SUSQUEHANNA BANCSHARES INC - FORM 10-Q

SUSQUEHANNA BANCSHARES INC - FORM 10-Q - August 8, 2011

Attached files

Attached files

SUSQUEHANNA BANCSHARES INC Reports

file	filename
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - SUSQUEHANNA BANCSHARES INC	dex32.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SUSQUEHANNA BANCSHARES INC	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SUSQUEHANNA BANCSHARES INC	dex312.htm
EX-3.1 - AMENDED AND RESTATED ARTICLES OF INCORPORATION - SUSQUEHANNA BANCSHARES INC	dex31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from to

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Pennsylvania		23-2201716
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

26 North Cedar St., Lititz, Pennsylvania		17543
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

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

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

As of July 29, 2011, there were 130,067,574 shares of the registrant’s common stock outstanding, par value $2.00 per share.

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS


		Page

PART I.	FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2011 and 2010, and December 31, 2010		3

	Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010		4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		5

	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010		7

	Notes to the Consolidated Financial Statements		8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3	Quantitative and Qualitative Disclosures About Market Risk		55

Item 4	Controls and Procedures		57

PART II.	OTHER INFORMATION

Item 1	Legal Proceedings		57

Item 1A	Risk Factors		59

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		61

Item 3	Defaults Upon Senior Securities		61

Item 4	Reserved		61

Item 5	Other Information		61

Item 6	Exhibits		62

SIGNATURES			63

EXHIBIT INDEX			64

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30, 2011			December 31, 2010			June 30, 2010
	(in thousands, except share data)
Assets
Cash and due from banks	$	211,953		$	200,646		$	200,520
Unrestricted short-term investments		29,135			52,252			120,021

Cash and cash equivalents		241,088			252,898			320,541
Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		4,946			7,260			6,062
Restricted short-term investments		48,660			34,435			100
Securities available for sale		2,615,203			2,408,943			2,140,318
Securities held to maturity (fair values approximate $8,544; $8,668; and $8,800)		8,544			8,668			8,800
Loans and leases, net of unearned income		9,431,453			9,417,801			9,555,737
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		204,734			215,396			231,319
Less: Allowance for loan and lease losses		189,292			191,834			185,795

Net loans and leases		9,446,895			9,441,363			9,601,261

Premises and equipment, net		165,161			165,557			163,183
Other real estate and foreclosed assets		29,426			19,962			17,379
Accrued income receivable		35,084			36,121			35,142
Bank-owned life insurance		358,967			359,579			352,010
Goodwill		1,018,031			1,018,031			1,018,031
Intangible assets with finite lives		29,779			34,076			38,770
Other assets		155,960			167,192			189,936

Total Assets	$	14,157,744		$	13,954,085		$	13,891,533

Liabilities and Shareholders’ Equity
Deposits:
Demand	$	1,421,947		$	1,372,235		$	1,321,411
Interest-bearing demand		3,598,052			3,646,714			3,481,397
Savings		807,117			767,852			778,600
Time		2,052,626			2,168,503			2,390,652
Time of $100 or more		1,522,773			1,235,903			1,197,887

Total deposits		9,402,515			9,191,207			9,169,947
Federal Home Loan Bank short-term borrowings		400,000			300,000			0
Other short-term borrowings		635,183			770,623			619,439
Federal Home Loan Bank long-term borrowings		715,517			801,620			967,674
Other long-term debt		176,034			176,038			176,042
Junior subordinated debentures		323,125			322,880			322,605
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna's general credit		184,708			207,036			222,960
Accrued interest, taxes, and expenses payable		48,343			46,449			49,902
Deferred taxes		41,020			33,729			56,783
Other liabilities		208,397			119,701			213,730

Total Liabilities		12,134,842			11,969,283			11,799,082

Shareholders’ equity:
Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Outstanding: 0 at June 30, 2011 and December 31, 2010 and 100,000 at June 30, 2010		0			0			97,745
Common stock, $2.00 par value, 400,000,000 shares authorized. Issued: 130,070,101 at June 30, 2011; 129,965,635 at December 31, 2010; and 129,694,801 at June 30, 2010		260,140			259,931			259,390
Treasury stock, at cost. 2,527 at June 30, 2011 and 0 at December 31, 2010 and June 30, 2010		(24	)		0			0
Additional paid-in capital		1,298,109			1,301,042			1,299,498
Retained earnings		498,881			481,964			470,874
Accumulated other comprehensive loss, net of taxes of $18,925; $32,526; and $19,470, respectively		(34,204	)		(58,135	)		(35,056	)

Total Shareholders’ Equity		2,022,902			1,984,802			2,092,451

Total Liabilities and Shareholders’ Equity	$	14,157,744		$	13,954,085		$	13,891,533

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

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	127,199		$	136,252		$	253,998		$	272,481
Securities:
Taxable		15,026			13,458			30,706			27,487
Tax-exempt		4,034			3,371			7,985			7,061
Dividends		996			962			2,018			1,937
Short-term investments		23			39			52			73

Total interest income		147,278			154,082			294,759			309,039

Interest Expense:
Deposits:
Interest-bearing demand and savings		5,624			5,980			11,436			11,691
Time		14,109			21,072			29,290			43,794
Federal Home Loan Bank short-term borrowings		3,030			0			5,338			38
Other short-term borrowings		1,837			536			3,734			1,295
Federal Home Loan Bank long-term borrowings		7,799			11,098			15,883			20,696
Other long-term debt		8,793			9,165			17,969			17,003

Total interest expense		41,192			47,851			83,650			94,517

Net interest income		106,086			106,231			211,109			214,522
Provision for loan and lease losses		28,000			43,000			63,000			88,000

Net interest income, after provision for loan and lease losses		78,086			63,231			148,109			126,522

Noninterest Income:
Service charges on deposit accounts		8,077			8,886			15,833			16,955
Vehicle origination and servicing fees		1,996			1,887			3,899			3,484
Asset management fees		7,125			7,513			14,286			14,626
Income from fiduciary-related activities		1,853			1,787			3,688			3,591
Commissions on brokerage, life insurance, and annuity sales		2,356			2,000			4,610			3,660
Commissions on property and casualty insurance sales		3,468			2,879			7,453			6,281
Other commissions and fees		6,518			6,113			12,506			11,612
Income from bank-owned life insurance		1,149			1,341			2,255			2,631
Net gain on sale of loans and leases		2,419			2,766			6,470			4,733
Net realized gain on sales of securities		1,060			4,299			2,930			10,892
Total other-than-temporary impairment, net of recoveries		(2,380	)		(3,566	)		(4,366	)		(4,123	)
Portion of loss recognized in other comprehensive income (before taxes)		1,767			1,386			1,521			1,386

Net impairment losses recognized in earnings		(613	)		(2,180	)		(2,845	)		(2,737	)
Other		1,646			980			3,436			1,225

Total noninterest income		37,054			38,271			74,521			76,953

Noninterest Expenses:
Salaries and employee benefits		53,412			49,259			104,404			97,394
Occupancy		8,861			8,510			18,516			18,351
Furniture and equipment		3,239			3,409			6,305			7,086
Advertising and marketing		3,139			3,115			5,486			5,896
FDIC insurance		5,406			4,575			8,787			8,784
Legal fees		2,723			1,836			5,317			3,600
Amortization of intangible assets		2,133			2,360			4,296			4,743
Vehicle lease disposal		2,620			3,844			5,057			7,171
Other		19,624			19,255			38,871			37,442

Total noninterest expenses		101,157			96,163			197,039			190,467

Income before income taxes		13,983			5,339			25,591			13,008
Provision for (benefit from) income taxes		2,928			(52	)		4,775			114

Net Income		11,055			5,391			20,816			12,894
Preferred stock dividends and accretion		0			6,754			0			10,942

Net Income (Loss) Applicable to Common Shareholders	$	11,055		$	(1,363	)	$	20,816		$	1,952

Earnings per common share:
Basic	$	0.09		$	(0.01	)	$	0.16		$	0.02
Diluted	$	0.09		$	(0.01	)	$	0.16		$	0.02
Cash dividends per common share	$	0.02		$	0.01		$	0.03		$	0.02
Average common shares outstanding:
Basic		129,761			129,630			129,744			112,207
Diluted		129,832			129,630			129,826			112,233

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

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended June 30,
	2011			2010
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	20,816		$	12,894
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		16,812			13,082
Provision for loan and lease losses		63,000			88,000
Realized gain on available-for-sale securities, net		(85	)		(8,155	)
Deferred income taxes		(6,433	)		(22,168	)
Gain on sale of loans and leases		(6,470	)		(4,733	)
(Gain) loss on sale of other real estate and foreclosed assets		(461	)		1,493
Mortgage loans originated for sale		(143,143	)		(155,011	)
Proceeds from sale of mortgage loans originated for sale		145,951			150,727
Payments received on loans and leases transferred from held for sale to held for investment, net of advances on home equity lines of credit		75,363			71,641
Increase in cash surrender value of bank-owned life insurance		(1,315	)		(2,259	)
Decrease in accrued interest receivable		1,037			1,651
(Decrease) increase in accrued interest payable		(722	)		1,337
Increase in accrued expenses and taxes payable		2,616			841
Other, net		12,646			(3,285	)

Net cash provided by operating activities		179,612			146,055

Cash Flows from Investing Activities:
Net (increase) decrease in restricted short-term investments		(11,911	)		1,529
Activity in available-for-sale securities:
Sales		146,929			231,241
Maturities, repayments, and calls		269,266			317,120
Purchases		(503,955	)		(694,554	)
Net (increase) decrease in loans and leases		(167,053	)		141,253
Purchase of bank-owned life insurance		(2,350	)		0
Proceeds from bank-owned life insurance		4,277			5,622
Proceeds from sale of foreclosed assets		17,817			16,200
Additions to premises and equipment, net		(6,110	)		(4,761	)

Net cash (used in) provided by investing activities		(253,090	)		13,650

Cash Flows from Financing Activities:
Net increase in deposits		211,308			195,584
Net decrease in other short-term borrowings		(135,440	)		(421,264	)
Net increase (decrease) in short-term FHLB borrowings		100,000			(100,000	)
Proceeds from long-term FHLB borrowings		0			150,000
Repayment of long-term FHLB borrowings		(85,221	)		(105,095	)
Proceeds from issuance of long-term debt		0			47,749
Repayment of long-term debt		(22,332	)		(16,984	)
Proceeds from issuance of common stock		2,545			328,636
Redemption of preferred stock		0			(200,000	)
Purchase of treasury stock		(24	)		0
Redemption of warrant		(5,269	)		0
Cash dividends paid		(3,899	)		(8,996	)

Net cash provided by (used in) financing activities		61,668			(130,370	)

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

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)


Net change in cash and cash equivalents		(11,810	)		29,335
Cash and cash equivalents at January 1		252,898			291,206

Cash and cash equivalents at June 30	$	241,088		$	320,541

Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	84,372		$	93,143
Income tax payments		2,784			19,412
Supplemental Schedule of Noncash Activities
Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities at January 1, 2010	$	0		$	7,537
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities at January 1, 2010		0			248,333
Real estate acquired in settlement of loans		23,375			11,553
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna's general credit at January 1, 2010		0			239,936
Securities purchased not settled		78,268			99,475
Accretion of preferred stock discount		0			5,386
Home equity line of credit loans transferred from held for sale to held for investment		0			434,897
Cumulative-effect adjustment to retained earnings relating to the consolidation of variable interest entities		0			(5,805	)
Adjustment to accumulated other comprehensive income relating to the consolidation of variable interest entities		0			(6,922	)

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

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except share data)


	Preferred Stock			Shares of Common Stock		Common Stock		Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at January 1, 2010	$	292,359			86,473,612	$	172,947	$	0		$	1,057,305		$	478,167		$	(19,697	)	$	1,981,081

Cumulative-effect adjustment resulting from the consolidation of variable interest entities															(5,805	)		(6,922	)		(12,727	)

Comprehensive income:
Net income															12,894						12,894
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $5,166																		15,829			15,829
Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $508																		(878	)		(878	)
Change in unrealized loss on cash flow hedges, net of taxes																		(23,388	)		(23,388	)

Total comprehensive income																					4,457

Issuance of common stock					43,125,000		86,250					241,090									327,340
Issuance of common stock and options under employee benefit plans					96,189		193					1,103									1,296
Redemption of preferred stock		(200,000	)																		(200,000	)
Accretion of discount on preferred stock		5,386													(5,386	)					0
Cash dividends paid on preferred stock															(6,833	)					(6,833	)
Cash dividends paid on common stock ($0.02 per share)															(2,163	)					(2,163	)

Balance at June 30, 2010	$	97,745			129,694,801	$	259,390	$	0		$	1,299,498		$	470,874		$	(35,056	)	$	2,092,451

Balance at January 1, 2011	$	0			129,965,635	$	259,931	$	0		$	1,301,042		$	481,964		$	(58,135	)	$	1,984,802

Comprehensive income:
Net income															20,816						20,816
Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of $54																		29,970			29,970
Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $558																		(963	)		(963	)
Change in unrealized loss on cash flow hedges, net of taxes of $2,513																		(4,775	)		(4,775	)
Adjustment to postretirement benefit obligations, net of taxes of $162																		(301	)		(301	)

Total comprehensive income																					44,747

Issuance of common stock and options under employee benefit plans					104,466		209					2,336									2,545
Treasury stock purchased									(24	)											(24	)
Redemption of warrant												(5,269	)								(5,269	)
Cash dividends paid on common stock ($0.03 per share)															(3,899	)					(3,899	)

Balance at June 30, 2011	$	0			130,070,101	$	260,140	$	(24	)	$	1,298,109		$	498,881		$	(34,204	)	$	2,022,902

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. Accounting Policies

The information contained in this report is unaudited. In the opinion of management, the information reflects all normal recurring adjustments necessary for a fair statement of results for the periods ended June 30, 2011 and 2010. Certain prior-year amounts have been reclassified to conform to current period classifications and are not material to previously issued financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries (“Susquehanna”), as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 76 through 83 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Recently Adopted Accounting Guidance

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

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

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Recently Issued Accounting Guidance

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

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

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 2. Pending Acquisitions

Agreement to Acquire Tower Bancorp, Inc.

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

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

Agreement to Acquire Abington Bancorp, Inc.

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 3. Investment Securities

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


At June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	299,024	$	2,750	$	9	$	301,765
Obligations of states and political subdivisions		400,450		11,205		1,274		410,381
Agency residential mortgage-backed securities		1,511,189		29,047		1,314		1,538,922
Non-agency residential mortgage-backed securities		91,187		0		7,508		83,679
Commercial mortgage-backed securities		66,331		2,749		0		69,080
Other structured financial products		24,755		0		10,622		14,133
Other debt securities		49,135		629		452		49,312
Equity securities of the Federal Home Loan Bank		73,079		0		0		73,079
Equity securities of the Federal Reserve Bank		50,225		0		0		50,225
Other equity securities		24,935		429		737		24,627

Total available-for-sale securities	$	2,590,310	$	46,809	$	21,916	$	2,615,203

Held-to-Maturity:
Other	$	4,570	$	0	$	0	$	4,570
State and municipal		3,974		0		0		3,974

Total held-to-maturity securities	$	8,544	$	0	$	0	$	8,544


At December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	268,828	$	2,230	$	2,883	$	268,175
Obligations of states and political subdivisions		397,777		4,869		5,986		396,660
Agency residential mortgage-backed securities		1,321,771		19,671		17,873		1,323,569
Non-agency residential mortgage-backed securities		129,206		32		12,427		116,811
Commercial mortgage-backed securities		99,501		5,341		0		104,842
Other structured financial products		24,680		0		12,177		12,503
Other debt securities		41,842		88		930		41,000
Equity securities of the Federal Home Loan Bank		71,065		0		0		71,065
Equity securities of the Federal Reserve Bank		50,225		0		0		50,225
Other equity securities		24,689		251		847		24,093

Total available-for-sale securities	$	2,429,584	$	32,482	$	53,123	$	2,408,943

Held-to-Maturity:
Other	$	4,560	$	0	$	0	$	4,560
State and municipal		4,108		0		0		4,108

Total held-to-maturity securities	$	8,668	$	0	$	0	$	8,668

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	June 30, 2011
	Amortized Cost		Fair Value
Securities available for sale:
Within one year	$	30,108	$	30,927
After one year but within five years		320,322		324,341
After five years but within ten years		398,420		406,409
After ten years		1,693,221		1,705,595

Total securities available for sale	$	2,442,071	$	2,467,272

Securities held to maturity:
Within one year	$	0	$	0
After one year but within five years		0		0
After five years but within ten years		0		0
After ten years		8,544		8,544

Total securities held to maturity	$	8,544	$	8,544

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


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

Net gain	$	447		$	2,119		$	85		$	8,155

The following table presents Susquehanna's investments' gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010.


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

	$	314,647	$	3,198	$	91,170	$	18,718	$	405,817	$	21,916

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


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

	$	926,664	$	27,203	$	131,573	$	25,920	$	1,058,237	$	53,123

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

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

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


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

Balance - end of period	$	4,582	$	1,737	$	4,582	$	1,737

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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


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

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

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

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

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

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

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

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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


As of June 30, 2011	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Class		B			B			B			A2L
Class face value	$	35,000		$	57,840		$	87,309		$	45,500

Book value	$	3,000		$	7,032		$	7,973		$	6,750
Fair value		1,880			3,997			4,547			3,709

Unrealized loss	$	(1,120	)	$	(3,035	)	$	(3,426	)	$	(3,041	)

Present value of expected cash flows for all tranches within the Pooled Trust	$	463,202		$	403,145		$	661,743		$	386,475
Aggregate face value of Susquehanna’s tranche and all senior tranches (1)		369,846			356,122			541,503			345,717
Lowest credit rating assigned		CCC-			Caa3			Ca			CCC-
Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		391,728			300,200			507,406			315,700
Actual defaults		3,000			27,580			93,500			61,500
Actual deferrals		77,400			144,690			98,900			93,480
Projected future defaults		62,829			90,695			51,406			59,880
Actual defaults as a % of original collateral		0.5	%		5.5	%		13.3	%		12.6	%
Actual deferrals as a % of original collateral (2)		12.4			28.9			14.1			19.2

Actual defaults and deferrals as a % of original collateral		12.9	%		34.4	%		27.4	%		31.8	%

Projected future defaults as a % of original collateral (3)		10.1	%		18.1	%		7.3	%		12.3	%
Actual institutions deferring and defaulted as a % of total institutions		13.4			37.5			31.1			38.0
Projected future defaults as a % of performing collateral plus deferrals		13.4			20.4			8.5			14.6

(1)

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

(3)

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

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

NOTE 4. Loans and Leases

Loans and Leases, Net of Unearned Income


	June 30, 2011		December 31, 2010
Commercial, financial, and agricultural	$	1,793,490	$	1,816,519
Real estate - construction		775,096		877,223
Real estate secured - residential		2,704,802		2,666,692
Real estate secured - commercial		2,999,986		2,998,176
Consumer		665,602		603,084
Leases		697,211		671,503

Total loans and leases	$	9,636,187	$	9,633,197

Nonaccrual loans and leases	$	190,733	$	196,895
Loans and leases contractually past due 90 days and still accruing		18,268		20,588
Troubled debt restructurings		62,143		114,566

Net Investment in Direct Financing Leases


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

Total leases	$	697,211		$	671,503

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

Three Months Ended June 30, 2011


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

Balance at June 30, 2011	$	29,358		$	44,432		$	29,990		$	72,554		$	2,755		$	10,091		$	112	$	189,292

Six Months Ended June 30, 2011


	Commercial			Real Estate - Construction			Real Estate Secured - Residential			Real Estate Secured - Commercial			Consumer			Leases			Unallocated		Total
Allowance for credit losses:
Balance at January 1, 2011	$	31,608		$	50,250		$	28,320		$	70,137		$	2,841		$	8,643		$	35	$	191,834
Charge-offs		(14,941	)		(19,962	)		(10,128	)		(26,734	)		(2,692	)		(3,140	)		0		(77,597	)
Recoveries		2,103			5,456			1,283			1,825			546			842			0		12,055
Provision		10,588			8,688			10,515			27,326			2,060			3,746			77		63,000

Balance at June 30, 2011	$	29,358		$	44,432		$	29,990		$	72,554		$	2,755		$	10,091		$	112	$	189,292

Balance at June 30, 2011:
Individually evaluated for impairment	$	3,535		$	3,212		$	2,995		$	9,271		$	0		$	0				$	19,013

Collectively evaluated for impairment	$	25,823		$	41,220		$	26,995		$	63,283		$	2,755		$	10,091		$	112	$	170,279

Financing receivables:
Balance at June 30, 2011	$	1,793,490		$	775,096		$	2,704,802		$	2,999,986		$	665,602		$	697,211				$	9,636,187

Balance at June 30, 2011:
Individually evaluated for impairment	$	21,983		$	44,062		$	32,417		$	94,117		$	148		$	0				$	192,727

Collectively evaluated for impairment	$	1,771,507		$	731,034		$	2,672,385		$	2,905,869		$	665,454		$	697,211				$	9,443,460

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Credit Quality Indicators at June 30, 2011

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade


	Commercial		Real Estate - Construction (1)		Real Estate - Secured - Commercial (2)		Total Commercial Credit Exposure
Grade:
Pass (3)	$	1,670,777	$	526,220	$	3,165,710	$	5,362,707
Special mention (4)		49,968		70,959		169,929		290,856
Substandard (5)		72,745		99,462		274,930		447,137

Total	$	1,793,490	$	696,641	$	3,610,569	$	6,100,700

Other Credit Exposure

Credit-risk Profile based on Payment Activity


	Real Estate - Secured - Residential		Consumer		Leases		Total Other Credit Exposure
Performing	$	2,136,236	$	665,099	$	692,961	$	3,494,296
Nonperforming (6)		36,438		503		4,250		41,191

Total	$	2,172,674	$	665,602	$	697,211	$	3,535,487

Credit Quality Indicators at December 31, 2010

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade


	Commercial		Real Estate - Construction (1)		Real Estate - Secured - Commercial (2)		Total Commercial Credit Exposure
Grade:
Pass (3)	$	1,677,506	$	612,330	$	3,134,762	$	5,424,598
Special mention (4)		59,988		64,283		201,833		326,104
Substandard (5)		79,025		125,672		280,287		484,984

Total	$	1,816,519	$	802,285	$	3,616,882	$	6,235,686

Other Credit Exposure

Credit-risk Profile based on Payment Activity


	Real Estate - Secured - Residential		Consumer		Leases		Total Other Credit Exposure
Performing	$	2,085,067	$	600,627	$	667,936	$	3,353,630
Nonperforming (6)		37,857		2,457		3,567		43,881

Total	$	2,122,924	$	603,084	$	671,503	$	3,397,511

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

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

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

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

Financing Receivables that are Accruing


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	6,011	$	2,206	$	1,466	$	9,683	$	1,765,587	$	1,775,270
Real estate - construction		232		3,181		3,124		6,537		724,254		730,791
Real estate secured - residential		5,302		2,204		7,074		14,581		2,639,174		2,653,755
Real estate secured - commercial		8,443		7,088		5,667		21,197		2,905,444		2,926,641
Consumer		4,543		1,313		503		6,358		659,244		665,602
Leases		2,039		1,157		434		3,631		689,764		693,395

Total	$	26,570	$	17,149	$	18,268	$	61,987	$	9,383,467	$	9,445,454

Financing Receivables that are Nonaccruing


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	0	$	123	$	10,112	$	10,235	$	7,984	$	18,219
Real estate - construction		0		0		42,532		42,532		1,773		44,305
Real estate secured - residential		1,354		1,654		46,905		49,913		1,134		51,047
Real estate secured - commercial		1,297		809		35,582		37,687		35,659		73,346
Leases		0		49		2,227		2,277		1,539		3,816

Total	$	2,651	$	2,635	$	137,358	$	142,644	$	48,089	$	190,733

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Financing Receivables that are Accruing


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	12,808	$	5,190	$	947	$	18,945	$	1,777,563	$	1,796,507
Real estate - construction		2,466		2,845		751		6,062		813,382		819,444
Real estate secured - residential		18,466		6,923		12,724		38,113		2,577,605		2,615,719
Real estate secured - commercial		12,324		8,384		2,961		23,669		2,909,195		2,932,863
Consumer		6,385		828		2,455		9,668		593,415		603,083
Leases		5,274		3,126		750		9,150		659,536		668,686

Total	$	57,723	$	27,296	$	20,588	$	105,607	$	9,330,696	$	9,436,302

Financing Receivables that are Nonaccruing


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	1,392	$	365	$	14,227	$	15,983	$	4,029	$	20,012
Real estate - construction		2,418		2,513		45,417		50,348		7,431		57,779
Real estate secured - residential		2,196		615		36,479		39,290		11,683		50,973
Real estate secured - commercial		8,812		4,666		38,947		52,425		12,888		65,313
Consumer		0		0		0		0		1		1
Leases		0		178		1,461		1,639		1,178		2,817

Total	$	14,818	$	8,337	$	136,531	$	159,685	$	37,210	$	196,895

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Impaired Loans at June 30, 2011


	Unpaid Principal Balance			Related Allowance		Average Unpaid Principal Balance		Interest Income Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	10,824				$	13,419	$	134
Real estate - construction		11,824					24,644		137
Real estate secured - residential		18,602					15,501		267
Real estate secured - commercial		38,397					45,200		448
Consumer		148					74		4

Total impaired loans without a related reserve		79,795	(1)				98,838		990

Impaired loans with a related reserve:
Commercial, financial, and agricultural		11,159		$	3,535		11,092		135
Real estate - construction		32,238			3,212		28,453		91
Real estate secured - residential		13,815			2,995		17,540		260
Real estate secured - commercial		55,720			9,271		65,729		808

Total impaired loans with a related reserve		112,932	(2)		19,013		122,814		1,294

Total impaired loans:
Commercial, financial, and agricultural		21,983			3,535		24,511		269
Real estate - construction		44,062			3,212		53,097		228
Real estate secured - residential		32,417			2,995		33,041		527
Real estate secured - commercial		94,117			9,271		110,929		1,256
Consumer		148			0		74		4

Total impaired loans	$	192,727		$	19,013	$	221,652	$	2,284

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Impaired Loans at December 31, 2010


	Unpaid Principal Balance			Related Allowance		Average Unpaid Principal Balance		Interest Income Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	10,071				$	24,816	$	907
Real estate - construction		31,827					43,857		652
Real estate secured - residential		10,624					10,703		594
Real estate secured - commercial		59,953					50,434		1,591
Consumer		264					100		3

Total impaired loans without a related reserve		112,739	(1)				129,910		3,747

Impaired loans with a related reserve:
Commercial, financial, and agricultural		15,497		$	6,343		20,078		406
Real estate - construction		31,483			6,986		39,053		307
Real estate secured - residential		16,331			3,273		13,245		470
Real estate secured - commercial		70,606			13,627		60,766		1,747
Consumer		198			68		222		13

Total impaired loans with a related reserve		134,115	(2)		30,297		133,364		2,943

Total impaired loans:
Commercial, financial, and agricultural		25,568			6,343		44,894		1,313
Real estate - construction		63,310			6,986		82,910		959
Real estate secured - residential		26,955			3,273		23,948		1,064
Real estate secured - commercial		130,559			13,627		111,200		3,338
Consumer		462			68		322		16

Total impaired loans	$	246,854		$	30,297	$	263,274	$	6,690

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

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

Financing Receivables on Nonaccrual Status


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

Total nonaccrual financing receivables	$	190,733	$	196,895

NOTE 5. Goodwill

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Bank Reporting Unit

Goodwill assigned to the bank reporting unit at both May 31, 2011 and 2010 was $915,421. Fair value of the bank reporting unit was determined utilizing the market multiples approach, which measures the value of the reporting unit using information pertaining to recent non-distressed sales of financial institutions in Susquehanna's market. Susquehanna considered two key ratios to measure goodwill of the bank reporting unit for impairment: price to book and price to tangible book. In keeping with the investment community’s current valuations of financial institutions, Susquehanna gave no consideration to the price to earnings ratio. The following table shows the ratios used at May 31, 2011 and 2010.


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

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

Wealth Management Reporting Unit

Goodwill assigned to the wealth management reporting unit at both May 31, 2011 and 2010 was $82,746. Fair value of the wealth management reporting unit was determined utilizing the “market multiples” approach and the “income” approach. The income approach measures the value of the reporting unit based on a discount rate to determine the present value of the reporting unit's future economic benefit over ten years, assuming a weighted increase in the reporting unit's revenues and a weighted increase in the reporting unit's expenses. In keeping with the investment community's current valuations of wealth management institutions, Susquehanna predominantly uses the income approach. The following table shows the factors used in the income approach at May 31, 2011 and 2010.


	Annual			Annual
Factor	May 31, 2011			May 31, 2010
Discount rate		17.5	%		17.5	%
Weighted-average increase in revenues		6.0	%		6.0	%
Weighted-average increase in expenses		5.0	%		5.0	%

Fair value of the wealth management reporting unit exceeded carrying value by 59.7% at May 31, 2011 and by 53.6% at May 31, 2010.

Property and Casualty Insurance Reporting Unit

Goodwill assigned to the property and casualty insurance reporting unit at both May 31, 2011 and 2010 was $17,177. Fair value of the property and casualty insurance reporting unit was determined utilizing the market multiples approach, which measures the value of the reporting unit using recent sales of property and casualty insurance companies in Susquehanna's market. Susquehanna uses two key ratios to measure goodwill of the property and casualty insurance reporting unit for impairment: average price to book and median price to earnings. The following table shows the ratios used at May 31, 2011 and 2010.


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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 6. Borrowings

Other short-term borrowings


	June 30, 2011		December 31, 2010
Securities sold under repurchase agreements	$	305,981	$	306,423
Federal funds purchased		323,000		458,000
Treasury tax and loan notes		6,202		6,200

Total other short-term borrowings	$	635,183	$	770,623

NOTE 7. Earnings per Share (“EPS”)

The following tables set forth the calculation of basic and diluted EPS for the three-month and six-month periods ended June 30, 2011 and 2010.

Basic earnings per common share


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

Diluted earnings per common share


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Net income available to common shareholders	$	11,055	$	(1,363	)	$	20,816	$	1,952
Average common shares outstanding		129,761		129,630			129,744		112,207
Dilutive potential common shares		71		0			82		26

Total diluted average common shares outstanding		129,832		129,630			129,826		112,233

Diluted earnings per common share	$	0.09	$	(0.01	)	$	0.16	$	0.02

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

For the six months ended June 30, 2011 and 2010, average options to purchase 2,157 shares and 2,075 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options' common stock equivalents were antidilutive. For the six months ended June 30, 2011 and 2010, warrants to purchase 0 shares and 3,028 shares of common stock, respectively, were outstanding but were not included in the computation of diluted EPS because the warrants' common stock equivalents were antidilutive.

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost


	Three Months Ended June 30,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2011			2010			2011		2010		2011		2010
Service cost	$	1,248		$	1,401		$	31	$	33	$	194	$	191
Interest cost		1,694			1,589			71		73		185		193
Expected return on plan assets		(2,563	)		(2,437	)		0		0		0		0
Amortization of prior service cost		6			6			29		29		16		16
Amortization of transition obligation (asset)		0			0			0		0		28		28
Amortization of net actuarial loss		1,020			595			36		25		0		0
Curtailments/settlements		0			0			0		0		0		0

Net periodic benefit cost	$	1,405		$	1,154		$	167	$	160	$	423	$	428


	Six Months Ended June 30,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2011			2010			2011		2010		2011		2010
Service cost	$	2,496		$	2,802		$	62	$	66	$	388	$	382
Interest cost		3,388			3,178			142		146		370		386
Expected return on plan assets		(5,126	)		(4,874	)		0		0		0		0
Amortization of prior service cost		12			12			58		58		32		32
Amortization of transition obligation (asset)		0			0			0		0		56		56
Amortization of net actuarial loss		2,040			1,190			72		50		0		0
Curtailments/settlements		0			0			0		0		0		0

Net periodic benefit cost	$	2,810		$	2,308		$	334	$	320	$	846	$	856

Employer Contributions

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

NOTE 9. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Susquehanna is exposed to certain risks arising from both its business operations and economic conditions, and principally manages its exposures through management of its core business activities. Susquehanna manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, Susquehanna enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Susquehanna's derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to certain variable-rate liabilities. Susquehanna also has derivatives

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

that are a result of a service it provides to certain qualifying customers, and therefore, are not used to manage interest-rate risk in its assets or liabilities. Susquehanna manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net exposure resulting from such transactions. All derivatives are recorded at fair value.

Cash Flow Hedges of Interest Rate Risk

Susquehanna's objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of its variable-rate borrowings, Susquehanna uses interest rate swaps designated as cash flow hedges that involve the receipt of variable amounts from a counterparty in exchange for fixed-rate payments from Susquehanna. As of June 30, 2011, Susquehanna had eight interest rate swaps with an aggregate notional amount of $667,227 that were designated as cash flow hedges of interest-rate risk. One of these interest rate swaps, with a notional amount of $42,227 and a fair value of $98, relates to a consolidated variable interest entity.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During the first six months of 2011, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings, federal funds borrowings, and long-term debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Amounts recorded in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Susquehanna's variable-rate liabilities. During the next 12 months, Susquehanna estimates that $17,856 will be reclassified as an increase to interest expense.

Non-designated Derivatives

Susquehanna does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are used to manage Susquehanna's exposure to interest rate movements and other identified risks but do not meet the strict requirements of hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly in earnings.

Susquehanna has interest rate derivatives, including interest rate swaps and option products, resulting from a service it provides to certain customers with high-quality credit ratings. Susquehanna executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. The credit risk associated with derivatives executed with these customers is essentially the same as that involved in extending loans and is subject to our normal credit policies. Susquehanna obtains collateral based upon its assessment of the customers’ credit quality. Those derivatives are simultaneously hedged by offsetting derivatives that Susquehanna executes with a third party to minimize Susquehanna's net risk exposure resulting from those transactions. At June 30, 2011, Susquehanna had 86 derivative transactions related to this program with an aggregate notional amount of $495,811. For the first six months of 2011, Susquehanna recognized a net loss of $34 related to changes in fair value of the derivatives in this program. For the first six months of 2010, Susquehanna recognized a net gain of $71 related to changes in fair value of the derivatives in this program.

Credit-risk-related Contingent Features

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

•

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

•

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

•

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

•

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

•

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

At June 30, 2011, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $40,712. At June 30, 2011, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $48,560. If Susquehanna had breached any of the above provisions at June 30, 2011, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

Fair Values of Derivative Instruments

June 30, 2011

Asset Derivatives

Liability Derivatives

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

Derivatives designated as hedging instruments

Interest rate contracts

Other assets

Other liabilities

37,544

Derivatives not designated or qualifying as hedging instruments

Interest rate contracts

Other assets

17,022

Other liabilities

16,399

Total derivatives

17,120

53,943

December 31, 2010

Asset Derivatives

Liability Derivatives

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

Derivatives designated as hedging instruments

Interest rate contracts

Other assets

181

Other liabilities

31,793

Derivatives not designated or qualifying as hedging instruments

Interest rate contracts

Other assets

17,167

Other liabilities

16,767

Total derivatives

17,348

48,560

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The Effect of Derivative Instruments on the Statement of Income

Three months ended June 30, 2011


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)	Amount of Gain Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(8,610	)		Interest expense		$	(6,149	)	Other expense	$	321

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Loss Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	(374	)
		Other expense			(121	)
Three months ended June 30, 2010

Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)	Amount of Loss Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(16,324	)		Interest expense		$	(2,098	)	Other expense	$	(69	)

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Gain Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	625

Six months ended June 30, 2011

Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Gain Recognized in Income (Ineffective Portion)	Amount of Gain Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(4,775	)		Interest expense		$	(7,625	)	Other expense	$	218

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Gain (Loss) Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	515
		Other expense			(123	)

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Six months ended June 30, 2010


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income		Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)	Amount of Loss Recognized in Income (Ineffective Portion)

Interest rate contracts:	$	(23,388	)		Interest expense	$	(2,465	)	Other expense	$	(461	)

Derivatives not designated or qualifying as hedging instruments	Location of Gain Recognized in Income on Derivatives			Amount of Gain Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	71

NOTE 10. Securitizations and Variable Interest Entities ("VIEs")

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

2006 Transaction

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2005 Transaction

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

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

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


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

Total loans and leases serviced	$	9,636,235	$	9,635,745	$	241,293	$	241,494	$	65,750	$	75,017

(1)	Includes nonaccrual loans and leases, foreclosed real estate, and loans and leases past due 90 days and still accruing.

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


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

NOTE 11. Fair Value Disclosures

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Securities

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

Derivatives

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


			Fair Value Measurements at Reporting Date Using
Description	June 30, 2011		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	301,765	$	0	$	301,765	$	0
Obligations of states and political subdivisions		410,381				410,381
Agency residential mortgage-backed securities		1,538,922				1,538,922
Non-agency residential mortgage-backed securities		83,679				83,679
Commercial mortgage-backed securities		69,080				69,080
Other structured financial products		14,133				0		14,133
Other debt securities		49,312				49,312
Equity securities of the FHLB		73,079				73,079
Equity securities of the FRB		50,225				50,225
Other equity securities		24,627		2,491		18,737		3,399
Derivatives: (1)
Designated as hedging instruments		98				98
Not designated or qualifying as hedging instruments		17,022				17,022

Total	$	2,632,323	$	2,491	$	2,612,300	$	17,532

Liabilities
Derivatives: (2)
Designated as hedging instruments	$	37,544	$	0	$	37,544	$	0
Not designated or qualifying as hedging instruments		16,399				16,399

Total	$	53,943	$	0	$	53,943	$	0

(1)	Included in Other assets

(2)	Included in Other liabilities

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


			Fair Value Measurements at Reporting Date Using
Description	December 31, 2010		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	268,175	$	0	$	268,175	$	0
Obligations of states and political subdivisions		396,660				396,660
Agency residential mortgage-backed securities		1,323,569				1,323,569
Non-agency residential mortgage-backed securities		116,811				116,811
Commercial mortgage-backed securities		104,842				104,842
Other structured financial products		12,503				0		12,503
Other debt securities		41,000				41,000
Equity securities of the FHLB		71,065				71,065
Equity securities of the FRB		50,225				50,225
Other equity securities		24,093		2,446		18,266		3,381
Derivatives: (1)
Designated as hedging instruments		181				181
Not designated or qualifying as hedging instruments		17,167				17,167

Total	$	2,426,291	$	2,446	$	2,407,961	$	15,884

Liabilities
Derivatives: (2)
Designated as hedging instruments	$	31,793	$	0	$	31,793	$	0
Not designated or qualifying as hedging instruments		16,767				16,767

Total	$	48,560	$	0	$	48,560	$	0

(1)	Included in Other assets

(2)	Included in Other liabilities

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


	Available-for-sale Securities
	Equity Securities					Other Structured Financial Products			Total
Balance at April 1, 2011	$	3,399				$	13,992		$	17,391
Total gains or losses (realized/unrealized):
Included in other comprehensive income (before taxes)		0					141			141

Balance at June 30, 2011	$	3,399				$	14,133		$	17,532


	Available-for-sale Securities
	Equity Securities			Synthetic Collateralized Debt Obligations		Other Structured Financial Products			Total
Balance at April 1, 2010	$	4,081		$	734	$	13,407		$	18,222
Total gains or losses (realized/unrealized):
Included in other comprehensive income (before taxes)		(525	)		842		(2,454	)		(2,137	)

Balance at June 30, 2010	$	3,556		$	1,576	$	10,953		$	16,085

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


	Available-for-sale Securities
	Equity Securities						Other Structured Financial Products									Total
Balance at January 1, 2011	$	3,381					$	12,503								$	15,884
Total gains or losses (realized/unrealized):
Included in other comprehensive income (before taxes)		18						1,630									1,648

Balance at June 30, 2011	$	3,399					$	14,133								$	17,532


	Available-for-sale Securities
	Equity Securities			Synthetic Collateralized Debt Obligations			Other Structured Financial Products			Non-agency Residential Mortgage- backed Securities			Interest-only Strips			Total
Balance at January 1, 2010	$	4,081		$	1,331		$	14,113		$	2,111		$	17,840		$	39,476
Adjustments relating to the consolidation of variable interest entities											(2,111	)		(17,840	)		(19,951	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment (1)					(557	)											(557	)
Included in other comprehensive income (before taxes)		(525	)		802			(3,160	)								(2,883	)

Balance at June 30, 2010	$	3,556		$	1,576		$	10,953		$	0		$	0		$	16,085

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

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

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

Foreclosed Real Estate

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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


Description	June 30, 2011		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	93,919	$	0	$	0	$	93,919
Foreclosed real estate		27,953		0		0		27,953

	$	121,872	$	0	$	0	$	121,872

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


Description	December 31, 2010		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	103,818	$	0	$	0	$	103,818
Foreclosed real estate		18,489		0		0		18,489

	$	122,307	$	0	$	0	$	122,307

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

Additional Disclosures about Fair Value of Financial Instruments

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

Cash and due from banks and short-term investments

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

Investment securities

Refer to the above discussion on securities.

Loans and leases

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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Deposits

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

Short-term borrowings

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

FHLB borrowings and long-term debt

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

Derivatives

Refer to the above discussion on derivatives.

Off-balance-sheet items

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

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


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

NOTE 12. Share-based Compensation

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


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

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

NOTE 13. Income Taxes

Susquehanna's provision for income taxes during interim reporting periods historically has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (pre-tax income or loss excluding significant, unusual or infrequently occurring items) for the reporting period. For the reporting period ended June 30, 2011, Susquehanna has computed its provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. Susquehanna determined that, as small changes in estimated "ordinary" income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended June 30, 2011. The actual effective rate for the reporting period ended June 30, 2011 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate below statutory rates for the interim reporting periods.

NOTE 14. Loss Contingency

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

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

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

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, general economic conditions, the impact of new regulations on our business, our potential exposures to various types of market risks, such as interest rate risk and credit risk; whether our allowance for loan and lease losses is adequate to meet probable loan and lease losses; whether we will be required to sell available-for-sale securities that are in an unrealized loss position; our ability to achieve loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to maintain market share through monitoring our time-deposit portfolio; and our ability to achieve our 2011 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

•

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

•

adverse changes in regional real estate values;

•

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

•

decreases in our loan and lease quality and origination volume;

•

the adequacy of loss reserves;

•

impairment of goodwill or other assets;

•

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

•

continued relationships with major customers;

•

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

•

adverse international, national, and regional economic and business conditions;

•

compliance with laws and regulatory requirements of federal and state agencies;

•

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

•

the ability to hedge certain risks effectively and economically;

•

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

•

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

•

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

•

the impact of federal laws and related rules and regulations on our business operations and competitiveness;

•

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

•

the effects on the economy regarding the U.S. government’s response to the debt ceiling;

•

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

•

the timing of the consummation of the pending mergers with each of Tower Bancorp, Inc. and Abington Bancorp, Inc., or failure to consummate either or both of the mergers; and

•

our success in managing the risks involved in the foregoing.

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

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

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

Availability of Information

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

Executive Overview

The prolonged economic downturn continues to impact customers in our markets, as well as our own financial performance. Our results for the first six months of 2011 have been impacted by a number of issues related to this downturn, including an elevated (when viewed from an historical perspective) provision for loan and lease losses and related credit costs. We have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered “well-capitalized.”

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

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

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

Updated Financial Goals for 2011 (1)


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

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

Pending Acquisitions

Agreement to Acquire Tower Bancorp, Inc.

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

Agreement to Acquire Abington Bancorp, Inc.

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

Results of Operations

Summary of 2011 Compared to 2010

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

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

Additional information is as follows:


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

(1)

Supplemental Reporting of Non-GAAP-based Financial Measures

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Return on average equity (GAAP basis)		2.22	%		1.01	%		2.11	%		1.25	%
Effect of excluding average intangible assets and related amortization		3.02	%		1.56	%		2.94	%		1.90	%
Return on average tangible equity		5.24	%		2.57	%		5.05	%		3.15	%

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential—taxable equivalent basis


	For the Three-Month Period Ended June 30, 2011							For the Three-Month Period Ended June 30, 2010
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	78,447		$	23		0.12	$	95,959		$	39		0.16
Investment securities:
Taxable		2,064,971			16,022		3.11		1,579,983			14,420		3.66
Tax-advantaged		408,130			6,206		6.10		329,841			5,187		6.31

Total investment securities		2,473,101			22,228		3.61		1,909,824			19,607		4.12

Loans and leases, (net):
Taxable		9,315,101			124,424		5.36		9,618,981			133,599		5.57
Tax-advantaged		305,219			4,270		5.61		261,170			4,082		6.27

Total loans and leases		9,620,320			128,694		5.37		9,880,151			137,681		5.59

Total interest-earning assets		12,171,868			150,945		4.97		11,885,934			157,327		5.31

Allowance for loan and lease losses		(200,983	)						(182,985	)
Other non-earning assets		2,064,823							2,124,506

Total assets	$	14,035,708						$	13,827,455

Liabilities
Deposits:
Interest-bearing demand	$	3,652,558			5,324		0.58	$	3,445,011			5,679		0.66
Savings		806,682			300		0.15		778,373			301		0.16
Time		3,500,813			14,109		1.62		3,699,050			21,072		2.28
Short-term borrowings		667,856			1,837		1.10		503,082			536		0.43
FHLB borrowings		1,115,754			10,829		3.89		1,024,326			11,098		4.35
Long-term debt		690,573			8,793		5.11		726,994			9,165		5.06

Total interest-bearing liabilities		10,434,236			41,192		1.58		10,176,836			47,851		1.89

Demand deposits		1,381,708							1,291,607
Other liabilities		219,369							221,338

Total liabilities		12,035,313							11,689,781
Shareholders’ equity		2,000,395							2,137,674

Total liabilities and shareholders’ equity	$	14,035,708						$	13,827,455

Net interest income / yield on average earning assets				$	109,753		3.62				$	109,476		3.69

(1) Additional Information

Average loan balances include non-accrual loans.

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

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

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential—taxable equivalent basis


	For the Six-Month Period Ended June 30, 2011							For the Six-Month Period Ended June 30, 2010
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	78,896		$	52		0.13	$	88,490		$	73		0.17
Investment securities:
Taxable		2,072,186			32,724		3.18		1,539,668			29,424		3.85
Tax-advantaged		403,239			12,285		6.14		336,618			10,863		6.51

Total investment securities		2,475,425			45,009		3.67		1,876,286			40,287		4.33

Loans and leases, (net):
Taxable		9,303,458			248,532		5.39		9,676,952			267,226		5.57
Tax-advantaged		298,851			8,409		5.67		259,727			8,085		6.28

Total loans and leases		9,602,309			256,941		5.40		9,936,679			275,311		5.59

Total interest-earning assets		12,156,630			302,002		5.01		11,901,455			315,671		5.35

Allowance for loan and lease losses		(196,125	)						(178,960	)
Other non-earning assets		2,040,417							2,093,304

Total assets	$	14,000,922						$	13,815,799

Liabilities
Deposits:
Interest-bearing demand	$	3,669,649			10,843		0.60	$	3,399,548			11,104		0.66
Savings		793,655			593		0.15		764,728			587		0.15
Time		3,468,520			29,290		1.70		3,719,618			43,794		2.37
Short-term borrowings		707,588			3,734		1.06		659,370			1,295		0.40
FHLB borrowings		1,108,100			21,221		3.86		1,000,170			20,734		4.18
Long-term debt		695,522			17,969		5.21		710,689			17,003		4.82

Total interest-bearing liabilities		10,443,034			83,650		1.62		10,254,123			94,517		1.86

Demand deposits		1,360,757							1,257,885
Other liabilities		205,107							221,252

Total liabilities		12,008,898							11,733,260
Shareholders’ equity		1,992,024							2,082,539

Total liabilities and shareholders’ equity	$	14,000,922						$	13,815,799

Net interest income / yield on average earning assets				$	218,352		3.62				$	221,154		3.75

(1) Additional Information

Average loan balances include non-accrual loans.

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

Net Interest Income-Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. (Net interest income as a percentage of net interest income plus noninterest

income was 74.1% for the quarter ended June 30, 2011 and 73.5% for the quarter ended June 30, 2010. Net interest income as a percentage of net interest income plus noninterest income was 73.9% for the six months ended June 30, 2011 and 73.6% for the six months ended June 30, 2010.) Income from earning assets includes income from loans, investment securities, and short-term investments. The amount of interest income is dependent upon many factors, including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and the levels of non-performing loans. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, the rates paid on borrowed funds, and the levels of noninterest-bearing demand deposits and equity capital. Table 1 above presents average balances, taxable equivalent interest income and expense, and yields earned or paid on these assets and liabilities. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates.

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

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

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

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management’s estimate of probable incurred losses in the loan and lease portfolio. Our provision for loan and lease losses is based upon management’s quarterly review of the loan and lease portfolio. The purpose of the review is to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets we serve. Detailed information about the allowance for loan and lease losses is presented in Table 2.

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

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at June 30, 2011.

There can be no assurance, however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at June 30, 2011.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(dollars in thousands)
Balance - Beginning of period	$	193,233		$	178,819		$	191,834		$	172,368
Additions		28,000			43,000			63,000			88,000
Charge-offs:
Commercial, financial, and agricultural		(10,048	)		(9,197	)		(14,941	)		(14,233	)
Real estate - construction		(8,978	)		(13,275	)		(19,962	)		(25,958	)
Real estate secured - residential		(5,648	)		(3,465	)		(10,128	)		(9,602	)
Real estate secured - commercial		(10,654	)		(11,845	)		(26,734	)		(26,573	)
Consumer		(386	)		(1,137	)		(2,692	)		(2,234	)
Leases		(1,397	)		(2,347	)		(3,140	)		(5,010	)

Total charge-offs		(37,111	)		(41,266	)		(77,597	)		(83,610	)

Recoveries:
Commercial, financial, and agricultural		910			1,496			2,103			2,740
Real estate - construction		2,626			1,477			5,456			2,847
Real estate secured - residential		606			403			1,283			557
Real estate secured - commercial		187			1,314			1,825			1,512
Consumer		319			366			546			841
Leases		522			186			842			540

Total recoveries		5,170			5,242			12,055			9,037

Net charge-offs		(31,941	)		(36,024	)		(65,542	)		(74,573	)

Balance - Period end	$	189,292		$	185,795		$	189,292		$	185,795

Net charge-offs as a percentage of average loans and leases (annualized)		1.33	%		1.46	%		1.38	%		1.51	%
Allowance as a percentage of period-end loans and leases		1.96	%		1.90	%		1.96	%		1.90	%
Average loans and leases	$	9,620,320		$	9,880,151		$	9,602,309		$	9,936,679
Period-end loans and leases		9,636,187			9,787,056			9,636,187			9,787,056

Noninterest Income

Second Quarter 2011 Compared to Second Quarter 2010

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

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

•

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

•

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

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

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

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

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

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

•

Increased commissions on property and casualty insurance sales of $1.2 million;

•

Increased gains on the sale of loans and leases of $1.7 million;

•

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

•

Increased other of $2.2 million.

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

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

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

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

Noninterest Expenses

Second Quarter 2011 Compared to Second Quarter 2010

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

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

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

Income Taxes

Our provision for income taxes during interim reporting periods historically has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding significant, unusual or infrequently occurring items) for the reporting period. For the reporting period ended June 30, 2011, we have computed our provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. We determined that, as small changes in estimated “ordinary” income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended June 30, 2011. The actual effective rate for the reporting period ended June 30, 2011 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate below statutory rates for the interim reporting periods.

Financial Condition

Summary of June 30, 2011 Compared to December 31, 2010

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

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

At June 30, 2011, we had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. For additional information about our financial assets and financial liabilities carried at fair value, refer to “Note 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

For information about our investment securities portfolio, refer to “Note 3. Investment Securities” and “Note 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

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

Risk Assets

Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets


	June 30, 2011			December 31, 2010			June 30, 2010
	(dollars in thousands)
Nonperforming assets:
Nonaccrual loans and leases:
Commercial, financial, and agricultural	$	18,219		$	20,012		$	24,917
Real estate - construction		44,305			57,779			89,476
Real estate secured - residential		51,047			50,973			48,213
Real estate secured - commercial		73,346			65,313			70,785
Consumer		0			1			4
Leases		3,816			2,817			3,983

Total nonaccrual loans and leases		190,733			196,895			237,378
Foreclosed real estate		27,953			18,489			17,379

Total nonperforming assets	$	218,686		$	215,384		$	254,757

Nonperforming assets as a percentage of period-end loans and leases plus foreclosed real estate		2.26	%		2.23	%		2.60	%
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases		99	%		97	%		78	%
Loans and leases contractually past due 90 days and still accruing	$	18,268		$	20,588		$	13,039
Troubled debt restructurings		62,143			114,566			79,595

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

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

Of the $192.7 million of impaired loans (nonaccrual, non-consumer loan relationships greater than $0.5 million plus accruing restructured loans), $79.8 million, or 41.4%, had no related reserve (refer to “Note 4. Loans and Leases – Impaired Loans” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.) The determination that no related reserve for collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

At June 30, 2011, real estate – construction loans comprised only 8.0% of our total loan and lease portfolio, but accounted for 23.2% of nonaccrual loans and leases and 23.5% of our allowance for loan and lease losses. In addition, for the six months ended June 30, 2011, this loan type accounted for 22.1% of total net charge-offs. As a result, we consider real estate - construction loans to be higher-risk loans. Additional information about our real estate – construction loan portfolio is presented in Tables 4, 5, and 6. Categories within these tables are defined as follows:

•

Construction loans – loans used to fund vertical construction for residential and non-residential structures;

•

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

•

Raw land – loans secured by land for which there are neither approvals nor site improvements.

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


Category	Balance at June 30, 2011		% of Total Construction			Past Due 30-89 Days			Past Due 90 Days and Still Accruing			Nonaccrual			Other Internally Monitored (1)			Net Charge-offs (2)			Reserve (3)
	(dollars is thousands)
1-4 Family:
Construction	$	172,998		22.3	%		0.1	%		1.8	%		12.3	%		18.1	%		10.5	%		6.5	%
Land development		184,539		23.8			0.4			0.0			0.4			15.9			1.5			5.9
Raw land		6,126		0.8			37.0			0.0			0.1			5.4			24.4			7.6

		363,663		46.9			0.9			0.9			6.1			16.8			6.5			6.2

All Other:
Construction:
Investor		164,478		21.2			0.0			0.0			0.2			2.5			6.5			5.6
Owner-occupied		17,394		2.2			1.3			0.0			0.0			0.0			1.5			4.8
Land development:
Investor		175,032		22.6			0.0			0.0			7.5			27.5			9.1			4.3
Owner-occupied		15,374		2.0			0.0			0.0			0.0			5.5			0.2			6.1
Raw land:
Investor		38,665		5.0			0.0			0.0			22.8			18.6			4.3			8.2
Owner-occupied		490		0.1			0.0			0.0			0.0			0.0			0.0			0.5

		411,433		53.1			0.1			0.0			5.4			14.7			7.0			5.3

Total	$	775,096		100.0			0.4			0.4			5.7			15.7			6.7			5.7

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

(2)	Represents the amount of net charge-offs in each category for the last twelve months divided by the category loan balance at June 30, 2011 plus the net charge-offs.

(3)	Represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at June 30, 2011.

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


	Balance at June 30, 2011		Geographical Location by %
Category	Balance at June 30, 2011		Maryland			New Jersey			Pennsylvania			Other
	(dollars in thousands)
1-4 Family:
Construction	$	172,998		53.7	%		4.3	%		36.9	%		5.1	%
Land development		184,539		46.7			5.7			37.5			10.1
Raw land		6,126		37.1			3.1			59.8			0.0

		363,663		49.9			5.0			37.6			7.6

All Other:
Construction:
Investor		164,478		34.5			15.7			48.1			1.8
Owner-occupied		17,394		15.7			16.5			67.8			0.0
Land development:
Investor		175,032		20.0			2.2			57.3			20.5
Owner-occupied		15,374		75.7			0.0			24.3			0.0
Raw land:
Investor		38,665		22.2			13.2			64.0			0.6
Owner-occupied		490		87.3			0.0			12.7			0.0

		411,433		28.0			9.2			53.4			9.5

Total	$	775,096		38.2			7.2			46.0			8.6

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


Category	Balance at June 30, 2011		Global Debt Coverage Ratio Less than 1.1 Times (1)			Average Loan to Value (current)
	(dollars in thousands)
1-4 Family:
Construction	$	172,998		25.4	%		78.5	%
Land development		184,539		6.6			67.8
Raw land		6,126		14.1			70.8

		363,663		15.7			74.4

All Other:
Construction:
Investor		164,478		0.5			71.5
Owner-occupied		17,394		0.0			64.2
Land development:
Investor		175,032		27.2			65.9
Owner-occupied		15,374		29.8			57.4
Raw land:
Investor		38,665		20.1			72.2
Owner-occupied		490		0.0			85.7

		411,433		15.1			68.1

	$	775,096		15.4			71.5

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

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

•

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

•

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

•

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

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

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

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

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

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

We continue to aggressively review our portfolio, contact customers to evaluate their financial situation, and where necessary, to work with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We believe that the remainder of 2011 will be challenging, with the volatility of key commodity prices and its impact on the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame and to minimize the effect on our earnings.

Goodwill

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

We performed our annual goodwill impairment tests in the second quarter of 2011 and determined that the fair value of each of our reporting units exceeded its book value, and there was no goodwill impairment. For additional information about goodwill, refer to “Note 5. Goodwill” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Deposits

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

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

Shareholders’ Equity

Repurchase of Warrant from the U.S. Treasury

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

Capital Adequacy

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

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

Our capital ratios are as follows:

Table 8. Regulatory Capital Ratios


	At June 30, 2011			Well-capitalized Threshold			Preliminary Minimum Basel III Requirements
Tangible Common Ratio (1)		7.75	%		N/A			N/A
Tier 1 Common Ratio		9.65	%		N/A			7.0	%
Leverage Ratio		10.37	%		5.0	%		4.0	%
Tier 1 Capital Ratio		12.68	%		6.0	%		8.5	%
Total Risk-based Capital Ratio		14.75	%		10.0	%		10.5	%

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

Loss Contingency

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

Recently Adopted or Issued Accounting Guidance

For information about the impact that recently adopted or issued accounting guidance will have on our financial statements, refer to “Note 1. Accounting Policies” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Equity Market Price Risk

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

Liquidity Risk

The maintenance of adequate liquidity — the ability to meet the cash requirements of our customers and other financial commitments — is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources — purchased funds, repurchase agreements, and deposit accounts — allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At June 30, 2011, our bank subsidiary had approximately $655.3 million available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and approximately $526.3 million more would have been available provided that additional collateral had been pledged. Furthermore, at June 30, 2011, we had unused federal funds lines of $943.0 million.

In addition, we have pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment securities to obtain collateralized borrowing availability at the Federal Reserve’s Discount Window. At June 30, 2011, we had unused collateralized availability of $985.1 million.

Liquidity, however, is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $29.1 million at June 30, 2011 and represented additional sources of liquidity.

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

Interest Rate Risk

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

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

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Board’s approved guidelines at an up 300 basis point shock. At June 30, 2011, our asset/liability position was asset sensitive.

Derivative Financial Instruments and Hedging Activities

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

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

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

Vehicle Leasing Residual Value Risk

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

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures

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

(b)

Change in Internal Control Over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Shareholder Litigation Related to the Merger with Abington

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

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

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

Shareholder Litigation Related to the Merger with Tower

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

On July 8, 2011, a purported shareholder of Tower, James T. Duffey, served a written demand (“Duffey Demand”) on Tower’s board of directors requesting that the board remedy its alleged failure to engage in an independent and fair process surrounding the merger and requesting the formation of a special committee to renegotiate the terms of the merger. Tower has acknowledged receipt of the Duffey Demand and is in the process of reviewing the request.

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

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

Other Legal Proceedings

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

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. In addition to those risk factors, Susquehanna shareholders carefully should consider the following additional risk factors:

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

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

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

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

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

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

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

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

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

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

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

•

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

•

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

•

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

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

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

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

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

Risks Relating to Combined Operations Following the Tower Merger

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

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

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

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Reserved

Item 5. Other Information.

None.

Item 6. Exhibits.

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



2.1		Agreement and Plan of Merger between Susquehanna and Tower Bancorp, Inc., dated June 20, 2011, incorporated by reference to Exhibit 2.1 of Susquehanna’s Current Report on Form 8-K, filed June 21, 2011.

3.1		Amended and Restated Articles of Incorporation, dated May 6, 2011, is filed herewith as Exhibit 3.1.

3.2		Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.

31.1		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.

31.2		Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.

32		Section 1350 Certifications are filed herewith as Exhibit 32.

SIGNATURES

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


				SUSQUEHANNA BANCSHARES, INC.

August 5, 2011				/s/ WILLIAM J. REUTER
				William J. Reuter
				Chairman and Chief Executive Officer

August 5, 2011				/s/ DREW K. HOSTETTER
				Drew K. Hostetter
				Executive Vice President, Treasurer, and Chief Financial Officer

EXHIBIT INDEX


Exhibit Numbers		Description and Method of Filing

2.1		Agreement and Plan of Merger between Susquehanna and Tower Bancorp, Inc., dated June 20, 2011, incorporated by reference to Exhibit 2.1 of Susquehanna’s Current Report on Form 8-K, filed June 21, 2011.

3.1		Amended and Restated Articles of Incorporation, dated May 6, 2011, is filed herewith as Exhibit 3.1.

3.2		Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.

31.1		Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.

31.2		Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.

32		Section 1350 Certifications are filed herewith as Exhibit 32.

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