          |  |                |  |   | 664,312   |   |          |   |        |  |     
|Other liabilities                                     |  |                                                     | 175,075   |                                                     |          |   |          |  |                |  |   | 158,500   |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total liabilities                                     |  |                                                     | 6,629,229 |                                                     |          |   |          |  |                |  |   | 5,267,744 |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |  
|Equity                                                |  |                                                     | 731,406   |                                                     |          |   |          |  |                |  |   | 538,257   |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total liabilities and shareholders equity            |  | $                                                   | 7,360,635 |                                                     |          |   |          |  |                |  | $ | 5,806,001 |   |          |   |        |  |     
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Net interest income / yield on average earning assets |  |                                                     |           |                                                     |          | $ | 59,120   |  | 3.63           |  |   |           |   |          | $ | 45,338 |  | 3.43
|                                                      |  |                                                     |           |                                                     |          |   |          |  |                |  |   |           |   |          |   |        |  |     



Additional Information



Average loan balances include non-accrual loans.

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

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



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)



Interest rates and interest differential - taxable equivalent basis



|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|----------------------------------------------------- |  | ------------------------------------------------- | --------- | ------------------------------------------------- | -------- | - | -------- |  | -------------- |  | - | --------- | - | -------- | - | ------- |  | ----
|                                                      |  | For the Nine Month Period EndedSeptember 30, 2004 |           | For the Nine Month Period EndedSeptember 30, 2003
|                                                      |  | AverageBalance                                    |           |                                                   | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest  |   | Rate (%)
|Assets                                                |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Short - term investments                              |  | $                                                 | 75,565    |                                                   |          | $ | 543      |  | 0.96           |  | $ | 73,741    |   |          | $ | 542     |  | 0.98
|Investment securities:                                |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Taxable                                               |  |                                                   | 1,136,607 |                                                   |          |   | 30,829   |  | 3.62           |  |   | 1,145,737 |   |          |   | 29,278  |  | 3.42
|Tax - advantaged                                      |  |                                                   | 29,703    |                                                   |          |   | 1,642    |  | 7.38           |  |   | 33,260    |   |          |   | 1,780   |  | 7.16
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total investment securities                           |  |                                                   | 1,166,310 |                                                   |          |   | 32,471   |  | 3.72           |  |   | 1,178,997 |   |          |   | 31,058  |  | 3.52
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Loans and leases, (net):                              |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Taxable                                               |  |                                                   | 4,518,955 |                                                   |          |   | 196,548  |  | 5.81           |  |   | 3,831,914 |   |          |   | 181,976 |  | 6.35
|Tax - advantaged                                      |  |                                                   | 73,417    |                                                   |          |   | 3,449    |  | 6.28           |  |   | 55,750    |   |          |   | 3,114   |  | 7.47
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total loans and leases                                |  |                                                   | 4,592,372 |                                                   |          |   | 199,997  |  | 5.82           |  |   | 3,887,664 |   |          |   | 185,090 |  | 6.37
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total interest - earning assets                       |  |                                                   | 5,834,247 |                                                   |          | $ | 233,011  |  | 5.33           |  |   | 5,140,402 |   |          | $ | 216,690 |  | 5.64
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Allowance for loan and lease losses                   |  |                                                   | (47,545   | )                                                 |          |   |          |  |                |  |   | (40,511   | ) |          |   |         |  |     
|Other non - earning assets                            |  |                                                   | 766,334   |                                                   |          |   |          |  |                |  |   | 568,308   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total assets                                          |  | $                                                 | 6,553,036 |                                                   |          |   |          |  |                |  | $ | 5,668,199 |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Liabilities                                           |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Deposits:                                             |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Interest - bearing demand                             |  | $                                                 | 1,589,569 |                                                   |          | $ | 11,452   |  | 0.96           |  | $ | 1,176,731 |   |          | $ | 7,258   |  | 0.82
|Savings                                               |  |                                                   | 547,022   |                                                   |          |   | 1,487    |  | 0.36           |  |   | 494,588   |   |          |   | 1,608   |  | 0.43
|Time                                                  |  |                                                   | 1,721,819 |                                                   |          |   | 35,977   |  | 2.79           |  |   | 1,600,991 |   |          |   | 39,439  |  | 3.29
|Short - term borrowings                               |  |                                                   | 343,166   |                                                   |          |   | 2,646    |  | 1.03           |  |   | 342,440   |   |          |   | 2,718   |  | 1.06
|FHLB borrowings                                       |  |                                                   | 611,950   |                                                   |          |   | 16,255   |  | 3.55           |  |   | 584,119   |   |          |   | 17,054  |  | 3.90
|Long - term debt                                      |  |                                                   | 179,669   |                                                   |          |   | 8,964    |  | 6.66           |  |   | 145,275   |   |          |   | 7,780   |  | 7.16
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total interest - bearing liabilities                  |  |                                                   | 4,993,195 |                                                   |          | $ | 76,781   |  | 2.05           |  |   | 4,344,144 |   |          | $ | 75,857  |  | 2.33
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Demand deposits                                       |  |                                                   | 759,997   |                                                   |          |   |          |  |                |  |   | 628,619   |   |          |   |         |  |     
|Other liabilities                                     |  |                                                   | 176,115   |                                                   |          |   |          |  |                |  |   | 158,016   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total liabilities                                     |  |                                                   | 5,929,307 |                                                   |          |   |          |  |                |  |   | 5,130,779 |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |  
|Equity                                                |  |                                                   | 623,729   |                                                   |          |   |          |  |                |  |   | 537,420   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                                 | 6,553,036 |                                                   |          |   |          |  |                |  | $ | 5,668,199 |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Net interest income / yield on average earning assets |  |                                                   |           |                                                   |          | $ | 156,230  |  | 3.58           |  |   |           |   |          | $ | 140,833 |  | 3.66
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     



Additional Information

Average loan balances include non-accrual loans.

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

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



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##### Table of Contents

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 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 growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the
markets we serve.



As illustrated in Table 2, the provision was
$2.8 million in the third quarter of 2004, an increase of $0.1 million from the same period in 2003. Net charge-offs increased from $1.5 million for the quarter ended September 30, 2003, to $3.1 million for the quarter ended September 30, 2004.



For the nine months ended September 30, 2004, the provision
was $6.6 million, a decrease of $0.9 million over the $7.5 million provision for the first nine months of 2003. Net charge-offs increased slightly, from $5.7 million in 2003 to $5.9 million in 2004.



The allowance for loan and lease losses as a percentage of period-end loans
and leases was 1.02% at September 30, 2004 and 1.00% at September 30, 2003.



Determining the level of the allowance for probable loan and lease losses at any given period is difficult, particularly during uncertain economic periods. We must make estimates using information and assumptions that
are often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing event 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 loan and lease losses at September 30, 2004. There can be no assurance, however, that we will not sustain losses in future periods, which could be greater than the size of the allowance at September 30, 2004.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

(dollars in thousands)



TABLE 2 - Allowance for Loan and Lease Losses



|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|--------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                      |  | Three Months Ended September 30, |           |   | Nine Months Ended September 30, |  
|                                                                      |  | 2004                             |           |   | 2003                            |   |           | 2004 |  |   | 2003      |  
|Balance - Beginning of period                                         |  | $                                | 52,811    |   |                                 | $ | 40,329    |      |  | $ | 42,672    |   |  | $ | 39,671    |  
|Additions through acquisition                                         |  |                                  | 0         |   |                                 |   | 0         |      |  |   | 9,149     |   |  |   | 0         |  
|Additions charged to operating expenses                               |  |                                  | 2,783     |   |                                 |   | 2,665     |      |  |   | 6,590     |   |  |   | 7,545     |  
|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|                                                                      |  |                                  | 55,594    |   |                                 |   | 42,994    |      |  |   | 58,411    |   |  |   | 47,216    |  
|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Charge-offs                                                           |  |                                  | (3,904    | ) |                                 |   | (2,139    | )    |  |   | (8,245    | ) |  |   | (7,873    | )
|Recoveries                                                            |  |                                  | 778       |   |                                 |   | 658       |      |  |   | 2,302     |   |  |   | 2,170     |  
|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                                       |  |                                  | (3,126    | ) |                                 |   | (1,481    | )    |  |   | (5,943    | ) |  |   | (5,703    | )
|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Balance - Period end                                                  |  | $                                | 52,468    |   |                                 | $ | 41,513    |      |  | $ | 52,468    |   |  | $ | 41,513    |  
|                                                                      |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs as a percent of average loans and leases (annualized) |  |                                  | 0.24      | % |                                 |   | 0.15      | %    |  |   | 0.17      | % |  |   | 0.20      | %
|Allowance as a percent of period-end loans and leases                 |  |                                  | 1.02      | % |                                 |   | 1.00      | %    |  |   | 1.02      | % |  |   | 1.00      | %
|                                                                      |  |                                  |           |  
|Average loans and leases                                              |  | $                                | 5,077,125 |   |                                 | $ | 4,011,590 |      |  | $ | 4,592,372 |   |  | $ | 3,887,664 |  
|Period-end loans and leases                                           |  |                                  | 5,166,137 |   |                                 |   | 4,147,957 |      |  |   | 5,166,137 |   |  |   | 4,147,957 |  



TABLE 3 - Risk Assets



|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | ----------------- |  | - | ------ | -
|                                                                         |  | September 30,2004 |        |   | December 31,2003 |   |        | September 30,2003 | 
|Nonperforming assets:                                                    |  |                   |        |   |                  |   |        |                   |  |   |        |  
|Nonaccrual loans and leases                                              |  | $                 | 18,204 |   |                  | $ | 19,037 |                   |  | $ | 19,689 |  
|Restructured accrual loans                                               |  |                   | 0      |   |                  |   | 5,823  |                   |  |   | 5,855  |  
|Other real estate owned                                                  |  |                   | 1,210  |   |                  |   | 2,893  |                   |  |   | 2,081  |  
|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|Total nonperforming assets                                               |  | $                 | 19,414 |   |                  | $ | 27,753 |                   |  | $ | 27,625 |  
|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|As a percent of period-end loans and leases plus other real estate owned |  |                   | 0.38   | % |                  |   | 0.65   | %                 |  |   | 0.67   | %
|Coverage ratio                                                           |  |                   | 288.22 | % |                  |   | 172.00 | %                 |  |   | 162.52 | %
|Loans and leases contractually past due 90 days and still accruing       |  | $                 | 10,126 |   |                  | $ | 6,538  |                   |  | $ | 8,410  |  



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Noninterest Income



Noninterest income as a percentage of net interest income plus noninterest income was 34.0% for the quarter ended September
30, 2004, compared with 39.0% for the same period in 2003. Noninterest income as a percentage of net interest income plus noninterest income was 35.4% for the nine months ended September 30, 2004, compared with 36.2% for the same period in 2003.



For the third quarter of 2004, noninterest income increased
$1.4 million, or 5.0%, from $28.7 million in the third quarter of 2003, to $30.1 million. This net increase is primarily the result of:



| |  | increased asset management fees of $1.2 million;
| | - | ------------------------------------------------



| |  | increased income from bank-owned life insurance of $0.6 million;
| | - | ----------------------------------------------------------------



| |  | increased service charges on deposit accounts of $0.7 million;
| | - | --------------------------------------------------------------



| |  | increased net gains on securities sales of $1.8 million;
| | - | --------------------------------------------------------



| |  | net gain on the sale of branch deposits of $1.1 million;
| | - | --------------------------------------------------------



| |  | decreased net gains on the sale of loans and leases of $2.9 million; and
| | - | ------------------------------------------------------------------------



| |  | decreased vehicle origination, servicing, and securitization fees of $1.7 million.
| | - | ----------------------------------------------------------------------------------



For the nine months ended September 30, 2004, noninterest income increased $5.5 million, or 6.9%, from $79.1 million for the
nine months ended September 30, 2003 to $84.6 million. This net increase is primarily the result of:



| |  | increased asset management fees of $3.1 million;
| | - | ------------------------------------------------



| |  | increased commissions on brokerage, life insurance, and annuity sales of $1.5 million;
| | - | --------------------------------------------------------------------------------------



| |  | increased income from bank-owned life insurance of $1.8 million;
| | - | ----------------------------------------------------------------



| |  | increased service charges on deposit accounts of $1.7 million;
| | - | --------------------------------------------------------------



| |  | increased net gains on securities sales of $2.2 million;
| | - | --------------------------------------------------------



| |  | net gain on the sale of branch deposits of $1.1 million;
| | - | --------------------------------------------------------



| |  | decreased net gains on the sale of loans and leases of $1.2 million; and
| | - | ------------------------------------------------------------------------



| |  | decreased vehicle origination, servicing, and securitization fees of $5.5 million.
| | - | ----------------------------------------------------------------------------------



Asset Management Fees and Commissions on Brokerage, Life Insurance and Annuity Sales



As part of our strategy to increase other fee-based income, we continued to
focus on enhancing the wealth management part of our business. As a result, asset management fees increased to $3.8 million for the second quarter of 2004, from $2.6 million for the same period in 2003. For the nine months ended September 30, 2004,
asset management fees increased to $10.5 million from $7.4 million for the nine months ended September 2003, and commissions on brokerage, life insurance, and annuity sales increased from $1.5 million to $3.0 million. The increase in asset
management fees is the result of a 41.7% increase in assets under management at VFAM, from $2.3 billion at September 30, 2003, to $3.5 billion at September 30, 2004.



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Income from Bank-owned Life Insurance



The increase in income from bank-owned life insurance for the quarter and nine months ended September 30, 2004 primarily can
be attributed to the purchase of $50.0 million of life insurance during the third quarter of 2003, $4.9 million during the first quarter of 2004, and $25.0 million in the third quarter of 2004. In addition, we acquired $19.0 million of bank-owned
life insurance through the Patriot acquisition.



Service Charges on Deposit
Accounts



The increase in service charges on deposit
accounts is directly related to the acquisition of Patriot and to the increase in demand deposit accounts from $688.9 million at September 30, 2003, to $817.7 million at September 30, 2004.



Net Gains on Sales of Securities



In July and August of 2004, as part of a restructuring of our
investment portfolio in response to the Patriot acquisition and EITF 03-01, we sold approximately $107.0 million in securities and realized a net, pre-tax gain of approximately $3.8 million.



Net Gain on the Sale of Branch Deposits



In July 2004, we closed the Hancock branch of our subsidiary, F & M, and
realized a net, pre-tax gain on the sale of its deposits to another financial institution of $1.1 million. This sale is part of our effort to enhance the efficiency of our branch network through our previously announced plan to consolidate and/or
sell several locations.



Net Gains on Sales of Loans and Leases



During the third quarter of 2004, Hanns
originations went to our affiliate banks and, therefore, Hann did not enter into any securitization transactions. Consequently, no gains or losses were realized. During the third quarter of 2003, however, Hann entered into a term securitization
transaction and recognized a net, pre-tax gain of $2.7 million. In addition, gains realized through the sale of mortgage loans decreased $0.2 million, from $1.2 million for the third quarter of 2003, to $1.0 million for the third quarter of 2004.
This decrease is attributable to higher mortgage interest rates and the resultant slowdown in the refinance market.



For the nine months ended September 30, gains realized through the sale of mortgage loans decreased from $3.6 million in 2003 to $2.4 million in 2004 due
to higher mortgage interest rates and the resultant slowdown in the refinance market.



Vehicle Origination, Servicing, and Securitization Fees



The quarterly and year-to-date decreases in vehicle origination, servicing, and securitization fees were primarily due to a reduction in securitization fees as a result of the roll-off of earlier securitizations and
lower vehicle origination volumes.



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Noninterest Expenses



Total noninterest expenses increased $11.2 million, or 23.1%, from $48.3 million in the third quarter of 2003, to $59.5
million in the third quarter of 2004. For the nine months ended September 30, 2004, total noninterest expenses increased $18.6 million, or 13.1%, to $160.2 million from $141.6 million during the same period in 2003.



The quarter-to-quarter increase was primarily due to increases in salaries
and benefits expense of 19.6%, or $4.6 million, as a result of the Patriot acquisition, normal annual salary increases, filling open positions, and higher benefit costs. Vehicle delivery and preparation expense increased by 30.2%, or $1.1 million,
due to higher volumes of vehicles being returned upon the expiration of the related leases and higher costs associated with the retail dispositions, which should benefit future periods with lower residual value insurance expense. In addition, the
inclusion of Patriot for the entire third quarter of 2004 has contributed to a general increase in all expense categories.



The $18.6 million increase in noninterest expenses between the nine-month periods ended September 30, 2003 and September 30, 2004 is attributable to the
same factors described above. Salaries and benefits expense increased $9.7 million, or 14.2%, and vehicle delivery and preparation expenses increased $2.2 million, or 23.79%. Also contributing to the overall increase in noninterest expenses were
increases in occupancy expense of $1.3 million, increases in consulting, advertising and marketing expenses of $1.6 million, which primarily relate to the Patriot acquisition and our branding initiatives.



Income Taxes



Susquehannas effective tax rate for the third quarter of 2004 was 29.5%, compared with 29.0% for the third quarter of
2003.



For the nine months ended September 30, 2004, our
effective tax rate was 29.5%, compared with 30.0% for the nine months ended September 30, 2003. The reduction in the year-to-date effective tax rate was primarily due to the Patriot acquisition.



Financial Condition



Summary of 2004 compared to 2003



Total assets at September 30, 2004 were $7.4 billion, compared with $6.0
billion at December 31, 2003. Equity capital was $746.4 million at September 30, 2004, or $16.05 per share, compared with $547.4 million, or $13.73 per share, at December 31, 2003. The following discussion details the factors that contributed to
these changes.



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Acquisition of Patriot Bank Corp on June 10, 2004



The following is a summary of the fair value of assets acquired and
liabilities assumed through the purchase of Patriot (in thousands):



|                                            |  |   |          
|------------------------------------------- |  | - | ---------
|Assets                                      |  |   |          
|Cash and cash equivalents                   |  | $ | 13,804   
|Securities                                  |  |   | 303,584  
|Loans and leases, net of allowance of 9,149 |  |   | 642,322  
|Premises and other equipment                |  |   | 11,728   
|Goodwill and other intangibles              |  |   | 188,285  
|Other assets                                |  |   | 43,106   
|                                            |  |   |          
|Total assets acquired                       |  | $ | 1,202,829
|                                            |  |   |          
|Liabilities                                 |  |   |          
|Deposits                                    |  | $ | 648,797  
|Borrowings                                  |  |   | 337,125  
|Other liabilities                           |  |   | 8,390    
|                                            |  |   |          
|Total liabilities assumed                   |  |   | 994,312  
|                                            |  |   |          
|Net assets acquired                         |  | $ | 208,517  
|                                            |  |   |          



Investment Securities Available
for Sale



Investment securities available for sale
increased $305.3 million from December 31, 2003 to September 30, 2004. As part of the Patriot acquisition, we acquired $303.6 million in available-for-sale securities; however, in July and August of 2004, as part of a restructuring of our investment
portfolio in anticipation of the ramifications of EITF 03-01, we sold approximately $107.0 million of these securities.



Loans and Leases



Loans and leases increased $902.9 million from December 31, 2003 to September 30, 2004. Of this increase, Patriot accounted for $651.5 million, resulting
in internal core growth of $251.4 million.



Risk Assets



Table 3 shows a decrease in non-accrual loans and
leases, from $19.7 million at September 30, 2003, to $18.2 million at September 30, 2004. Loans and leases past due 90 days or more and still accruing interest increased from $8.4 million at September 30, 2003 to $10.1 million at September 30, 2004.
The percentage of non-performing assets to period-end loans and leases plus other real estate owned, however, decreased from 0.67% at September 30, 2003 to 0.38% at



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September 30, 2004. The percentage of loan and lease loss reserves to non-performing loans and leases (coverage ratio)
was 288.2% at September 30, 2004 compared with 162.5% at September 30, 2003.



At December 31, 2003, Susquehanna had a restructured loan totaling $5.8 million with a long-time borrower. However, in accordance with FAS No. 114, information about a restructured loan involving a modification of
terms need not be included in disclosures in years after the restructuring if the restructuring agreement has market terms, including a market rate of interest, and the restructured loan is current and is expected to perform in accordance with the
modified terms. The removal of this restructured loan from nonperforming assets in January 2004 was the primary reason for the ratio changes noted in the above paragraph.



Goodwill and Other Identifiable Intangible Assets



As a result of the Patriot acquisition, we recognized goodwill of $180.3 million and a core deposit intangible of $8.0
million. The core deposit intangible will be amortized over ten years.



Deposits



Total deposits increased
$951.1 million from December 31, 2003 to September 30, 2004. Of this increase, Patriot accounted for $648.8 million, resulting in a net increase of $302.3 million. Of this net increase, approximately $115.0 million has been in brokered certificates
of deposit, which are being utilized as an alternative funding source to support the increase in our loan portfolio. We believe that the remainder of the net increase is a direct result of the continuing success of our bank subsidiaries in carrying
out our retail and corporate sales initiatives.



Borrowings



Total borrowings increased $334.9 million from
December 31, 2003 to September 30, 2004. Of this increase, Patriot accounted for $337.1 million, resulting in a net decrease of $2.2 million. While the net change in borrowings has been minimal, we have decreased our borrowings from Federal Home
Loan Banks and are using the purchase of Federal Funds and brokered certificates of deposits as alternative sources of funds.



On May 3, 2004, we completed the private placement of $75 million aggregate principal amount of 4.75% fixed rate/floating rate subordinated notes due May
1, 2014. We used the net proceeds from the offering to fund the cash portion of the Patriot acquisition and the remaining balance to increase our liquidity and capital position in anticipation of future growth and for general corporate purposes. The
notes qualify as Tier 2 Capital under the capital guidelines established by the Federal Reserve Board.



The notes bear interest at a fixed rate of 4.75% per annum through and including May 1, 2009 and convert to a floating rate thereafter until maturity,
based on the US dollar three-month LIBOR plus 1.82%. Beginning May 1, 2009, we, upon consultation with the Federal Reserve Board, have the right to redeem the notes at a redemption price of 100% of the principal amount of the notes plus any accrued
interest. We issued and sold the notes to Keefe, Bruyette & Woods,



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Inc., Sandler ONeill & Partners, L.P., Legg Mason Wood Walker, Incorporated and Ferris, Baker Watts,
Incorporated, the initial purchasers, in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, because the sale did not involve a public offering. The initial purchasers resold the notes to persons they
reasonably believed to be qualified institutional buyers as defined in Rule 144A of the Securities Act of 1933 or pursuant to Regulation S. Under the registration rights agreement relating to the notes, we filed a registration statement
with the Securities and Exchange Commission to register an identical form of notes which could be exchanged for the privately placed notes that were not registered for sale; and on October 28, 2004, we completed the exchange offer pursuant to which
we exchanged all of the outstanding $75 million notes for the form of notes registered for resale.



In addition, as part of the Patriot acquisition, we assumed $20.5 million in junior subordinated debt issued to Patriot Capital Trust I and Patriot
Capital Trust II. The aggregate fair value of this debt at the date of acquisition was $23.6 million. The $15.5 million in debentures issued to Patriot Capital Trust I bear interest at 10.30% and are callable on or after July 1, 2007. If these
debentures are not called, they must be redeemed upon maturity in 2027. The $5.0 million in debentures issued to Patriot Capital Trust II bear interest at the 180-day LIBOR plus 3.70%; the rate at September 30, 2004 was 5.31%. The debentures are
callable on any April 22 or October 22 after April 22, 2007. If these debentures are not called, they must be redeemed upon maturity in 2032.



Capital Resources



Capital elements for Susquehanna are segmented into two tiers. Tier 1 capital represents shareholders equity plus the junior subordinated
debentures, reduced by most intangible assets. Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses limited 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.



The minimum Tier 1 capital ratio is 4%; our ratio at September 30, 2004 was 8.08%. The minimum total capital (Tier 1 and 2) ratio is 8%; our ratio at
September 30, 2004 was 11.25%. The minimum leverage ratio is 4%; our leverage ratio at September 30, 2004 was 7.24%. Susquehanna and each of its banking subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and
each entity is considered well-capitalized under regulatory guidelines.



Item 3



Quantitative and Qualitative
Disclosures about Market Risk



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



In addition to general banking risks,
we have other risks that are related to vehicle leasing, asset securitizations, and off-balance sheet financing that are discussed below.



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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. If market values decline, our fee income may also decline.



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  enables us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At September 30, 2004, our bank
subsidiaries had approximately $361.0 million available to them under collateralized lines of credit with various Federal Home Loan Banks; and approximately $220.2 million more was available provided that additional collateral would have been
pledged.



Liquidity, however, is not entirely dependent on
increasing our liability balances. Liquidity also can be generated from maturing or readily marketable assets. Unrestricted short-term investments amounted to $27.0 million and represented additional sources of liquidity. Consequently, our exposure
to liquidity risk is not considered significant.



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 shocks simulation; and evaluation of the change in economic value of equity. By dividing the assets and liabilities into three groups - fixed rate, floating rate, and
those that reprice at our discretion - we develop strategies 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



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most recent interest rate shock analysis, we were within the Boards approved guidelines at a down 100 basis point
shock and an up 300 basis point shock. Any down rate shock scenario greater than 100 basis points is considered remote, as the current federal funds target rate is only 1.75%.



At September 30, 2004, we continue to be an asset-sensitive institution and should benefit from additional increases in
interest rates in the future, if they should occur. If rates should fall, we likely will experience compression in our net interest margin.



Vehicle Leasing Residual Value Risk



Our exposure to vehicle residual value risk results primarily from Hann, our vehicle-leasing subsidiary. In an effort to manage this risk, in the third
quarter of 2000, Hann entered into a Servicing Agreement with Auto Lenders pursuant to which Hann effectively transferred to Auto Lenders all residual value risk of the managed auto lease portfolio originated by Hann, and all residual value risk on
any new leases originated over the term of the agreement. Auto Lenders, which was formed in 1990, is a used vehicle remarketer with three retail locations in New Jersey and has access to various wholesale facilities throughout the country. Under
this Servicing Agreement, 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.
Further, Hann agrees to set its stated residual values of new leases in accordance with the standards approved in advance by 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 negotiation of the payments for the additional
year. During the renewal process, Hann periodically obtains competitive quotes from third parties to determine the best remarketing alternative for Hann.



Securitizations and Off-Balance Sheet Vehicle Lease Financings



As of September 30, 2004 and December 31, 2003, Hanns off-balance sheet, managed portfolio was funded in the following manner:



|                                    |  |                          |               |                         |   |              
|----------------------------------- |  | ------------------------ | ------------- | ----------------------- | - | -------------
|                                    |  | As of September 30, 2004 |               | As of December 31, 2003
|Securitization Transactions         |  | $                        | 399.7 million |                         | $ | 313.5 million
|Agency Arrangements and Lease Sales |  | $                        | 635.1 million |                         | $ | 730.6 million
|Sale-Leaseback Transaction          |  | $                        | 116.9 million |                         | $ | 125.6 million



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In comparison, as of September 30, 2004 and December 31, 2003, our on-balance sheet, managed portfolio
totaled $460.8 million and $397.7 million, respectively. All of Hanns securitizations and off-balance sheet financings primarily are done to fund the assets originated by the Origination Trust and in some cases, to enable Susquehanna to
utilize more efficiently its required regulatory capital.



Securitization Transactions



As of
September 30, 2004, the aggregate fair value of all recorded PV Receivables in connection with Hann securitizations was $9.1 million. For a description of the accounting policies for measuring the PV Receivables, the characteristics of the
securitization transactions, including the gain or loss from sale, and the key assumptions used in measuring the fair value of the PV Receivables, see Note 1 - Summary of Significant Accounting Policies under the captions Asset
Securitizations and Recorded Interests in Securitized Assets to the financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2003 and Note 10 - Securitization Activity to the
financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.



Summary of Recent Securitization Transactions



Early in the fourth quarter of 2004, Hann entered into a revolving securitization transaction (the 2004 transaction). In connection with this transaction, Hann sells and contributes beneficial interests in automobile leases and
related vehicles to a wholly owned qualifying special purpose entity (the QSPE). From time to time, the QSPE may purchase the beneficial interests in additional automobile leases and related vehicles from Hann. Transfers to the QSPE are
accounted for as sales under the guidelines of FAS No. 140. The QSPE finances the purchases by borrowing funds in an amount up to $200.0 million from a non-related, asset-backed commercial paper issuer (the lender). Neither Hann nor
Susquehanna provides recourse for credit losses. However, the QSPEs obligation to pay Hann the servicing fee each month is subordinate to the QSPEs obligation to pay interest, principal and fees due on the loans. Therefore, if the QSPE
suffers credit losses on its assets, it may have insufficient funds to pay the servicing fee to Hann. Additionally, if an early amortization event were to occur under the QSPEs loan agreement, Hann, as servicer, would not receive payments of
the servicing fee until all interest, principal and fees due on the loans have been paid (although the servicing fee will continue to accrue).



In connection with the transaction, Susquehanna has entered into a back-up servicing agreement pursuant to which it has agreed to service the automobile
leases and related vehicles beneficially owned by the QSPE if Hann is terminated as servicer. If Susquehanna were appointed servicer, it would receive a servicing fee each month.



The debt issued in the revolving securitization transaction will bear a floating rate of interest. In this transaction, the
QSPE is required to obtain an interest rate hedge agreement if the weighted average fixed interest rate of its assets is less than a targeted portfolio yield calculated monthly and if the funds on deposit in a yield supplement account established by
the QSPE are less than a targeted amount. Neither Hann nor Susquehanna has any obligation to obtain such a hedge agreement for the QSPE, but the failure of the QSPE to obtain a required hedge agreement would be an event of default under its loan
documents.



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The transaction documents for the revolving transaction contain several requirements, obligations,
liabilities, provisions and consequences, including events of default, which become applicable upon, among other conditions, the failure of the sold portfolio to meet certain performance tests. That transaction also provides that any assets that
fail to meet the eligibility requirements set forth in that transaction must be repurchased by Hann and reallocated to Hanns beneficial interest in the Origination Trust.



Summary of Prior Years Securitization Transactions



In July 2003, Hann entered into a term securitization transaction (the 2003 transaction). In this transaction,
Hann sold and contributed the beneficial interest in $239.5 million in automobile leases and related leased vehicles to a wholly owned QSPE (the Issuer). The Issuer financed the purchase of the beneficial interest primarily
by issuing $233.0 million of asset backed notes. The initial recorded PV Receivable for the 2003 transaction was $12.0 million, and the fair value of this PV Receivable at September 30, 2004 was $4.8 million.



During the third quarter of 2002, Hann entered into a revolving
securitization transaction. In connection with this transaction, Hann sells and contributes beneficial interests in automobile leases and related vehicles to a wholly owned QSPE. From time to time, the QSPE may purchase the beneficial interests in
additional automobile leases and related vehicles from Hann. Transfers to the QSPE are accounted for as sales under the guidelines of FAS No. 140. The QSPE finances the purchases by borrowing funds in an amount up to $250.0 million from a
non-related, asset-backed commercial paper issuer (the lender); however, the lender is not committed to make loans to the QSPE. During the third quarter of 2004, Hann made no transfers to the QSPE of beneficial interests in automobile
leases and related vehicles. For the nine months ended September 30, 2004, Hann transferred to the QSPE the beneficial interest in $194.9 million in automobile leases and related vehicles. Neither Hann nor Susquehanna provides recourse for credit
losses. However, the QSPEs obligation to pay Hann the servicing fee each month is subordinate to the QSPEs obligation to pay interest, principal and fees due on the loans. Therefore, if the QSPE suffers credit losses on its assets, it
may have insufficient funds to pay the servicing fee to Hann. Additionally, if an early amortization event were to occur under the QSPEs loan agreement, Hann, as servicer, would not receive payments of the servicing fee until all interest,
principal and fees due on the loans have been paid (although the servicing fee will continue to accrue).



The debt issued in the revolving securitization transaction bears a floating rate of interest. In this transaction, the QSPE is required to obtain an
interest rate hedge agreement if the weighted average fixed interest rate of its assets is less than a targeted portfolio yield calculated monthly. Neither Hann nor Susquehanna has any obligation to obtain such a hedge agreement for the QSPE, but
the failure of the QSPE to obtain a required hedge agreement would be an event of default under its loan documents.



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The transaction documents for the revolving transaction contain several requirements, obligations,
liabilities, provisions and consequences, including events of default, which become applicable upon, among other conditions, the failure of the sold portfolio to meet certain performance tests. That transaction also provides that any assets that
fail to meet the eligibility requirements set forth in that transaction must be repurchased by Hann and reallocated to Hanns beneficial interest in the Origination Trust.



In June 2004, Hann issued a cleanup call to purchase the remaining balance of the 2001 transaction. A cleanup call is issued
when the amount of outstanding assets falls to a specified level at which the cost of servicing those assets becomes burdensome. As a result, Hann acquired $4.5 million in auto leases.



Agency Agreements and Lease Sales



Agency arrangements and lease sales generally occur on economic terms similar to vehicle lease terms and generally result in
no accounting gains or losses to Hann and no retention of credit, residual value, or interest rate risk with respect to the sold assets. Agency arrangements involve the origination and servicing by Hann of automobile leases for other financial
institutions, and lease sales involve the sale of previously originated leases (with servicing retained) to other financial institutions. Hann generally is entitled to receive all of the administrative fees collected from obligors, a servicing fee
and, in the case of agency arrangements, an origination fee per lease. Lease sales are generally accounted for as sales under FAS 140.



During the second quarter of 2002, Hann entered into an agency arrangement. In connection with that arrangement, we entered into an agreement under which
we guarantee Auto Lenders performance of its obligations to the new agency client (the Residual Interest Agreement). Auto Lenders has agreed to purchase leased vehicles in the agency clients portfolio at the termination of
the leases for the full residual value of those vehicles. In the event the agency client incurs any losses, costs or expenses as a result of any failure of Auto Lenders to perform this purchase obligation, we will compensate the agency client for
any final liquidation losses with respect to such leased vehicle. However, our liability is limited to 12% of the maximum aggregate residual value of all leases purchased by the agency client. At September 30, 2004, the total residual value of the
vehicles in the portfolio for this transaction was $56.3 million, and our maximum obligation under the Residual Interest Agreement at September 30, 2004, was $6.8 million.



Sale-leaseback Transaction



In December 2000, Hann sold and contributed the beneficial interest in $190 million of automobiles and related auto leases
owned by the Origination Trust to a wholly owned special purpose subsidiary (the Lessee). The Lessee sold such beneficial interests to a lessor (the Lessor), and the Lessor in turn leased the beneficial interests in the
automobiles and auto leases back to the Lessee under a Master Lease Agreement that has an eight-year term. For accounting purposes, the sale-leaseback transaction between the Lessee and the Lessor is treated as a sale and an operating lease and
qualifies as a sale and leaseback under FAS No. 13. The Lessor held the beneficial interest in vehicles and auto leases with a remaining balance of approximately



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$116.9 million at September 30, 2004. To support its obligations under the Master Lease Agreement, at closing the Lessee
pledged the beneficial interest in an additional $43.0 million of automobile leases and related vehicles, which were also sold or contributed to the Lessee. At September 30, 2004, the beneficial interest in additional automobile leases and related
vehicles pledged by the Lessee was $49.9 million.



Servicing Fees under the Securitization Transactions, the Sale-Leaseback Transaction, Agency Agreements, and Lease Sales



Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. The servicing fees paid to Hann under
the securitization transactions, the sale-leaseback transaction, agency agreements, and lease sales approximate current market value and Hanns servicing costs. Consequently, Hann records no servicing asset or liability with regard to those
transactions because its expected servicing costs are approximately equal to its expected servicing income. We enter into securitization transactions primarily to achieve low-cost funding for the growth of our auto lease portfolio, and not primarily
to maximize our ongoing servicing fee revenue. In the future, if servicing costs were to exceed servicing income, Hann would record the present value of that liability as an expense; if servicing income were to exceed servicing costs, Hann would
record the present value of that asset as income.



Our policy
regarding the impairment of servicing assets is to evaluate the assets based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics which affect their current
value, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a
valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. For the reasons discussed above, we presently have no recorded servicing rights, and therefore, no associated
impairment allowance.



Summary of Susquehannas
Potential Exposure under Off-Balance Sheet Vehicle Lease Financings as of September 30, 2004.



Securitization Transactions



As a result of the June 2004 clean-up call, the reimbursement obligations under the 2001 transaction to a lender under a letter of credit facility have
terminated. At June 30, 2004, we were no longer obligated to make payments in an amount up to $20.5 million under this letter of credit upon a contractual breach by Auto Lenders.



Sale-Leaseback Transaction



Under the existing sale-leaseback transaction, we guarantee certain obligations of the Lessee, which is a wholly owned special purpose subsidiary of
Hann. If we fail to maintain our investment-grade senior unsecured long-term debt ratings, then we must obtain a $35.1 million letter of credit from an eligible financial institution for the benefit of the equity participants in the transaction to
secure our obligations under the guarantee. We also have obtained from a third party an $8.0 million letter of credit for the benefit of an equity participant if we fail to make payments under the guarantee.



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Additionally, the transaction documents contain several requirements, obligations, liabilities,
provisions, and consequences that become applicable upon the occurrence of an Early Amortization Event. The precise amount of any termination and other related payments is subject to a great deal of variability and depends significantly on future
interest rates, the sales proceeds for the respective vehicles, the termination dates at which consumer leases terminate, and the length of the remaining term of the Master Lease Agreement at the time of the Early Amortization Event. It is virtually
impossible to calculate the amount of any termination payments. Even if an Early Amortization Event were to occur, we would expect that the present value of these payments would not exceed the present value of the rent avoided and tax benefits
gained by a material amount. We believe that the occurrence of any Early Amortization Event is remote.



At the end of the lease term under the Master Lease Agreement, the Lessee has agreed to act as a remarketing agent for the Lessor if the Lessor decides to
sell the beneficial interest in the leases and related vehicles. The Lessee has agreed that if the aggregate net proceeds of such sale are less then the Lease End Value of the beneficial interest in the leases and related vehicles at that time, the
Lessee will pay to the Lessor the excess, if any, of the Lease End Value over the aggregate net proceeds of such sale. If the leases and related vehicles were to be worthless at such time, the maximum exposure to Susquehanna and its subsidiaries
under these provisions would be $38 million.



Agency
Agreement and Lease Sales



With regard to the agency
arrangement, our maximum obligation under the Residual Interest Agreement at September 30, 2004 was $6.8 million.



Miscellaneous



Additionally, we are required to maintain contingent vehicle liability insurance coverage with regard to most of these transactions. This same coverage is
also maintained on vehicles within our own portfolio. Because vehicles are leased in the State of New York, a vicarious liability state, the ability to maintain our coverage or the premium cost could potentially have a negative impact on us. The
basic coverage policy is renewable annually and expires in the first quarter of 2005.



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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 Susquehannas most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Susquehannas internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 6



Exhibits and Reports on Form 8-K



| | (a) | Exhibits. The Exhibits filed as part of this report are as follows:
| | --- | -------------------------------------------------------------------



|     |  |                                                                                                                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment Agreement dated August 26, 2004 between the registrant and Michael M. Quick is incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed
August 31, 2004.
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer                                                                                                                                         
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer                                                                                                                                         
|     | 
|32.  |  | Section 1350 Certifications                                                                                                                                                                               



| | (b) | Reports on Form 8-K.
| | --- | --------------------



| | (i) | On July 27, 2004, the registrant furnished a report on Form 8-K regarding its issuance of a press release announcing financial results for its second quarter ended June 30, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | On August 31, 2004, the registrant filed a report on Form 8-K regarding the execution of an Employment Agreement between the registrant and Michael M. Quick on August 26, 2004.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.                        
|                 | 
|November 9, 2004 |  | /s/ William J. Reuter                               
|                 |  | William J. Reuter                                   
|                 |  | Chairman, President and Chief Executive Officer     
|                 | 
|November 9, 2004 |  | /s/ Drew K. Hostetter                               
|                 |  | Drew K. Hostetter                                   
|                 |  | Executive Vice President and Chief Financial Officer



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumbers |  | Description and Method of Filing                                                                                                                                                                          
|10.1           |  | Employment Agreement dated August 26, 2004 between the registrant and Michael M. Quick is incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed
August 31, 2004.
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer                                                                                                                                         
|               | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer                                                                                                                                         
|               | 
|32             |  | Section 1350 Certifications                                                                                                                                                                               



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