##### 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, 2005



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 by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



46,813,572 shares of common stock, par value $2.00 per share, as of October 27, 2005.



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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, 2005 and 2004 (unaudited), and December 31, 2004                           |  | 3 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Income  for the three and nine months ended September 30, 2005 and 2004 (unaudited)              |  | 4 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Cash Flows - for the nine months ended September 30, 2005 and 2004 (unaudited)                    |  | 5 
|              |  |                                                                                                                             
|              |  | Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2005 and 2004 (unaudited) |  | 7 
|              |  |                                                                                                                             
|              |  | Notes to the Consolidated Financial Statements (unaudited)                                                                   |  | 8 
|              |  |                                                                                                                             
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 14
|              |  |                                                                                                                             
|Item 3        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                   |  | 25
|              |  |                                                                                                                             
|Item 4        |  | Controls and Procedures                                                                                                      |  | 31
|              |  |                                                                                                                             
|PART II.      |  | OTHER INFORMATION                                                                                                            |  |   
|              |  |                                                                                                                             
|Item 6        |  | Exhibits                                                                                                                     |  | 32
|              | 
|SIGNATURES    |  | 34                                                                                                                          
|              | 
|EXHIBIT INDEX |  | 35                                                                                                                          



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 302005                  |           |   | December 312004 |   |           | September 302004
|                                                                                                                                                                             |  | (in thousands, except share data)
|Assets                                                                                                                                                                       |  |                                   |           |   |                 |   |           |                  |  |   |          
|Cash and due from banks                                                                                                                                                      |  | $                                 | 185,623   |   |                 | $ | 160,574   |                  |  | $ | 182,857  
|Short-term investments:                                                                                                                                                      |  |                                   |           |   |                 |   |           |                  |  |   |          
|Restricted                                                                                                                                                                   |  |                                   | 27,379    |   |                 |   | 27,190    |                  |  |   | 26,637   
|Unrestricted                                                                                                                                                                 |  |                                   | 44,086    |   |                 |   | 31,544    |                  |  |   | 26,952   
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Total short-term investments                                                                                                                                                 |  |                                   | 71,465    |   |                 |   | 58,734    |                  |  |   | 53,589   
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Securities available for sale                                                                                                                                                |  |                                   | 1,161,576 |   |                 |   | 1,240,945 |                  |  |   | 1,289,222
|Securities held to maturity (fair values approximate $6,467; $4,469; and $4,602)                                                                                             |  |                                   | 6,467     |   |                 |   | 4,469     |                  |  |   | 4,602    
|Loans and leases, net of unearned income                                                                                                                                     |  |                                   | 5,334,008 |   |                 |   | 5,253,008 |                  |  |   | 5,166,137
|Less: Allowance for loan and lease losses                                                                                                                                    |  |                                   | 53,232    |   |                 |   | 54,093    |                  |  |   | 52,468   
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Net loans and leases                                                                                                                                                         |  |                                   | 5,280,776 |   |                 |   | 5,198,915 |                  |  |   | 5,113,669
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Premises and equipment, net                                                                                                                                                  |  |                                   | 88,988    |   |                 |   | 83,606    |                  |  |   | 80,399   
|Foreclosed assets                                                                                                                                                            |  |                                   | 3,417     |   |                 |   | 1,340     |                  |  |   | 1,210    
|Accrued income receivable                                                                                                                                                    |  |                                   | 23,830    |   |                 |   | 21,661    |                  |  |   | 21,711   
|Bank-owned life insurance                                                                                                                                                    |  |                                   | 255,120   |   |                 |   | 249,691   |                  |  |   | 247,336  
|Goodwill                                                                                                                                                                     |  |                                   | 242,718   |   |                 |   | 240,632   |                  |  |   | 239,432  
|Intangible assets with finite lives                                                                                                                                          |  |                                   | 12,149    |   |                 |   | 11,960    |                  |  |   | 12,640   
|Investment in and receivables from unconsolidated entities                                                                                                                   |  |                                   | 103,310   |   |                 |   | 68,384    |                  |  |   | 62,541   
|Other assets                                                                                                                                                                 |  |                                   | 104,528   |   |                 |   | 134,162   |                  |  |   | 140,648  
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|                                                                                                                                                                             |  | $                                 | 7,539,967 |   |                 | $ | 7,475,073 |                  |  | $ | 7,449,856
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Liabilities and Shareholders Equity                                                                                                                                         |  |                                   |           |   |                 |   |           |                  |  |   |          
|Deposits:                                                                                                                                                                    |  |                                   |           |   |                 |   |           |                  |  |   |          
|Demand                                                                                                                                                                       |  | $                                 | 900,715   |   |                 | $ | 853,411   |                  |  | $ | 817,744  
|Interest-bearing demand                                                                                                                                                      |  |                                   | 1,774,273 |   |                 |   | 1,765,077 |                  |  |   | 1,811,651
|Savings                                                                                                                                                                      |  |                                   | 481,778   |   |                 |   | 559,530   |                  |  |   | 574,339  
|Time                                                                                                                                                                         |  |                                   | 1,362,494 |   |                 |   | 1,367,282 |                  |  |   | 1,375,371
|Time of $100 or more                                                                                                                                                         |  |                                   | 779,128   |   |                 |   | 585,382   |                  |  |   | 506,465  
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Total deposits                                                                                                                                                               |  |                                   | 5,298,388 |   |                 |   | 5,130,682 |                  |  |   | 5,085,570
|Short-term borrowings                                                                                                                                                        |  |                                   | 374,123   |   |                 |   | 420,868   |                  |  |   | 460,820  
|FHLB borrowings                                                                                                                                                              |  |                                   | 718,257   |   |                 |   | 751,220   |                  |  |   | 750,049  
|Long-term debt                                                                                                                                                               |  |                                   | 150,000   |   |                 |   | 200,000   |                  |  |   | 200,000  
|Junior subordinated debentures                                                                                                                                               |  |                                   | 22,905    |   |                 |   | 23,277    |                  |  |   | 23,397   
|Accrued interest, taxes, and expenses payable                                                                                                                                |  |                                   | 73,430    |   |                 |   | 41,255    |                  |  |   | 58,185   
|Deferred taxes                                                                                                                                                               |  |                                   | 103,887   |   |                 |   | 114,050   |                  |  |   | 94,431   
|Other liabilities                                                                                                                                                            |  |                                   | 31,334    |   |                 |   | 42,027    |                  |  |   | 30,991   
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Total liabilities                                                                                                                                                            |  |                                   | 6,772,324 |   |                 |   | 6,723,379 |                  |  |   | 6,703,443
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Shareholders equity:                                                                                                                                                        |  |                                   |           |   |                 |   |           |                  |  |   |          
|Common stock, $2.00 par value, 100,000,000 shares authorized;Issued: 46,809,572 at September 30, 2005; 46,592,930 at
December 31, 2004; and 46,504,941 at September 30, 2004 |  |                                   | 93,619    |   |                 |   | 93,186    |                  |  |   | 93,010   
|Additional paid-in capital                                                                                                                                                   |  |                                   | 230,221   |   |                 |   | 226,384   |                  |  |   | 225,021  
|Retained earnings                                                                                                                                                            |  |                                   | 454,833   |   |                 |   | 435,159   |                  |  |   | 426,607  
|Accumulated other comprehensive income (loss), net of taxes of $(5,939); $(1,634); and $956, respectively                                                                    |  |                                   | (11,030   | ) |                 |   | (3,035    | )                |  |   | 1,775    
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|Total shareholders equity                                                                                                                                                   |  |                                   | 767,643   |   |                 |   | 751,694   |                  |  |   | 746,413  
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          
|                                                                                                                                                                             |  | $                                 | 7,539,967 |   |                 | $ | 7,475,073 |                  |  | $ | 7,449,856
|                                                                                                                                                                             |  |                                   |           |   |                 |   |           |                  |  |   |          



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



3



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | ----------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                                               |  | Three Months EndedSeptember 30        |        | Nine Months EndedSeptember 30
|                                                               |  | 2005                                  |        | 2004                          |   | 2005   |  | 2004
|                                                               |  | (in thousands, except per share data)
|Interest Income:                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Loans and leases, including fees                               |  | $                                     | 87,747 |                               | $ | 74,255 |  | $    | 249,065 |  | $ | 198,790
|Securities:                                                    |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Taxable                                                        |  |                                       | 9,898  |                               |   | 11,761 |  |      | 31,169  |  |   | 29,174 
|Tax-exempt                                                     |  |                                       | 206    |                               |   | 508    |  |      | 1,020   |  |   | 1,067  
|Dividends                                                      |  |                                       | 587    |                               |   | 765    |  |      | 1,924   |  |   | 1,655  
|Short-term investments                                         |  |                                       | 500    |                               |   | 159    |  |      | 1,186   |  |   | 543    
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Total interest income                                          |  |                                       | 98,938 |                               |   | 87,448 |  |      | 284,364 |  |   | 231,229
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Interest Expense:                                              |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Deposits:                                                      |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Interest-bearing demand                                        |  |                                       | 7,961  |                               |   | 5,092  |  |      | 19,157  |  |   | 11,452 
|Savings                                                        |  |                                       | 538    |                               |   | 655    |  |      | 1,704   |  |   | 1,487  
|Time                                                           |  |                                       | 16,636 |                               |   | 12,554 |  |      | 45,953  |  |   | 35,977 
|Short-term borrowings                                          |  |                                       | 2,814  |                               |   | 1,228  |  |      | 6,949   |  |   | 2,646  
|FHLB borrowings                                                |  |                                       | 7,815  |                               |   | 5,946  |  |      | 22,805  |  |   | 16,254 
|Long-term debt                                                 |  |                                       | 2,468  |                               |   | 3,561  |  |      | 7,776   |  |   | 8,965  
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Total interest expense                                         |  |                                       | 38,232 |                               |   | 29,036 |  |      | 104,344 |  |   | 76,781 
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Net interest income                                            |  |                                       | 60,706 |                               |   | 58,412 |  |      | 180,020 |  |   | 154,448
|Provision for loan and lease losses                            |  |                                       | 3,215  |                               |   | 2,783  |  |      | 8,445   |  |   | 6,590  
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Net interest income, after provision for loan and lease losses |  |                                       | 57,491 |                               |   | 55,629 |  |      | 171,575 |  |   | 147,858
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Noninterest Income:                                            |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Service charges on deposit accounts                            |  |                                       | 5,574  |                               |   | 5,955  |  |      | 15,866  |  |   | 16,270 
|Vehicle origination, servicing, and securitization fees        |  |                                       | 4,444  |                               |   | 4,894  |  |      | 12,276  |  |   | 15,575 
|Asset management fees                                          |  |                                       | 4,505  |                               |   | 3,784  |  |      | 13,331  |  |   | 10,478 
|Income from fiduciary-related activities                       |  |                                       | 1,495  |                               |   | 1,434  |  |      | 4,441   |  |   | 4,260  
|Commissions on brokerage, life insurance, and annuity sales    |  |                                       | 1,019  |                               |   | 943    |  |      | 3,278   |  |   | 2,999  
|Commissions on property and casualty insurance sales           |  |                                       | 2,372  |                               |   | 2,101  |  |      | 8,327   |  |   | 6,690  
|Income from bank-owned life insurance                          |  |                                       | 2,349  |                               |   | 2,430  |  |      | 6,876   |  |   | 6,694  
|Net gain on sale of loans and leases                           |  |                                       | 1,104  |                               |   | 977    |  |      | 5,674   |  |   | 7,625  
|Net gain on securities                                         |  |                                       | 807    |                               |   | 3,770  |  |      | 4,188   |  |   | 4,338  
|Other                                                          |  |                                       | 3,507  |                               |   | 3,834  |  |      | 11,113  |  |   | 9,621  
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Total noninterest income                                       |  |                                       | 27,176 |                               |   | 30,122 |  |      | 85,370  |  |   | 84,550 
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Noninterest Expenses:                                          |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Salaries and employee benefits                                 |  |                                       | 27,444 |                               |   | 28,331 |  |      | 83,914  |  |   | 78,127 
|Occupancy                                                      |  |                                       | 4,574  |                               |   | 4,160  |  |      | 14,194  |  |   | 11,544 
|Furniture and equipment                                        |  |                                       | 2,534  |                               |   | 2,388  |  |      | 7,523   |  |   | 6,675  
|Amortization of intangible assets                              |  |                                       | 386    |                               |   | 413    |  |      | 1,140   |  |   | 792    
|Vehicle residual value                                         |  |                                       | 2,477  |                               |   | 1,663  |  |      | 7,727   |  |   | 4,053  
|Vehicle delivery and preparation                               |  |                                       | 3,249  |                               |   | 4,120  |  |      | 9,697   |  |   | 10,199 
|Other                                                          |  |                                       | 17,884 |                               |   | 18,427 |  |      | 56,470  |  |   | 48,777 
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Total noninterest expenses                                     |  |                                       | 58,548 |                               |   | 59,502 |  |      | 180,665 |  |   | 160,167
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Income before income taxes                                     |  |                                       | 26,119 |                               |   | 26,249 |  |      | 76,280  |  |   | 72,241 
|Provision for income taxes                                     |  |                                       | 8,358  |                               |   | 7,743  |  |      | 24,410  |  |   | 21,310 
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Net Income                                                     |  | $                                     | 17,761 |                               | $ | 18,506 |  | $    | 51,870  |  | $ | 50,931 
|                                                               |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Earnings per share:                                            |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Basic                                                          |  | $                                     | 0.38   |                               | $ | 0.40   |  | $    | 1.11    |  | $ | 1.20   
|Diluted                                                        |  | $                                     | 0.38   |                               | $ | 0.40   |  | $    | 1.11    |  | $ | 1.19   
|Cash dividends                                                 |  | $                                     | 0.23   |                               | $ | 0.22   |  | $    | 0.69    |  | $ | 0.66   
|Average shares outstanding:                                    |  |                                       |        |                               |   |        |  |      |         |  |   |        
|Basic                                                          |  |                                       | 46,763 |                               |   | 46,478 |  |      | 46,676  |  |   | 42,596 
|Diluted                                                        |  |                                       | 46,988 |                               |   | 46,711 |  |      | 46,896  |  |   | 42,883 



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



4



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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,                            |  | 2005 |          |   | 2004 |  
|Cash Flows from Operating Activities:                                             |  |      |          |   |      |   |          |  
|Net income                                                                        |  | $    | 51,870   |   |      | $ | 50,931   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |          |   |      |   |          |  
|Depreciation, amortization, and accretion                                         |  |      | 14,376   |   |      |   | 11,920   |  
|Provision for loan and lease losses                                               |  |      | 8,445    |   |      |   | 6,590    |  
|Realized gain on sales of available-for-sale securities, net                      |  |      | (4,188   | ) |      |   | (4,338   | )
|Deferred income taxes                                                             |  |      | (5,858   | ) |      |   | (9,850   | )
|Gain on sale of loans and leases                                                  |  |      | (5,674   | ) |      |   | (7,625   | )
|Gain on sale of other real estate owned                                           |  |      | (172     | ) |      |   | (441     | )
|Gain on sale of branch offices                                                    |  |      | (638     | ) |      |   | (1,068   | )
|Mortgage loans originated for sale                                                |  |      | (112,654 | ) |      |   | (100,547 | )
|Proceeds from sale of mortgage loans originated for sale                          |  |      | 111,037  |   |      |   | 102,772  |  
|Leases acquired/originated for sale                                               |  |      | (5,671   | ) |      |   | (194,852 | )
|Proceeds from sale of leases acquired/originated for sale                         |  |      | 5,218    |   |      |   | 179,971  |  
|Increase in cash surrender value of bank-owned life insurance                     |  |      | (6,876   | ) |      |   | (6,694   | )
|Increase in accrued interest receivable                                           |  |      | (2,169   | ) |      |   | (4,217   | )
|Increase in accrued interest payable                                              |  |      | 3,486    |   |      |   | 2,768    |  
|Increase in accrued expenses and taxes payable                                    |  |      | 28,719   |   |      |   | 21,681   |  
|Other, net                                                                        |  |      | 32,074   |   |      |   | (7,646   | )
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |      | 111,325  |   |      |   | 39,355   |  
|                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Investing Activities:                                             |  |      |          |   |      |   |          |  
|Net (increase) decrease in restricted short-term investments                      |  |      | (189     | ) |      |   | 18,180   |  
|Activity in available-for-sale securities:                                        |  |      |          |   |      |   |          |  
|Sales                                                                             |  |      | 175,025  |   |      |   | 207,159  |  
|Maturities, repayments and calls                                                  |  |      | 202,170  |   |      |   | 356,958  |  
|Purchases                                                                         |  |      | (313,729 | ) |      |   | (554,884 | )
|Net proceeds from sale of leases in banks portfolios                             |  |      | 320,754  |   |      |   | 0        |  
|Net increase in loans and leases                                                  |  |      | (453,343 | ) |      |   | (266,442 | )
|Purchase of bank-owned life insurance                                             |  |      | 0        |   |      |   | (29,900  | )
|Acquisitions, net of cash acquired                                                |  |      | (3,412   | ) |      |   | (36,278  | )
|Additions to premises and equipment                                               |  |      | (11,953  | ) |      |   | (11,229  | )
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                               |  |      | (84,677  | ) |      |   | (316,436 | )
|                                                                                  |  |      |          |   |      |   |          |  
|Cash Flows from Financing Activities:                                             |  |      |          |   |      |   |          |  
|Net increase in deposits                                                          |  |      | 175,438  |   |      |   | 312,323  |  
|Sale of branch offices net of premium received                                    |  |      | (6,861   | ) |      |   | (8,949   | )
|Net (decrease) increase in short-term borrowings                                  |  |      | (46,745  | ) |      |   | 105,266  |  
|Net decrease in FHLB borrowings                                                   |  |      | (32,963  | ) |      |   | (177,529 | )
|Repayment of long-term debt                                                       |  |      | (50,000  | ) |      |   | (5,000   | )
|Proceeds from issuance of long-term debt                                          |  |      | 0        |   |      |   | 74,356   |  
|Proceeds from issuance of common stock                                            |  |      | 4,270    |   |      |   | 3,812    |  
|Cash dividends paid                                                               |  |      | (32,196  | ) |      |   | (27,774  | )
|                                                                                  |  |      |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                               |  |      | 10,943   |   |      |   | 276,505  |  
|                                                                                  |  |      |          |   |      |   |          |  



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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               |  |   | 37,591  |  |   | (576      | )
|Cash and cash equivalents at January 1                |  |   | 192,118 |  |   | 210,385   |  
|                                                      |  |   |         |  |   |           |  
|Cash and cash equivalents at September 30             |  | $ | 229,709 |  | $ | 209,809   |  
|                                                      |  |   |         |  |   |           |  
|Cash and cash equivalents:                            |  |   |         |  |   |           |  
|Cash and due from banks                               |  | $ | 185,623 |  | $ | 182,857   |  
|Unrestricted short-term investments                   |  |   | 44,086  |  |   | 26,952    |  
|                                                      |  |   |         |  |   |           |  
|Cash and cash equivalents at September 30             |  | $ | 229,709 |  | $ | 209,809   |  
|                                                      |  |   |         |  |   |           |  
|Supplemental Disclosure of Cash Flow Information      |  |   |         |  |   |           |  
|                                                      |  |  
|Cash paid for interest on deposits and borrowings     |  | $ | 100,858 |  | $ | 74,013    |  
|Income tax payments (refunds)                         |  | $ | 3,359   |  | $ | (3,151    | )
|                                                      |  |  
|Supplemental Schedule of Noncash Investing Activities |  |   |         |  |   |           |  
|                                                      |  |  
|Real estate acquired in settlement of loans           |  | $ | 4,643   |  | $ | 1,154     |  
|                                                      |  |  
|Acquisition of Patriot Bank Corp.                     |  |   |         |  |   |           |  
|Common stock issued                                   |  |   |         |  | $ | 166,454   |  
|Fair value of assets acquired (noncash)               |  |   |         |  | $ | 1,138,122 |  
|Liabilities assumed                                   |  |   |         |  | $ | 985,922   |  



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



6



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(Dollars in thousands, except
share data)



|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ----------- | ------ | ------------------------ | - | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                                                     |  | Shares ofCommonStock |  | CommonStock |        | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |        
|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 taxes                                   |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | (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 (including 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 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Balance at January 1, 2005                                                                                           |  | 46,592,930           |  | $           | 93,186 |                          | $ | 226,384          |  | $ | 435,159                                    |   |  | $     | (3,035  | ) |  | $ | 751,694 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Comprehensive income:                                                                                                |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Net income                                                                                                           |  |                      |  |             |        |                          |   |                  |  |   | 51,870                                     |   |  |       |         |   |  |   | 51,870  |  
|Change in unrealized loss on securities available for sale, net of tax effect and reclassification adjustment        |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | (9,442  | ) |  |   | (9,442  | )
|Change in unrealized loss on recorded interests in securitized assets, net of tax effect                             |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | 626     |   |  |   | 626     |  
|Unrealized gain on cash flow hedges, net of tax effect                                                               |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       | 821     |   |  |   | 821     |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Total comprehensive income                                                                                           |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   | 43,875  |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Common stock issued under employee benefit plans (including related tax benefit of $599)                             |  | 195,630              |  |             | 391    |                          |   | 3,411            |  |   |                                            |   |  |       |         |   |  |   | 3,802   |  
|Common stock issued under contingent earnings agreement                                                              |  | 21,012               |  |             | 42     |                          |   | 426              |  |   |                                            |   |  |       |         |   |  |   | 468     |  
|Cash dividends declared ($0.69 per share)                                                                            |  |                      |  |             |        |                          |   |                  |  |   | (32,196                                    | ) |  |       |         |   |  |   | (32,196 | )
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  
|Balance at September 30, 2005                                                                                        |  | 46,809,572           |  | $           | 93,619 |                          | $ | 230,221          |  | $ | 454,833                                    |   |  | $     | (11,030 | ) |  | $ | 767,643 |  
|                                                                                                                     |  |                      |  |             |        |                          |   |                  |  |   |                                            |   |  |       |         |   |  |   |         |  



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

(Amounts 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, 2005 and 2004.



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 62 through 70 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2004.



Recent Accounting Pronouncements.



In June, 2005, the Financial Accounting Standards Board issued Statement No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FAS Statement No.3. Statement No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. Opinion 20
previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. In addition, Statement No. 154
requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. Opinion 20 previously required
that such a change be reported as a change in accounting principle. Statement No. 154 carries forward many provisions of Opinion 20 without change, including the provisions related to the reporting of a change in accounting estimate, a change
in reporting entity, and the correction of an error. Statement No. 154 also carries forward the provisions of Statement No. 3 that govern reporting accounting changes in interim financial statements. Statement No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of this statement is not expected to have an effect on results of operations or financial condition.



In April 2005, the Securities and Exchange Commission approved a new rule
that, for public companies, delays the effective date of FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)). Under the SECs rule, FAS 123(R) is now effective for public companies for annual, rather
than interim, periods that begin after June 15, 2005. For most public companies the delay will eliminate the comparability issues that would have arisen from adopting FAS 123(R) in the middle of a fiscal year as originally required. Except for
this deferral of the effective date, the guidance in FAS 123(R) is unchanged.



In December 2004, the Financial Accounting Standards Board issued FAS No. 123 (revised 2004), Share-Based Payment. Statement 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured on the fair value of the equity or liability instruments issued. Susquehanna expects to adopt this standard on January 1, 2006, and select the Modified Prospective
Application (MPA) as its transition method. It is estimated that adoption of Statement 123(R) will reduce Susquehannas net income by approximately $536 in 2006.



In March 2005, the Financial Accounting Standards Board issued FASB Staff Position No. FIN 46(R)-5, Implicit Variable
Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The FSP gives guidance to a reporting enterprise on determining whether it holds an implicit variable interest in a variable
interest entity (VIE) or potential VIE. For entities to which Interpretation 46(R) has been applied, the FSP was to be applied in the first reporting period beginning after March 3, 2005. Application of this FSP has not had a
material effect on Susquehannas financial condition or results of operations.



NOTE 2. Acquisitions



Brandywine Benefits Corporation and
Rockford Pensions, LLC



On February 1, 2005,
Susquehanna acquired Brandywine Benefits Corporation and Rockford Pensions, LLC (collectively Brandywine) located in Wilmington, Delaware. Brandywine is a financial planning, consulting and administration firm specializing in retirement
benefit plans for small-to-medium-sized businesses. Brandywine Benefits Corporation is a wholly owned subsidiary of Brandywine Benefits Corp., LLC, which in turn is a wholly owned subsidiary of VFAM.



The acquisition of Brandywine is considered immaterial for purposes of the
disclosures required by FAS No. 141.



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.



Presented below is certain unaudited pro forma information for the nine-month period ended September 30, 2004, as if Patriot had been acquired on January 1, 2004. 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 date.



|            |  |                               |        |      |   |       
|----------- |  | ----------------------------- | ------ | ---- | - | ------
|            |  | Nine Months EndedSeptember 30
|            |  | 2005 Actual                   |        | 2004
|Net income  |  | $                             | 51,870 |      | $ | 44,627
|Basic EPS   |  | $                             | 1.11   |      | $ | 0.96  
|Diluted EPS |  | $                             | 1.11   |      | $ | 0.96  



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Amounts 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, 2005 |           | December 31, 2004
|                            |  | Amortized cost     |           | Fair value        |   | Amortized cost |  | Fair value
|Available-for-sale:         |  |                    |           |                   |   |                |  |            |           |  |   |          
|U.S. Government agencies    |  | $                  | 378,473   |                   | $ | 374,172        |  | $          | 263,835   |  | $ | 262,340  
|State & municipal           |  |                    | 12,094    |                   |   | 12,139         |  |            | 37,050    |  |   | 38,219   
|Mortgage-backed             |  |                    | 667,115   |                   |   | 653,384        |  |            | 872,324   |  |   | 868,266  
|Other debt securities       |  |                    | 54,251    |                   |   | 54,197         |  |            | 7,376     |  |   | 7,365    
|Equities                    |  |                    | 67,649    |                   |   | 67,684         |  |            | 63,840    |  |   | 64,755   
|                            |  |                    |           |                   |   |                |  |            |           |  |   |          
|                            |  |                    | 1,179,582 |                   |   | 1,161,576      |  |            | 1,244,425 |  |   | 1,240,945
|Held-to-maturity:           |  |                    |           |                   |   |                |  |            |           |  |   |          
|State & municipal           |  |                    | 6,467     |                   |   | 6,467          |  |            | 4,469     |  |   | 4,469    
|                            |  |                    |           |                   |   |                |  |            |           |  |   |          
|Total investment securities |  | $                  | 1,186,049 |                   | $ | 1,168,043      |  | $          | 1,248,894 |  | $ | 1,245,414
|                            |  |                    |           |                   |   |                |  |            |           |  |   |          



NOTE 4. Loans and Leases



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



|                                        |  |                   |           |                  |   |          
|--------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                        |  | September 30,2005 |           | December 31,2004
|Commercial, financial, and agricultural |  | $                 | 810,112   |                  | $ | 760,106  
|Real estate - construction              |  |                   | 896,243   |                  |   | 741,660  
|Real estate secured - residential       |  |                   | 1,603,837 |                  |   | 1,611,999
|Real estate secured - commercial        |  |                   | 1,240,774 |                  |   | 1,252,753
|Consumer                                |  |                   | 328,395   |                  |   | 351,846  
|Leases                                  |  |                   | 454,647   |                  |   | 534,644  
|                                        |  |                   |           |                  |   |          
|Total loans and leases                  |  | $                 | 5,334,008 |                  | $ | 5,253,008
|                                        |  |                   |           |                  |   |          



The net investment in direct financing
leases was as follows:



|                                      |  |   |         |   |  |   |         |  
|------------------------------------- |  | - | ------- | - |  | - | ------- | -
|Minimum lease payments receivable     |  | $ | 306,548 |   |  | $ | 332,016 |  
|Estimated residual value of leases    |  |   | 204,467 |   |  |   | 260,514 |  
|Unearned income under lease contracts |  |   | (56,368 | ) |  |   | (57,886 | )
|                                      |  |   |         |   |  |   |         |  
|Total leases                          |  | $ | 454,647 |   |  | $ | 534,644 |  
|                                      |  |   |         |   |  |   |         |  



An analysis of impaired loans, as of
September 30, 2005 and December 31, 2004, is as follows:



|                                         |  |   |       |  |   |      
|---------------------------------------- |  | - | ----- |  | - | -----
|Impaired loans without a related reserve |  | $ | 3,253 |  | $ | 3,024
|Impaired loans with a reserve            |  |   | 2,374 |  |   | 3,687
|                                         |  |   |       |  |   |      
|Total impaired loans                     |  | $ | 5,627 |  | $ | 6,711
|                                         |  |   |       |  |   |      
|Reserve for impaired loans               |  | $ | 1,361 |  | $ | 1,194
|                                         |  |   |       |  |   |      



An analysis of impaired loans, for the
three and nine month periods ended September 30, 2005 and 2004, is as follows:



|                                               |  |                                 |       |      |   |      
|---------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                               |  | Three Months endedSeptember 30,
|                                               |  | 2005                            |       | 2004
|Average balance of impaired loans              |  | $                               | 4,566 |      | $ | 7,065
|Interest income on impaired loans (cash-basis) |  |                                 | 40    |      |   | 13   
|                                               | 
|                                               |  | Nine Months ended September 30,
|                                               |  | 2005                            |       | 2004
|Average balance of impaired loans              |  | $                               | 4,756 |      | $ | 8,178
|Interest income on impaired loans (cash-basis) |  |                                 | 113   |      |   | 84   



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



NOTE 5. Borrowings



Short-term borrowings were as follows:



|                                            |  |                   |         |                  |   |        
|------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                            |  | September 30,2005 |         | December 31,2004
|Securities sold under repurchase agreements |  | $                 | 309,418 |                  | $ | 307,765
|Federal funds purchased                     |  |                   | 62,700  |                  |   | 108,600
|Treasury tax and loan notes                 |  |                   | 2,005   |                  |   | 4,503  
|                                            |  |                   |         |                  |   |        
|Total short-term borrowings                 |  | $                 | 374,123 |                  | $ | 420,868
|                                            |  |                   |         |                  |   |        



Long-term debt was as follows:



|                                        |  |   |         |  |   |        
|--------------------------------------- |  | - | ------- |  | - | -------
|Subordinated notes due February, 2005   |  | $ | 0       |  | $ | 50,000 
|Subordinated notes due November, 2012   |  |   | 75,000  |  |   | 75,000 
|Subordinated notes due May, 2014        |  |   | 75,000  |  |   | 75,000 
|Junior subordinated notes callable 2007 |  |   | 22,905  |  |   | 23,277 
|                                        |  |   |         |  |   |        
|Total long-term debt                    |  | $ | 172,905 |  | $ | 223,277
|                                        |  |   |         |  |   |        



NOTE 6. Earnings per Share



The following tables set forth the calculation of basic and diluted
earnings per share for the three and nine month periods ended September 30, 2005 and 2004.



|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|--------------------------------------------------------------- |  | --------------------------------------- | ------ | ------ | ------ | --------------- | - | ------ |  | ------ | ------ | --------------- | ------ |  | - | ----
|                                                                |  | For the three months ended September 30
|                                                                |  | 2005                                    |        | 2004  
|                                                                |  | Income                                  |        | Shares |        | Per ShareAmount |   | Income |  | Shares |        | Per ShareAmount
|Basic Earnings per Share:                                       |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders                         |  | $                                       | 17,761 |        | 46,763 |                 | $ | 0.38   |  | $      | 18,506 |                 | 46,478 |  | $ | 0.40
|                                                                |  |                                         |        |        |        |                
|Effect of Diluted Securities:                                   |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Stock options outstanding                                       |  |                                         |        |        | 225    |                 |   |        |  |        |        |                 | 233    |  |   |     
|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Diluted Earnings per Share:                                     |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders and assuming conversion |  | $                                       | 17,761 |        | 46,988 |                 | $ | 0.38   |  | $      | 18,506 |                 | 46,711 |  | $ | 0.40
|                                                                |  |                                         |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     



For the three months
ended September 30, 2005 and 2004, average options to purchase 7 and 362 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.



|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|--------------------------------------------------------------- |  | -------------------------------------- | ------ | ------ | ------ | --------------- | - | ------ |  | ------ | ------ | --------------- | ------ |  | - | ----
|                                                                |  | For the nine months ended September 30
|                                                                |  | 2005                                   |        | 2004  
|                                                                |  | Income                                 |        | Shares |        | Per ShareAmount |   | Income |  | Shares |        | Per ShareAmount
|Basic Earnings per Share:                                       |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders                         |  | $                                      | 51,870 |        | 46,676 |                 | $ | 1.11   |  | $      | 50,931 |                 | 42,596 |  | $ | 1.20
|                                                                |  |                                        |        |        |        |                
|Effect of Diluted Securities:                                   |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Stock options outstanding                                       |  |                                        |        |        | 220    |                 |   |        |  |        |        |                 | 287    |  |   |     
|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Diluted Earnings per Share:                                     |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     
|Income available to common shareholders and assuming conversion |  | $                                      | 51,870 |        | 46,896 |                 | $ | 1.11   |  | $      | 50,931 |                 | 42,883 |  | $ | 1.19
|                                                                |  |                                        |        |        |        |                 |   |        |  |        |        |                 |        |  |   |     



For the nine months
ended September 30, 2005 and 2004, average options to purchase 503 and 362 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.



10



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



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 March 1, 2005, options to purchase 151 shares of common stock were granted to employees and directors, with an exercise price of $24.95 per share on the date of grant; the options
vested immediately.



|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | ------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                                                                            |  | For the three months endedSeptember 30 |        | For the nine months endedSeptember 30
|                                                                                                                                            |  | 2005                                   |        | 2004                                  |   | 2005   |  | 2004
|Net income, as reported                                                                                                                     |  | $                                      | 17,761 |                                       | $ | 18,506 |  | $    | 51,870 |  | $ | 50,931
|                                                                                                                                            |  |                                        |        |                                      
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                        | 213    |                                       |   | 238    |  |      | 1,097  |  |   | 718   
|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Pro forma net income                                                                                                                        |  | $                                      | 17,548 |                                       | $ | 18,268 |  | $    | 50,773 |  | $ | 50,213
|                                                                                                                                            |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Earnings per share:                                                                                                                         |  |                                        |        |                                       |   |        |  |      |        |  |   |       
|Basic - as reported                                                                                                                         |  | $                                      | 0.38   |                                       | $ | 0.40   |  | $    | 1.11   |  | $ | 1.20  
|Basic - pro forma                                                                                                                           |  | $                                      | 0.38   |                                       | $ | 0.39   |  | $    | 1.09   |  | $ | 1.18  
|                                                                                                                                            |  |                                        |        |                                      
|Diluted - as reported                                                                                                                       |  | $                                      | 0.38   |                                       | $ | 0.40   |  | $    | 1.11   |  | $ | 1.19  
|Diluted - pro forma                                                                                                                         |  | $                                      | 0.37   |                                       | $ | 0.39   |  | $    | 1.08   |  | $ | 1.17  



NOTE 8. Benefit Plans



Components of Net Periodic Benefit Cost



|                                              |  |                                 |        |   |                |   |        |      |  |   |      |   |  |   |    
|--------------------------------------------- |  | ------------------------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---
|                                              |  | Three months ended September 30
|                                              |  | Pension Benefits                |        |   | Other Benefits
|                                              |  | 2005                            |        |   | 2004           |   |        | 2005 |  |   | 2004
|Service cost                                  |  | $                               | 981    |   |                | $ | 739    |      |  | $ | 94   |   |  | $ | 121
|Interest cost                                 |  |                                 | 891    |   |                |   | 755    |      |  |   | 75   |   |  |   | 102
|Expected return on plan assets                |  |                                 | (1,327 | ) |                |   | (1,104 | )    |  |   | 0    |   |  |   | 0  
|Amortization of prior service cost            |  |                                 | (15    | ) |                |   | (20    | )    |  |   | 12   |   |  |   | 12 
|Amortization of transition obligation (asset) |  |                                 | (17    | ) |                |   | (51    | )    |  |   | 29   |   |  |   | 29 
|Amortization of net actuarial (gain) or loss  |  |                                 | 90     |   |                |   | 42     |      |  |   | (12  | ) |  |   | 16 
|                                              |  |                                 |        |   |                |   |        |      |  |   |      |   |  |   |    
|Net periodic benefit cost                     |  | $                               | 603    |   |                | $ | 361    |      |  | $ | 198  |   |  | $ | 280
|                                              |  |                                 |        |   |                |   |        |      |  |   |      |   |  |   |    
|                                              | 
|                                              |  | Nine months ended September 30 
|                                              |  | Pension Benefits                |        |   | Other Benefits
|                                              |  | 2005                            |        |   | 2004           |   |        | 2005 |  |   | 2004
|Service cost                                  |  | $                               | 2,661  |   |                | $ | 2,079  |      |  | $ | 266  |   |  | $ | 229
|Interest cost                                 |  |                                 | 2,875  |   |                |   | 2,667  |      |  |   | 261  |   |  |   | 242
|Expected return on plan assets                |  |                                 | (3,981 | ) |                |   | (3,310 | )    |  |   | 0    |   |  |   | 0  
|Amortization of prior service cost            |  |                                 | (43    | ) |                |   | (44    | )    |  |   | 36   |   |  |   | 36 
|Amortization of transition obligation (asset) |  |                                 | (51    | ) |                |   | (51    | )    |  |   | 85   |   |  |   | 85 
|Amortization of net actuarial (gain) or loss  |  |                                 | 530    |   |                |   | 268    |      |  |   | 0    |   |  |   | 0  
|                                              |  |                                 |        |   |                |   |        |      |  |   |      |   |  |   |    
|Net periodic benefit cost                     |  | $                               | 1,991  |   |                | $ | 1,609  |      |  | $ | 648  |   |  | $ | 592
|                                              |  |                                 |        |   |                |   |        |      |  |   |      |   |  |   |    



Employer Contributions



Susquehanna previously
disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $118 to its pension plans and $249 to its other postretirement benefit plan in 2005. As of September 30, 2005, $90 of contributions
have been made to its pension plans, and $152 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $28 to fund its pension plans in 2005 for a total of $118, and $98 to its
other postretirement benefit plan for a total of $249.



11



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



NOTE 9. Goodwill and Other Intangible
Assets



The change in the carrying amount
of goodwill for the nine months ended September 30, 2005, is as follows:



|                                                                                                     |  |   |        
|---------------------------------------------------------------------------------------------------- |  | - | -------
|Balance as of January 1, 2005                                                                        |  | $ | 240,632
|                                                                                                     | 
|Goodwill acquired through the Brandywine acquisition, deemed to be tax deductible                    |  |   | 1,901  
|Additional goodwill related to contingent earnings agreement associated with the Patriot acquisition |  |   | 185    
|                                                                                                     |  |   |        
|Balance at September 30, 2005                                                                        |  | $ | 242,718
|                                                                                                     |  |   |        



In
addition, $1,326 was recorded as customer lists relating to the Brandywine acquisition.



NOTE 10. Derivative Financial Instruments and Hedging Activities



On March 16, 2005, Susquehanna entered into a $219,836 amortizing interest rate swap; and in the third quarter of 2005, Susquehanna entered into two incremental swaps totaling $81,157. For purposes of
Susquehannas consolidated financial statements, the $300,993 amortizing interest rate swaps (the hedging instruments) are designated as cash flow hedges of expected future cash flows (proceeds) associated with a forecasted sale of auto leases
(the hedged forecasted transaction). This transaction is subject to FAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. At September 30, 2005, the unrealized gain, net of taxes, recorded in
other comprehensive income was $272.



Susquehannas risk
management objective and strategy is to mitigate its exposure to changes in interest rates associated with future securitizations of auto leases. Susquehanna is meeting this objective by entering into forward-starting, pay-fixed and receive-LIBOR
interest rate swaps. The swaps are expected to be effective in hedging the risk of changes in expected future cash flows associated with the forecasted sale of auto leases due to changes in the LIBOR swap rate, the designated benchmark interest rate
being hedged, over the term of the hedging relationship.



Since
the critical terms of the swap and the hedged transaction match at inception, and it is probable that the swap counterparty will not default on the swaps, Susquehanna has concluded at inception that the hedging relationship is expected to be highly
effective at achieving offsetting changes in cash flows. Throughout the life of the hedging relationship, both retrospective evaluations and prospective assessments of hedge effectiveness will be based on the hypothetical derivative method and
performed at least quarterly. Assuming the hedging relationship qualifies as highly effective, the actual swaps will then be recorded on the balance sheet at fair value, and accumulated other comprehensive income will be adjusted to a balance that
reflects the lesser of either the cumulative change in the fair value of the actual swaps or the cumulative change in the fair value of a perfect hypothetical swap. At the date of securitization, the balance in accumulated other
comprehensive income will be reclassified to earnings when the associated gain on sale from securitization is recognized. At September 30, 2005, the hedge was assessed as prospectively effective.



In June 2005, Susquehanna entered into two $25,000 interest rate swaps to
hedge the interest rate risk exposure on $50,000 of variable-rate debt. The risk management objective with respect to this interest rate swap is to hedge the risk of changes in Susquehannas cash flow attributable to changes in the LIBOR swap
rate.



Prospective effectiveness evaluations will be performed
by qualitatively assessing on an ongoing basis that the critical terms of the swaps and hedged transactions still match, and will periodically review the credit quality of the swap counterparty to evaluate whether it is probable that the swap
counterparty will not default. At September 30, 2005, the hedges were assessed as effective.



The following table summarizes our derivative financial instruments at September 30, 2005:



|                |         |            |   |               |  |                   |  |                |  
|--------------- | ------- | ---------- | - | ------------- |  | ----------------- |  | -------------- | -
|Notional Amount |         | Fair Value |   | Variable Rate |  | Fixed Rate        | 
|$               | 300,993 |            | $ | 419           |  | One-month LIBOR   |  | 4.415% - 4.475 | %
|                | 25,000  |            |   | 352           |  | Three-month LIBOR |  | 3.934          | %
|                | 25,000  |            |   | 492           |  | Three-month LIBOR |  | 4.083          | %
|                |         |            |   |               |  |                   |  |                |  
|$               | 350,993 |            | $ | 1,263         |  |                   |  |                |  
|                |         |            |   |               |  |                   |  |                |  



12



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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



Note 11. 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.



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 (Recoveries)
|                                   |  | 2005               |           | 2004                                   |   | 2005                           |  | 2004 |       | 2005 |   |       | 2004
|Leases and loans held in portfolio |  | $                  | 381,457   |                                        | $ | 460,771                        |  | $    | 241   |      | $ | 567   |      | $ | (2  | ) |  | $ | 46 
|Leases securitized                 |  |                    | 631,400   |                                        |   | 399,748                        |  |      | 921   |      |   | 406   |      |   | 220 |   |  |   | 114
|Leases serviced for others (1)     |  |                    | 543,204   |                                        |   | 751,933                        |  |      | 2,505 |      |   | 2,795 |      |   | 14  |   |  |   | 100
|                                   |  |                    |           |                                        |   |                                |  |      |       |      |   |       |      |   |     |   |  |   |    
|Total leases and loans serviced    |  | $                  | 1,556,061 |                                        | $ | 1,612,452                      |  | $    | 3,667 |      | $ | 3,768 |      | $ | 232 |   |  | $ | 260
|                                   |  |                    |           |                                        |   |                                |  |      |       |      |   |       |      |   |     |   |  |   |    

---

|(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
|                                                |  | 2005                           |       | 2004                          |   | 2005  |  | 2004
|Proceeds from lease securitizations             |  | $                              | 0     |                               | $ | 0     |  | $    | 345,710 |  | $ | 179,971
|Amounts derecognized                            |  |                                | 0     |                               |   | 0     |  |      | 372,488 |  |   | 194,852
|Servicing fees received                         |  |                                | 2,055 |                               |   | 1,421 |  |      | 6,012   |  |   | 2,846  
|Other cash flows received on retained interests |  |                                | 4,804 |                               |   | 2,176 |  |      | 12,990  |  |   | 3,411  



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, 2005 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, 2005



|                                                 |  |            |       |                                  |    |                        |   |      |                                 |  |   |                        |   |  |   |      |  
|------------------------------------------------ |  | ---------- | ----- | -------------------------------- | -- | ---------------------- | - | ---- | ------------------------------- |  | - | ---------------------- | - |  | - | ---- | -
|Automobile Leases                                |  | Fair Value |       | Weighted-average Life(in months) |    | MonthlyPrepaymentSpeed |   |      | ExpectedCumulativeCredit Losses |  |   | AnnualDiscountRate (1) |  
|2005 transaction - Interest-Only Strip           |  | $          | 1,532 |                                  | 28 |                        |   | 3.40 | %                               |  |   | 0.10                   | % |  |   | 4.51 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | $ | 27   |                                 |  | $ | 0                      |   |  | $ | 16   |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        |   | 54   |                                 |  |   | 0                      |   |  |   | 32   |  
|2004 revolving transaction - Interest-Only Strip |  | $          | 516   |                                  | 28 |                        |   | 3.00 | %                               |  |   | 0.10                   | % |  |   | 4.58 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | $ | 2    |                                 |  | $ | 0                      |   |  | $ | 5    |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        |   | 4    |                                 |  |   | 0                      |   |  |   | 10   |  
|2003 revolving transaction - Interest-Only Strip |  | $          | 1,456 |                                  | 20 |                        |   | 2.00 | %                               |  |   | 0.10                   | % |  |   | 4.54 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | $ | 0    |                                 |  | $ | 0                      |   |  | $ | 11   |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        |   | 0    |                                 |  |   | 0                      |   |  |   | 22   |  
|2003 transaction - Interest-Only Strip           |  | $          | 1,668 |                                  | 7  |                        |   | 5.00 | %                               |  |   | 0.10                   | % |  |   | 4.25 | %
|Decline in fair value of 10% adverse change      |  |            |       |                                  |    |                        | $ | 0    |                                 |  | $ | 0                      |   |  | $ | 4    |  
|Decline in fair value of 20% adverse change      |  |            |       |                                  |    |                        |   | 0    |                                 |  |   | 0                      |   |  |   | 8    |  

---

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



13



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##### Table of Contents

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



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



Certain statements in
this document may be considered to be forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words expect, estimate,
project, anticipate, should, intend, probability, risk, target, objective, and similar expressions or variations on such expressions. In particular, this
document includes forward-looking statements relating, but not limited to, 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 lease 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; and
expectations regarding our branding strategy and internal realignment plans and their potential impact on our efficiency ratios and earnings. 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 which 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse 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.
| | - |  | ------------------------------------------------------------



14



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##### Table of Contents

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, Susquehanna Bank PA and subsidiaries, Susquehanna Bank and subsidiaries, Susquehanna Patriot Bank and
subsidiaries, Susque-Bancshares Life Insurance Co. (SBLIC), Valley Forge Asset Management Corp. and subsidiaries (VFAM), and The Addis Group, LLC (Addis).



Availability of Information



Our web-site address is www.susquehanna.net. We make available free of
charge, through the Investor Relations section of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities and Exchange Commission. We include our web-site address in this Quarterly Report on Form 10-Q only as an inactive textual reference and do not intend it to be an active link to our web
site.



Acquisitions



Brandywine Benefits Corporation and Rockford Pensions, LLC



On February 1, 2005, we acquired Brandywine Benefits Corporation and
Rockford Pension, LLC, located in Wilmington, Delaware. Brandywine is a financial planning, consulting and administration firm specializing in retirement benefit plans for small-to-medium-sized businesses. Brandywine Benefits Corporation is a wholly
owned subsidiary of Brandywine Benefits Corp., LLC, which in turn is a wholly owned subsidiary of VFAM. The acquisition was accounted for under the purchase method, and all transactions since that date are included in our consolidated financial
statements.



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.



Other Notable Events



On January 21, 2005, we merged two of our subsidiary banks, First Susquehanna Bank and Trust and WNB Bank, into our Susquehanna Bank PA subsidiary.
On April 15, 2005, we merged three of our subsidiary banks, Susquehanna Bank; Citizens Bank of Southern Pennsylvania; and First American Bank of Pennsylvania, into our Farmers & Merchants Bank subsidiary, which subsequently changed its
name to Susquehanna Bank. These actions were taken as part of the consolidation plan we first announced in October 2004.



15



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##### Table of Contents

Results of Operations



Summary of 2005 Compared to 2004



Net income for the third quarter of 2005, was $17.8 million, a decrease of $0.7 million, or 4.0%, over net income of $18.5 million for the third quarter
of 2004. Net interest income increased 3.9%, to $60.7 million for the third quarter of 2005, from $58.4 million for the third quarter of 2004. Non-interest income decreased 9.8%, to $27.2 million for the third quarter of 2005, from $30.1 million for
the third quarter of 2004. Non-interest expenses decreased 1.6%, to $58.5 million for the third quarter of 2005, from $59.5 million for the third quarter of 2004.



Net income for the first nine months of 2005, was $51.9 million, an increase of $1.0 million, or 1.8%, over net income of
$50.9 million for the first nine months of 2004. Net interest income increased 16.6%, to $180.0 million for the first nine months of 2005, from $154.4 million for the first nine months of 2004. Non-interest income increased 1.0%, to $85.4 million
for the first nine months of 2005, from $84.6 million for the first nine months of 2004. Non-interest expenses increased 12.8%, to $180.7 million for the first nine months of 2005, from $160.2 million for the comparable period in 2004.



Additional information is as follows:



|                                      |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                      |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                      |  | 2005                            |       |   | 2004                           |   |       | 2005 |  |   | 2004  |  
|Diluted Earnings per Share            |  | $                               | 0.38  |   |                                | $ | 0.40  |      |  | $ | 1.11  |   |  | $ | 1.19  |  
|Return on Average Assets              |  |                                 | 0.95  | % |                                |   | 1.00  | %    |  |   | 0.94  | % |  |   | 1.04  | %
|Return on Average Equity              |  |                                 | 9.29  | % |                                |   | 10.07 | %    |  |   | 9.22  | % |  |   | 10.91 | %
|Return on Average Tangible Equity (1) |  |                                 | 14.20 | % |                                |   | 15.60 | %    |  |   | 14.15 | % |  |   | 13.91 | %
|Efficiency Ratio                      |  |                                 | 66.19 | % |                                |   | 66.67 | %    |  |   | 67.59 | % |  |   | 66.52 | %
|Efficiency Ratio excluding Hann (1)   |  |                                 | 58.49 | % |                                |   | 59.07 | %    |  |   | 59.09 | % |  |   | 62.31 | %



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

---

|(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)                                  |  | 9.29  | % |  | 10.07 | % |  | 9.22  | % |  | 10.91 | %
|Effect of excluding average intangible assets and related amortization |  | 4.91  | % |  | 5.53  | % |  | 4.93  | % |  | 3.00  | %
|Return on average tangible equity                                      |  | 14.20 | % |  | 15.60 | % |  | 14.15 | % |  | 13.91 | %



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 an 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 income, 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)   |  | 66.19 | % |  | 66.67 | % |  | 67.59 | % |  | 66.52 | %
|Effect of excluding Hann        |  | 7.70  | % |  | 7.60  | % |  | 8.50  | % |  | 4.21  | %
|Efficiency ratio excluding Hann |  | 58.49 | % |  | 59.07 | % |  | 59.09 | % |  | 62.31 | %



16



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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 EndedSeptember 30, 2005 |           | For the Three Month Period EndedSeptember 30, 2004
|                                                      |  | AverageBalance                                     |           |                                                    | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest  |   | Rate (%)
|Assets                                                |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Short-term investments                                |  | $                                                  | 65,301    |                                                    |          | $ | 500      |  | 3.04           |  | $ | 56,212    |   |          | $ | 159    |  | 1.13
|Investment securities:                                |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Taxable                                               |  |                                                    | 1,148,672 |                                                    |          |   | 10,485   |  | 3.62           |  |   | 1,306,170 |   |          |   | 12,526 |  | 3.82
|Tax - advantaged                                      |  |                                                    | 19,824    |                                                    |          |   | 317      |  | 6.34           |  |   | 43,971    |   |          |   | 781    |  | 7.07
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total investment securities                           |  |                                                    | 1,168,496 |                                                    |          |   | 10,802   |  | 3.67           |  |   | 1,350,141 |   |          |   | 13,307 |  | 3.92
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Loans and leases, (net):                              |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Taxable                                               |  |                                                    | 5,185,972 |                                                    |          |   | 86,897   |  | 6.65           |  |   | 4,996,775 |   |          |   | 73,448 |  | 5.85
|Tax - advantaged                                      |  |                                                    | 78,363    |                                                    |          |   | 1,308    |  | 6.62           |  |   | 80,350    |   |          |   | 1,242  |  | 6.15
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total loans and leases                                |  |                                                    | 5,264,335 |                                                    |          |   | 88,205   |  | 6.65           |  |   | 5,077,125 |   |          |   | 74,690 |  | 5.85
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total interest - earning assets                       |  |                                                    | 6,498,132 |                                                    |          | $ | 99,507   |  | 6.08           |  |   | 6,483,478 |   |          | $ | 88,156 |  | 5.41
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Allowance for loan and lease losses                   |  |                                                    | (55,484   | )                                                  |          |   |          |  |                |  |   | (53,562   | ) |          |   |        |  |     
|Other non - earning assets                            |  |                                                    | 982,597   |                                                    |          |   |          |  |                |  |   | 930,719   |   |          |   |        |  |     
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total assets                                          |  | $                                                  | 7,425,245 |                                                    |          |   |          |  |                |  | $ | 7,360,635 |   |          |   |        |  |     
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Liabilities                                           |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Deposits:                                             |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Interest - bearing demand                             |  | $                                                  | 1,745,718 |                                                    |          | $ | 7,961    |  | 1.81           |  | $ | 1,822,372 |   |          | $ | 5,092  |  | 1.11
|Savings                                               |  |                                                    | 506,519   |                                                    |          |   | 538      |  | 0.42           |  |   | 589,745   |   |          |   | 655    |  | 0.44
|Time                                                  |  |                                                    | 2,019,095 |                                                    |          |   | 16,636   |  | 3.27           |  |   | 1,843,671 |   |          |   | 12,554 |  | 2.71
|Short - term borrowings                               |  |                                                    | 394,526   |                                                    |          |   | 2,814    |  | 2.83           |  |   | 417,090   |   |          |   | 1,228  |  | 1.17
|FHLB borrowings                                       |  |                                                    | 743,150   |                                                    |          |   | 7,815    |  | 4.17           |  |   | 732,242   |   |          |   | 5,946  |  | 3.23
|Long - term debt                                      |  |                                                    | 172,986   |                                                    |          |   | 2,468    |  | 5.66           |  |   | 224,451   |   |          |   | 3,561  |  | 6.31
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total interest - bearing liabilities                  |  |                                                    | 5,581,994 |                                                    |          | $ | 38,232   |  | 2.72           |  |   | 5,629,571 |   |          | $ | 29,036 |  | 2.05
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Demand deposits                                       |  |                                                    | 872,576   |                                                    |          |   |          |  |                |  |   | 824,583   |   |          |   |        |  |     
|Other liabilities                                     |  |                                                    | 212,551   |                                                    |          |   |          |  |                |  |   | 175,075   |   |          |   |        |  |     
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total liabilities                                     |  |                                                    | 6,667,121 |                                                    |          |   |          |  |                |  |   | 6,629,229 |   |          |   |        |  |     
|Equity                                                |  |                                                    | 758,124   |                                                    |          |   |          |  |                |  |   | 731,406   |   |          |   |        |  |     
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Total liabilities and shareholders equity            |  | $                                                  | 7,425,245 |                                                    |          |   |          |  |                |  | $ | 7,360,635 |   |          |   |        |  |     
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     
|Net interest income / yield on average earning assets |  |                                                    |           |                                                    |          | $ | 61,275   |  | 3.74           |  |   |           |   |          | $ | 59,120 |  | 3.63
|                                                      |  |                                                    |           |                                                    |          |   |          |  |                |  |   |           |   |          |   |        |  |     



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.



17



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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, 2005 |           | For the Nine Month Period EndedSeptember 30, 2004
|                                                      |  | AverageBalance                                    |           |                                                   | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest  |   | Rate (%)
|Assets                                                |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Short - term investments                              |  | $                                                 | 59,269    |                                                   |          | $ | 1,186    |  | 2.68           |  | $ | 75,565    |   |          | $ | 543     |  | 0.96
|Investment securities:                                |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Taxable                                               |  |                                                   | 1,186,259 |                                                   |          |   | 33,093   |  | 3.73           |  |   | 1,136,607 |   |          |   | 30,829  |  | 3.62
|Tax - advantaged                                      |  |                                                   | 30,440    |                                                   |          |   | 1,569    |  | 6.89           |  |   | 29,703    |   |          |   | 1,642   |  | 7.38
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total investment securities                           |  |                                                   | 1,216,699 |                                                   |          |   | 34,662   |  | 3.81           |  |   | 1,166,310 |   |          |   | 32,471  |  | 3.72
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Loans and leases, (net):                              |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Taxable                                               |  |                                                   | 5,123,298 |                                                   |          |   | 246,514  |  | 6.43           |  |   | 4,518,955 |   |          |   | 196,548 |  | 5.81
|Tax - advantaged                                      |  |                                                   | 82,272    |                                                   |          |   | 3,925    |  | 6.38           |  |   | 73,417    |   |          |   | 3,449   |  | 6.28
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total loans and leases                                |  |                                                   | 5,205,570 |                                                   |          |   | 250,439  |  | 6.43           |  |   | 4,592,372 |   |          |   | 199,997 |  | 5.82
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total interest - earning assets                       |  |                                                   | 6,481,538 |                                                   |          | $ | 286,287  |  | 5.91           |  |   | 5,834,247 |   |          | $ | 233,011 |  | 5.33
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Allowance for loan and lease losses                   |  |                                                   | (54,381   | )                                                 |          |   |          |  |                |  |   | (47,545   | ) |          |   |         |  |     
|Other non - earning assets                            |  |                                                   | 980,804   |                                                   |          |   |          |  |                |  |   | 766,334   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total assets                                          |  | $                                                 | 7,407,961 |                                                   |          |   |          |  |                |  | $ | 6,553,036 |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Liabilities                                           |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Deposits:                                             |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Interest - bearing demand                             |  | $                                                 | 1,716,314 |                                                   |          | $ | 19,157   |  | 1.49           |  | $ | 1,589,569 |   |          | $ | 11,452  |  | 0.96
|Savings                                               |  |                                                   | 540,233   |                                                   |          |   | 1,704    |  | 0.42           |  |   | 547,022   |   |          |   | 1,487   |  | 0.36
|Time                                                  |  |                                                   | 2,001,155 |                                                   |          |   | 45,953   |  | 3.07           |  |   | 1,721,819 |   |          |   | 35,977  |  | 2.79
|Short - term borrowings                               |  |                                                   | 387,988   |                                                   |          |   | 6,949    |  | 2.39           |  |   | 343,166   |   |          |   | 2,646   |  | 1.03
|FHLB borrowings                                       |  |                                                   | 763,456   |                                                   |          |   | 22,805   |  | 3.99           |  |   | 611,950   |   |          |   | 16,254  |  | 3.55
|Long - term debt                                      |  |                                                   | 178,789   |                                                   |          |   | 7,776    |  | 5.81           |  |   | 179,669   |   |          |   | 8,965   |  | 6.67
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total interest - bearing liabilities                  |  |                                                   | 5,587,935 |                                                   |          | $ | 104,344  |  | 2.50           |  |   | 4,993,195 |   |          | $ | 76,781  |  | 2.05
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Demand deposits                                       |  |                                                   | 868,420   |                                                   |          |   |          |  |                |  |   | 759,997   |   |          |   |         |  |     
|Other liabilities                                     |  |                                                   | 199,671   |                                                   |          |   |          |  |                |  |   | 176,115   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total liabilities                                     |  |                                                   | 6,656,026 |                                                   |          |   |          |  |                |  |   | 5,929,307 |   |          |   |         |  |     
|Equity                                                |  |                                                   | 751,935   |                                                   |          |   |          |  |                |  |   | 623,729   |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                                 | 7,407,961 |                                                   |          |   |          |  |                |  | $ | 6,553,036 |   |          |   |         |  |     
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     
|Net interest income / yield on average earning assets |  |                                                   |           |                                                   |          | $ | 181,943  |  | 3.75           |  |   |           |   |          | $ | 156,230 |  | 3.58
|                                                      |  |                                                   |           |                                                   |          |   |          |  |                |  |   |           |   |          |   |         |  |     



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.



18



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##### Table of Contents

Net Interest Income  Taxable Equivalent Basis



Our major source of operating revenues is net interest income, which
increased to $60.7 million in the third quarter of 2005, as compared to $58.4 million for the same period in 2004. For the nine months ended September 30, 2005, net interest income increased to $180.0 million, as compared to $154.4 million for
the same period in 2004.



Net interest income as a percentage
of net interest income plus noninterest income was 69.1% for the quarter ended September 30, 2005, and 66.1% for the quarter ended September 30, 2004. Net interest income as a percentage of net interest income plus noninterest income was
67.8% for the nine months ended September 30, 2005 and 64.6% for the nine months ended September 30, 2004.



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



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



The $2.3 million increase in our net interest income for the third quarter of 2005, as compared to the third quarter of
2004, was the result of the net effect of an increase in the volume of average interest-earning assets and a decrease in the volume of average interest-bearing liabilities. In addition, although we remain an asset-sensitive institution, where assets
reprice more quickly than liabilities, we have decreased our asset-sensitivity by offering premium rates on interest-bearing deposits, primarily indexed money market accounts, since June 1, 2005. These promotional deposit programs were
instituted so that we would continue to be competitive in our marketplace. Consequently, the yield on average interest-earning assets increased 67 basis points, and the cost of average interest-bearing liabilities also increased 67 basis points.
Overall, our net interest margin for the third quarter of 2005 increased 11 basis points, to 3.74%, from 3.63% for the third quarter of 2004.



The $25.6 million increase in our net interest income for the nine-month period ended September 30, 2005, as compared to the same period in 2004, was
primarily the result of the net contribution from interest-earning assets and interest-bearing liabilities acquired from Patriot on June 10, 2004. In addition, since we are an asset-sensitive institution, where assets reprice more quickly than
liabilities, we experienced improvement in our net interest margin due to recent increases in interest rates. Consequently, our net interest margin for the first nine months of 2005 increased 17 basis points, to 3.75%, from 3.58% for the first nine
months of 2004. The yield on average interest-earning assets increased 58 basis points, while the cost of average interest-bearing liabilities only increased 44 basis points.



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



Provision and Allowance for Loan and Lease Losses



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



19



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##### Table of Contents

As illustrated in Table 2, the provision for loan and lease losses was $3.2 million for the third quarter
of 2005, and $2.8 million for the third quarter of 2004.



The
provision for loan and lease losses was $8.4 million for the nine months ended September 30, 2005, and $6.6 million for the nine months ended September 30, 2004. This $1.8 million increase in the provision is the result of a $3.4 million
increase in net charge-offs and a net increase in total loans outstanding since December 31, 2004.



The allowance for loan and lease losses at September 30, 2005, was 1.00% of period-end loans and leases, or $53.2 million, compared with 1.02%, or
$52.5 million, at September 30, 2004.



Determining the
level of the allowance for possible loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing
rapidly. The review of the loan and lease portfolios is a continuing 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, 2005. There can be no assurance, however, that we will not sustain losses in future periods that could be greater than the size of the allowance at September 30, 2005.



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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 EndedSeptember 30, |           |   | Nine Months EndedSeptember 30, |  
|                                                                      |  | 2005                            |           |   | 2004                           |   |           | 2005 |  |   | 2004      |  
|Balance - Beginning of period                                         |  | $                               | 53,927    |   |                                | $ | 52,811    |      |  | $ | 54,093    |   |  | $ | 42,672    |  
|Additions through acquisition                                         |  |                                 | 0         |   |                                |   | 0         |      |  |   | 0         |   |  |   | 9,149     |  
|Additions charged to operating expenses                               |  |                                 | 3,215     |   |                                |   | 2,783     |      |  |   | 8,445     |   |  |   | 6,590     |  
|                                                                      |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|                                                                      |  |                                 | 57,142    |   |                                |   | 55,594    |      |  |   | 62,538    |   |  |   | 58,411    |  
|                                                                      |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Charge-offs                                                           |  |                                 | (4,750    | ) |                                |   | (3,904    | )    |  |   | (13,090   | ) |  |   | (8,245    | )
|Recoveries                                                            |  |                                 | 840       |   |                                |   | 778       |      |  |   | 3,784     |   |  |   | 2,302     |  
|                                                                      |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                                       |  |                                 | (3,910    | ) |                                |   | (3,126    | )    |  |   | (9,306    | ) |  |   | (5,943    | )
|                                                                      |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Balance-Period end                                                    |  | $                               | 53,232    |   |                                | $ | 52,468    |      |  | $ | 53,232    |   |  | $ | 52,468    |  
|                                                                      |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs as a percent of average loans and leases (annualized) |  |                                 | 0.29      | % |                                |   | 0.24      | %    |  |   | 0.24      | % |  |   | 0.17      | %
|Allowance as a percent of period-end loans and leases                 |  |                                 | 1.00      | % |                                |   | 1.02      | %    |  |   | 1.00      | % |  |   | 1.02      | %
|Average loans and leases                                              |  | $                               | 5,264,335 |   |                                | $ | 5,077,125 |      |  | $ | 5,205,570 |   |  | $ | 4,592,372 |  
|Period-end loans and leases                                           |  |                                 | 5,334,008 |   |                                |   | 5,166,137 |      |  |   | 5,334,008 |   |  |   | 5,166,137 |  



TABLE 3 - Risk Assets



|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | ----------------- |  | - | ------ | -
|                                                                         |  | September 30,2005 |        |   | December 31,2004 |   |        | September 30,2004 | 
|Nonperforming assets:                                                    |  |                   |        |   |                  |   |        |                   |  |   |        |  
|Nonaccrual loans and leases                                              |  | $                 | 19,033 |   |                  | $ | 20,407 |                   |  | $ | 18,204 |  
|Other real estate owned                                                  |  |                   | 3,417  |   |                  |   | 1,340  |                   |  |   | 1,210  |  
|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|Total nonperforming assets                                               |  | $                 | 22,450 |   |                  | $ | 21,747 |                   |  | $ | 19,414 |  
|                                                                         |  |                   |        |   |                  |   |        |                   |  |   |        |  
|As a percent of period-end loans and leases plus other real estate owned |  |                   | 0.42   | % |                  |   | 0.41   | %                 |  |   | 0.38   | %
|Coverage ratio                                                           |  |                   | 279.68 | % |                  |   | 265.07 | %                 |  |   | 288.22 | %
|Loans and leases contractually past due 90 days and still accruing       |  | $                 | 8,489  |   |                  | $ | 10,217 |                   |  | $ | 10,126 |  



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##### Table of Contents

Noninterest Income



Third Quarter 2005 Compared to Third Quarter 2004



Noninterest income, as a percentage of net interest income plus noninterest
income, was 30.9% for the third quarter of 2005, and 34.0% for the third quarter of 2004.



Noninterest income decreased $2.9 million, or 9.8%, for the third quarter of 2005, over the third quarter of 2004. This net decrease primarily is attributable to a decrease in net gains on the sale of securities.
During the third quarter of 2004, as part of a restructuring of our investment portfolio in response to the Patriot acquisition, we sold approximately $107.0 million in securities and realized a net, pre-tax gain of $3.8 million. During the third
quarter of 2005, we sold $49.6 million in securities and realized a net, pre-tax gain of $0.8 million.



Nine Months ended September 30, 2005 Compared to Nine Months ended September 30, 2004



Noninterest income, as a percentage of net interest income plus noninterest
income, was 32.2% for the nine-month period ended September 30, 2005, and 35.4% for the nine-month period ended September 30, 2004.



Noninterest income increased $0.8 million, or 1.0%, for the nine-month period ended September 30, 2005, over the comparable period in 2004. This net
increase is composed primarily of the following:



| |  |  | Increased asset management fees of $2.9 million;
| | - |  | ------------------------------------------------



| |  |  | Increased commissions on property and casualty insurance sales of $1.6 million;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Increased other income of $1.5 million;
| | - |  | ---------------------------------------



| |  |  | Decreased vehicle origination, servicing, and securitization fees of $3.3 million; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Decreased net gains on sales of loans and leases of $2.0 million.
| | - |  | -----------------------------------------------------------------



Asset management fees. As part of our strategy to increase other fee-based income, we continued to focus on enhancing the wealth management aspect
of our business. As a result, asset management fees increased 27.2%, as assets under management at VFAM increased 8.6%, to $3.8 billion at September 30, 2005, from $3.5 billion at September 30, 2004. This increase is also due, in part, to
our strategic acquisitions.



Commissions on property and
casualty insurance sales.The 24.5% increase in commissions on property and casualty insurance sales is attributed to new business, growth in existing business, and better than expected contingency fee income in the first quarter of 2005.



Other income. The 15.5% increase in other income
primarily can be attributed to a $0.6 million gain on the sale of one of our branch offices during the second quarter of 2005, and an $0.8 million insurance reimbursement, also received during the second quarter of 2005.



Vehicle origination, securitization, and servicing fees.The 21.2%
decrease in vehicle origination, servicing, and securitization fees was primarily due to a combination of decreased lease origination volumes and decreased fees from securitization transactions at Hann. This reduction in volume has been due to
special financing offers provided by the major car manufacturers with whom Hann competes. If these special financing offers continue, Hanns production in 2005 should be less than the $450.1 million originated in 2004, and this will have an
adverse effect on our fee income and earnings in 2005. The decrease in securitization fees is due to the current interest rate environment.



Net gains on sales of loans and leases. Due to the timing of vehicle lease securitizations, we recognized $2.9 million in net gains on the sale and
securitization of leases for the nine-month period ended September 30, 2005. Net gains recognized during the comparable period in 2004, were $5.2 million.



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##### Table of Contents

Noninterest Expenses



Third Quarter 2005 Compared to Third Quarter 2004



Noninterest expenses decreased $1.0 million, or 1.6%, from $59.5 million for
the third quarter of 2004, to $58.5 million for the third quarter of 2005. This net decrease was composed primarily of the following:



| |  |  | Decreased salaries and employee benefits of $0.9 million;
| | - |  | ---------------------------------------------------------



| |  |  | Increased vehicle residual value expense of $0.8 million; and
| | - |  | -------------------------------------------------------------



| |  |  | Decreased vehicle delivery and preparation expense of $0.9 million.
| | - |  | -------------------------------------------------------------------



Salaries and employee benefits. The largest component of noninterest expense is salaries and employee benefits, which decreased 3.1%, for the third
quarter of 2005, as compared to the third quarter of 2004. The net decrease in salaries and benefits was primarily the result of normal annual salary increases, new revenue producing positions, and higher benefit costs, which were more than offset
by a decline in related expenses due to our charter consolidations.



Vehicle residual value expense. As we had anticipated, vehicle residual value expense increased for the third quarter of 2005, based upon servicing agreements with Auto Lenders. For further information concerning Vehicle Leasing
Residual Value Risk, refer to Item 3, Quantitative and Qualitative Disclosures about Market Risk, in this Form 10-Q.



Vehicle delivery and preparation expense. The 21.1% decrease in these expenses is due to efficiencies recognized through the operation of the new
reconditioning center at Auto Lenders. In addition, the number of vehicles coming off lease declined 8.3% from the third quarter of 2004 to the third quarter of 2005.



Nine Months ended September 30, 2005 Compared to Nine Months ended September 30, 2004



Noninterest expenses increased $20.5 million, or 12.8%, from $160.2 million
for the nine-month period ended September 30, 2004, to $180.7 million for the comparable period in 2005. This net increase is composed primarily of the following:



| |  |  | Increased salaries and employee benefits of $5.8 million;
| | - |  | ---------------------------------------------------------



| |  |  | Increased occupancy expense of $2.7 million;
| | - |  | --------------------------------------------



| |  |  | Increased vehicle residual value expense of $3.7 million; and
| | - |  | -------------------------------------------------------------



| |  |  | Increased other expenses of $7.7 million.
| | - |  | -----------------------------------------



Salaries and employee benefits. The largest component of noninterest expense is salaries and employee benefits, which increased 7.4%, for the first
nine months of 2005, as compared to the first nine months of 2004. The increase in salaries and benefits was primarily the result of the Patriot acquisition, normal annual salary increases, new revenue producing positions, and higher benefit costs.
Offsetting these increases was a decline in related expenses due to our charter consolidations.



Occupancy. Charges for occupancy increased 23.0%. The increase can be attributed to the Patriot acquisition and general increases in the costs of
doing business, predominantly in the categories of rent, maintenance, and taxes.



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Vehicle residual value expense. As we had anticipated, vehicle residual value expense increased
for the first nine months of 2005, based upon servicing agreements with Auto Lenders. For further information concerning Vehicle Leasing Residual Value Risk, refer to Item 3, Quantitative and Qualitative Disclosures about Market Risk, in this
Form 10-Q.



Other expenses. The 15.8% increase in other
expenses is directly related to the inclusion of Patriot operations for the entire nine-month period of 2005. Nonrecurring charter consolidation costs incurred during the second quarter of 2005 also contributed to the increase.



Income Taxes



Our effective tax rate for the third quarter of 2005 and also for the nine-month period ended September 30, 2005 was
32.0%. Our effective tax rate for the third quarter of 2004 and also for the nine-month period ended September 30, 2004 was 29.5%. The increase in the effective tax rate for 2005 was primarily related to a proportionate decline in
tax-advantaged income.



Financial Condition



Summary of September 30, 2005 Compared to December 31, 2004



Total assets were $7.5 billion at September 30,
2005, and December 31, 2004. Equity capital was $767.6 million at September 30, 2005, or $16.40 per share, compared to $751.7 million, or $16.13 per share, at December 31, 2004.



Loans and Leases



In March 2005, our banking subsidiaries entered into a term securitization transaction in which they collectively sold and
contributed beneficial interests in a portfolio of automobile leases and related vehicles with an aggregate total of $366.8 million. Internal growth in the loan and lease portfolio was approximately $453.3 million. As a result, loans and leases
increased $86.5 million, net, from December 31, 2004, to September 30, 2005.



Risk Assets



Table 3 shows a decrease
in nonaccrual loans and leases, from $20.4 million at December 31, 2004, to $19.0 million at September 30, 2005. Loans and leases past due 90 days or more and still accruing interest decreased from $10.2 million at December 31, 2004,
to $8.5 million at September 30, 2005. The percentage of nonperforming assets to period-end loans and leases plus other real estate owned increased slightly, from 0.41% at December 31, 2004, to 0.42% at September 30, 2005. The
percentage of loan and lease loss reserves to nonperforming loans and leases (coverage ratio) was 279.7% at September 30, 2005, and 265.1% at December 31, 2004.



Goodwill and Other Identifiable Intangible Assets



As a result of the Brandywine acquisition in February 2005, we recognized goodwill of $1.9 million and a customer list
intangible of $1.3 million. Furthermore, in the second quarter of 2005, we recorded additional goodwill of $0.2 million as a result of a contingent earnings agreement related to a previous Patriot acquisition.



Investment in and Receivables from Unconsolidated Entities



Concurrent with the lease-securitization transaction in March 2005, our
banking subsidiaries recorded investments in and receivables from unconsolidated entities of $49.1 million. This amount represents receivables from the unconsolidated qualified special purpose entities that were established to transact the
securitization, which resulted in a $2.9 million gain on sale of leases.



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##### Table of Contents

Borrowings



Long-term debt decreased $50.0 million, from December 31, 2004, to September 30, 2005. The decrease was the result of our repayment, at maturity
on February 1, 2005, of $50.0 million aggregate principal amount of 9.0% subordinated notes.



Capital Adequacy



Capital elements are segmented into two tiers. Tier 1 capital represents shareholders equity plus junior subordinated debentures, reduced by excludable intangibles. Tier 2 capital represents certain allowable long-term debt, the
portion of the allowance for loan and lease losses 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, 2005,
was 8.28%. The minimum total capital (Tiers 1and 2) ratio is 8%; our ratio at September 30, 2005, was 11.36%. The minimum leverage ratio is 4%; our leverage ratio at September 30, 2005, was 7.61%. We and each of our bank 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 equity market price risk, liquidity risk, interest rate risk, foreign
currency risk, and commodity price risk.



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



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  allows 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, 2005, our bank subsidiaries had approximately $642.5 million available to them under collateralized lines of credit with various Federal Home
Loan Banks; and approximately $352.5 million more was available provided that additional collateral would have been pledged.



Liquidity is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into consideration maturing or readily
marketable assets. Unrestricted short-term investments totaled $44.1 million at September 30, 2005, and represented additional sources of liquidity.



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.



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##### Table of Contents

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. Board directed guidelines have been adopted for both the rate shock simulations and economic value of equity exposure
limits. By dividing the assets and liabilities into three groups, fixed rate, floating rate and those which reprice only at our discretion, strategies are developed to control the exposure to interest rate fluctuations.



Our policy, as approved by our Board of Directors, is designed so that we
experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis
are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Boards approved guidelines at a down 300 basis point shock and an up 300 basis point shock. Positive rate scenarios are
considered more likely, as we and most economists believe that the Federal Reserve will continue to increase short-term interest rates throughout the remainder of 2005, putting upward pressure on the long-term interest rates, as well.



At September 30, 2005, we were an asset-sensitive institution and should
benefit from a continued rise in interest rates in 2005, if that should occur.



Derivative Financial Instruments and Hedging Activities



On March 16, 2005, we entered into a $219.8 million amortizing interest rate swap; and in the third quarter of 2005, we entered into two incremental
swaps totaling $81.2 million. For purposes of Susquehannas consolidated financial statements, the $301.0 million amortizing interest rate swaps (the hedging instruments) are designated as cash flow hedges of expected future cash flows
(proceeds) associated with a forecasted sale of auto leases (the hedged forecasted transaction). This transaction is subject to FAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. At
September 30, 2005, the unrealized gain, net of taxes, recorded in other comprehensive income was $0.3 million.



Our risk management objective and strategy is to mitigate our exposure to changes in interest rates associated with future securitizations of auto leases.
We are meeting this objective by entering into forward-starting, pay-fixed and receive-LIBOR interest rate swaps. The swaps are expected to be effective in hedging the risk of changes in expected future cash flows associated with the forecasted sale
of auto leases due to changes in the LIBOR swap rate, the designated interest rate being hedged, over the term of the hedging relationship.



Since the critical terms of the swaps and the hedged forecasted transaction match at inception, and it is probable that the swap counterparty will not
default on the swaps, we have concluded at inception that the hedging relationship is expected to be highly effective at achieving offsetting changes in cash flows. Throughout the life of the hedging relationship, both retrospective evaluations and
prospective assessments of hedge effectiveness will be performed at least quarterly. Assuming the hedging relationship qualifies as highly effective, the actual swaps will then be recorded on the balance sheet at fair value, and accumulated other
comprehensive income will be adjusted to a balance that reflects the lesser of either the cumulative change in the fair value of the actual swaps or the cumulative change in the fair value of a perfect hypothetical swap. At the date of
securitization, the balance in accumulated other comprehensive income will be reclassified to earnings when the associated gain on sale from securitization is recognized. At September 30, 2005, the hedges were assessed as prospectively
effective.



In June 2005, we entered into two $25.0 million
interest rate swaps to hedge the interest rate risk exposure on $50.0 million of our variable-rate debt. Our risk management objective with respect to this interest rate swap is to hedge the risk of changes in our cash flows attributable to changes
in the LIBOR swap rate.



Prospective effectiveness evaluations
will be performed by qualitatively assessing on an ongoing basis that the critical terms of the swap and hedged transactions still match, and will periodically review the credit quality of the swap counterparty to evaluate whether it is probable
that the swap counterparty will not default. At September 30, 2005, the hedges were assessed as effective.



26



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##### Table of Contents

The following table summarizes our derivative financial instruments at September 30, 2005:



|                       |         |            |   |               |  |                   |  |               
|---------------------- | ------- | ---------- | - | ------------- |  | ----------------- |  | --------------
|Notional Amount        |         | Fair Value |   | Variable Rate |  | Fixed Rate       
|(Dollars in thousands) |         |           
|$                      | 300,993 |            | $ | 419           |  | one-month LIBOR   |  | 4.415% -4.475%
|                       | 25,000  |            |   | 352           |  | three-month LIBOR |  | 3.935         
|                       | 25,000  |            |   | 492           |  | three-month LIBOR |  | 4.083         
|                       |         |            |   |               |  |                   |  |               
|$                      | 350,993 |            | $ | 1,263         |  |                   |  |               
|                       |         |            |   |               |  |                   |  |               



Vehicle Leasing Residual Value Risk



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



Securitizations and Off-Balance Sheet Vehicle Lease Financings



As of September 30, 2005 and 2004, Hanns managed portfolio was comprised of the following:



|                                     |  |                          |                 |                          |   |                
|------------------------------------ |  | ------------------------ | --------------- | ------------------------ | - | ---------------
|                                     |  | As of September 30, 2005 |                 | As of September 30, 2004
|                                     |  |                         
|Securitization Transactions*         |  | $                        | 631.4 million   |                          | $ | 399.7 million  
|Agency Arrangements and Lease Sales* |  |                          | 443.9 million   |                          |   | 635.1 million  
|Sale-Leaseback Transactions*         |  |                          | 99.3 million    |                          |   | 116.9 million  
|Leases and Loans Held in Portfolio   |  |                          | 381.5 million   |                          |   | 460.8 million  
|                                     |  |                          |                 |                          |   |                
|Total Leases and Loans Serviced      |  | $                        | 1,556.1 million |                          | $ | 1,612.5 million
|                                     |  |                          |                 |                          |   |                

---

|* | Off-balance sheet
|- | -----------------



All of our securitizations and off-balance sheet financings primarily are done to fund the assets originated by the Origination Trust and in some cases,
to enable us to more efficiently utilize required regulatory capital.



Securitization Transactions



As of
September 30, 2005, the aggregate fair value of all receivables representing the present value of excess cash flows (each, a PV Receivable) in connection with securitizations was $5.2 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, 2004, and Note 11  Securitization Activity to the financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.



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##### Table of Contents

Summary of Recent Securitization Transactions



In March 2005, each of our wholly owned commercial and retail banking
subsidiaries (each, a Sponsor Subsidiary) entered into a term securitization transaction (the 2005 transaction). In connection with the 2005 transaction, each Sponsor Subsidiary sold and contributed the beneficial interest in
a portfolio of automobile leases and related vehicles to a separate wholly owned QSPE (each QSPE a Transferor and, collectively the Transferors). Collectively, the Sponsor Subsidiaries sold and contributed the beneficial
interest in $366.8 million of automobile leases and related vehicles to the Transferors. However, the transaction documents for the 2005 transaction provide, among other things, that any assets that failed to meet the eligibility requirements when
transferred by the applicable Sponsor Subsidiary must be repurchased by such Sponsor Subsidiary. Each Transferor sold and contributed the portfolio acquired from the related Sponsor Subsidiary to a newly formed statutory trust (the
Issuer). The equity interests of the Issuer are owned pro rata by the Transferors (based on the value of the portfolio conveyed by each Transferor to the Issuer). The Transferors financed the purchases of the beneficial interests from
the Sponsor Subsidiaries primarily through the issuance by the Issuer of $329.4 million of fixed-rate asset-backed notes to third-party investors. The Issuer also issued $11.1 million of notes, which will be retained pro rata by the Transferors in
the same ratio as the Transferors retain the equity interests of the Issuer.



The initial recorded PV Receivable for this transaction was $2.3 million, and the fair value of this PV Receivable at September 30, 2005, was $1.5 million.



Summary of Prior Years Securitization Transactions



Late in the third 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 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). There were no transfers made to the QSPE during the third quarter of 2005. During the first nine months of 2005, Hann made transfers
to the QSPE of beneficial interests in $5.7 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).



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 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 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 the required hedge agreement could be an event of default under its loan documents.



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.



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The fair value of this PV Receivable at September 30, 2005 was $0.5 million.



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 vehicles to a wholly owned QSPE. The QSPE financed the purchase of the beneficial interest
primarily by issuing $233.0 million of asset-backed notes.



The
initial recorded PV Receivable for this transaction was $12.0 million, and the fair value of this PV Receivable at September 30, 2005 was $1.7 million.



During the third quarter of 2002, Hann entered into a revolving securitization transaction and sold and contributed 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 (a lender); however, the lender is not committed to make loans
to the QSPE. 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,
will 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.



The transaction documents for the revolving securitization 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.



The fair value of this PV Receivable at September 30, 2005 was $1.5 million.



In June 2004, Hann issued a cleanup call to purchase the remaining balance of a 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.



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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, 2005, the total residual value of the vehicles in the portfolio for this transaction was $43.8 million, and our maximum obligation under the Residual Interest Agreement was $5.3 million.



Sale-leaseback Transactions



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 $99.3 million at September 30,
2005. 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, 2005, the beneficial interest in additional automobile leases and related vehicles pledged by the Lessee was $47.0 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, 2005.



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 $35.0 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, as discussed above, the transaction documents contain several requirements, obligations,
liabilities, provisions, and consequences that become applicable upon the occurrence of an Early Amortization Event, as described above. The precise amount of the 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 the 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
Agreements and Lease Sales



Under the agency
arrangements, our maximum obligation under the Residual Interest Agreement at September 30, 2005 was $5.3 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. The basic coverage policy is renewable annually and expires in 2006.



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.



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



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



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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 7, 2005 |  | /s/ William J. Reuter                               
|                 |  | William J. Reuter                                   
|                 |  | Chairman, President and Chief Executive Officer     
|                 | 
|November 7, 2005 |  | /s/ Drew K. Hostetter                               
|                 |  | Drew K. Hostetter                                   
|                 |  | Executive Vice President and Chief Financial Officer



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EXHIBIT INDEX



|                |  |                                                                  
|--------------- |  | -----------------------------------------------------------------
|Exhibit Numbers |  | Description and Method of Filing                                 
|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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