##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2009

or



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

For the transition period from  to

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)



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

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

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

Yes  x    No   ̈

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

Yes   ̈    No   ̈

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



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

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

Yes   ̈    No  x

As of October 30, 2009, there were 86,394,320 shares of the registrants common stock outstanding, par value $2.00 per share.









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##### Table of Contents

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS



|              |  |                                                                                                                  |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                  |  | Page
|              |  |                                                                                                                 
|PART I.       |  | FINANCIAL INFORMATION                                                                                            |  |     
|              |  |                                                                                                                 
|Item 1        |  | Financial Statements (Unaudited)                                                                                 |  |     
|              |  |                                                                                                                 
|              |  | Consolidated Balance Sheets as of September 30, 2009 and 2008, and December 31, 2008                             |  | 3   
|              |  |                                                                                                                 
|              |  | Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008                |  | 4   
|              |  |                                                                                                                 
|              |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008                      |  | 5   
|              |  |                                                                                                                 
|              |  | Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2009 and 2008 |  | 7   
|              |  |                                                                                                                 
|              |  | Notes to the Consolidated Financial Statements                                                                   |  | 8   
|              |  |                                                                                                                 
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 27  
|              |  |                                                                                                                 
|Item 3        |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 41  
|              |  |                                                                                                                 
|Item 4        |  | Controls and Procedures                                                                                          |  | 43  
|              |  |                                                                                                                 
|PART II.      |  | OTHER INFORMATION                                                                                                |  |     
|              |  |                                                                                                                 
|Item 1        |  | Legal Proceedings                                                                                                |  | 43  
|              |  |                                                                                                                 
|Item 1A       |  | Risk Factors                                                                                                     |  | 44  
|              |  |                                                                                                                 
|Item 2        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 45  
|              |  |                                                                                                                 
|Item 3        |  | Defaults Upon Senior Securities                                                                                  |  | 45  
|              |  |                                                                                                                 
|Item 4        |  | Submission of Matters to a Vote of Security Holders                                                              |  | 45  
|              |  |                                                                                                                 
|Item 5        |  | Other Information                                                                                                |  | 45  
|              |  |                                                                                                                 
|Item 6        |  | Exhibits                                                                                                         |  | 45  
|              | 
|SIGNATURES    |  | 46                                                                                                              
|              | 
|EXHIBIT INDEX |  | 47                                                                                                              



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ---------------- | - | ---------- | ----------------- |  | - | ---------- | -
|                                                                                                                                                                              |  | September 30,2009                 |            |   | December 31,2008 |   |            | September 30,2008 | 
|                                                                                                                                                                              |  | (in thousands, except share data) |           
|Assets                                                                                                                                                                        |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Cash and due from banks                                                                                                                                                       |  | $                                 | 199,626    |   |                  | $ | 237,701    |                   |  | $ | 260,358    |  
|Unrestricted short-term investments                                                                                                                                           |  |                                   | 100,099    |   |                  |   | 119,146    |                   |  |   | 105,704    |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Cash and cash equivalents                                                                                                                                                     |  |                                   | 299,725    |   |                  |   | 356,847    |                   |  |   | 366,062    |  
|Restricted short-term investments                                                                                                                                             |  |                                   | 50         |   |                  |   | 214        |                   |  |   | 213        |  
|Securities available for sale                                                                                                                                                 |  |                                   | 1,813,910  |   |                  |   | 1,870,746  |                   |  |   | 2,030,395  |  
|Securities held to maturity (fair values approximate $8,985; $9,145; and $9,195)                                                                                              |  |                                   | 8,985      |   |                  |   | 9,145      |                   |  |   | 9,195      |  
|Loans and leases, net of unearned income                                                                                                                                      |  |                                   | 9,863,705  |   |                  |   | 9,653,873  |                   |  |   | 9,454,094  |  
|Less: Allowance for loan and lease losses                                                                                                                                     |  |                                   | 168,570    |   |                  |   | 113,749    |                   |  |   | 105,575    |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Net loans and leases                                                                                                                                                          |  |                                   | 9,695,135  |   |                  |   | 9,540,124  |                   |  |   | 9,348,519  |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Premises and equipment, net                                                                                                                                                   |  |                                   | 165,764    |   |                  |   | 173,269    |                   |  |   | 177,219    |  
|Foreclosed assets                                                                                                                                                             |  |                                   | 22,510     |   |                  |   | 10,313     |                   |  |   | 10,671     |  
|Accrued income receivable                                                                                                                                                     |  |                                   | 38,028     |   |                  |   | 40,486     |                   |  |   | 43,363     |  
|Bank-owned life insurance                                                                                                                                                     |  |                                   | 357,325    |   |                  |   | 353,771    |                   |  |   | 353,864    |  
|Goodwill                                                                                                                                                                      |  |                                   | 1,018,031  |   |                  |   | 1,017,551  |                   |  |   | 1,014,282  |  
|Intangible assets with finite lives                                                                                                                                           |  |                                   | 46,116     |   |                  |   | 54,044     |                   |  |   | 56,658     |  
|Other assets                                                                                                                                                                  |  |                                   | 193,575    |   |                  |   | 256,478    |                   |  |   | 225,846    |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Total Assets                                                                                                                                                                  |  | $                                 | 13,659,154 |   |                  | $ | 13,682,988 |                   |  | $ | 13,636,287 |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Liabilities and Shareholders Equity                                                                                                                                          |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Deposits:                                                                                                                                                                     |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Demand                                                                                                                                                                        |  | $                                 | 1,210,770  |   |                  | $ | 1,201,416  |                   |  | $ | 1,228,255  |  
|Interest-bearing demand                                                                                                                                                       |  |                                   | 2,962,307  |   |                  |   | 2,528,475  |                   |  |   | 2,446,467  |  
|Savings                                                                                                                                                                       |  |                                   | 724,487    |   |                  |   | 695,275    |                   |  |   | 712,930    |  
|Time                                                                                                                                                                          |  |                                   | 2,747,706  |   |                  |   | 3,045,653  |                   |  |   | 2,962,563  |  
|Time of $100 or more                                                                                                                                                          |  |                                   | 1,255,043  |   |                  |   | 1,595,674  |                   |  |   | 1,843,926  |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Total deposits                                                                                                                                                                |  |                                   | 8,900,313  |   |                  |   | 9,066,493  |                   |  |   | 9,194,141  |  
|Short-term borrowings                                                                                                                                                         |  |                                   | 1,020,614  |   |                  |   | 910,219    |                   |  |   | 738,516    |  
|FHLB borrowings                                                                                                                                                               |  |                                   | 1,049,383  |   |                  |   | 1,069,784  |                   |  |   | 1,354,981  |  
|Long-term debt                                                                                                                                                                |  |                                   | 176,055    |   |                  |   | 176,284    |                   |  |   | 151,289    |  
|Junior subordinated debentures                                                                                                                                                |  |                                   | 272,191    |   |                  |   | 271,798    |                   |  |   | 271,654    |  
|Accrued interest, taxes, and expenses payable                                                                                                                                 |  |                                   | 71,708     |   |                  |   | 55,126     |                   |  |   | 63,957     |  
|Deferred taxes                                                                                                                                                                |  |                                   | 74,391     |   |                  |   | 87,695     |                   |  |   | 96,565     |  
|Other liabilities                                                                                                                                                             |  |                                   | 115,417    |   |                  |   | 99,671     |                   |  |   | 70,410     |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Total Liabilities                                                                                                                                                             |  |                                   | 11,680,072 |   |                  |   | 11,737,070 |                   |  |   | 11,941,513 |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Shareholders equity:                                                                                                                                                         |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Issued: 300,000 at September 30, 2009;
300,000 at December 31, 2008; and 0 at September 30, 2008      |  |                                   | 291,944    |   |                  |   | 290,700    |                   |  |   |           |  
|Common stock, $2.00 par value, 200,000,000 shares authorized; Issued: 86,394,320 at September 30, 2009; 86,174,285 at
December 31, 2008; and 86,089,662 at September 30, 2008 |  |                                   | 172,789    |   |                  |   | 172,349    |                   |  |   | 172,179    |  
|Additional paid-in capital                                                                                                                                                    |  |                                   | 1,056,800  |   |                  |   | 1,055,255  |                   |  |   | 1,044,338  |  
|Retained earnings                                                                                                                                                             |  |                                   | 475,591    |   |                  |   | 512,924    |                   |  |   | 516,290    |  
|Accumulated other comprehensive loss, net of taxes of $9,715; $45,936; and $20,479, respectively                                                                              |  |                                   | (18,042    | ) |                  |   | (85,310    | )                 |  |   | (38,033    | )
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Total Shareholders Equity                                                                                                                                                    |  |                                   | 1,979,082  |   |                  |   | 1,945,918  |                   |  |   | 1,694,774  |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  
|Total Liabilities and Shareholders Equity                                                                                                                                    |  | $                                 | 13,659,154 |   |                  | $ | 13,682,988 |                   |  | $ | 13,636,287 |  
|                                                                                                                                                                              |  |                                   |            |   |                  |   |            |                   |  |   |            |  

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



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three Months EndedSeptember 30,       |         |   | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2009                                  |         |   | 2008                           |   |         | 2009 |  |   | 2008    |  
|                                                                       |  | (in thousands, except per share data) |        
|Interest Income:                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loans and leases, including fees                                       |  | $                                     | 139,591 |   |                                | $ | 148,374 |      |  | $ | 415,341 |   |  | $ | 444,243 |  
|Securities:                                                            |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Taxable                                                                |  |                                       | 16,758  |   |                                |   | 21,331  |      |  |   | 54,329  |   |  |   | 65,521  |  
|Tax-exempt                                                             |  |                                       | 3,755   |   |                                |   | 3,326   |      |  |   | 11,174  |   |  |   | 9,287   |  
|Dividends                                                              |  |                                       | 992     |   |                                |   | 1,541   |      |  |   | 2,943   |   |  |   | 4,541   |  
|Short-term investments                                                 |  |                                       | 54      |   |                                |   | 491     |      |  |   | 529     |   |  |   | 1,939   |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total interest income                                                  |  |                                       | 161,150 |   |                                |   | 175,063 |      |  |   | 484,316 |   |  |   | 525,531 |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest Expense:                                                      |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Deposits:                                                              |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest-bearing demand                                                |  |                                       | 4,499   |   |                                |   | 7,441   |      |  |   | 17,102  |   |  |   | 27,254  |  
|Savings                                                                |  |                                       | 291     |   |                                |   | 1,116   |      |  |   | 1,400   |   |  |   | 3,954   |  
|Time                                                                   |  |                                       | 33,166  |   |                                |   | 41,236  |      |  |   | 109,103 |   |  |   | 124,094 |  
|Short-term borrowings                                                  |  |                                       | 1,098   |   |                                |   | 3,179   |      |  |   | 3,233   |   |  |   | 9,368   |  
|FHLB borrowings                                                        |  |                                       | 10,122  |   |                                |   | 13,120  |      |  |   | 30,275  |   |  |   | 39,104  |  
|Long-term debt                                                         |  |                                       | 7,172   |   |                                |   | 7,709   |      |  |   | 23,027  |   |  |   | 23,256  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total interest expense                                                 |  |                                       | 56,348  |   |                                |   | 73,801  |      |  |   | 184,140 |   |  |   | 227,030 |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net interest income                                                    |  |                                       | 104,802 |   |                                |   | 101,262 |      |  |   | 300,176 |   |  |   | 298,501 |  
|Provision for loan and lease losses                                    |  |                                       | 48,000  |   |                                |   | 17,704  |      |  |   | 133,000 |   |  |   | 41,306  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net interest income, after provision for loan and lease losses         |  |                                       | 56,802  |   |                                |   | 83,558  |      |  |   | 167,176 |   |  |   | 257,195 |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Income:                                                    |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Service charges on deposit accounts                                    |  |                                       | 9,326   |   |                                |   | 11,968  |      |  |   | 28,277  |   |  |   | 34,823  |  
|Vehicle origination, servicing, and securitization fees                |  |                                       | 1,210   |   |                                |   | 2,200   |      |  |   | 4,996   |   |  |   | 7,698   |  
|Asset management fees                                                  |  |                                       | 6,733   |   |                                |   | 7,405   |      |  |   | 18,920  |   |  |   | 19,161  |  
|Income from fiduciary-related activities                               |  |                                       | 1,803   |   |                                |   | 1,977   |      |  |   | 5,270   |   |  |   | 6,500   |  
|Commissions on brokerage, life insurance, and annuity sales            |  |                                       | 2,291   |   |                                |   | 1,672   |      |  |   | 5,850   |   |  |   | 5,361   |  
|Commissions on property and casualty insurance sales                   |  |                                       | 2,661   |   |                                |   | 2,636   |      |  |   | 9,446   |   |  |   | 9,604   |  
|Income from bank-owned life insurance                                  |  |                                       | 1,312   |   |                                |   | 3,719   |      |  |   | 4,094   |   |  |   | 10,651  |  
|Net gain on sale of loans and leases                                   |  |                                       | 3,142   |   |                                |   | 1,856   |      |  |   | 8,141   |   |  |   | 4,960   |  
|Net realized gain on sales of securities                               |  |                                       | 4,727   |   |                                |   |        |      |  |   | 5,079   |   |  |   | 207     |  
|Other-than-temporary impairment of securities related to credit losses |  |                                       |        |   |                                |   | (17,550 | )    |  |   | (937    | ) |  |   | (17,550 | )
|Other                                                                  |  |                                       | 7,500   |   |                                |   | 2,036   |      |  |   | 28,586  |   |  |   | 24,091  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest income                                               |  |                                       | 40,705  |   |                                |   | 17,919  |      |  |   | 117,722 |   |  |   | 105,506 |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Noninterest Expenses:                                                  |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Salaries and employee benefits                                         |  |                                       | 47,771  |   |                                |   | 49,140  |      |  |   | 144,849 |   |  |   | 142,258 |  
|Occupancy                                                              |  |                                       | 7,633   |   |                                |   | 8,994   |      |  |   | 26,696  |   |  |   | 27,304  |  
|Furniture and equipment                                                |  |                                       | 3,620   |   |                                |   | 3,983   |      |  |   | 10,962  |   |  |   | 12,092  |  
|Advertising and marketing                                              |  |                                       | 1,802   |   |                                |   | 2,657   |      |  |   | 6,392   |   |  |   | 9,843   |  
|FDIC insurance                                                         |  |                                       | 4,245   |   |                                |   | 434     |      |  |   | 20,236  |   |  |   | 933     |  
|Amortization of intangible assets                                      |  |                                       | 2,624   |   |                                |   | 2,853   |      |  |   | 7,928   |   |  |   | 8,048   |  
|Vehicle lease disposal                                                 |  |                                       | 3,858   |   |                                |   | 3,622   |      |  |   | 10,384  |   |  |   | 9,148   |  
|Other                                                                  |  |                                       | 19,982  |   |                                |   | 24,107  |      |  |   | 62,071  |   |  |   | 68,428  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest expenses                                             |  |                                       | 91,535  |   |                                |   | 95,790  |      |  |   | 289,518 |   |  |   | 278,054 |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                      |  |                                       | 5,972   |   |                                |   | 5,687   |      |  |   | (4,620  | ) |  |   | 84,647  |  
|(Benefit from) provision for income taxes                              |  |                                       | (850    | ) |                                |   | (673    | )    |  |   | (9,690  | ) |  |   | 21,065  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net Income                                                             |  |                                       | 6,822   |   |                                |   | 6,360   |      |  |   | 5,070   |   |  |   | 63,582  |  
|Preferred stock dividends and accretion                                |  |                                       | 4,165   |   |                                |   |        |      |  |   | 12,494  |   |  |   |        |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net Income (Loss) Applicable to Common Shareholders                    |  | $                                     | 2,657   |   |                                | $ | 6,360   |      |  | $ | (7,424  | ) |  | $ | 63,582  |  
|                                                                       |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share:                                             |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                  |  | $                                     | 0.03    |   |                                | $ | 0.07    |      |  | $ | (0.09   | ) |  | $ | 0.74    |  
|Diluted                                                                |  | $                                     | 0.03    |   |                                | $ | 0.07    |      |  | $ | (0.09   | ) |  | $ | 0.74    |  
|Cash dividends per common share                                        |  | $                                     | 0.05    |   |                                | $ | 0.26    |      |  | $ | 0.36    |   |  | $ | 0.78    |  
|Average common shares outstanding:                                     |  |                                       |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                  |  |                                       | 86,294  |   |                                |   | 86,010  |      |  |   | 86,220  |   |  |   | 85,956  |  
|Diluted                                                                |  |                                       | 86,294  |   |                                |   | 86,033  |      |  |   | 86,220  |   |  |   | 85,992  |  

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



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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                  |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2009                           |          |   | 2008 |  
|                                                                                  |  | (in thousands)                 |         
|Cash Flows from Operating Activities:                                             |  |                                |          |   |      |   |          |  
|Net income                                                                        |  | $                              | 5,070    |   |      | $ | 63,582   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Depreciation, amortization, and accretion                                         |  |                                | 17,669   |   |      |   | 19,908   |  
|Provision for loan and lease losses                                               |  |                                | 133,000  |   |      |   | 41,306   |  
|Realized (gain) loss on available-for-sale securities, net                        |  |                                | (4,142   | ) |      |   | 17,343   |  
|Deferred income taxes                                                             |  |                                | (49,526  | ) |      |   | (21,163  | )
|Gain on sale of loans and leases                                                  |  |                                | (8,141   | ) |      |   | (4,960   | )
|Gain on sale of foreclosed assets                                                 |  |                                | (287     | ) |      |   | (798     | )
|Gain on sale of branch                                                            |  |                                | (402     | ) |      |   |         |  
|Mortgage loans originated for sale                                                |  |                                | (271,242 | ) |      |   | (143,946 | )
|Proceeds from sale of mortgage loans originated for sale                          |  |                                | 275,996  |   |      |   | 140,501  |  
|Loans and leases originated/acquired for sale, net of payments received           |  |                                | (148,194 | ) |      |   | (85,023  | )
|Payments received on leases transferred from held for sale to held for investment |  |                                | 71,731   |   |      |   |         |  
|Increase in cash surrender value of bank-owned life insurance                     |  |                                | (3,554   | ) |      |   | (10,136  | )
|Decrease in accrued interest receivable                                           |  |                                | 2,458    |   |      |   | 3,402    |  
|Decrease in accrued interest payable                                              |  |                                | (6,314   | ) |      |   | (1,663   | )
|Increase in accrued expenses and taxes payable                                    |  |                                | 22,896   |   |      |   | 4,751    |  
|Other, net                                                                        |  |                                | 50,970   |   |      |   | (32,189  | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                               |  |                                | 87,988   |   |      |   | (9,085   | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Cash Flows from Investing Activities:                                             |  |                                |          |   |      |   |          |  
|Net decrease in restricted short-term investments                                 |  |                                | 164      |   |      |   | 29       |  
|Activity in available-for-sale securities:                                        |  |                                |          |   |      |   |          |  
|Sales                                                                             |  |                                | 72,746   |   |      |   | 17,322   |  
|Maturities, repayments, and calls                                                 |  |                                | 343,170  |   |      |   | 482,266  |  
|Purchases                                                                         |  |                                | (242,587 | ) |      |   | (541,867 | )
|Net increase in loans and leases                                                  |  |                                | (233,519 | ) |      |   | (577,106 | )
|Cash flows received from retained interests                                       |  |                                | 18,960   |   |      |   | 27,217   |  
|Proceeds from bank-owned life insurance                                           |  |                                |         |   |      |   | 850      |  
|Proceeds from sale of foreclosed assets                                           |  |                                | 13,448   |   |      |   | 9,697    |  
|Acquisitions                                                                      |  |                                |         |   |      |   | (68,146  | )
|Additions to premises and equipment, net                                          |  |                                | (3,828   | ) |      |   | (9,794   | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                | (31,446  | ) |      |   | (659,532 | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Cash Flows from Financing Activities:                                             |  |                                |          |   |      |   |          |  
|Net (decrease) increase in deposits                                               |  |                                | (152,368 | ) |      |   | 249,022  |  
|Sale of branch deposits                                                           |  |                                | (13,410  | ) |      |   |         |  
|Net increase in short-term borrowings                                             |  |                                | 110,395  |   |      |   | 170,104  |  
|Net increase in short-term FHLB borrowings                                        |  |                                |         |   |      |   | 200,000  |  
|Proceeds from long-term FHLB borrowings                                           |  |                                |         |   |      |   | 200,000  |  
|Repayment of long-term FHLB borrowings                                            |  |                                | (18,878  | ) |      |   | (190,778 | )
|Repayment of long-term debt                                                       |  |                                | (229     | ) |      |   | (14      | )
|Proceeds from issuance of common stock                                            |  |                                | 1,985    |   |      |   | 3,271    |  
|Tax benefit from exercise of stock options                                        |  |                                |         |   |      |   | 139      |  
|Cash dividends paid                                                               |  |                                | (41,159  | ) |      |   | (67,072  | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                               |  |                                | (113,664 | ) |      |   | 564,672  |  
|                                                                                  |  |                                |          |   |      |   |          |  



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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)



|                                                             |  |   |         |   |  |   |          |  
|------------------------------------------------------------ |  | - | ------- | - |  | - | -------- | -
|Net change in cash and cash equivalents                      |  |   | (57,122 | ) |  |   | (103,945 | )
|Cash and cash equivalents at January 1                       |  |   | 356,847 |   |  |   | 470,007  |  
|                                                             |  |   |         |   |  |   |          |  
|Cash and cash equivalents at September 30                    |  | $ | 299,725 |   |  | $ | 366,062  |  
|                                                             |  |   |         |   |  |   |          |  
|Supplemental Disclosure of Cash Flow Information             |  |   |         |   |  |   |          |  
|Cash paid for interest on deposits and borrowings            |  | $ | 190,454 |   |  | $ | 228,693  |  
|Income tax payments                                          |  |   | 1,358   |   |  |   | 29,070   |  
|Supplemental Schedule of Noncash Activities                  |  |   |         |   |  |   |          |  
|Real estate acquired in settlement of loans                  |  | $ | 32,820  |   |  | $ | 8,569    |  
|Leases acquired in clean-up calls                            |  |   |        |   |  |   | 63,913   |  
|Accretion of preferred stock discount                        |  |   | 1,244   |   |  |   |         |  
|Leases transferred from held for sale to held for investment |  |   |        |   |  |   | 238,351  |  
|Securities purchased not settled                             |  |   | 15,000  |   |  |   |         |  

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



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Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------------- | ---------- | ----------- | - | ------------------------ |  | ---------------- | --------- |  | --------------------------------- | ------- | - | ----- | - | ------- | - |  | - | --------- | -
|                                                                                                                                                                                                         |  | PreferredStock |         | Shares ofCommonStock |            | CommonStock |   | AdditionalPaid-inCapital |  | RetainedEarnings |           |  | AccumulatedOtherComprehensiveLoss |         |   | Total |  
|Balance at January 1, 2008                                                                                                                                                                               |  | $              |        |                      | 85,935,315 |             | $ | 171,810                  |  | $                | 1,038,894 |  | $                                 | 522,268 |   |       | $ | (3,958  | ) |  | $ | 1,729,014 |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Cumulative-effect adjustment resulting from adoption of accounting guidance relating to deferred compensation and postretirement
benefit aspects of endorsement split-dollar life insurance arrangements |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | (2,488  | ) |       |   |         |   |  |   | (2,488    | )
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Comprehensive income:                                                                                                                                                                                    |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Net income                                                                                                                                                                                               |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | 63,582  |   |       |   |         |   |  |   | 63,582    |  
|Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of
$3,364                                                                                       |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | (36,214 | ) |  |   | (36,214   | )
|Change in unrealized gain on recorded interests in securitized assets, net of taxes                                                                                                                      |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 233     |   |  |   | 233       |  
|Change in unrealized loss on cash flow hedges, net of taxes and reclassification adjustment of $2,098                                                                                                    |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 1,906   |   |  |   | 1,906     |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Total comprehensive income                                                                                                                                                                               |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   | 29,507    |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Common stock and options issued under employee benefit plans (including related tax benefit of $139)                                                                                                     |  |                |         |                      | 154,347    |             |   | 369                      |  |                  | 3,041     |  |                                   |         |   |       |   |         |   |  |   | 3,410     |  
|Adjustments relating to the Community acquisition                                                                                                                                                        |  |                |         |                      |            |             |   |                          |  |                  | 2,403     |  |                                   |         |   |       |   |         |   |  |   | 2,403     |  
|Cash dividends paid ($0.78 per share)                                                                                                                                                                    |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | (67,072 | ) |       |   |         |   |  |   | (67,072   | )
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at September 30, 2008                                                                                                                                                                            |  | $              |        |                      | 86,089,662 |             | $ | 172,179                  |  | $                | 1,044,338 |  | $                                 | 516,290 |   |       | $ | (38,033 | ) |  | $ | 1,694,774 |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at January 1, 2009                                                                                                                                                                               |  | $              | 290,700 |                      | 86,174,285 |             | $ | 172,349                  |  | $                | 1,055,255 |  | $                                 | 512,924 |   |       | $ | (85,310 | ) |  | $ | 1,945,918 |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Comprehensive income:                                                                                                                                                                                    |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Net income                                                                                                                                                                                               |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | 5,070   |   |       |   |         |   |  |   | 5,070     |  
|Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of
$3,301                                                                                       |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 61,796  |   |  |   | 61,796    |  
|Change in unrealized gain on recorded interests in securitized assets, net of taxes                                                                                                                      |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 2,960   |   |  |   | 2,960     |  
|Change in unrealized gain on cash flow hedges, net of taxes                                                                                                                                              |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   | 2,512   |   |  |   | 2,512     |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Total comprehensive income                                                                                                                                                                               |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   | 72,338    |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Common stock and options issued under employee benefit plans                                                                                                                                             |  |                |         |                      | 220,035    |             |   | 440                      |  |                  | 1,545     |  |                                   |         |   |       |   |         |   |  |   | 1,985     |  
|Accretion of discount on preferred stock                                                                                                                                                                 |  |                | 1,244   |                      |            |             |   |                          |  |                  |           |  |                                   | (1,244  | ) |       |   |         |   |  |   |          |  
|Cash dividends paid on preferred stock                                                                                                                                                                   |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | (10,125 | ) |       |   |         |   |  |   | (10,125   | )
|Cash dividends paid on common stock ($0.36 per share)                                                                                                                                                    |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   | (31,034 | ) |       |   |         |   |  |   | (31,034   | )
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  
|Balance at September 30, 2009                                                                                                                                                                            |  | $              | 291,944 |                      | 86,394,320 |             | $ | 172,789                  |  | $                | 1,056,800 |  | $                                 | 475,591 |   |       | $ | (18,042 | ) |  | $ | 1,979,082 |  
|                                                                                                                                                                                                         |  |                |         |                      |            |             |   |                          |  |                  |           |  |                                   |         |   |       |   |         |   |  |   |           |  

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



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. Accounting Policies

The information contained in this report is unaudited. Certain prior year amounts have been reclassified to conform with
current period classifications. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended September 30, 2009 and 2008. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). Operating results for the three and nine-month periods
ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries (Susquehanna), as applied in the consolidated interim financial statements presented herein, are substantially the same
as those followed on an annual basis as presented on pages 77 through 85 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Recently Adopted Accounting Guidance.

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

In June 2009, FASB issued ASU No. 2009-01  Topic 105- Generally Accepted Accounting Principles 
amendments based on  Statement of Financial Accounting Standards No. 168  TheFASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This ASU establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities
in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. This ASU was effective for financial statements issued for interim and annual periods ending after September 15, 2009.
Adoption of this guidance has had no material impact on results of operations or financial condition.

In May 2009, FASB
issued an update to Topic 855  Subsequent Events. This update establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be
issued. Adoption of this guidance has had no material impact on results of operations or financial condition. See Note 13 for the required disclosures.

In April 2009, FASB issued three updates intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The update to Topic
820  Fair Value Measurements and Disclosures provides guidelines for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The
update to Topic 825  Financial Instruments enhances consistency in financial reporting by increasing the frequency of fair value disclosures. The update to Topic 320  Investments  Debt and Equity Securities provides additional
guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. These updates were effective for interim and annual periods ending after June 15, 2009. Adoption of this guidance has
had no material impact on results of operations or financial condition.

In April, 2009, FASB issued an update to Topic 805
 Business Combinations. This update addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This
update was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Adoption of this guidance has had no material impact on results of operations or financial condition.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



In January 2009, FASB issued an update to Topic 325  Investments  Other.
This update amends the impairment guidance relating to the recognition of interest income and impairment on purchased beneficial interests and beneficial interests that continue to be held by a transferor in securitized financial assets to achieve
more consistent determination of whether an other- than-temporary impairment has occurred and also retains and emphasizes the objective of an other-than-temporary impairment and the related disclosure requirements. This update was effective for
reporting periods ending after December 15, 2008. Adoption of this guidance has had no material impact on results of operations or financial condition.

In November 2008, FASB issued an update to Topic 323  Investments  Equity Method and Joint Ventures. This update clarifies the accounting for certain transactions and impairment considerations
involving equity method investments and was effective for fiscal years beginning on or after December 15, 2008. Adoption of this guidance has had no material impact on results of operation or financial condition.

In June 2008, FASB issued an update to Topic 260  Earnings Per Share. This update states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This update was effective for financial
statements issued for fiscal years beginning after December 15, 2008. All prior-period EPS data presented was to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform
with the provisions of this guidance. Susquehanna has granted share-based payment awards that contain nonforfeitable rights to dividends; however, Susquehanna has determined that their effect on the computation of EPS is immaterial.

In April 2008, FASB issued updates to Topic 350  Intangibles  Goodwill and Other and Topic 275  Risks and Uncertainties.
These updates amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. These updates were effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal years. Adoption of this guidance has had no material impact on results of operations or financial condition.

In February 2008, FASB issued an update to Topic 860  Transfer and Servicing. This update provides guidance on a repurchase
financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties, that is entered into contemporaneously with, or in contemplation of, the initial transfer. This update was
effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Adoption of this guidance has had no material impact on results of operations or financial condition.

In December 2007, FASB issued an update to Topic 805  Business Combinations. This update requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This update was effective for fiscal years beginning after
December 15, 2008. At September 30, 2009, adoption of this guidance has had no material impact on results of operations or financial condition.

In December 2007, FASB issued an update to Topic 810  Consolidation. This update requires that a reporting entity provide provide sufficient disclosures that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners. This update was effective for fiscal years beginning after December 15, 2008. Adoption of this guidance has had no material impact on results of operations or financial
condition.

Recently Issued Accounting Guidance.

In August 2009, FASB issued ASU No. 2009-05, Fair Value Measurement and Disclosures: Measuring Liabilities at Fair Value. This ASU provides clarification on measuring liabilities at fair
value when a quoted price in an active market is not available and is effective for the first reporting period beginning after issuance. Susquehanna is evaluating the impact of this guidance.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



In June 2009, FASB issued Statement No. 166, Accounting for Transfers of
Financial Assets (an amendment of FASB Statement No. 140), and Statement No. 167, Amendments to FASB Interpretation No. 46(R). (Both of these standards are awaiting integration into the FASC.) Statement
No. 166 will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a
qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement No. 167 changes how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a
companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. Both Statements are effective as of the beginning of an enterprises first annual reporting period that begins
after November 15, 2009, with earlier application prohibited. Susquehanna is evaluating the impact of this guidance.

In
December 2008, FASB issued an update to Topic 715  Compensation  Retirement Benefits. This update provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by this update are to be provided for fiscal years ending after December 15, 2009. Susquehanna is evaluating the impact of this guidance.

NOTE 2. Acquisitions

Stratton Holding Company

On April 30, 2008, Susquehanna completed the acquisition of Stratton Holding Company, an investment management company based in Plymouth
Meeting, Pennsylvania with approximately $3,000,000 in assets under management. Stratton became a wholly owned subsidiary of Susquehanna Bancshares and part of the family of Susquehanna wealth management companies. The addition of Stratton brings
increased diversification in Susquehannas investment expertise, including experience in mutual fund management. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in
Susquehannas consolidated financial statements. The acquisition of Stratton was considered immaterial for purposes of presenting the disclosures required by U.S. GAAP.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



NOTE 3. Investment Securities

The amortized cost and fair values of investment securities at September 30, 2009 and December 31, 2008, were as follows:



|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|------------------------------------------------- |  | ------------- | --------- | -------------------- | - | --------------------- |  | ---------- | ------- |  | - | ---------
|                                                  |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At September 30, 2009                             |  |               |           |                      |   |                       |  |            |         |  |   |          
|Available-for-Sale:                               |  |               |           |                      |   |                       |  |            |         |  |   |          
|U.S. Government agencies                          |  | $             | 277,795   |                      | $ | 6,993                 |  | $          |        |  | $ | 284,788  
|Obligations of states and political subdivisions  |  |               | 347,167   |                      |   | 14,166                |  |            | 1,597   |  |   | 359,736  
|Agency residential mortgage-backed securities     |  |               | 646,585   |                      |   | 29,112                |  |            | 265     |  |   | 675,432  
|Non-agency residential mortgage-backed securities |  |               | 178,564   |                      |   |                      |  |            | 35,522  |  |   | 143,042  
|Commercial mortgage-backed securities             |  |               | 192,698   |                      |   | 1,174                 |  |            | 2,305   |  |   | 191,567  
|Synthetic collateralized debt obligations         |  |               | 1,513     |                      |   |                      |  |            | 370     |  |   | 1,143    
|Other structured financial products               |  |               | 26,254    |                      |   |                      |  |            | 12,349  |  |   | 13,905   
|Equity securities of the Federal Home Loan Bank   |  |               | 74,342    |                      |   |                      |  |            |        |  |   | 74,342   
|Equity securities of the Federal Reserve Bank     |  |               | 45,725    |                      |   |                      |  |            |        |  |   | 45,725   
|Other equity securities                           |  |               | 26,436    |                      |   | 298                   |  |            | 2,504   |  |   | 24,230   
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|                                                  |  |               | 1,817,079 |                      |   | 51,743                |  |            | 54,912  |  |   | 1,813,910
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|Held-to-Maturity:                                 |  |               |           |                      |   |                       |  |            |         |  |   |          
|Other                                             |  |               | 4,550     |                      |   |                      |  |            |        |  |   | 4,550    
|State and municipal                               |  |               | 4,435     |                      |   |                      |  |            |        |  |   | 4,435    
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|                                                  |  |               | 8,985     |                      |   |                      |  |            |        |  |   | 8,985    
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|Total investment securities                       |  | $             | 1,826,064 |                      | $ | 51,743                |  | $          | 54,912  |  | $ | 1,822,895
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|                                                  |  |               |           |                     
|                                                  |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At December 31, 2008                              |  |               |           |                      |   |                       |  |            |         |  |   |          
|Available-for-Sale:                               |  |               |           |                      |   |                       |  |            |         |  |   |          
|U.S. Government agencies                          |  | $             | 427,905   |                      | $ | 16,117                |  | $          |        |  | $ | 444,022  
|Obligations of states and political subdivisions  |  |               | 316,829   |                      |   | 1,787                 |  |            | 10,070  |  |   | 308,546  
|Mortgage-backed securities                        |  |               | 1,047,787 |                      |   | 20,973                |  |            | 102,907 |  |   | 965,853  
|Other debt obligations                            |  |               | 28,784    |                      |   |                      |  |            | 22,420  |  |   | 6,364    
|Equity securities                                 |  |               | 147,681   |                      |   | 306                   |  |            | 2,026   |  |   | 145,961  
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|                                                  |  |               | 1,968,986 |                      |   | 39,183                |  |            | 137,423 |  |   | 1,870,746
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|Held-to-Maturity:                                 |  |               |           |                      |   |                       |  |            |         |  |   |          
|Other                                             |  |               | 4,550     |                      |   |                      |  |            |        |  |   | 4,550    
|State and municipal                               |  |               | 4,595     |                      |   |                      |  |            |        |  |   | 4,595    
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|                                                  |  |               | 9,145     |                      |   |                      |  |            |        |  |   | 9,145    
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          
|Total investment securities                       |  | $             | 1,978,131 |                      | $ | 39,183                |  | $          | 137,423 |  | $ | 1,879,891
|                                                  |  |               |           |                      |   |                       |  |            |         |  |   |          

At September 30, 2009 and December 31, 2008, investment securities with
carrying values of $1,342,545 and $1,318,894, respectively, were pledged to secure public funds and for other purposes as required by law.



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The amortized cost and fair value of U.S. Government agencies, obligations of states and
political subdivisions, synthetic collateralized debt obligations, other structured financial products, and residential and commercial mortgage-backed securities, at September 30, 2009, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                      |  |               |           |            |   |          
|------------------------------------- |  | ------------- | --------- | ---------- | - | ---------
|                                      |  | AmortizedCost |           | Fair Value
|Securities available-for-sale:        |  |               |           |            |   |          
|Within one year                       |  | $             | 53,983    |            | $ | 54,879   
|After one year but within five years  |  |               | 319,622   |            |   | 327,763  
|After five years but within ten years |  |               | 123,402   |            |   | 126,706  
|After ten years                       |  |               | 1,173,569 |            |   | 1,160,265
|                                      |  |               |           |            |   |          
|                                      |  |               | 1,670,576 |            |   | 1,669,613
|                                      |  |               |           |            |   |          
|Securities held-to-maturity:          |  |               |           |            |   |          
|Within one year                       |  |               |          |            |   |         
|After one year but within five years  |  |               |          |            |   |         
|After five years but within ten years |  |               |          |            |   |         
|After ten years                       |  |               | 8,985     |            |   | 8,985    
|                                      |  |               |           |            |   |          
|                                      |  |               | 8,985     |            |   | 8,985    
|                                      |  |               |           |            |   |          
|Total debt securities                 |  | $             | 1,679,561 |            | $ | 1,678,598
|                                      |  |               |           |            |   |          



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



|                                |  |                                          |       |      |                  |   |                    |  |   |                  |   |  |   |  
|------------------------------- |  | ---------------------------------------- | ----- | ---- | ---------------- | - | ------------------ |  | - | ---------------- | - |  | - | -
|                                |  | For the Three Months Ended September 30,
|                                |  | 2009                                     |       | 2008
|                                |  | Available-for-Sale                       |       |      | Held-to-Maturity |   | Available-for-Sale |  |   | Held-to-Maturity
|Gross gains                     |  | $                                        | 4,962 |      |                  | $ |                   |  | $ |                 |   |  | $ | 
|Gross losses                    |  |                                          | (235  | )    |                  |   |                   |  |   |                 |   |  |   | 
|Other-than-temporary impairment |  |                                          |      |      |                  |   |                   |  |   | (17,550          | ) |  |   | 
|                                |  |                                          |       |      |                  |   |                    |  |   |                  |   |  |   |  
|Net gains (losses)              |  | $                                        | 4,727 |      |                  | $ |                   |  | $ | (17,550          | ) |  | $ | 
|                                |  |                                          |       |      |                  |   |                    |  |   |                  |   |  |   |  
|                                | 
|                                |  | For the Nine Months Ended September 30, 
|                                |  | 2009                                     |       | 2008
|                                |  | Available-for-Sale                       |       |      | Held-to-Maturity |   | Available-for-Sale |  |   | Held-to-Maturity
|Gross gains                     |  | $                                        | 5,314 |      |                  | $ |                   |  | $ | 209              |   |  | $ | 
|Gross losses                    |  |                                          | (235  | )    |                  |   |                   |  |   | (2               | ) |  |   | 
|Other-than-temporary impairment |  |                                          | (937  | )    |                  |   |                   |  |   | (17,550          | ) |  |   | 
|                                |  |                                          |       |      |                  |   |                    |  |   |                  |   |  |   |  
|Net gains (losses)              |  | $                                        | 4,142 |      |                  | $ |                   |  | $ | (17,343          | ) |  | $ | 
|                                |  |                                          |       |      |                  |   |                    |  |   |                  |   |  |   |  

The following table presents Susquehannas investments gross unrealized
losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at September 30, 2009 and December 31, 2008.



|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |        
|------------------------------------------------- |  | ------------------- | ------- | ----------------- | - | ---------- |  | ---------------- | ------- | ---------- | - | ---------------- |  | - | ------- |  | - | -------
|September 30, 2009                                |  | Less than 12 Months |         | 12 Months or More |   | Total     
|                                                  |  | Fair Value          |         | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |         | Fair Value |   | UnrealizedLosses
|Obligations of states and political subdivisions  |  |                     | 31,104  |                   |   | 328        |  |                  | 31,774  |            |   | 1,269            |  |   | 62,878  |  |   | 1,597  
|Agency residential mortgage-backed securities     |  |                     | 35,652  |                   |   | 265        |  |                  |        |            |   |                 |  |   | 35,652  |  |   | 265    
|Non-agency residential mortgage-backed securities |  |                     | 97      |                   |   | 3          |  |                  | 140,145 |            |   | 35,519           |  |   | 140,242 |  |   | 35,522 
|Commercial mortgage-backed securities             |  |                     |        |                   |   |           |  |                  | 87,977  |            |   | 2,305            |  |   | 87,977  |  |   | 2,305  
|Synthetic collateralized debt obligations         |  |                     | 1,143   |                   |   | 370        |  |                  |        |            |   |                 |  |   | 1,143   |  |   | 370    
|Other structured financial products               |  |                     |        |                   |   |           |  |                  | 13,905  |            |   | 12,349           |  |   | 13,905  |  |   | 12,349 
|Other equity securities                           |  |                     | 28      |                   |   | 24         |  |                  | 19,571  |            |   | 2,480            |  |   | 19,599  |  |   | 2,504  
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |        
|                                                  |  | $                   | 68,024  |                   | $ | 990        |  | $                | 293,372 |            | $ | 53,922           |  | $ | 361,396 |  | $ | 54,912 
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |        
|                                                  |  |                     |        
|December 31, 2008                                 |  | Less than 12 Months |         | 12 Months or More |   | Total     
|                                                  |  | Fair Value          |         | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |         | Fair Value |   | UnrealizedLosses
|Obligations of states and political subdivisions  |  | $                   | 218,184 |                   | $ | 9,842      |  | $                | 1,586   |            | $ | 228              |  | $ | 219,770 |  | $ | 10,070 
|Mortgage-backed securities                        |  |                     | 316,874 |                   |   | 102,907    |  |                  |        |            |   |                 |  |   | 316,874 |  |   | 102,907
|Other debt obligations                            |  |                     | 2,396   |                   |   | 1,812      |  |                  | 3,968   |            |   | 20,608           |  |   | 6,364   |  |   | 22,420 
|Other equity securities                           |  |                     | 1,111   |                   |   | 443        |  |                  | 19,462  |            |   | 1,583            |  |   | 20,573  |  |   | 2,026  
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |        
|                                                  |  | $                   | 538,565 |                   | $ | 115,004    |  | $                | 25,016  |            | $ | 22,419           |  | $ | 563,581 |  | $ | 137,423
|                                                  |  |                     |         |                   |   |            |  |                  |         |            |   |                  |  |   |         |  |   |        

Non-agency residential mortgage-backed securities(all 18 securities are in a loss position).
None of Susquehannas non-agency residential mortgage-backed securities include subprime or Alt-A components. Management has analyzed the assets underlying these issues with respect to defaults, loan to collateral value ratios, current levels
of subordination, and geographic concentrations and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

Other structured financial products.Other structured financial products are comprised of pooled trust preferred securities. All four
of



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these securities are in unrealized loss positions. Management has analyzed the assets underlying these securities with respect to interest deferrals and defaults, collateral coverage, and current
levels of subordination and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

Susquehanna does not have the intent to sell any of its available-for-sale securities that are in an unrealized loss position, and it is
more likely than not that Susquehanna will not be required to sell these securities before recovery of its amortized cost basis.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



NOTE 4. Loans and Leases

Loans and Leases, net of unearned income



|                                                                                                        |  |                   |           |                  |   |          
|------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                                                                                        |  | September 30,2009 |           | December 31,2008
|Commercial, financial, and agricultural                                                                 |  | $                 | 2,096,869 |                  | $ | 2,063,942
|Real estate - construction                                                                              |  |                   | 1,208,706 |                  |   | 1,313,647
|Real estate secured - residential                                                                       |  |                   | 2,350,192 |                  |   | 2,298,709
|Real estate secured - commercial                                                                        |  |                   | 3,016,452 |                  |   | 2,875,502
|Consumer                                                                                                |  |                   | 443,417   |                  |   | 419,371  
|Leases                                                                                                  |  |                   | 748,069   |                  |   | 682,702  
|                                                                                                        |  |                   |           |                  |   |          
|Total loans and leases                                                                                  |  | $                 | 9,863,705 |                  | $ | 9,653,873
|                                                                                                        |  |                   |           |                  |   |          
|Nonaccrual loans and leases                                                                             |  | $                 | 225,343   |                  | $ | 105,313  
|Loans and leases contractually past due 90 days and still accruing                                      |  |                   | 38,396    |                  |   | 22,316   
|Troubled debt restructurings                                                                            |  |                   | 32,188    |                  |   | 2,566    
|Home equity line of credit loans held for sale (included in Real estate secured - residential, above) |  |                   | 363,884   |                  |   | 215,690  

Net investment in direct financing leases was as follows:



|                                      |  |                   |         |   |                  |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                      |  | September 30,2009 |         |   | December 31,2008 |  
|Minimum lease payments receivable     |  | $                 | 490,440 |   |                  | $ | 443,703 |  
|Estimated residual value of leases    |  |                   | 337,801 |   |                  |   | 318,850 |  
|Unearned income under lease contracts |  |                   | (80,172 | ) |                  |   | (79,851 | )
|                                      |  |                   |         |   |                  |   |         |  
|Total leases                          |  | $                 | 748,069 |   |                  | $ | 682,702 |  
|                                      |  |                   |         |   |                  |   |         |  

Allowance for Loan and Lease Losses



|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                              |  | 2009                            |         |   | 2008                           |   |         | 2009 |  |   | 2008    |  
|Balance - Beginning of period |  | $                               | 157,517 |   |                                | $ | 96,033  |      |  | $ | 113,749 |   |  | $ | 88,569  |  
|Additions                     |  |                                 | 48,000  |   |                                |   | 17,704  |      |  |   | 133,000 |   |  |   | 41,306  |  
|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                              |  |                                 | 205,517 |   |                                |   | 113,737 |      |  |   | 246,749 |   |  |   | 129,875 |  
|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Charge-offs                   |  |                                 | (39,848 | ) |                                |   | (9,425  | )    |  |   | (85,715 | ) |  |   | (29,516 | )
|Recoveries                    |  |                                 | 2,901   |   |                                |   | 1,263   |      |  |   | 7,536   |   |  |   | 5,216   |  
|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net charge-offs               |  |                                 | (36,947 | ) |                                |   | (8,162  | )    |  |   | (78,179 | ) |  |   | (24,300 | )
|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Balance - Period end          |  | $                               | 168,570 |   |                                | $ | 105,575 |      |  | $ | 168,570 |   |  | $ | 105,575 |  
|                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

Impaired Loans

An analysis of impaired loans, as of September 30, 2009 and December 31, 2008, is as follows:



|                                         |  |                   |         |                  |   |       
|---------------------------------------- |  | ----------------- | ------- | ---------------- | - | ------
|                                         |  | September 30,2009 |         | December 31,2008
|Impaired loans without a related reserve |  | $                 | 99,577  |                  | $ | 21,388
|Impaired loans with a reserve            |  |                   | 129,880 |                  |   | 62,092
|                                         |  |                   |         |                  |   |       
|Total impaired loans                     |  | $                 | 229,457 |                  | $ | 83,480
|                                         |  |                   |         |                  |   |       
|Reserve for impaired loans               |  | $                 | 36,817  |                  | $ | 14,454
|                                         |  |                   |         |                  |   |       

An analysis of impaired loans for the three months and nine months ended
September 30, 2009 and 2008, is as follows:



|                                               |  |                                 |         |                                |   |        |  |      |         |  |   |       
|---------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|                                               |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                                               |  | 2009                            |         | 2008                           |   | 2009   |  | 2008
|Average balance of impaired loans              |  | $                               | 245,895 |                                | $ | 72,431 |  | $    | 194,723 |  | $ | 57,866
|Interest income on impaired loans (cash-basis) |  |                                 | 1,715   |                                |   | 60     |  |      | 4,666   |  |   | 191   



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



NOTE 5. Goodwill

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

Susquehanna
performed its annual goodwill impairment test in the second quarter of 2009 and determined that the fair value of each of its reporting units exceeded its book value, and there was no goodwill impairment. However, given the continuing downturn in
the economy and overall market conditions and the fact that Susquehannas market capitalization has been below the book value of its equity, Susquehanna performed interim goodwill impairment tests, as required by U.S. GAAP, in the third quarter
of 2009.

Based upon Susquehannas analyses at September 30, 2009, the fair value of each of its reporting units
exceeded its book value, and there was no goodwill impairment. Susquehanna will continue to monitor and evaluate the carrying value of goodwill for possible future impairment as conditions warrant.

NOTE 6. Borrowings



|                                            |  |                   |           |                  |   |        
|------------------------------------------- |  | ----------------- | --------- | ---------------- | - | -------
|                                            |  | September 30,2009 |           | December 31,2008
|Securities sold under repurchase agreements |  | $                 | 358,414   |                  | $ | 375,317
|Federal funds purchased                     |  |                   | 205,000   |                  |   | 480,000
|Treasury tax and loan notes                 |  |                   | 7,200     |                  |   | 4,902  
|Federal Reserve term auction facility       |  |                   | 450,000   |                  |   | 50,000 
|                                            |  |                   |           |                  |   |        
|Total short-term borrowings                 |  | $                 | 1,020,614 |                  | $ | 910,219
|                                            |  |                   |           |                  |   |        

NOTE 7. Earnings per Share (EPS)

The following tables set forth the calculation of basic and diluted EPS for the three-month and nine-month periods ended September 30,
2009 and 2008.



|                                                                 |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     
|---------------------------------------------------------------- |  | ---------------------------------------- | ----- | ------------------- | ------ | --------------- | - | ------ |  | ------------------- | ----- | --------------- | ------ |  | - | ----
|                                                                 |  | For the Three Months Ended September 30,
|                                                                 |  | 2009                                     |       | 2008               
|                                                                 |  | Income                                   |       | AverageCommonShares |        | Per ShareAmount |   | Income |  | AverageCommonShares |       | Per ShareAmount
|Basic Earnings per Share:                                        |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     
|Income applicable to common shareholders                         |  | $                                        | 2,657 |                     | 86,294 |                 | $ | 0.03   |  | $                   | 6,360 |                 | 86,010 |  | $ | 0.07
|Effect of Diluted Securities:                                    |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     
|Stock options and restricted shares outstanding                  |  |                                          |       |                     |       |                 |   |        |  |                     |       |                 | 23     |  |   |     
|                                                                 |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     
|Diluted Earnings per Share:                                      |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     
|Income applicable to common shareholders and assuming conversion |  | $                                        | 2,657 |                     | 86,294 |                 | $ | 0.03   |  | $                   | 6,360 |                 | 86,033 |  | $ | 0.07
|                                                                 |  |                                          |       |                     |        |                 |   |        |  |                     |       |                 |        |  |   |     

For the three months ended September 30, 2009 and 2008, average options to
purchase 2,490 and 2,308 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options common stock equivalents were antidilutive. For the three months ended September 30, 2009,
warrants to purchase 3,028 shares of common stock were outstanding but were not included in the computation of diluted EPS because the warrants common stock equivalents were antidilutive.



|                                                                        |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     
|----------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ------------------- | ------ | --------------- | - | ----- | ------ |  | ------------------- | ------ | --------------- | ------ |  | - | ----
|                                                                        |  | For the Nine Months Ended September 30,
|                                                                        |  | 2009                                    |        |   | 2008               
|                                                                        |  | Loss                                    |        |   | AverageCommonShares |        | Per ShareAmount |   |       | Income |  | AverageCommonShares |        | Per ShareAmount
|Basic Earnings per Share:                                               |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     
|(Loss) income applicable to common shareholders                         |  | $                                       | (7,424 | ) |                     | 86,220 |                 | $ | (0.09 | )      |  | $                   | 63,582 |                 | 85,956 |  | $ | 0.74
|Effect of Diluted Securities:                                           |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     
|Stock options and restricted shares outstanding                         |  |                                         |        |   |                     |       |                 |   |       |        |  |                     |        |                 | 36     |  |   |     
|                                                                        |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     
|Diluted Earnings per Share:                                             |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     
|(Loss) income applicable to common shareholders and assuming conversion |  | $                                       | (7,424 | ) |                     | 86,220 |                 | $ | (0.09 | )      |  | $                   | 63,582 |                 | 85,992 |  | $ | 0.74
|                                                                        |  |                                         |        |   |                     |        |                 |   |       |        |  |                     |        |                 |        |  |   |     

For the nine months ended September 30, 2009 and 2008, average options to
purchase 2,490 and 2,167 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options common stock equivalents were antidilutive. For the nine months ended September 30, 2009, warrants
to purchase 3,028 shares of common stock were outstanding but were not included in the computation of diluted EPS because the warrants common stock equivalents were antidilutive.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



NOTE 8. Share-Based Compensation

On February 27, 2009, Susquehannas Compensation Committee granted to directors and certain employees nonqualified stock options to
purchase an aggregate of 249 shares of common stock with an exercise price of $8.77. In addition, the Committee awarded to directors an aggregate of 15 restricted shares with a grant-date fair value of $8.77.

The fair value of $0.90 for each of the 2009 options and $2.78 for each of the 2008 options was estimated on the date of grant using the
Black-Scholes-Merton model, with the assumptions noted in the following table:



|                         |  |       |   |  |       |  
|------------------------ |  | ----- | - |  | ----- | -
|                         |  | 2009  |   |  | 2008  |  
|Volatility               |  | 24.74 | % |  | 19.70 | %
|Expected dividend yield  |  | 6.50  | % |  | 4.50  | %
|Expected term (in years) |  | 7.0   |   |  | 7.0   |  
|Risk-free rate           |  | 2.46  | % |  | 3.33  | %

NOTE 9. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost



|                                              |  |                                  |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |       |  |   |    
|--------------------------------------------- |  | -------------------------------- | ------ | - | ----------------------------------- | - | --------------------------- | ---- |  | ---- | --- | ---- | - | ---- |  | - | ----- |  | - | ---
|                                              |  | Three Months Ended September 30,
|                                              |  | Pension Benefits                 |        |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementBenefits
|                                              |  | 2009                             |        |   | 2008                                |   |                             | 2009 |  | 2008 |     | 2009 |   | 2008
|Service cost                                  |  | $                                | 954    |   |                                     | $ | 1,578                       |      |  | $    | 30  |      | $ | 27   |  | $ | 128   |  | $ | 111
|Interest cost                                 |  |                                  | 1,468  |   |                                     |   | 1,335                       |      |  |      | 70  |      |   | 62   |  |   | 162   |  |   | 121
|Expected return on plan assets                |  |                                  | (1,899 | ) |                                     |   | (1,844                      | )    |  |      |     |      |   |     |  |   |      |  |   |   
|Amortization of prior service cost            |  |                                  | 9      |   |                                     |   | 12                          |      |  |      | 30  |      |   | 31   |  |   | 23    |  |   | 28 
|Amortization of transition obligation (asset) |  |                                  |       |   |                                     |   |                            |      |  |      |     |      |   |     |  |   | 28    |  |   | 28 
|Amortization of net actuarial loss            |  |                                  | 714    |   |                                     |   | 173                         |      |  |      | 31  |      |   | 20   |  |   |      |  |   |   
|Curtailments/settlements                      |  |                                  | (80    | ) |                                     |   |                            |      |  |      |     |      |   |     |  |   |      |  |   |   
|                                              |  |                                  |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |       |  |   |    
|Net periodic benefit cost                     |  | $                                | 1,166  |   |                                     | $ | 1,254                       |      |  | $    | 161 |      | $ | 140  |  | $ | 341   |  | $ | 288
|                                              |  |                                  |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |       |  |   |    
|                                              | 
|                                              |  | Nine Months Ended September 30, 
|                                              |  | Pension Benefits                 |        |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementBenefits
|                                              |  | 2009                             |        |   | 2008                                |   |                             | 2009 |  | 2008 |     | 2009 |   | 2008
|Service cost                                  |  | $                                | 4,386  |   |                                     | $ | 4,326                       |      |  | $    | 90  |      | $ | 84   |  | $ | 384   |  | $ | 333
|Interest cost                                 |  |                                  | 4,304  |   |                                     |   | 3,995                       |      |  |      | 196 |      |   | 180  |  |   | 486   |  |   | 363
|Expected return on plan assets                |  |                                  | (5,683 | ) |                                     |   | (5,848                      | )    |  |      |     |      |   |     |  |   |      |  |   |   
|Amortization of prior service cost            |  |                                  | 17     |   |                                     |   | 30                          |      |  |      | 88  |      |   | 93   |  |   | 69    |  |   | 84 
|Amortization of transition obligation (asset) |  |                                  |       |   |                                     |   |                            |      |  |      |     |      |   |     |  |   | 84    |  |   | 84 
|Amortization of net actuarial loss            |  |                                  | 1,966  |   |                                     |   | 173                         |      |  |      | 63  |      |   | 44   |  |   |      |  |   |    
|Curtailments/settlements                      |  |                                  | 124    |   |                                     |   |                            |      |  |      |     |      |   |     |  |   |      |  |   |   
|                                              |  |                                  |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |       |  |   |    
|Net periodic benefit cost                     |  | $                                | 5,114  |   |                                     | $ | 2,676                       |      |  | $    | 437 |      | $ | 401  |  | $ | 1,023 |  | $ | 864
|                                              |  |                                  |        |   |                                     |   |                             |      |  |      |     |      |   |      |  |   |       |  |   |    

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2008, that it expected to contribute $124 to its pension plans and $594 to its other postretirement
benefit plan in 2009. As of September 30, 2009, $93 of contributions have been made to its pension plans, and $446 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $31
to fund its pension plan in 2009, for a total of $124, and $148 to its other postretirement benefit plan, for a total of $594.

Changes to
Susquehannas Retirement Program

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

These changes were implemented so that Susquehanna can better manage the financial risk and volatility associated with the Cash Balance Pension Plan. These changes are not expected to reduce costs, and
the new program will be cost-neutral.



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



Note 10. Derivative Financial Instruments

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

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

At September 30, 2009, the aggregate amount of derivative assets recorded in other assets was $19,976, and the aggregate amount of
derivative liabilities recorded in other liabilities was $17,342. When quoted market prices are not available, the valuation of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis
on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including interest rate curves and implied volatilities. The estimates of fair value are made by an independent third-party valuation
service using a standardized methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). As part of Susquehannas overall valuation process, management evaluates this third-party
methodology to ensure that it is representative of exit prices in Susquehannas principal markets. These future net cash flows, however, are susceptible to change primarily due to fluctuations in interest rates. As a result, the estimated
values of these derivatives will change over time as cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on estimated valuations. Based on the nature and limited
purposes of the derivatives that Susquehanna employs, fluctuation in interest rates have had only a modest effect on its results of operations. As such, fluctuations are generally expected to be countered by offsetting changes in income, expense,
and/or values of assets and liabilities

In addition to making valuation estimates, Susquehanna also faces the risk that
certain derivative instruments that have been designated as hedges and currently meet hedge accounting requirements may not qualify in the future. Further, new interpretations and guidance related to hedge accounting may be issued in the future, and
Susquehanna cannot predict the possible impact that such guidance may have on its use of derivative instruments.

The majority
of Susquehannas hedging relationships have been designated as cash flow hedges, for which hedge effectiveness is assessed and measured using a long haul approach. During the first nine months of 2009, there was no hedge
ineffectiveness. During 2008, an immaterial amount of hedge ineffectiveness was required to be reported in earnings on Susquehannas outstanding cash flow hedging relationships.

Derivative contracts can be exchange-traded or over-the-counter (OTC). Susquehannas OTC derivatives consist of interest
rate swaps. Susquehanna has classified its OTC derivatives in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by
market-observable date, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the
selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. Susquehanna generally uses similar
models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For OTC derivatives that trade in
liquid markets, such as generic swaps, model inputs can generally be verified, and model selection does not involve significant management judgment.

To comply with U.S. GAAP relating to Fair Value Measurements, Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements of its OTC derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and
potential future exposure) and then applying each



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counterpartys credit spread to the applicable exposure. For derivatives with two-way exposure, such as interest rate swaps, the counterpartys credit spread is applied to
Susquehannas exposure to the counterparty, and Susquehannas own credit spread is applied to the counterpartys exposure to Susquehanna, and the net credit valuation adjustment is reflected in Susquehannas derivative
valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. For Susquehannas own credit spread and for counterparties having publicly available credit information,
the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third-party credit data provider. For counterparties without publicly available credit information, who are primarily commercial
banking customers, the credit spreads over LIBOR used in the calculations are estimated by Susquehanna based on current market conditions, including consideration of current borrowing spreads for similar customers and transactions, review of
existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered
the impact of netting and any applicable credit enhancements, such as collateral postings, current threshold amounts, mutual puts, and guarantees. Additionally, Susquehanna actively monitors counterparty credit ratings for significant changes.

At September 30, 2009, net credit valuation adjustments increased the settlement values of Susquehannas derivative
assets by $127 and reduced its derivative liabilities by $339. During the first nine months of 2009, Susquehanna recognized a net expense of $582 related to credit valuation adjustments on nonhedge derivative instruments, which is included in
noninterest income. Various factors impact changes in the credit valuation adjustments over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total
expected exposure of the derivative instruments.

Although Susquehanna has determined that the majority of the inputs used to
value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by
itself and its counterparties. However, as of September 30, 2009, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the
credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has classified its OTC derivative valuations in Level 2 of the fair value hierarchy.

When appropriate, valuations are also adjusted for various factors, such as liquidity and bid/offer spreads, which factors were deemed
immaterial by Susquehanna as of September 30, 2009 and December 31, 2008.



|                                                  |  |                                                         |  |                       |        |                       |                   |           |   |       
|------------------------------------------------- |  | ------------------------------------------------------- |  | --------------------- | ------ | --------------------- | ----------------- | --------- | - | ------
|                                                  |  | Fair Values of Derivative InstrumentsSeptember 30, 2009
|                                                  |  | Asset Derivatives                                       |  | Liability Derivatives
|                                                  |  | Balance SheetLocation                                   |  | FairValue             |        | Balance SheetLocation |                   | FairValue
|Derivatives designated as hedging instruments     |  |                                                         |  |                       |        |                       |                   |           |   |       
|Interest rate contracts                           |  | Other assets                                            |  | $                     | 3,420  |                       | Other liabilities |           | $ | 623   
|Derivatives not designated as hedging instruments |  |                                                         |  |                       |        |                       |                   |           |   |       
|Interest rate contracts                           |  | Other assets                                            |  |                       | 16,556 |                       | Other liabilities |           |   | 16,719
|                                                  |  |                                                         |  |                       |        |                       |                   |           |   |       
|Total derivatives                                 |  |                                                         |  | $                     | 19,976 |                       |                   |           | $ | 17,342
|                                                  |  |                                                         |  |                       |        |                       |                   |           |   |       
|                                                  | 
|                                                  |  | December 31, 2008                                      
|                                                  |  | Asset Derivatives                                       |  | Liability Derivatives
|                                                  |  | Balance SheetLocation                                   |  | FairValue             |        | Balance SheetLocation |                   | FairValue
|Derivatives designated as hedging instruments     |  |                                                         |  |                       |        |                       |                   |           |   |       
|Interest rate contracts                           |  |                                                         |  |                       |        |                       | Other liabilities |           | $ | 939   
|Derivatives not designated as hedging instruments |  |                                                         |  |                       |        |                       |                   |           |   |       
|Interest rate contracts                           |  | Other assets                                            |  |                       | 21,895 |                       | Other liabilities |           |   | 21,473
|                                                  |  |                                                         |  |                       |        |                       |                   |           |   |       
|Total derivatives                                 |  |                                                         |  | $                     | 21,895 |                       |                   |           | $ | 22,412
|                                                  |  |                                                         |  |                       |        |                       |                   |           |   |       



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The Effect of Derivative Instruments on the Statement of Income



|                                                  |  |                                                   |                                      |                                                                      |   |                  |                                                                    |  |   |      |  
|------------------------------------------------- |  | ------------------------------------------------- | ------------------------------------ | -------------------------------------------------------------------- | - | ---------------- | ------------------------------------------------------------------ |  | - | ---- | -
|                                                  |  | Amount of LossRecognized in OCI                   |                                      | Location of Gain or(Loss) ReclassifiedfromAccumulated OCIinto Income |   |                  | Amount of Gain or(Loss)
Reclassifiedfrom AccumulatedOCIinto Income | 
|                                                  |  | Three months endedSeptember 30, 2009              |                                      |                                                                     
|Derivatives in cash flow hedging relationships    |  |                                                   |                                      | September 30, 2009                                                   |  
|Interest rate contracts:                          |  | $                                                 | (7,280)                              |                                                                      |   | Interest expense |                                                                    |  | $ | (226 | )
|                                                  |  |                                                   |                                     
|                                                  |  | Location of LossRecognized inIncome onDerivatives |                                      | Amount of LossRecognized inIncome onDerivatives                      |   |                  |                                                                    | 
|Derivatives not designated as hedging instruments |  |                                                   | Three months endedSeptember 30, 2009 |                                                                      |   |                  |                                                                   
|Interest rate contracts:                          |  |                                                   | Other income                         |                                                                      | $ | (455             | )                                                                  |  |   |      |  
|                                                  |  |                                                   |                                     
|                                                  |  | Amount of GainRecognized in OCI                   |                                      | Location of Gain or(Loss) ReclassifiedfromAccumulated OCIinto Income |   |                  | Amount of Gain or(Loss) Reclassifiedfrom AccumulatedOCIinto Income | 
|                                                  |  | Nine months endedSeptember 30, 2009               |                                      |                                                                     
|Derivatives in cash flow hedging relationships    |  |                                                   |                                      | September 30, 2009                                                   |  
|Interest rate contracts:                          |  | $                                                 | 2,512                                |                                                                      |   | Interest expense |                                                                    |  | $ | (548 | )
|                                                  |  |                                                   |                                     
|                                                  |  | Location of LossRecognized inIncome onDerivatives |                                      | Amount of LossRecognized inIncome onDerivatives                      |   |                  |                                                                    | 
|Derivatives not designated as hedging instruments |  |                                                   | Nine months endedSeptember 30, 2009  |                                                                      |   |                  |                                                                   
|Interest rate contracts:                          |  |                                                   | Other income                         |                                                                      | $ | (582             | )                                                                  |  |   |      |  



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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



Note 11. Securitization Activity

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



|                                   |  |                   |            |                                          |   |                                   |  |                   |         |      |   |         |      |   |        |   |  |   |       
|---------------------------------- |  | ----------------- | ---------- | ---------------------------------------- | - | --------------------------------- |  | ----------------- | ------- | ---- | - | ------- | ---- | - | ------ | - |  | - | ------
|                                   |  | Principal Balance |            | Loans and Leases Past Due30 Days or More |   | For the Nine Months EndedSept 30,
|                                   |  |                   |            | Net Credit Losses (Recoveries)          
|                                   |  | Sept 30, 2009     |            | December 31, 2008                        |   | Sept 30, 2009                     |  | December 31, 2008 |         | 2009 |   |         | 2008
|Loans and leases held in portfolio |  | $                 | 9,863,705  |                                          | $ | 9,653,873                         |  | $                 | 332,899 |      | $ | 261,504 |      | $ | 78,179 |   |  | $ | 24,300
|Leases securitized                 |  |                   | 36,561     |                                          |   | 123,608                           |  |                   | 159     |      |   | 185     |      |   | 101    |   |  |   | 154   
|Home equity loans securitized      |  |                   | 258,640    |                                          |   | 286,577                           |  |                   | 4,387   |      |   | 5,637   |      |   | 85     |   |  |   | 202   
|Leases serviced for others         |  |                   | 16,716     |                                          |   | 31,645                            |  |                   | 669     |      |   | 1,060   |      |   | (15    | ) |  |   | 1     
|                                   |  |                   |            |                                          |   |                                   |  |                   |         |      |   |         |      |   |        |   |  |   |       
|Total loans and leases serviced    |  | $                 | 10,175,622 |                                          | $ | 10,095,703                        |  | $                 | 338,114 |      | $ | 268,386 |      | $ | 78,350 |   |  | $ | 24,657
|                                   |  |                   |            |                                          |   |                                   |  |                   |         |      |   |         |      |   |        |   |  |   |       

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



|                                                  |  |                             |        |                            |   |        |  |      |        |  |   |       
|------------------------------------------------- |  | --------------------------- | ------ | -------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|Automobile Leases                                 |  | Three Months Ended Sept 30, |        | Nine Months Ended Sept 30,
|                                                  |  | 2009                        |        | 2008                       |   | 2009   |  | 2008
|Servicing fees received                           |  | $                           | 170    |                            | $ | 611    |  | $    | 701    |  | $ | 2,490 
|Other cash flows received from retained interests |  |                             | 4,856  |                            |   | 6,544  |  |      | 11,885 |  |   | 21,461
|                                                  |  |                            
|Home Equity Loans                                 |  | Three Months Ended Sept 30, |        | Nine Months Ended Sept 30,
|                                                  |  | 2009                        |        | 2008                       |   | 2009   |  | 2008
|Additional draws conveyed to the trusts           |  | $                           | 11,487 |                            | $ | 14,846 |  | $    | 35,494 |  | $ | 43,012
|Servicing fees received                           |  |                             | 281    |                            |   | 310    |  |      | 857    |  |   | 964   
|Other cash flows received from retained interests |  |                             | 2,626  |                            |   | 1,022  |  |      | 7,075  |  |   | 5,755 

There were no proceeds from securitizations nor amounts derecognized for the
nine-month periods ended September 30, 2009 and 2008 relating to home equity loans and automobile leases.

The following
table sets forth 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, 2009 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.

Susquehannas analysis of the information presented below indicates that any adverse change of 20% in the key economic assumptions
would not have a significant effect on the fair value of Susquehanna's interest-only strips.

As of September 30, 2009



|                                            |  |            |                                                                                                                                   |                                 |    |                        |   |                                |  |   |                        |   |  |   |      |  
|------------------------------------------- |  | ---------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -- | ---------------------- | - | ------------------------------ |  | - | ---------------------- | - |  | - | ---- | -
|Automobile Leases                           |  | Fair Value |                                                                                                                                   | Weighted-averageLife(in months) |    | ConstantPrepaymentRate |   | ExpectedCumulativeCreditLosses |  |   | AnnualDiscountRate (1) |  
|2007 transaction - Interest-Only Strip      |  |            | The remaining interest-only strip was fully amortized in the third quarter of 2009. A clean-up callwas completed in October 2009. |                                
|Home Equity Loans                           |  |            |                                                                                                                                   |                                 |    |                        |   |                                |  |   |                        |  
|2006 transaction - Interest-Only Strips     |  |            |                                                                                                                                   |                                 |    |                        |   |                                |  |   |                        |   |  |   |      |  
|Fixed-rate portion                          |  | $          | 8,474                                                                                                                             |                                 | 42 |                        |   | 15.00                          |  |   | 0.15                   | % |  |   | 6.98 | %
|Decline in fair value of 10% adverse change |  |            |                                                                                                                                   |                                 |    |                        | $ | 317                            |  | $ | 46                     |   |  | $ | 166  |  
|Decline in fair value of 20% adverse change |  |            |                                                                                                                                   |                                 |    |                        |   | 615                            |  |   | 92                     |   |  |   | 322  |  
|Variable-rate portion                       |  | $          | 3,735                                                                                                                             |                                 | 32 |                        |   | 30.00                          |  |   | 0.15                   | % |  |   | 6.58 | %
|Decline in fair value of 10% adverse change |  |            |                                                                                                                                   |                                 |    |                        | $ | 247                            |  | $ | 20                     |   |  | $ | 68   |  
|Decline in fair value of 20% adverse change |  |            |                                                                                                                                   |                                 |    |                        |   | 463                            |  |   | 41                     |   |  |   | 133  |  
|2005 transaction - Interest-Only Strips     |  | $          | 6,821                                                                                                                             |                                 | 32 |                        |   | 30.00                          |  |   | 0.15                   | % |  |   | 6.56 | %
|Decline in fair value of 10% adverse change |  |            |                                                                                                                                   |                                 |    |                        | $ | 380                            |  | $ | 31                     |   |  | $ | 147  |  
|Decline in fair value of 20% adverse change |  |            |                                                                                                                                   |                                 |    |                        |   | 717                            |  |   | 62                     |   |  |   | 288  |  



|(1) | The annual discount rate is based on fair-value estimates of similar instruments.
|--- | ---------------------------------------------------------------------------------



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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 12. Fair Value Disclosures

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

At September 30, 2009, Susquehanna
had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. In addition, non-financial assets and non-financial liabilities have not been
measured at fair value because Susquehanna has made the determination that the impact on its financial statements would be minimal.

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

Securities

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

Derivatives

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

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives may utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of
September 30, 2009, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to
the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Certain Retained Interests in Securitizations

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

hierarchy. For further discussion of the most significant assumptions used to value interest-only strips, as well as the applicable stress tests for those assumptions, refer to Note 11. Securitization Activity.



22



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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)



Assets Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at September 30, 2009 and December 31, 2008, on the
consolidated balance sheets and by levels within the valuation hierarchy.



|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|------------------------------------------------- |  | ------------------ | --------- | ---------------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | --------- |  | - | ------
|                                                  |  |                    |           | Fair Value Measurements at Reporting Date Using                 
|Description                                       |  | September 30, 2009 |           | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Assets                                            |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Available-for-sale securities:                    |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|U.S. Government Agencies                          |  | $                  | 284,788   |                                                                  | $ |                                            |  | $                                       | 284,788   |  | $ |      
|Obligations of states and political subdivisions  |  |                    | 359,736   |                                                                  |   |                                             |  |                                         | 359,736   |  |   |       
|Agency residential mortgage-backed securities     |  |                    | 675,432   |                                                                  |   |                                             |  |                                         | 675,432   |  |   |       
|Non-agency residential mortgage-backed securities |  |                    | 143,042   |                                                                  |   |                                             |  |                                         | 140,242   |  |   | 2,800 
|Commercial mortgage-backed securities             |  |                    | 191,567   |                                                                  |   |                                             |  |                                         | 191,567   |  |   |       
|Synthetic collateralized debt obligations         |  |                    | 1,143     |                                                                  |   |                                             |  |                                         |          |  |   | 1,143 
|Other structured financial products               |  |                    | 13,905    |                                                                  |   |                                             |  |                                         | 1,163     |  |   | 12,742
|Equity securities of the FHLB                     |  |                    | 74,342    |                                                                  |   |                                             |  |                                         | 74,342    |  |   |       
|Equity securities of the FRB                      |  |                    | 45,725    |                                                                  |   |                                             |  |                                         | 45,725    |  |   |       
|Other equity securities                           |  |                    | 24,230    |                                                                  |   | 3,018                                       |  |                                         | 17,131    |  |   | 4,081 
|Derivatives (1)                                   |  |                    | 19,976    |                                                                  |   |                                             |  |                                         | 19,976    |  |   |       
|Interest-only strips (1)                          |  |                    | 19,030    |                                                                  |   |                                             |  |                                         |          |  |   | 19,030
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                  | 1,852,916 |                                                                  | $ | 3,018                                       |  | $                                       | 1,810,102 |  | $ | 39,796
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Liabilities                                       |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Derivatives (2)                                   |  | $                  | 17,342    |                                                                  | $ |                                            |  | $                                       | 17,342    |  | $ |      
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                  | 17,342    |                                                                  | $ |                                            |  | $                                       | 17,342    |  | $ |      
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|                                                  |  |                    |           |                                                                 
|(1)    Included in Other assets                   |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|                                                  |  |                    |           |                                                                 
|(2)    Included in Other liabilities              |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|                                                  |  |                   
|                                                  |  |                    |           | Fair Value Measurements at Reporting Date Using                 
|Description                                       |  | December 31, 2008  |           | Quoted Prices inActive Markets forIdentical Instruments(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Assets                                            |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Available-for-sale securities                     |  | $                  | 1,870,746 |                                                                  | $ | 3,877                                       |  | $                                       | 1,821,554 |  | $ | 45,315
|Derivatives (1)                                   |  |                    | 21,895    |                                                                  |   |                                             |  |                                         | 21,895    |  |   |       
|Interest-only strips (1)                          |  |                    | 17,565    |                                                                  |   |                                             |  |                                         |           |  |   | 17,565
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                  | 1,910,206 |                                                                  | $ | 3,877                                       |  | $                                       | 1,843,449 |  | $ | 62,880
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Liabilities                                       |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Derivatives (2)                                   |  | $                  | 22,412    |                                                                  | $ |                                            |  | $                                       | 22,412    |  | $ |      
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       
|Total                                             |  | $                  | 22,412    |                                                                  | $ |                                            |  | $                                       | 22,412    |  | $ |      
|                                                  |  |                    |           |                                                                  |   |                                             |  |                                         |           |  |   |       



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



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



23



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



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

The following tables present rollforwards of the balance sheet amounts for the three months ended September 30, 2009
and 2008, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.



|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | -------------------------------------- | - | ----- | -------------------------------- |  | ---------------------------------------------- | ------ |  | ------------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                                             |  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |      
|                                                                             |  | Available-for-sale Securities                                           |       |                                        |   |       |                                  |  |                                               
|                                                                             |  | EquitySecurities                                                        |       | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  | Non-agencyResidentialMortgage-backedSecurities |        |  | Interest-onlyStrips |         |   | Total |  
|Balance at July 1, 2009                                                      |  | $                                                                       | 4,081 |                                        | $ | 1,513 |                                  |  | $                                              | 12,071 |  | $                   | 2,795   |   |       | $ | 18,020 |   |  | $ | 38,480  |  
|Total gains or losses (realized/unrealized)                                  |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|Other-than-temporary impairment                                              |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |        |  
|Included in other comprehensive income (Presented here gross of taxes)       |  |                                                                         |       |                                        |   | (370  | )                                |  |                                                | 671    |  |                     | 5       |   |       |   | 1,759  |   |  |   | 2,065   |  
|Purchases, issuances, and settlements                                        |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   | (749   | ) |  |   | (749    | )
|Transfers in and/or out of Level 3                                           |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|Balance at September 30, 2009                                                |  | $                                                                       | 4,081 |                                        | $ | 1,143 |                                  |  | $                                              | 12,742 |  | $                   | 2,800   |   |       | $ | 19,030 |   |  | $ | 39,796  |  
|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|                                                                             |  |                                                                         |       |                                        |   |      
|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  | Available-for-saleSecurities                   |        |  | Interest-onlyStrips |         |   | Total |  
|Balance at July 1, 2008                                                      |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  | $                   | 76,915  |   |       | $ | 19,195 |   |  | $ | 96,110  |  
|Total gains or losses (realized/unrealized)                                  |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|Other-than-temporary impairment                                              |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     | (17,550 | ) |       |   |       |   |  |   | (17,550 | )
|Reclassified from other comprehensive income (Presented here gross of taxes) |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     | 9,200   |   |       |   |       |   |  |   | 9,200   |  
|Included in other comprehensive income (Presented here gross of taxes)       |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     | (2,164  | ) |       |   | (1,734 | ) |  |   | (3,898  | )
|Purchases, issuances, and settlements                                        |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     | (7,560  | ) |       |   | (1,905 | ) |  |   | (9,465  | )
|Transfers in and/or out of Level 3                                           |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     | 2,809   |   |       |   |       |   |  |   | 2,809   |  
|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  
|Balance at September 30, 2008                                                |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  | $                   | 61,650  |   |       | $ | 15,556 |   |  | $ | 77,206  |  
|                                                                             |  |                                                                         |       |                                        |   |       |                                  |  |                                                |        |  |                     |         |   |       |   |        |   |  |   |         |  

The following tables present rollforwards of the balance sheet amounts for the nine
months ended September 30, 2009 and 2008, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.



|                                                                       |  |                                                                         |        |   |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ------ | - | -------------------------------------- | - | ----- | -------------------------------- |  | ---------------------------------------------- | ------ | -------------------------------------------- | - | ----- | ---------------------- | - | ---- | ------------------- |  | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                       |  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |       
|                                                                       |  | Available-for-sale Securities                                           |        |   |                                        |   |       |                                  | 
|                                                                       |  | EquitySecurities                                                        |        |   | SyntheticCollateralizedDebtObligations |   |       | OtherStructuredFinancialProducts |  | Non-agencyResidentialMortgage-backedSecurities |        | Obligationsof State andPoliticalSubdivisions |   |       | U.S.GovernmentAgencies |   |      | Interest-onlyStrips |  |   | Total   |     
|Balance at January 1, 2009                                             |  | $                                                                       | 5,169  |   |                                        | $ | 1,200 |                                  |  | $                                              | 3,968  |                                              | $ | 2,787 |                        | $ | 440  |                     |  | $ | 31,751  |      |  | $ | 17,565 |   |  | $ | 62,880  |  
|Total gains or losses (realized/unrealized)                            |  |                                                                         |        |   |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|Other-than-temporary impairment                                        |  |                                                                         |        |   |                                        |   | (937  | )                                |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   | (937    | )
|Included in other comprehensive income (Presented here gross of taxes) |  |                                                                         | 4      |   |                                        |   | 880   |                                  |  |                                                | 8,774  |                                              |   | 13    |                        |   |      |                     |  |   |         |      |  |   | 4,553  |   |  |   | 14,224  |  
|Purchases, issuances, and settlements                                  |  |                                                                         | (1,092 | ) |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   | (3,088 | ) |  |   | (4,180  | )
|Transfers in and/or out of Level 3                                     |  |                                                                         |        |   |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   | (440 | )(1)                |  |   | (31,751 | )(1) |  |   |        |   |  |   | (32,191 | )
|                                                                       |  |                                                                         |        |   |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  
|Balance at September 30, 2009                                          |  | $                                                                       | 4,081  |   |                                        | $ | 1,143 |                                  |  | $                                              | 12,742 |                                              | $ | 2,800 |                        | $ |     |                     |  | $ |        |      |  | $ | 19,030 |   |  | $ | 39,796  |  
|                                                                       |  |                                                                         |        |   |                                        |   |       |                                  |  |                                                |        |                                              |   |       |                        |   |      |                     |  |   |         |      |  |   |        |   |  |   |         |  



|(1) | Represents four securities transferred from Level 3 to Level 2 as a result of enhanced valuation methodologies.
|--- | ---------------------------------------------------------------------------------------------------------------



|                                                                             |  |                              |         |   |                     |   |        |       |  |   |         |  
|---------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ------------------- | - | ------ | ----- |  | - | ------- | -
|                                                                             |  | Available-for-saleSecurities |         |   | Interest-onlyStrips |   |        | Total | 
|Balance at January 1, 2008                                                   |  | $                            | 81,285  |   |                     | $ | 21,138 |       |  | $ | 102,423 |  
|Total gains or losses (realized/unrealized)                                  |  |                              |         |   |                     |   |        |       |  |   |         |  
|Other-than-temporary impairment                                              |  |                              | (17,548 | ) |                     |   |       |       |  |   | (17,548 | )
|Reclassified from other comprehensive income (Presented here gross of taxes) |  |                              | 5,175   |   |                     |   |       |       |  |   | 5,175   |  
|Included in other comprehensive income (Presented here gross of taxes)       |  |                              | (6,898  | ) |                     |   | 359    |       |  |   | (6,539  | )
|Purchases, issuances, and settlements                                        |  |                              | (3,173  | ) |                     |   | (5,941 | )     |  |   | (9,114  | )
|Transfers in and/or out of Level 3                                           |  |                              | 2,809   |   |                     |   |       |       |  |   | 2,809   |  
|                                                                             |  |                              |         |   |                     |   |        |       |  |   |         |  
|Balance at September 30, 2008                                                |  | $                            | 61,650  |   |                     | $ | 15,556 |       |  | $ | 77,206  |  
|                                                                             |  |                              |         |   |                     |   |        |       |  |   |         |  



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

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

The following tables present the financial instruments carried at fair value at September 30, 2009 and
December 31, 2008, on the consolidated balance sheets and by the valuation hierarchy.



|               |  |                    |        |                                                               |   |                                           |  |                                        |   |  |   |       
|-------------- |  | ------------------ | ------ | ------------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | ------
|Description    |  | September 30, 2009 |        | QuotedPrices inActiveMarkets forIdenticalInstruments(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Impaired loans |  | $                  | 93,063 |                                                               | $ |                                          |  | $                                      |  |  | $ | 93,063
|               |  |                    |        |                                                               |   |                                           |  |                                        |   |  |   |       
|               |  | $                  | 93,063 |                                                               | $ |                                          |  | $                                      |  |  | $ | 93,063
|               |  |                    |        |                                                               |   |                                           |  |                                        |   |  |   |       

Specific reserves identified during the first nine months of 2009 totaled $22,363.
These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at September 30, 2009.



|               |  |                   |        |                                                               |   |                                           |  |                                        |   |  |   |       
|-------------- |  | ----------------- | ------ | ------------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | ------
|Description    |  | December 31, 2008 |        | QuotedPrices inActiveMarkets forIdenticalInstruments(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Impaired loans |  | $                 | 47,638 |                                                               | $ |                                          |  | $                                      |  |  | $ | 47,638
|               |  |                   |        |                                                               |   |                                           |  |                                        |   |  |   |       
|               |  | $                 | 47,638 |                                                               | $ |                                          |  | $                                      |  |  | $ | 47,638
|               |  |                   |        |                                                               |   |                                           |  |                                        |   |  |   |       

Specific reserves identified during 2008 totaled $10,308. These specific reserves
were taken into consideration when the required level of the allowance for loan and lease losses was determined at December 31, 2008.

Additional Disclosures about Fair Value of Financial Instruments

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

Cash and due from banks and short-term investments

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

Investment securities

Refer to the above discussion on securities.

Loans and leases

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

Certain retained interests in securitizations

Refer to the above discussion on certain retained interests in securitizations.

Deposits

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

Short-term borrowings

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

FHLB borrowings and long-term debt

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

Derivatives

Refer to the above discussion on derivatives.



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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



Off-balance-sheet items

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

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



|                        |  |                    |           |                   |   |                |  |            |           |  |   |          
|----------------------- |  | ------------------ | --------- | ----------------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                        |  | September 30, 2009 |           | December 31, 2008
|                        |  | CarryingAmount     |           | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial assets:       |  |                    |           |                   |   |                |  |            |           |  |   |          
|Cash and due from banks |  | $                  | 199,626   |                   | $ | 199,626        |  | $          | 237,701   |  | $ | 237,701  
|Short-term investments  |  |                    | 100,149   |                   |   | 100,149        |  |            | 119,360   |  |   | 119,360  
|Investment securities   |  |                    | 1,822,895 |                   |   | 1,822,895      |  |            | 1,879,891 |  |   | 1,879,891
|Loans and leases        |  |                    | 9,695,135 |                   |   | 9,906,177      |  |            | 9,653,879 |  |   | 9,798,658
|Financial liabilities:  |  |                    |           |                   |   |                |  |            |           |  |   |          
|Deposits                |  |                    | 8,900,313 |                   |   | 8,743,566      |  |            | 9,066,493 |  |   | 9,042,282
|Short-term borrowings   |  |                    | 1,020,614 |                   |   | 1,020,614      |  |            | 910,219   |  |   | 910,219  
|FHLB borrowings         |  |                    | 1,049,943 |                   |   | 1,120,315      |  |            | 1,069,784 |  |   | 1,158,477
|Long-term debt          |  |                    | 448,246   |                   |   | 345,377        |  |            | 448,082   |  |   | 366,380  

Note 13. Subsequent Events

Management has evaluated subsequent events, both recognized and nonrecognized, through November 6, 2009, which is the date of issuance
of Susquehanna's financial statements, and determined that there have been no material subsequent events.

Note 14. Income Taxes

Susquehannas provision for income taxes during interim reporting periods historically has been calculated by
applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items) for the reporting period. For the reporting
period ended September 30, 2009, in accordance with U.S. GAAP, Susquehanna has computed its provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. Susquehanna determined that as
small changes in estimated ordinary income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended September 30, 2009. The
actual effective rate for the reporting period ended September 30, 2009 is impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate above statutory rates for the interim
reporting periods.



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|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 and credit risk; whether Susquehannas allowance for loan and lease losses is adequate
to meet probable loan and lease losses; our ability to maintain loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to monitor the impact of the recession moving into the commercial and
industrial, commercial real estate, and consumer segments; the impact of a breach by Auto Lenders Liquidation Center, Inc. (Auto Lenders) on residual loss exposure; our ability to collect all amounts due under our outstanding synthetic
collateralized debt obligations; and our ability to achieve our 2009 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model
characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income
gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not
limited to:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | the impact of the Emergency Economic Stabilization Act of 2008 (EESA) and the American Recovery and Reinvestment Act (AARA) and
related rules and regulations on our business operations and competitiveness, including the impact of executive compensation restrictions, which may affect our ability to retain and recruit executives in competition with other firms that do not
operate under those restrictions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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

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

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

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

Availability of
Information

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

Executive Commentary

The prolonged economic downturn has continued to
impact customers in our markets, as well as our own financial performance. Our results for the first nine months of 2009 have been impacted by a number of issues related to the recession, including the industry-wide increase in FDIC insurance
premiums and special assessments and an increase in our provision for loan and lease losses as a result of deterioration in credit quality. In addition, we recorded pre-tax charges of $2.9 million in the second quarter related to our consolidation
initiative to combine certain branches in our central Pennsylvania market that are in close proximity to each other. We also had an other-than-temporary impairment charge of $0.9 million relating to our two corporate synthetic collateralized debt



28



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##### Table of Contents

obligations. We have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered well-capitalized. With these factors in mind, we
have updated our 2009 financial goals as follows:

Updated Financial Goals for 2009

Our updated financial goals for 2009 are as follows:



|                                          |  |                           |              |    |               |   |                |   
|----------------------------------------- |  | ------------------------- | ------------ | -- | ------------- | - | -------------- | --
|                                          |  | OriginallyPublished Goals |              |    | Updated Goals |  
|Net interest margin                       |  |                           | 3.70         | %  |               |   | 3.55           | % 
|Loan growth                               |  |                           | 8.0          | %  |               |   | 3.0            | % 
|Deposit growth                            |  |                           | 1.0          | %  |               |   | (2.0           | %)
|Noninterest income growth                 |  |                           | 6.0          | %  |               |   | 8.0            | % 
|Noninterest expense growth                |  |                           | (1.0         | %) |               |   | 3.0            | % 
|Tax rate                                  |  |                           | 32.0         | %  |               |   | Not meaningful |   
|Preferred dividend and discount accretion |  | $                         | 16.7 million |    |               | $ | 16.7 million   |   

Acquisitions

Stratton Holding Company

On April 30, 2008, we completed the acquisition of Stratton Holding Company, an investment management company based in Plymouth Meeting, Pennsylvania with approximately $3.0 billion in assets under management. Stratton became a wholly
owned subsidiary of Susquehanna and part of the family of Susquehanna wealth management companies. The addition of Stratton brings increased diversification in our investment expertise, including experience in mutual fund management. The acquisition
was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. The acquisition of Stratton was considered immaterial for purposes of presenting the disclosures
required by U.S. GAAP.

Results of Operations

Summary of 2009 Compared to 2008

Net income applicable to common
shareholders for the third quarter of 2009 was $2.7 million, a decrease of $3.7 million from net income applicable to common shareholders of $6.4 million for the third quarter of 2008. Net interest income increased 3.5%, to $104.8 million for the
third quarter of 2009, from $101.3 million for the third quarter of 2008. Noninterest income increased 127.2%, to $40.7 million for the third quarter of 2009, from $17.9 million for the third quarter of 2008. Noninterest expenses decreased 4.4%, to
$91.5 million for the third quarter of 2009, from $95.8 million for the third quarter of 2008.

Net loss applicable to common
shareholders for the first nine months of 2009 was $7.4 million, a decrease of $71.0 million from net income applicable to common shareholders of $63.6 million for the first nine months of 2008. Net interest income increased 0.6%, to $300.2 million
for the first nine months of 2009, from $298.5 million for the first nine months of 2008. Noninterest income increased 11.6%, to $117.7 million for the first nine months of 2009, from $105.5 million for the first nine months of 2008. Noninterest
expenses increased 4.1%, to $289.5 million for the first nine months of 2009, from $278.1 million for the first nine months of 2008.

Additional information is as follows:



29



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##### Table of Contents

|                                      |  |                                 |       |   |                                |   |       |      |  |    |       |   |  |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | -- | ----- | - |  | - | ----- | -
|                                      |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                      |  | 2009                            |       |   | 2008                           |   |       | 2009 |  |    | 2008  |  
|Diluted Earnings per Common Share     |  | $                               | 0.03  |   |                                | $ | 0.07  |      |  | ($ | 0.09  | ) |  | $ | 0.74  |  
|Return on Average Assets              |  |                                 | 0.20  | % |                                |   | 0.19  | %    |  |    | 0.05  | % |  |   | 0.64  | %
|Return on Average Equity              |  |                                 | 1.38  | % |                                |   | 1.49  | %    |  |    | 0.35  | % |  |   | 4.94  | %
|Return on Average Tangible Equity (1) |  |                                 | 3.76  | % |                                |   | 5.21  | %    |  |    | 1.55  | % |  |   | 13.59 | %
|Efficiency Ratio                      |  |                                 | 61.48 | % |                                |   | 78.38 | %    |  |    | 67.67 | % |  |   | 67.37 | %
|Net Interest Margin                   |  |                                 | 3.64  | % |                                |   | 3.60  | %    |  |    | 3.52  | % |  |   | 3.66  | %



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

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



|                                                                       |  |                                 |   |  |                                |   |  |      |   |  |       |  
|---------------------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ----- | -
|                                                                       |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2009                            |   |  | 2008                           |   |  | 2009 |   |  | 2008  |  
|Return on average equity (GAAP basis)                                  |  | 1.38                            | % |  | 1.49                           | % |  | 0.35 | % |  | 4.94  | %
|Effect of excluding average intangible assets and related amortization |  | 2.38                            | % |  | 3.72                           | % |  | 1.20 | % |  | 8.65  | %
|Return on average tangible equity                                      |  | 3.76                            | % |  | 5.21                           | % |  | 1.55 | % |  | 13.59 | %



30



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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, 2009 |            | For the Three-Month Period EndedSeptember 30, 2008
|                                                      |  | AverageBalance                                     |            |                                                    | Interest |   | Rate (%) |  | AverageBalance |  |   | Interest   |   | Rate (%)
|Assets                                                |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Short-term investments                                |  | $                                                  | 105,109    |                                                    |          | $ | 54       |  | 0.20           |  | $ | 92,693     |   |          | $ | 491     |  | 2.11
|Investment securities:                                |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                                    | 1,463,580  |                                                    |          |   | 17,750   |  | 4.81           |  |   | 1,776,148  |   |          |   | 22,872  |  | 5.12
|Tax-advantaged                                        |  |                                                    | 350,376    |                                                    |          |   | 5,775    |  | 6.54           |  |   | 309,751    |   |          |   | 5,117   |  | 6.57
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total investment securities                           |  |                                                    | 1,813,956  |                                                    |          |   | 23,525   |  | 5.15           |  |   | 2,085,899  |   |          |   | 27,989  |  | 5.34
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Loans and leases, (net):                              |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Taxable                                               |  |                                                    | 9,649,279  |                                                    |          |   | 137,085  |  | 5.64           |  |   | 9,134,226  |   |          |   | 146,070 |  | 6.36
|Tax-advantaged                                        |  |                                                    | 221,763    |                                                    |          |   | 3,855    |  | 6.90           |  |   | 197,137    |   |          |   | 3,546   |  | 7.16
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total loans and leases                                |  |                                                    | 9,871,042  |                                                    |          |   | 140,940  |  | 5.66           |  |   | 9,331,363  |   |          |   | 149,616 |  | 6.38
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-earning assets                         |  |                                                    | 11,790,107 |                                                    |          |   | 164,519  |  | 5.54           |  |   | 11,509,955 |   |          |   | 178,096 |  | 6.16
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Allowance for loan and lease losses                   |  |                                                    | (163,409   | )                                                  |          |   |          |  |                |  |   | (98,963    | ) |          |   |         |  |     
|Other non-earning assets                              |  |                                                    | 2,077,130  |                                                    |          |   |          |  |                |  |   | 2,095,831  |   |          |   |         |  |     
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total assets                                          |  | $                                                  | 13,703,828 |                                                    |          |   |          |  |                |  | $ | 13,506,823 |   |          |   |         |  |     
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Liabilities                                           |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Deposits:                                             |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Interest-bearing demand                               |  | $                                                  | 2,878,901  |                                                    |          |   | 4,499    |  | 0.62           |  | $ | 2,558,459  |   |          |   | 7,441   |  | 1.16
|Savings                                               |  |                                                    | 738,392    |                                                    |          |   | 291      |  | 0.16           |  |   | 734,832    |   |          |   | 1,116   |  | 0.60
|Time                                                  |  |                                                    | 4,083,021  |                                                    |          |   | 33,166   |  | 3.22           |  |   | 4,509,237  |   |          |   | 41,236  |  | 3.64
|Short-term borrowings                                 |  |                                                    | 1,050,060  |                                                    |          |   | 1,098    |  | 0.41           |  |   | 722,528    |   |          |   | 3,179   |  | 1.75
|FHLB borrowings                                       |  |                                                    | 1,049,652  |                                                    |          |   | 10,122   |  | 3.83           |  |   | 1,396,158  |   |          |   | 13,120  |  | 3.74
|Long-term debt                                        |  |                                                    | 448,280    |                                                    |          |   | 7,172    |  | 6.35           |  |   | 422,870    |   |          |   | 7,709   |  | 7.25
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total interest-bearing liabilities                    |  |                                                    | 10,248,306 |                                                    |          |   | 56,348   |  | 2.18           |  |   | 10,344,084 |   |          |   | 73,801  |  | 2.84
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Demand deposits                                       |  |                                                    | 1,234,941  |                                                    |          |   |          |  |                |  |   | 1,223,621  |   |          |   |         |  |     
|Other liabilities                                     |  |                                                    | 256,121    |                                                    |          |   |          |  |                |  |   | 240,354    |   |          |   |         |  |     
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities                                     |  |                                                    | 11,739,368 |                                                    |          |   |          |  |                |  |   | 11,808,059 |   |          |   |         |  |     
|Equity                                                |  |                                                    | 1,964,460  |                                                    |          |   |          |  |                |  |   | 1,698,764  |   |          |   |         |  |     
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                                  | 13,703,828 |                                                    |          |   |          |  |                |  | $ | 13,506,823 |   |          |   |         |  |     
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     
|Net interest income / yield on average earning assets |  |                                                    |            |                                                    |          | $ | 108,171  |  | 3.64           |  |   |            |   |          | $ | 104,295 |  | 3.60
|                                                      |  |                                                    |            |                                                    |          |   |          |  |                |  |   |            |   |          |   |         |  |     

Additional Information

Average loan balances include non-accrual loans.

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

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



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##### Table of Contents

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differentialtaxable equivalent basis



|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|----------------------------------------------------- |  | ------------------------------------------------- | ---------- | ------------------------------------------------- | -------- | - | ------- |  | -------------- |  | - | ---------- | - | ------- | - | ------- |  | ----
|                                                      |  | For the Nine-Month Period EndedSeptember 30, 2009 |            | For the Nine-Month Period EndedSeptember 30, 2008
|                                                      |  | AverageBalance                                    |            |                                                   | Interest |   | Rate(%) |  | AverageBalance |  |   | Interest   |   | Rate(%)
|Assets                                                |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Short-term investments                                |  | $                                                 | 111,182    |                                                   |          | $ | 529     |  | 0.64           |  | $ | 99,699     |   |         | $ | 1,939   |  | 2.60
|Investment securities:                                |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Taxable                                               |  |                                                   | 1,528,135  |                                                   |          |   | 57,271  |  | 5.01           |  |   | 1,775,290  |   |         |   | 70,062  |  | 5.27
|Tax-advantaged                                        |  |                                                   | 346,929    |                                                   |          |   | 17,193  |  | 6.63           |  |   | 293,539    |   |         |   | 14,288  |  | 6.50
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total investment securities                           |  |                                                   | 1,875,064  |                                                   |          |   | 74,464  |  | 5.31           |  |   | 2,068,829  |   |         |   | 84,350  |  | 5.45
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Loans and leases, (net):                              |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Taxable                                               |  |                                                   | 9,569,595  |                                                   |          |   | 408,064 |  | 5.70           |  |   | 8,858,477  |   |         |   | 437,299 |  | 6.59
|Tax-advantaged                                        |  |                                                   | 220,699    |                                                   |          |   | 11,195  |  | 6.78           |  |   | 193,896    |   |         |   | 10,683  |  | 7.36
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total loans and leases                                |  |                                                   | 9,790,294  |                                                   |          |   | 419,259 |  | 5.73           |  |   | 9,052,373  |   |         |   | 447,982 |  | 6.61
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total interest-earning assets                         |  |                                                   | 11,776,540 |                                                   |          |   | 494,252 |  | 5.61           |  |   | 11,220,901 |   |         |   | 534,271 |  | 6.36
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Allowance for loan and lease losses                   |  |                                                   | (138,218   | )                                                 |          |   |         |  |                |  |   | (94,097    | ) |         |   |         |  |     
|Other non-earning assets                              |  |                                                   | 2,059,445  |                                                   |          |   |         |  |                |  |   | 2,098,571  |   |         |   |         |  |     
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total assets                                          |  | $                                                 | 13,697,767 |                                                   |          |   |         |  |                |  | $ | 13,225,375 |   |         |   |         |  |     
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Liabilities                                           |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Deposits:                                             |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Interest-bearing demand                               |  | $                                                 | 2,793,759  |                                                   |          |   | 17,102  |  | 0.82           |  | $ | 2,662,819  |   |         |   | 27,254  |  | 1.37
|Savings                                               |  |                                                   | 729,966    |                                                   |          |   | 1,400   |  | 0.26           |  |   | 729,658    |   |         |   | 3,954   |  | 0.72
|Time                                                  |  |                                                   | 4,309,384  |                                                   |          |   | 109,103 |  | 3.38           |  |   | 4,243,996  |   |         |   | 124,094 |  | 3.91
|Short-term borrowings                                 |  |                                                   | 939,446    |                                                   |          |   | 3,233   |  | 0.46           |  |   | 643,341    |   |         |   | 9,368   |  | 1.95
|FHLB borrowings                                       |  |                                                   | 1,052,286  |                                                   |          |   | 30,275  |  | 3.85           |  |   | 1,344,995  |   |         |   | 39,104  |  | 3.88
|Long-term debt                                        |  |                                                   | 448,223    |                                                   |          |   | 23,027  |  | 6.87           |  |   | 421,297    |   |         |   | 23,256  |  | 7.37
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total interest-bearing liabilities                    |  |                                                   | 10,273,064 |                                                   |          |   | 184,140 |  | 2.40           |  |   | 10,046,106 |   |         |   | 227,030 |  | 3.02
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Demand deposits                                       |  |                                                   | 1,217,211  |                                                   |          |   |         |  |                |  |   | 1,208,861  |   |         |   |         |  |     
|Other liabilities                                     |  |                                                   | 255,087    |                                                   |          |   |         |  |                |  |   | 252,526    |   |         |   |         |  |     
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total liabilities                                     |  |                                                   | 11,745,362 |                                                   |          |   |         |  |                |  |   | 11,507,493 |   |         |   |         |  |     
|Equity                                                |  |                                                   | 1,952,405  |                                                   |          |   |         |  |                |  |   | 1,717,882  |   |         |   |         |  |     
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Total liabilities and shareholders equity            |  | $                                                 | 13,697,767 |                                                   |          |   |         |  |                |  | $ | 13,225,375 |   |         |   |         |  |     
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     
|Net interest income / yield on average earning assets |  |                                                   |            |                                                   |          | $ | 310,112 |  | 3.52           |  |   |            |   |         | $ | 307,241 |  | 3.66
|                                                      |  |                                                   |            |                                                   |          |   |         |  |                |  |   |            |   |         |   |         |  |     

Additional Information

Average loan balances include non-accrual loans.

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

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



32



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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 $104.8 million for the third quarter of 2009, as compared
to $101.3 million for the same period in 2008. For the nine months ended September 30, 2009, net interest income increased to $300.2 million, as compared to $298.5 million for the same period in 2008.

Net interest income as a percentage of net interest income plus noninterest income was 72.0% for the quarter ended September 30, 2009,
and 85.0% for the quarter ended September 30, 2008. Net interest income as a percentage of net interest income plus noninterest income was 71.8% for the nine months ended September 30, 2009, and 73.9% for the nine months ended
September 30, 2008.

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 $3.5 million increase in our net interest income for the third quarter of 2009, as compared to the third quarter of 2008, was primarily
the result of a $280.2 million increase in average earning assets due to loan growth and a 4 basis point improvement in net interest margin as $829.9 million of higher-cost certificates of deposit at an average rate of 3.07% matured in the third
quarter of 2009 and repriced to lower-cost deposits and short-term borrowings.

The $1.7 million increase in our net interest
income for the first nine months of 2009 as compared to the first nine months of 2008, was primarily the result of a $555.6 million increase in average earning assets due to loan growth, offset by a 14 basis point decline in net interest margin.

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

Provision and Allowance for Loan and Lease Losses

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

During the first nine months of
2009, we continued to experience a challenging operating environment. Given the economic pressures that are impacting some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which
took into consideration a $129.3 million increase in nonaccrual loans and leases since September 30, 2008 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $48.0 million for the
third quarter of 2009, and $17.7 million for the third quarter of 2008. The provision was $133.0 million for the first nine months of 2009, and $41.3 million for first nine months of 2008.



33



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##### Table of Contents

Of the $225.3 million of nonaccrual loans and leases at September 30, 2009 (refer to
Table 3  Risk Assets), $197.3 million, or 87.6%, represented non-accrual, non-consumer loan relationships greater than $0.5 million that had been evaluated and considered impaired. Of the $229.5 million of total impaired loans
(non-accrual, non-consumer loan relationships greater than $0.5 million plus accruing restructured loans), $99.6 million, or 43.4%, had no related reserve (refer to Note 4. Loans and Leases  Impaired Loans). The determination that
no related reserve for these collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

Net charge-offs for the third quarter of 2009 increased to $36.9 million, or 1.48% of average loans and leases, when compared to net charge-offs for the third quarter of 2008 of $8.2 million, or 0.35% of
average loans and leases.

Net charge-offs for the first nine months of 2009 increased to $78.2 million, or 1.07% of average
loans and leases, when compared to net charge-offs for the first nine months of 2008 of $24.3 million, or 0.36% of average loans and leases. Furthermore, 53.3% of net charge-offs came from the real estate  construction portfolio as real estate
demand and values in some of our market areas are under considerable downward pressure. For additional information about our real estate  construction loan portfolio, refer to Tables 3, 4, 5, and 6 appearing in Financial Condition,Risk Assets in this Quarterly Report on Form 10-Q.

The allowance for loan and lease losses was
1.71% of period-end loans and leases, or $168.6 million, at September 30, 2009; 1.18% of period-end loans and leases, or $113.7 million, at December 31, 2008; and 1.12% of period-end loans and leases, or $105.6 million, at
September 30, 2008.

Determining the level of the allowance for probable loan and lease losses at any given point in time
is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a
changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at September 30, 2009. There can be no assurance,
however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at September 30, 2009.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease
Losses



|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------ |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                         |  | Three Months EndedSeptember 30, |           |   | Nine Months EndedSeptember 30, |  
|                                                                         |  | 2009                            |           |   | 2008                           |   |           | 2009 |  |   | 2008      |  
|                                                                         |  | (dollars in thousands)          |          
|Balance - Beginning of period                                            |  | $                               | 157,517   |   |                                | $ | 96,033    |      |  | $ | 113,749   |   |  | $ | 88,569    |  
|Additions                                                                |  |                                 | 48,000    |   |                                |   | 17,704    |      |  |   | 133,000   |   |  |   | 41,306    |  
|Charge-offs:                                                             |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                                 | (9,145    | ) |                                |   | (5,125    | )    |  |   | (20,952   | ) |  |   | (13,505   | )
|Real estate - construction                                               |  |                                 | (22,587   | ) |                                |   | (100      | )    |  |   | (42,979   | ) |  |   | (3,214    | )
|Real estate secured - residential                                        |  |                                 | (1,849    | ) |                                |   | (753      | )    |  |   | (5,097    | ) |  |   | (2,786    | )
|Real estate secured - commercial                                         |  |                                 | (3,888    | ) |                                |   | (509      | )    |  |   | (7,688    | ) |  |   | (892      | )
|Consumer                                                                 |  |                                 | (608      | ) |                                |   | (1,924    | )    |  |   | (2,483    | ) |  |   | (6,027    | )
|Leases                                                                   |  |                                 | (1,771    | ) |                                |   | (1,014    | )    |  |   | (6,516    | ) |  |   | (3,092    | )
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Total charge-offs                                                        |  |                                 | (39,848   | ) |                                |   | (9,425    | )    |  |   | (85,715   | ) |  |   | (29,516   | )
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Recoveries:                                                              |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Commercial, financial, and agricultural                                  |  |                                 | 1,205     |   |                                |   | 134       |      |  |   | 3,084     |   |  |   | 1,348     |  
|Real estate - construction                                               |  |                                 | 1,268     |   |                                |   | 2         |      |  |   | 1,273     |   |  |   | 5         |  
|Real estate secured - residential                                        |  |                                 | 33        |   |                                |   | 41        |      |  |   | 236       |   |  |   | 177       |  
|Real estate secured - commercial                                         |  |                                 | 18        |   |                                |   | 59        |      |  |   | 1,471     |   |  |   | 128       |  
|Consumer                                                                 |  |                                 | 207       |   |                                |   | 866       |      |  |   | 804       |   |  |   | 2,832     |  
|Leases                                                                   |  |                                 | 170       |   |                                |   | 161       |      |  |   | 668       |   |  |   | 726       |  
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Total recoveries                                                         |  |                                 | 2,901     |   |                                |   | 1,263     |      |  |   | 7,536     |   |  |   | 5,216     |  
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                                          |  |                                 | (36,947   | ) |                                |   | (8,162    | )    |  |   | (78,179   | ) |  |   | (24,300   | )
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Balance - Period end                                                     |  | $                               | 168,570   |   |                                | $ | 105,575   |      |  | $ | 168,570   |   |  | $ | 105,575   |  
|                                                                         |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs as a percentage of average loans and leases (annualized) |  |                                 | 1.48      | % |                                |   | 0.35      | %    |  |   | 1.07      | % |  |   | 0.36      | %
|Allowance as a percentage of period-end loans and leases                 |  |                                 | 1.71      | % |                                |   | 1.12      | %    |  |   | 1.71      | % |  |   | 1.12      | %
|Average loans and leases                                                 |  | $                               | 9,871,042 |   |                                | $ | 9,331,363 |      |  | $ | 9,790,294 |   |  | $ | 9,052,373 |  
|Period-end loans and leases                                              |  |                                 | 9,863,705 |   |                                |   | 9,454,094 |      |  |   | 9,863,705 |   |  |   | 9,454,094 |  



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##### Table of Contents

Noninterest Income

Third Quarter 2009 Compared to Third Quarter 2008

Noninterest income, as a percentage of net interest income plus noninterest income, was 28.0% for the third quarter of 2009, and 15.0% for the third quarter of 2008.

Noninterest income increased $22.8 million, or 127.2%, for the third quarter of 2009, over the third quarter of 2008. This net increase was
primarily a result of the following:



| |  |  | Decreased service charges on deposit accounts of $2.6 million;
| | - |  | --------------------------------------------------------------



| |  |  | Decreased income from bank-owned life insurance of $2.4 million;
| | - |  | ----------------------------------------------------------------



| |  |  | Increased net realized gains on the sale of securities of $4.7 million;
| | - |  | -----------------------------------------------------------------------



| |  |  | Decreasedother-than-temporary impairment of securities related to credit losses of $17.6 million; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Increased other of $5.5 million.
| | - |  | --------------------------------

Service charges on deposit accounts.The 22.1% decrease primarily was the result of changes in customers behavior regarding overdrafts.

Income from bank-owned life insurance.The 64.7% decrease was the result of a decline in the return on the underlying
investments due to the economic environment.

Net realized gains on the sale of securities.During the third
quarter of 2009, we sold securities with an aggregate book value of $54.6 million for a net gain of $4.7 million. There were no sales of securities in the third quarter of 2008.

Other-than-temporary impairment of securities related to credit losses. During the third quarter of 2008, we recognized a $17.6
million other-than-temporary impairment related to the two synthetic collateralized debt obligations in our available-for-sale portfolio. There were no other-than-temporary impairments recognized in the third quarter of 2009.

Other.During the third quarter of 2008, we reclassified the fair value of cash flow hedges related to a forecasted sale of vehicle
leases from accumulated other comprehensive loss to earnings and recognized a reduction in other noninterest income of $6.5 million.

Nine Months ended September 30, 2009 Compared to Nine Months ended September 30, 2008

Noninterest income, as a percentage of net interest income plus noninterest income, was 28.2% for the nine-month period ended September 30, 2009, and 26.1% for the nine-month period ended September 30, 2008.

Noninterest income increased $12.2 million, or 11.6%, for the nine-month period ended September 30, 2009, from the nine-month period
ended September 30, 2008. This net increase was primarily a result of the following:



| |  |  | Decreased service charges on deposit accounts of $6.5 million;
| | - |  | --------------------------------------------------------------



| |  |  | Decreased vehicle origination, servicing, and securitization fees of $2.7 million;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Decreased income from bank-owned life insurance of $6.6 million;
| | - |  | ----------------------------------------------------------------



35



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##### Table of Contents

| |  |  | Increased net gain on sale of loans and leases of $3.2 million;
| | - |  | ---------------------------------------------------------------



| |  |  | Increased net realized gains on the sale of securities of $4.9 million;
| | - |  | -----------------------------------------------------------------------



| |  |  | Decreasedother-than-temporary impairment of securities related to credit losses of $16.6 million; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Increased other of $4.5 million.
| | - |  | --------------------------------

Service charges on deposit accounts.The 18.8% decrease primarily was the result of changes in customers behavior regarding overdrafts.

Vehicle origination, servicing, and securitization fees.The 35.1% decrease primarily was the result of a reduction in securitization
fees, as no auto lease securitizations have occurred since February 2007 and a reduction in origination fees due to lower volumes, as new vehicle sales have declined significantly.

Income from bank-owned life insurance.The 61.6% decrease was the result of a decline in the return on the underlying investments due
to the economic environment.

Net gain on sale of loans and leases. The 64.1% increase primarily was the result of an
increased volume of mortgage loans originated and sold.

Net realized gains on the sale of securities.During the first
nine months of 2009, we realized net gains of $5.1 million on the sale of securities with an aggregate book value of $72.7 million. During the first nine months of 2008, we realized net gains of $0.2 million on the sale of securities with an
aggregate book value of $17.3 million.

Other-than-temporary impairment of securities related to credit losses.During
the first nine months of 2008, we recognized a $17.6 million other-than-temporary impairment related to the two synthetic collateralized debt obligations in our available-for-sale portfolio. During the first nine months of 2009, we recognized an
additional $0.9 million other-than-temporary impairment related to the same securities because additional credit events occurred in the underlying reference companies.

Other.The 18.7% increase primarily is the net result of the $6.9 million gain realized on the sale of our Central Atlantic Merchant Services accounts in March 2009; a general net decline in other
commissions and fees of $3.6 million during 2009; a $1.0 million fixed-asset write-off due to our branch consolidation in 2009; the reclassification of the fair value of cash flow hedges related to a forecasted sale of vehicle leases from
accumulated other comprehensive loss to earnings of $6.5 million in 2008; a one-time credit of $1.2 million in 2008 relating to Visas IPO redemption; and various other changes within this category.

Noninterest Expenses

Third Quarter 2009 Compared to Third Quarter 2008

Noninterest expenses decreased $4.3 million, or 4.4%,
from $95.8 million for the third quarter of 2008, to $91.5 million for the third quarter of 2009. This net decrease is primarily a result of the following:



| |  |  | Decreased salaries and employee benefitsof $1.4 million;
| | - |  | --------------------------------------------------------



| |  |  | Increased FDIC insurance of $3.8 million; and
| | - |  | ---------------------------------------------



| |  |  | Decreased otherof $4.1 million.
| | - |  | -------------------------------



36



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##### Table of Contents

Salaries and employee benefits.The 2.8% net decrease is primarily attributable to
our consolidation efforts, which have reduced staff.

FDIC insurance.The increase in FDIC insurance expense is a
direct result of increased assessment rates, as determined by the FDIC.

Other.The decrease is primarily the result of
a $2.1 million charge in 2008 to mitigate losses to VFAMs customers who held positions in a money market mutual fund managed by an independent mutual fund company and various other changes within this category.

Nine Months ended September 30, 2009 Compared to Nine Months ended September 30, 2008

Noninterest expenses increased $11.5 million, or 4.1%, from $278.1 million for the nine-month period ended September 30, 2008, to $289.5
million for the nine-month period ended September 30, 2009. This net increase is primarily a result of the following:



| |  |  | Increased salaries and employee benefitsof $2.6 million;
| | - |  | --------------------------------------------------------



| |  |  | Decreased advertising and marketing of $3.5 million;
| | - |  | ----------------------------------------------------



| |  |  | Increased FDIC insurance of $19.3 million; and
| | - |  | ----------------------------------------------



| |  |  | Decreased other of $6.4 million.
| | - |  | --------------------------------

Salaries and employee benefits.The 1.8% net increase is primarily attributable to the acquisition of Stratton on April 30, 2008, increased net periodic pension cost relating to the
amortization of net actuarial losses of $1.3 million, branch-consolidation-related charges of $1.0 million in the second quarter of 2009, our consolidation efforts, which have resulted in reduced staff, and restructuring charges of $1.6 million in
2008.

Advertising and marketing.The 35.1% decrease is the result of discretionary reductions in advertising and
marketing initiatives.

FDIC insurance.The increase in FDIC insurance expense is a direct result of increased
assessment rates and a $6.2 million special assessment incurred in May 2009, as determined by the FDIC.

Other.The
9.3% net decrease in other expenses is the result of various changes within this category primarily associated with cost-saving initiatives previously announced and the $2.1 million charge in 2008 to mitigate losses to VFAMs customers who held
positions in a money market mutual fund managed by an independent mutual fund company and various other changes within this category.

Income Taxes

Our provision for income taxes during interim reporting periods historically has been
calculated by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items) for the reporting period. For
the reporting period ended September 30, 2009, in accordance with U.S. GAAP, we have computed our provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. We determined that as
small changes in estimated ordinary income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended September 30, 2009. The
actual effective rate for the reporting period ended September 30, 2009 is impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate above statutory rates for the interim
reporting periods.



37



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##### Table of Contents

Financial Condition

Summary of September 30, 2009 Compared to December 31, 2008

Total assets at September 30, 2009 remained at the same level as total assets at December 31, 2008 of $13.7 billion. Total loans increased $209.8 million and total deposits decreased $166.2 million from December 31, 2008.
Equity capital was $2.0 billion at September 30, 2009, or $19.53 per common share, and $1.9 billion, or $19.21 per common share, at December 31, 2008.

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

At September 30, 2009, we had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value.
Furthermore, non-financial assets and non-financial liabilities have not been measured at fair value because we have made the determination that the impact on our financial statements would be minimal. For additional information about our financial
assets and financial liabilities carried at fair value, refer to Note 12. Fair Value Disclosures to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

For information about our investment securities portfolio, refer to Note 3. Investment Securities and Note 12. Fair Value Disclosures to the financial statements
appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

Our experience in recent months indicates that many consumers and businesses in our markets are proceeding cautiously in the current economic
environment. In some cases, they appear to be delaying or changing plans for taking on additional debt, and, as a result there has been a reduced demand for loans among credit-worthy borrowers. Nevertheless, loans and leases, net of unearned income,
increased a modest 2.2%, from $9.7 billion at December 31, 2008 to $9.9 billion at September 30, 2009. Real estate construction loans, which we consider to be higher-risk loans, however, declined $63.2 million (net of charge-offs of $41.7
million). This was primarily due to our plan to decrease our real estate construction loan portfolio thereby reducing our exposure in a segment that has been particularly stressed during this recession.

Risk Assets

Total
nonperforming assets increased $161.8 million, from December 31, 2008 to September 30, 2009, as presented in Table 3.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets



|                                                                                      |  |                        |         |   |                  |   |         |                   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | ----------------- |  | - | ------- | -
|                                                                                      |  | September 30,2009      |         |   | December 31,2008 |   |         | September 30,2008 | 
|                                                                                      |  | (dollars in thousands) |        
|Nonperforming assets:                                                                 |  |                        |         |   |                  |   |         |                   |  |   |         |  
|Nonaccrual loans and leases:                                                          |  |                        |         |   |                  |   |         |                   |  |   |         |  
|Commercial, financial, and agricultural                                               |  | $                      | 18,064  |   |                  | $ | 13,882  |                   |  | $ | 11,634  |  
|Real estate - construction                                                            |  |                        | 102,667 |   |                  |   | 49,774  |                   |  |   | 48,756  |  
|Real estate secured - residential                                                     |  |                        | 35,752  |   |                  |   | 18,271  |                   |  |   | 15,352  |  
|Real estate secured - commercial                                                      |  |                        | 60,387  |   |                  |   | 22,477  |                   |  |   | 17,953  |  
|Consumer                                                                              |  |                        | 32      |   |                  |   | 844     |                   |  |   | 160     |  
|Leases                                                                                |  |                        | 8,441   |   |                  |   | 65      |                   |  |   | 2,167   |  
|                                                                                      |  |                        |         |   |                  |   |         |                   |  |   |         |  
|Total nonaccrual loans and leases                                                     |  |                        | 225,343 |   |                  |   | 105,313 |                   |  |   | 96,022  |  
|Restructured loans                                                                    |  |                        | 32,188  |   |                  |   | 2,566   |                   |  |   | 2,592   |  
|Other real estate owned                                                               |  |                        | 22,510  |   |                  |   | 10,313  |                   |  |   | 10,671  |  
|                                                                                      |  |                        |         |   |                  |   |         |                   |  |   |         |  
|Total nonperforming assets                                                            |  | $                      | 280,041 |   |                  | $ | 118,192 |                   |  | $ | 109,285 |  
|                                                                                      |  |                        |         |   |                  |   |         |                   |  |   |         |  
|As a percentage of period-end loans and leases plus other real estate owned           |  |                        | 2.83    | % |                  |   | 1.22    | %                 |  |   | 1.15    | %
|Allowance for loan and lease losses as a percentage of nonperforming loans and leases |  |                        | 65      | % |                  |   | 105     | %                 |  |   | 107     | %
|Loans and leases contractually past due 90 days and still accruing                    |  | $                      | 38,396  |   |                  | $ | 22,316  |                   |  | $ | 20,313  |  



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Nonaccrual loans and leases increased from $105.3 million at December 31, 2008, to
$225.3 million at September 30, 2009. The net increase was primarily the result of the effects of the continuing economic deterioration on our borrowers. Consequently, total nonperforming assets as a percentage of period-end loans and leases
plus other real estate owned increased from 1.22% at December 31, 2008 to 2.83% at September 30, 2009. Furthermore, at September 30, 2009, 45.6% of nonaccrual loans and leases were in our real estate  construction portfolio as
real estate demand and values in some of our market areas are under considerable downward pressure. We consider these real-estate construction loans to be higher-risk loans. Additional information about our real estate  construction loan
portfolio is presented in Tables 4, 5, and 6. Categories within these tables are defined as follows:



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



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



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

We have been aggressively reviewing our portfolio, contacting customers to evaluate their financial situation and, where necessary, working
with them to find proactive solutions to help limit the number of loans that become delinquent or go into default.

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



|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|----------------- |  | --------------------------- | --------- | ---------------------- | ----- | - | ------------------ | --- | - | --------------------------------- | ---- | - | ---------- | ---- | - | ---------------------------- | ---- | - | ------------------ | ---- | - | ----------- | --- | -
|Category          |  | Balance atSeptember 30,2009 |           | % of TotalConstruction |       |   | Past Due30-89 Days |     |   | Past Due 90Days andStill Accruing |      |   | Nonaccrual |      |   | OtherInternallyMonitored (1) |      |   | NetCharge-offs (2) |      |   | Reserve (3) |    
|                  |  | (dollars is thousands)      |          
|1-4 Family:       |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Construction      |  | $                           | 291,019   |                        | 24.1  | % |                    | 0.3 | % |                                   | 2.5  | % |            | 19.8 | % |                              | 13.6 | % |                    | 3.0  | % |             | 5.1 | %
|Land development  |  |                             | 237,817   |                        | 19.7  |   |                    | 0.1 |   |                                   | 0.2  |   |            | 0.4  |   |                              | 21.6 |   |                    | 12.4 |   |             | 2.7 |  
|Raw land          |  |                             | 6,365     |                        | 0.5   |   |                    | 0.0 |   |                                   | 0.0  |   |            | 0.2  |   |                              | 0.0  |   |                    | 15.9 |   |             | 1.9 |  
|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|                  |  |                             | 535,201   |                        | 44.3  |   |                    | 0.2 |   |                                   | 1.4  |   |            | 10.9 |   |                              | 17.0 |   |                    | 7.5  |   |             | 4.0 |  
|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|All Other:        |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Construction:     |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                             | 250,553   |                        | 20.7  |   |                    | 0.0 |   |                                   | 0.0  |   |            | 3.7  |   |                              | 12.0 |   |                    | 0.5  |   |             | 2.4 |  
|Owner-occupied    |  |                             | 13,061    |                        | 1.1   |   |                    | 0.0 |   |                                   | 0.0  |   |            | 10.9 |   |                              | 0.0  |   |                    | 0.0  |   |             | 4.2 |  
|Land development: |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                             | 329,045   |                        | 27.2  |   |                    | 0.2 |   |                                   | 0.0  |   |            | 8.5  |   |                              | 27.8 |   |                    | 0.3  |   |             | 4.4 |  
|Owner-occupied    |  |                             | 11,210    |                        | 0.9   |   |                    | 0.0 |   |                                   | 0.0  |   |            | 0.0  |   |                              | 0.8  |   |                    | 0.0  |   |             | 2.2 |  
|Raw land:         |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Investor          |  |                             | 68,629    |                        | 5.7   |   |                    | 0.5 |   |                                   | 10.6 |   |            | 7.6  |   |                              | 32.6 |   |                    | 2.3  |   |             | 4.0 |  
|Owner-occupied    |  |                             | 1,007     |                        | 0.1   |   |                    | 0.0 |   |                                   | 0.0  |   |            | 24.2 |   |                              | 0.0  |   |                    | 0.0  |   |             | 4.7 |  
|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|                  |  |                             | 673,505   |                        | 55.7  |   |                    | 0.2 |   |                                   | 1.1  |   |            | 6.5  |   |                              | 21.4 |   |                    | 0.6  |   |             | 3.6 |  
|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  
|Total             |  | $                           | 1,208,706 |                        | 100.0 |   |                    | 0.2 |   |                                   | 1.2  |   |            | 8.5  |   |                              | 19.4 |   |                    | 3.8  |   |             | 3.8 |  
|                  |  |                             |           |                        |       |   |                    |     |   |                                   |      |   |            |      |   |                              |      |   |                    |      |   |             |     |  



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

|(2) | represents the amount of net charge-offs in each category for the last twelve months divided by the category loan balance at September 30, 2009 plus the net
charge-offs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at September 30, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|----------------- |  | --------------------------- | --------- | -------------------------- | ---- | ---------- |  | ---- | ------------ |  | ---- | ----- |  | ----
|                  |  | Balance atSeptember 30,2009 |           | Geographical Location by %
|Category          |  |                             | Maryland  |                            |      | New Jersey |  |      | Pennsylvania |  |      | Other
|                  |  | (dollars in thousands)     
|1-4 Family:       |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Construction      |  | $                           | 291,019   |                            | 50.6 | %          |  | 9.5  | %            |  | 37.8 | %     |  | 2.1 
|Land development  |  |                             | 237,817   |                            | 54.5 |            |  | 6.1  |              |  | 33.1 |       |  | 6.3 
|Raw land          |  |                             | 6,365     |                            | 88.2 |            |  | 0.0  |              |  | 11.8 |       |  | 0.0 
|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|                  |  |                             | 535,201   |                            | 52.7 |            |  | 7.9  |              |  | 35.4 |       |  | 4.0 
|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|All Other:        |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Construction:     |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Investor          |  |                             | 250,553   |                            | 10.0 |            |  | 23.3 |              |  | 62.4 |       |  | 4.3 
|Owner-occupied    |  |                             | 13,061    |                            | 77.8 |            |  | 15.5 |              |  | 6.7  |       |  | 0.0 
|Land development: |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Investor          |  |                             | 329,045   |                            | 35.5 |            |  | 1.3  |              |  | 47.9 |       |  | 15.3
|Owner-occupied    |  |                             | 11,210    |                            | 44.9 |            |  | 0.0  |              |  | 53.1 |       |  | 2.0 
|Raw land:         |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Investor          |  |                             | 68,629    |                            | 20.5 |            |  | 17.2 |              |  | 62.0 |       |  | 0.3 
|Owner-occupied    |  |                             | 1,007     |                            | 46.4 |            |  | 24.2 |              |  | 29.4 |       |  | 0.0 
|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|                  |  |                             | 673,505   |                            | 25.5 |            |  | 11.4 |              |  | 54.0 |       |  | 9.1 
|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     
|Total             |  | $                           | 1,208,706 |                            | 37.6 |            |  | 9.8  |              |  | 45.8 |       |  | 6.8 
|                  |  |                             |           |                            |      |            |  |      |              |  |      |       |  |     

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



|                  |  |                             |           |                                             |      |  
|----------------- |  | --------------------------- | --------- | ------------------------------------------- | ---- | -
|Category          |  | Balance atSeptember 30,2009 |           | Global DebtCoverage RatioLess than 1.1% (1) |     
|                  |  | (dollars in thousands)      |          
|1-4 Family:       |  |                             |           |                                             |      |  
|Construction      |  | $                           | 291,019   |                                             | 46.7 | %
|Land development  |  |                             | 237,817   |                                             | 23.5 |  
|Raw land          |  |                             | 6,365     |                                             | 0.2  |  
|                  |  |                             |           |                                             |      |  
|                  |  |                             | 535,201   |                                             | 35.9 |  
|                  |  |                             |           |                                             |      |  
|All Other:        |  |                             |           |                                             |      |  
|Construction:     |  |                             |           |                                             |      |  
|Investor          |  |                             | 250,553   |                                             | 16.2 |  
|Owner-occupied    |  |                             | 13,061    |                                             | 12.4 |  
|Land development: |  |                             |           |                                             |      |  
|Investor          |  |                             | 329,045   |                                             | 2.4  |  
|Owner-occupied    |  |                             | 11,210    |                                             | 4.5  |  
|Raw land:         |  |                             |           |                                             |      |  
|Investor          |  |                             | 68,629    |                                             | 59.4 |  
|Owner-occupied    |  |                             | 1,007     |                                             | 44.8 |  
|                  |  |                             |           |                                             |      |  
|                  |  |                             | 673,505   |                                             | 24.5 |  
|                  |  |                             |           |                                             |      |  
|                  |  | $                           | 1,208,706 |                                             | 29.7 |  
|                  |  |                             |           |                                             |      |  



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



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Goodwill

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

We performed our annual goodwill
impairment test in the second quarter of 2009, and determined that the fair value of each of our reporting units exceeded its book value, and there was no goodwill impairment. However, given the continuing downturn in the economy and overall market
conditions and the fact that our market capitalization has been below the book value of our equity, we have performed interim goodwill impairment tests, as required by U.S. GAAP.

Based upon our analyses at September 30, 2009, the fair value of each of our reporting units exceeded its book value, and there was no
goodwill impairment. We will continue to monitor and evaluate the carrying value of goodwill for possible future impairment as conditions warrant.

Deposits

Total deposits decreased 1.8%, or $166.2 million, from December 31, 2008 to
September 30, 2009. However, within this category, core deposits such as demand, interest-bearing demand, and savings increased 0.8%, 17.2%, and 4.2%, respectively. We attribute these increases to customers seeking safety and security while
maintaining ready access to their funds. Time deposits less than $0.1 million decreased 9.8%, or $297.9 million, from December 31, 2008 to September 30, 2009. This decrease, in part, reflects the results of our plan to improve our mix of
deposits by allowing high-cost, single-service certificates of deposit to run off.

Capital Adequacy

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

The minimum Tier 1 capital ratio is 4%; our ratio at September 30, 2009 was 11.05%. The minimum total capital (Tiers 1 and 2) ratio is 8%; our ratio at September 30, 2009 was 13.48%. The minimum
leverage ratio is 4%; our leverage ratio at September 30, 2009 was 9.65%. We and our bank subsidiary have leverage and risk-weighted ratios well in excess of regulatory requirements, and both entities are considered well capitalized
under regulatory guidelines.

Securitizations and Off-Balance-Sheet Financings

Table 7 - Components of Loans and Leases Serviced



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|                                              |  |                          |            |                          |   |          
|--------------------------------------------- |  | ------------------------ | ---------- | ------------------------ | - | ---------
|                                              |  | As of September 30, 2009 |            | As of September 30, 2008
|                                              |  | (dollars in thousands)  
|Lease Securitization Transactions*            |  | $                        | 36,561     |                          | $ | 150,065  
|Home Equity Loan Securitization Transactions* |  |                          | 258,640    |                          |   | 294,716  
|Agency Arrangements and Lease Sales*          |  |                          | 16,716     |                          |   | 37,070   
|Leases and Loans Held in Portfolio            |  |                          | 9,863,705  |                          |   | 9,454,094
|                                              |  |                          |            |                          |   |          
|Total Leases and Loans Serviced               |  | $                        | 10,175,622 |                          | $ | 9,935,945
|                                              |  |                          |            |                          |   |          



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

Securitization
Transactions

We use the securitization of financial assets as a source of funding and a means to manage capital. Hann and
our bank subsidiary sell beneficial interests in automobile leases and related vehicles and home equity loans to qualified special purpose entities. These transactions are accounted for as sales under the guidelines of generally accepted accounting
principles in the United States, and a net gain or loss is recognized at the time of the initial sale. Due to recent market conditions, no securitizations have occurred since 2007, and we do not anticipate that any will occur in the near future.

For additional information concerning the accounting policies for initially measuring interest-only strips, the
characteristics of securitization transactions, including the gain or loss from sale, the key assumptions used in measuring the fair value of the interest-only strips, and descriptions of prior years securitization transactions, see the
following sections of our Annual Report on Form 10-K for the year ended December 31, 2008:



| |  |  | Securitizations and Off-Balance-Sheet-Financings on pages 55 through 61;
| | - |  | --------------------------------------------------------------------------



| |  |  | Note 1. Summary of Significant Accounting Policies under the captions Asset Securitizations and Servicing Fees under
Securitization Transactions, Agency Agreements, and Lease Sales on pages 80 and 81; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Note 21. Securitization Activity on pages 110 through 114.
| | - |  | ------------------------------------------------------------

Also see Note 11. Securitization Activity to the financial statements appearing in Part I, Item 1, of this
Quarterly Report on Form 10-Q.



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

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

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

Equity Market Price Risk

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

Liquidity Risk



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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, 2009, our bank subsidiary had approximately $579.6 million available under a
collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and approximately $453.2 million more would have been available provided that additional collateral had been pledged. In addition, at September 30, 2009, we had unused
federal funds lines of $1.1 billion and no brokered certificates of deposit.

Over the past few years, as an additional source
of liquidity, we periodically entered into securitization transactions in which we sold the beneficial interests in loans and leases to qualified special purpose entities. Since our last securitization, which occurred in February 2007, adverse
market conditions have made such transactions extremely difficult, as evidenced by our inability to complete the securitization forecasted for 2008. As an alternative source of funding, we have pledged the leases previously held for sale, certain
auto loans, certain commercial finance leases, and certain investment securities to obtain collateralized borrowing availability at the Federal Reserves Discount Window and Term Auction Facility. At September 30, 2009, we had unused
collateralized availability of $352.2 million.

Liquidity, however, is not entirely dependent on increasing our liability
balances. Liquidity is also evaluated by taking into consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $100.1 million at September 30, 2009 and represented additional sources of liquidity.

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

Interest Rate Risk

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

We employ a variety of methods to monitor interest rate risk. These methods include basic gap analysis,
which points to directional exposure, routine rate 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 an up 300 basis point shock. At September 30, 2009, our asset/liability position was slightly liability sensitive.

Derivative Financial Instruments and Hedging Activities

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

Additionally, we execute derivative instruments in the form of interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those derivatives are immediately hedged by



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offsetting derivative contracts, such that we minimize our net risk exposure resulting from such transactions. We do not use credit default swaps in our investment or hedging operations.

For additional information about our derivative financial instruments, refer to Note 10. Derivative Financial
Instruments and Note 12. Fair Value Disclosures to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Vehicle Leasing Residual Value Risk

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



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



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

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



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

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

PART IIOTHER INFORMATION



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

There
are no material proceedings to which Susquehanna or any of our subsidiaries are a party or by which, to Susquehannas knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending



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or threatened against Susquehanna or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in
controversy.



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

There have
been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. However, readers should carefully consider the following additional risk factors:

The following risk factor updates the risk factor with the same heading in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.

We may be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC) premiums in the
future.

During 2008 and continuing in 2009, higher levels of bank failures have dramatically increased resolution
costs of the Federal Deposit Insurance Corporation (FDIC) and depleted the Deposit Insurance Fund. In addition, the FDIC instituted two temporary programs in 2008 to further insure customer deposits at FDIC-member banks through
December 31, 2009: deposit accounts are now insured up to $250,000 per customer (up from $100,000) and non-interest bearing transactional accounts are fully insured (unlimited coverage). These programs have placed additional stress on the
Deposit Insurance Fund. On May 20, 2009, the FDIC extended the $250,000 per customer insurance limit through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all accounts
except for certain retirement accounts which will remain insured up to $250,000 per depositor.

In order to maintain a strong
funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC increased assessment rates of insured institutions uniformly by 7 cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes
beginning April 1, 2009, which require riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels.

On May 22, 2009, the FDIC Board of Directors adopted a final rule that imposed a special assessment on all insured depository
institutions, which will be collected on September 30, 2009. The final rule also permits the FDIC to impose additional special assessments after June 30, 2009, if necessary to maintain public confidence in federal deposit insurance. The
latest possible date for imposing additional special assessments under the final rule would be December 31, 2009, with collection on March 30, 2010.

On September 29, 2009, the FDIC Board of Directors adopted a notice of proposed rulemaking and request for comment that would require insured depository institutions to prepay their quarterly
risk-based assessments for the fourth quarter of 2009 and full years 2010 through 2012 on December 29, 2009. This action was taken in connection with the adoption of an Amended Restoration Plan to meet immediate liquidity needs and return the
Deposit Insurance Fund to its federally mandated level, without imposing additional special assessments. Further, the prepayment of assessments does not prevent the FDIC from changing assessment rates or revising the risk-based assessment system in
future periods.

Susquehanna is generally unable to control the amount of premiums that it is required to pay for FDIC
insurance. If there are additional bank or financial institution failures, Susquehanna may be required to pay even higher FDIC premiums than the recently increased levels. Additionally, the FDIC may make material changes to the calculation of the
prepaid assessment from the current proposal. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on Susquehannas results of operations, financial condition and our ability to
continue to pay dividends on its common shares at the current rate or at all.

Recent legislative and regulatory initiatives to support
the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect ours business and require us to raise additional capital.



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In addition to the U.S. Treasurys TARP Capital Purchase Program announced in the fall
of 2008, the U.S. Treasury and the FDIC have taken further steps to support and regulate the financial services industry, that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding
facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. Also, the U.S. Congress, through the EESA and the AARA, has imposed a number of restrictions and limitations on the
operations of financial services firms participating in the federal programs. These programs subject us and other financial institutions who participate in them to (1) additional restrictions, oversight, reporting obligations and costs; and
(2) compensation restrictions that may limit our ability to attract and retain executives, each of which could have an adverse impact on our business, financial condition, results of operations or the price of our common stock. In addition, new
proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business
consistent with historical practices, including aspects such as compensation, interest rates, new and inconsistent consumer protection regulations and mortgage regulation, among others. Federal and state regulatory agencies also frequently adopt
changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof. Compliance with such current and
potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient
manner.



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

None.



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

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

None.



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

None.



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

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



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



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SIGNATURES

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



|                 |  |  |  |                                                                                   
|---------------- |  |  |  | ----------------------------------------------------------------------------------
|                 |  |  |  | SUSQUEHANNA BANCSHARES, INC.                                                      
|                 |  | 
|November 6, 2009 |  |  |  | /s/ William J. Reuter                                                             
|                 |  |  |  | William J. Reuter Chairman
and Chief Executive Officer                            
|                 |  |  |  |                                                                                   
|                 |  | 
|November 6, 2009 |  |  |  | /s/ Drew K. Hostetter                                                             
|                 |  |  |  | Drew K. Hostetter Executive
Vice President, Treasurer, and Chief Financial Officer



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EXHIBIT INDEX



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



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