Susquehanna Bancshares (SUSQ) 10-Q 2002 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended            September 30, 2002                                         

OR

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

For the transition period from                                        to                                             

Commission file number0-10674    

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

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

39,618,218 shares of common stock, par value $2.00 per share, as of October 31, 2002

SUSQUEHANNA BANCSHARES, INC.

INDEX

		Page Number
PART I.	FINANCIAL INFORMATION	3
Item 1	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets — as of September 30, 2002 and 2001, and December 31, 2001	3
	Consolidated Statements of Income — for the three and nine month periods ended September 30, 2002 and 2001	4
	Consolidated Statements of Cash Flow — for the three and nine month periods ended September 30, 2002 and 2001	5
	Notes to Consolidated Financial Statements	6
Item 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION	10
Item 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
Item 4	CONTROLS AND PROCEDURES	23
PART II.	OTHER INFORMATION	24
Item 6	EXHIBITS AND REPORTS ON FORM 8-K	24
	SIGNATURES	25
	CERTIFICATIONS	26
	EXHIBIT INDEX	30

2

PART I.FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)	September 30, 2002		December 31, 2001		September 30, 2001
ASSETS
Cash and due from banks	$	183,538	$	149,233	$	107,341
Short-term investments:
Restricted		31,665		41,584		41,251
Unrestricted		19,957		46,981		26,711
Total short-term investments		51,622		88,565		67,962
Investment securities available for sale, at fair value		1,082,175		1,019,313		1,031,212
Investment securities held to maturity, at amortized cost		3,641		1,778		1,822
(Fair values of $3,641; $1,778; and $1,822)
Loans and leases, net of unearned income		3,756,659		3,519,498		3,532,316
Less: Allowance for loan and lease losses		39,487		37,698		38,332
Net loans and leases		3,717,172		3,481,800		3,493,984
Premises and equipment (net)		59,877		60,063		57,968
Accrued income receivable		20,167		21,268		22,344
Bank-owned life insurance		124,564		120,174		118,530
Goodwill		54,865		43,946		40,852
Intangible assets with finite lives		5,155		5,172		2,234
Other assets		122,842		97,642		101,701
Total assets	$	5,425,618	$	5,088,954	$	5,045,950
LIABILITIES
Deposits:
Demand	$	573,494	$	529,162	$	484,712
Interest-bearing demand		1,037,214		915,080		809,747
Savings		461,725		435,959		419,526
Time		1,355,002		1,322,494		1,306,859
Time of $100 or more		337,655		281,636		290,988
Total deposits		3,765,090		3,484,331		3,311,832
Short-term borrowings		273,587		169,803		219,268
FHLB borrowings		546,869		570,580		560,739
Vehicle financing		59,463		171,462		261,851
Long-term debt		105,000		105,000		105,000
Accrued interest, taxes, and expenses payable		36,184		36,652		50,224
Other liabilities		111,367		57,590		47,239
Total liabilities		4,897,560		4,595,418		4,556,153
STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,614,548; 39,398,190; and 39,398,190, respectively		79,229		78,796		78,796
Surplus		62,164		57,986		57,769
Retained earnings		368,158		345,508		338,695
Accumulated other comprehensive income, net of taxes of $9,811; $6,928; and $8,510, respectively		18,507		12,009		15,805
Less: Treasury stock, (none; 54,115; and 89,900 common shares at cost, respectively)		0		763		1,268
Total stockholders' equity		528,058		493,536		489,797
Total liabilities and stockholders' equity	$	5,425,618	$	5,088,954	$	5,045,950

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

3

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share)	2002		2001		2002		2001
INTEREST INCOME
Interest and fees on loans and leases	$	65,622	$	71,111	$	195,646	$	214,798
Interest on investment securities: Taxable		12,572		14,016		39,688		37,612
Tax-exempt		587		801		1,909		2,550
Interest on short-term investments		347		755		1,047		2,949
Total interest income		79,128		86,683		238,290		257,909
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand		3,404		4,215		9,312		14,862
Savings		1,081		1,503		3,261		5,096
Time		16,293		20,885		50,445		64,637
Interest on short-term borrowings		945		1,932		2,417		6,994
Interest on FHLB borrowings		7,126		7,002		21,805		16,359
Interest on vehicle financing		1,090		5,269		5,684		16,751
Interest on long-term debt		2,002		1,951		5,995		5,835
Total interest expense		31,941		42,757		98,919		130,534
Net interest income		47,187		43,926		139,371		127,375
Provision for loan and lease losses		2,372		1,740		7,079		5,419
Net interest income after provision for loan and lease losses		44,815		42,186		132,292		121,956
OTHER INCOME
Service charges on deposit accounts		4,288		3,538		12,338		9,809
Vehicle origination and servicing fees		5,609		6,804		19,505		18,856
Merchant credit card fees		1,861		1,764		8,328		7,883
Asset management fees		2,353		2,513		7,326		6,115
Income from fiduciary-related activities		1,168		1,445		3,666		3,976
Gain on sale of loans and leases		1,490		605		3,629		3,562
Income from bank-owned life insurance		1,624		1,734		4,972		4,814
Commissions on insurance sales		1,816		0		1,816		0
Other operating income		2,808		2,121		8,117		7,219
Investment security gains/(losses)		643		272		788		272
Total other income		23,660		20,796		70,485		62,506
OTHER EXPENSES
Salaries and employee benefits		21,469		18,525		60,880		54,713
Net occupancy expense		3,103		2,805		9,278		8,565
Furniture and equipment expense		2,083		2,155		6,302		6,169
Amortization of intangible assets		157		894		483		2,653
Vehicle residual value expense		1,569		1,164		4,839		3,708
Vehicle delivery and preparation expense		2,541		1,128		6,149		3,456
Merchant credit card servicing expense		1,687		1,662		7,937		7,486
Other operating expenses		13,149		13,721		40,077		37,798
Total other expenses		45,758		42,054		135,945		124,548
Income before income taxes		22,717		20,928		66,832		59,914
Provision for income taxes		6,842		6,593		20,518		18,873
NET INCOME	$	15,875	$	14,335	$	46,314	$	41,041
Per share information:
Basic earnings	$	0.40	$	0.36	$	1.17	$	1.05
Diluted earnings	$	0.40	$	0.36	$	1.16	$	1.04
Cash dividends	$	0.20	$	0.19	$	0.60	$	0.57
Average shares outstanding: Basic		39,610		39,285		39,447		39,244
Diluted		40,030		39,732		39,907		39,555

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

4

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands) Nine months ended September 30,	2002			2001
OPERATING ACTIVITIES:
Net income	$	46,314		$	41,041
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		11,336			9,407
Provision for loan and lease losses		7,079			5,419
(Gain)/loss on securities transactions		(788	)		(272	)
Gain on sale of loans		(3,629	)		(5,314	)
(Gain)/loss on sale of other real estate owned		(176	)		(190	)
Mortgage loans originated for resale		(83,154	)		(82,037	)
Sale of mortgage loans originated for resale		81,855			87,300
Leases acquired/originated for resale		(121,300	)		(116,643	)
Sale of leases acquired/originated for resale		123,000			118,392
Decrease in accrued interest receivable		1,101			4,431
Increase in accrued interest payable		(3,595	)		(5,971	)
Decrease in accrued expenses and taxes payable		3,127			13,813
Other, net		19,310			(19,102	)
Net cash provided by operating activities		80,480			50,274
INVESTING ACTIVITIES:
Net decrease/(increase) in restricted short-term investments		9,919			(8,520	)
Proceeds from the sale of available-for-sale securities		19,973			0
Proceeds from the maturity of investment securities		206,598			364,032
Purchase of available-for-sale securities		(281,325	)		(474,075	)
Purchase of held-to-maturity securities		(1,863	)		0
Net increase in loans and leases		(240,777	)		(107,469	)
Net cash used in acquisitions		(7,000	)		0
Capital expenditures		(5,267	)		(3,217	)
Net cash used for investing activities		(299,742	)		(229,249	)
FINANCING ACTIVITIES:
Net increase in deposits		280,759			62,819
Net increase in short-term borrowings		103,784			13,932
Net increase/(decrease) in FHLB borrowings		(23,711	)		192,785
Net decrease in vehicle financing		(111,999	)		(95,671	)
Proceeds from issuance of long-term debt		0			5,000
Proceeds from issuance of common stock		1,375			1,123
Dividends paid		(23,665	)		(22,366	)
Net cash provided by financing activities		226,543			157,622
Net increase/(decrease) in cash and cash equivalents		7,281			(21,353	)
Cash and cash equivalents at January 1		196,214			155,405
Cash and cash equivalents at September 30	$	203,495		$	134,052
Cash and cash equivalents:
Cash and due from banks	$	183,538		$	107,341
Unrestricted short-term investments		19,957			26,711
Cash and cash equivalents at September 30	$	203,495		$	134,052

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

Interest paid on deposits, short-term borrowings, and long-term debt was $102,514 and $89,670 in 2002 and 2001, respectively. An income tax refund of $9,015 was received in 2002 and income taxes of $117 were paid in 2001. Amounts transferred to other real estate owned were $3,253 in 2002 and $2,791 in 2001.

5

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Nine months ended September 30	COMMON STOCK		SURPLUS			RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE INCOME			TREASURY STOCK			TOTAL EQUITY
Balance - January 1, 2001	$	78,796	$	57,872		$	320,020		$	(757	)	$	(2,494	)	$	453,437
Comprehensive income:
Net income							41,041									41,041
Change in unrealized gain/(loss) on securities, net of taxes of $4,216 and reclassification adjustment of $272										16,562						16,562
Total comprehensive income							41,041			16,562						57,603
Common stock issued under employee benefit plans				(103	)								1,226			1,123
Cash dividends paid:
Per common share of $0.57							(22,366	)								(22,366	)
Balance - September 30, 2001	$	78,796	$	57,769		$	338,695		$	15,805		$	(1,268	)	$	489,797
Balance - January 1, 2002	$	78,796	$	57,986		$	345,508		$	12,009		$	(763	)	$	493,536
Comprehensive income:
Net income							46,314									46,314
Change in unrealized gain/(loss) on securities, net of taxes of $2,886 and reclassification adjustment of $788										5,462						5,462
Unrealized gain on recorded interest in securitized assets, net of taxes of $36										1,036						1,036
Total comprehensive income							46,314			6,498						52,812
Common stock issued in acquisition		351		3,649												4,000
Common stock issued under employee benefit plans		82		529									763			1,374
Cash dividends paid:
Per common share of $0.60							(23,664	)								(23,664	)
Balance - September 30, 2002	$	79,229	$	62,164		$	368,158		$	18,507		$	—		$	528,058

ACCOUNTING POLICIES

The information contained in this report is unaudited and is subject to year-end adjustments. Certain prior year amounts have been reclassified to conform with current period classifications. The adjustments had no effect on gross revenues, gross expenses or net income. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended September 30, 2002 and 2001.

During the second quarter, management revised it's policy for evaluating loans for impairment. Previously all commercial loans greater than $100 were evaluated for impairment. Currently, only commercial loans greater than $250 will be evaluated for impairment.

Except as noted above, the accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 38 through 40 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

ACQUISITION

On June 28, 2002, Susquehanna completed the acquisition of The Addis Group, Inc. ("Addis"), an insurance brokerage located in King of Prussia, Pennsylvania, for $7.0 million in cash and $4.0 million in Susquehanna common stock. The acquisition was accounted for under the purchase method of accounting for business combinations. Goodwill of $10.9 million was realized in the acquisition. In this transaction, there are also contingent cash payments totaling $6.0 million. These contingent payments are based upon certain earnings targets and will be recorded as goodwill, if earned. No pro forma data is disclosed because the acquisition is not material to Susquehanna.

6

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENT SECURITIES

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

	September 30, 2002					December 31, 2001
	Amortized cost		Fair value			Amortized cost		Fair value
Available-for-sale:
U.S. Treasury	$	1,201	$	1,311		$	1,201	$	1,302
U.S. Government agencies		149,289		150,144			86,329		88,289
State & municipal		46,008		47,560			63,334		64,712
Mortgage-backed		828,419		847,580			799,266		808,981
Corporates		0		0			20,073		20,844
Equities		33,140		35,580			33,373		35,185
		1,058,057		1,082,175			1,003,576		1,019,313
Held-to-maturity:
State & municipal		3,641		3,641			1,778		1,778
		3,641		3,641			1,778		1,778
Total investment securities	$	1,061,698	$	1,085,816		$	1,005,354	$	1,021,091
LOANS AND LEASES
Loans and leases, net of unearned income at September 30, 2002 and December 31, 2001, were as follows:
			September 30, 2002					December 31, 2001
Commercial, financial, and agricultural			$	473,477				$	434,780
Real estate — construction				423,905					359,445
Real estate — mortgage				2,174,978					1,963,094
Consumer				351,080					325,170
Leases				333,219					437,009
Total loans and leases			$	3,756,659				$	3,519,498
Net investment in direct financing leases is as follows:
Minimum lease payments receivable			$	168,412				$	175,893
Estimated residual value of leases				199,787					299,433
Unearned income under lease contracts				(34,980	)				(38,317	)
Total leases			$	333,219				$	437,009
An analysis of impaired loans as of September 30, 2002 and December 31, 2001, is presented as follows:
			September 30, 2002					December 31, 2001
Impaired loans without a related reserve			$	6,134				$	7,252
Impaired loans with a reserve				1,384					2,111
Total impaired loans			$	7,518				$	9,363
Reserve for impaired loans			$	912				$	560
An analysis of impaired loans for the three and nine month periods ended September 30, 2002 and 2001 is presented as follows:
	Three Months ended September 30,					Nine Months ended September 30,
		2002		2001			2002		2001
Average balance of impaired loans	$	5,529	$	10,776		$	7,218	$	12,353
Interest income on impaired loans (cash-basis)		1		302			36		402
BORROWINGS
Short-term borrowings at September 30, 2002 and December 31, 2001, were as follows:
				September 30, 2002					December 31, 2001
Securities sold under repurchase agreements			$	220,773				$	158,140
Federal funds purchased				45,000					0
Treasury tax and loan notes				7,814					11,663
Total short-term borrowings			$	273,587				$	169,803
Long-term debt at September 30, 2002 and December 31, 2001, was as follows:
Subsidiaries:
Term notes due July, 2003 with interest at 6.09%			$	10,000				$	10,000
Term notes due July, 2003 with interest at 7.35%				5,000					5,000
Term notes due July, 2004 with interest at 4.48%				5,000					5,000
Parent:
Senior notes due February, 2003 with interest at 6.30%				35,000					35,000
Subordinated notes due February, 2005 with interest at 9.00%				50,000					50,000
Total long-term debt			$	105,000				$	105,000

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS-PER-SHARE

The following tables sets forth the calculation of basic and diluted earnings per share for the three months ended and nine months ended September 30, 2002 and 2001:

	For the three months ended September 30
	2002					2001
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic Earnings per Share:
Income available to common stockholders	$	15,875	39,610	$	0.40	$	14,335	39,285	$	0.36
Effect of Diluted Securities:
Stock options outstanding			420					447
Diluted Earnings per Share:
Income available to common stockholders and assuming conversion	$	15,875	40,030	$	0.40	$	14,335	39,732	$	0.36

	For the nine months ended September 30
	2002					2001
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic Earnings per Share:
Income available to common stockholders	$	46,314	39,447	$	1.17	$	41,041	39,244	$	1.05
Effect of Diluted Securities:
Stock options outstanding			460					311
Diluted Earnings per Share:
Income available to common stockholders and assuming conversion	$	46,314	39,907	$	1.16	$	41,041	39,555	$	1.04

SUBSEQUENT EVENT

On November 4, 2002, Susquehanna completed a private placement of $75 million aggregate principal amount of 6.05% Subordinated Notes due November 1, 2012. The offering was made through initial purchasers to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). The notes rank equally with Susquehanna's other subordinated indebtedness and are junior to its senior indebtedness. Susquehanna wil use the net proceeds of the offering to repay $50 million of maturing long-term senior indebtedness in 2003 and for general corporate purposes. The notes will qualify as Tier 2 capital, and their pre-tax cost to carry will be approximately $500,000 during the fourth quarter of 2002.

8

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization of identifiable intangible assets as of September 30, 2002 are as follows:

	Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles	$	5,874	($888	)
Favorable lease adjustments		393	(236	)
Total	$	6,267	($1,124	)
Unamortized intangible assets:
Goodwill	$	54,865	N/A
The following is the activity of the goodwill account since December 31, 2001:
Goodwill at December 31, 2001	$	43,946
Purchase of The Addis Group, Inc.		10,919
Goodwill at September 30, 2002	$	54,865
The following table sets forth the actual and estimated pre-tax amortization expense of amortized intangible assets:
Aggregate Amortization Expense:
For the quarter ended September 30, 2002	$	152
Estimated Amortization Expense:
For the year ended December 31, 2002	$	620
For the year ended December 31, 2003		608
For the year ended December 31, 2004		608
For the year ended December 31, 2005		608
For the year ended December 31, 2006		608

The following table sets forth the net income, basic EPS and diluted EPS as adjusted to exclude goodwill amortization expense for the three months and nine months ended September 30, 2002 and 2001:

	Three Months Ended				Nine Months Ended
	2002		2001		2002		2001
Reported net income	$	15,875	$	14,335	$	46,314	$	41,041
Add back: Goodwill amortization		0		753		0		2,317
Adjusted net income	$	15,875	$	15,088	$	46,314	$	43,358
Basic earnings per share:
Reported net income	$	0.40	$	0.36	$	1.17	$	1.05
Goodwill amortization		0.00		0.02		0.00		0.06
Adjusted net income	$	0.40	$	0.38	$	1.17	$	1.11
Diluted earnings per share:
Reported net income	$	0.40	$	0.36	$	1.16	$	1.04
Goodwill amortization		0.00		0.02		0.00		0.06
Adjusted net income	$	0.40	$	0.38	$	1.16	$	1.10

9

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Management’s discussion and analysis of the significant changes in the consolidated results of operations, financial condition, and cash flows of Susquehanna Bancshares, Inc. (“Susquehanna”) is set forth below for the periods indicated.

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited, to Susquehanna’s potential exposures to various types of market risks, such as interest rate risk and credit risk. 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: general economic conditions in market areas in which Susquehanna has significant business activities or investments; the monetary and interest rate policies of the Board of Governors of the Federal Reserve System; inflation; deflation; unanticipated turbulence in interest rates; changes in laws, regulations and taxes; changes in competition and pricing environments; natural disasters; the loss of certain key officers; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructuring; technological changes; changes in consumer spending and saving habits and the success of Susquehanna in managing the risks involved in the foregoing.

The management of Susquehanna encourages 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 made. Susquehanna does not update 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.

The following discussion and analysis, the purpose of which is to provide investors and others with information that Susquehanna’s management believes to be necessary for an understanding of its 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.

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Results of Operations

On June 28, 2002, Susquehanna completed the acquisition of Addis for $7.0 million in cash and $4.0 million in Susquehanna common stock. The acquisition is accounted for under the purchase method of accounting for business combinations. Accordingly, the financial results of Addis are recorded prospectively.

Summary of 2002 Compared to 2001

Susquehanna’s net income for the third quarter of 2002 was $15.9 million, a 10.7% increase from net income of $14.3 million in the third quarter of 2001. For the first nine months of 2002, net income was $46.3 million, a 12.8% increase from net income of $41.0 million for the same period during 2001.

During the third quarter of 2002, Susquehanna’s net interest income and other income continued to improve as they increased by 7.4% and 13.8%, respectively, from the third quarter of 2001 and other income represented 33.4% of total revenues for the third quarter of 2002. Offsetting these improvements was an 8.8% increase in operating expenses from the third quarter 2001 to the third quarter 2002. For the first nine months of 2002, net interest income and other income increased by 9.4% and 12.8%, respectively, from the comparable period of 2001 and other income represented 33.6% of total revenues for the first nine months of 2002. Offsetting this improvement in net interest income and other income was a 9.2% increase in operating expenses from the comparable period of 2001.

Diluted earnings per share (“EPS”) increased 11.1% from $0.36 per share for the third quarter of 2001 to $0.40 per share for the third quarter of 2002. Diluted EPS increased 11.5% from $1.04 for the nine months ended September 30, 2001 to $1.16 for the same period in 2002. Return on average assets (“ROA”) and return on average equity (“ROE”) were 1.18% and 12.04%, respectively, in the third quarter of 2002 compared with 1.14% and 11.89%, respectively, in the third quarter of 2001. ROA and ROE were 1.19% and 12.17%, respectively, for the nine months ended September 30, 2002 as compared to 1.14% and 11.75%, respectively, for the same period ended September 30, 2001.

In June 2001, the Financial Accounting Standards Board adopted SFAS 142, Goodwill and Other Intangible Assets. Because of the adoption of SFAS 142, goodwill amortization ceased in 2002. Had the new rules been in effect last year, diluted EPS would have been $1.10 and net income would have been $43.4 million for the nine months ended September 30, 2001, resulting in a 5.5% increase in diluted EPS and a 6.8% increase in net income for the first nine months of 2002. Under the new rules, third quarter 2001 diluted EPS and net income would have been $0.38 and $15.1 million, respectively, resulting in an increase of 5.2% respectively, for each measure, for the third quarter of 2002.

Total assets at September 30, 2002 were $5.4 billion, compared with $5.0 billion at September 30, 2001. Loans increased from $3.5 billion at September 30, 2001 to $3.8 billion at September 30, 2002, while deposits increased from $3.3 billion at September 30, 2001 to $3.8

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billion at September 30, 2002. Equity capital was $528 million at September 30, 2002, or $13.33 per share, compared to $490 million, or $12.46 per share, at September 30, 2001.

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

Net Interest Income — Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which rose to a level of $47.2 million in the third quarter of 2002, compared to $43.9 million for the same period in 2001. For the nine months ended September 30, 2002, net interest income was $139.4 million compared with $127.4 million for the same period of 2001. Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans and leases, income from investment securities and income from short-term investments. The amount of interest income is dependent upon many factors, including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and levels of non-performing assets. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds, and the levels of non-interest bearing demand deposits and equity capital.

Table 1 presents average balances, taxable equivalent interest income and expenses, and yields earned or paid on the assets and liabilities of Susquehanna. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Net interest income as a percentage of net interest income and other income was 66.6% for the quarter ended September 30, 2002 and 67.9% for the quarter ended September 30, 2001. For the nine month period ended September 30, 2002 and 2001, net interest income as a percentage of net interest income and other income was 66.4% and 67.1%, respectively.

Net interest income for the third quarter of 2002 increased $3.3 million compared to the third quarter of 2001. Average earning assets in the third quarter of 2002 increased $245 million over the same period in 2001, with average loans increasing $257 million, average investment securities decreasing $9 million, and lower yielding short-term investments decreasing $3 million. Average interest-bearing liabilities increased $152 million with average interest-bearing deposits increasing $339 million and vehicle financing decreasing $217 million. Non-interest bearing demand deposits increased $75 million in the third quarter of 2002 over the third quarter of 2001. These volume changes helped the net interest margin to improve to 3.93% in the third quarter of 2002 from 3.87% in the third quarter of 2001. The margin improvement is also attributable to a 120 basis point decrease in the cost of funds, coupled with a decrease of only 101 basis points in the yield on earning assets as interest rates continued to decline.

Net interest income for the nine months ended September 30, 2002 increased $12.0 million compared to the same period in 2001. Average earning assets for the first nine months of 2002 increased $311 million over the same period in 2001, with average loans increasing $199 million and average investment securities increasing $126 million. Average interest-bearing

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liabilities increased $226 million with average interest-bearing deposits increasing $258 million. Average non-interest bearing demand deposits increased $78 million for the first nine months of 2002 when compared with the same period of 2001. These volume changes helped the net interest margin improve to 3.98% in the first nine months of 2002 from 3.91% during the same period of 2001. The margin improvement is also attributable to a 130 basis point decrease in the cost of funds, coupled with a decrease of only 108 basis points in the yield on earning assets as interest rates continued to decline.

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 the section titled “Market Risks” below.

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 inherent losses in the loan and lease portfolio. Susquehanna’s provision for loan and lease losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets its affiliates serve.

As illustrated in Table 3, the provision was $2.4 million in the third quarter of 2002, an increase of $0.6 million from the same period in 2001. Net charge-offs were $2.0 million for the three-month period ended September 30, 2002 versus $1.8 million in the corresponding three month period ended 2001. For the nine months ended September 30, 2002, the provision was $7.1 million, an increase of $1.7 million from the $5.4 million provision for the first nine months of 2001, while net charge-offs increased from $4.3 million in 2001 to $5.3 million in 2002.

Determining the level of the allowance for possible loan and lease losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information that is often subject to rapid change. As a result, we periodically review the loan and lease portfolios in light of the changing economy and the dynamics of the banking and regulatory environment. For example, despite the fact that interest rates have been lowered, a slowdown of economic growth could occur, which may result in borrowers experiencing difficulty in maintaining their loans. If this were the case, the level of non-performing loans and assets, charge-offs and delinquencies could rise and require further increases to the provision.

Other Income

Non-interest income increased $2.9 million, or 13.8%, from $20.8 million in the third quarter of 2001, to $23.7 million in the third quarter of 2002. This quarter’s increase resulted primarily from commissions on insurance sales from Addis. Other significant variances are a $0.9 million increase in gain on sale of loans and leases due to the sale of $41.0 million of vehicle leases into a warehouse facility in the third quarter of 2002 and an $0.8 million increase in

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service charges on deposit accounts. Offsetting these increases was a $1.2 million decline in vehicle origination and servicing fees due to reduced volume of new leases. Included in other operating income is a $0.3 million gain on the sale or transfer of Susquehanna’s merchant credit card services. We decided to sell or transfer the merchant credit card services because of small margins and significant risk in the travel industry. Consequently, merchant credit card fees and related servicing expense will decline to zero in the fourth quarter.

Non-interest income increased $8.0 million, or 12.8%, from $62.5 million for the nine months ended September 30, 2001 to $70.5 million for the nine months ended September 30, 2002. The nine month improvement was primarily attributed to an increase in deposit service charges of $2.5 million, commissions on insurance sales from Addis of $1.8 million, and an increase in asset management fees of $1.2 million at Valley Forge Asset Management Corp.

Other income as a percentage of net interest income and other income was 33.4% for the quarter ended September 30, 2002 compared with 32.1% for the comparable period of 2001. Other income as a percentage of net interest income and other income was 33.6% for the nine months ended September 30, 2002 and 32.9% for the comparable period in 2001.

Other Expenses

Total non-interest expenses increased $3.7 million from $42.1 million in the third quarter of 2001 to $45.8 million in the third quarter of 2002. Total non-interest expenses increased $11.4 million from $124.5 million for the nine months ended September 30, 2001 to $135.9 million during the same period in 2002.

The quarter to quarter increase was primarily due to increases in salaries and benefits expense of 15.9%, or $2.9 million, and vehicle delivery and preparation expense of 125.3%, or $1.4 million. The increase in salaries and benefits expense primarily was due to the acquisition of Addis, normal annual salary increases, an increased sales force and sales-related costs, and the addition of seven banking branches. Four of these branches were acquired from another institution, while three were newly developed branches. Vehicle delivery and preparation expenses increased at Hann Financial Service Corp. (“Hann”) due to Hann’s increased ability to remarket cars through retail channels rather than through auction, as well as volume increases. This increased retail ability keeps the residual value expense at lower levels as the retail sale of after-lease vehicles yields higher prices than those sold at auction. The nine month increase was due to the same factors as noted above plus a $2.3 million increase in other operating expenses due to increased marketing, advertising and other miscellaneous costs associated with growth.

Income Taxes

Susquehanna’s effective tax rate decreased to 30.1% for the third quarter and decreased to 30.7% for first nine months of 2002 due to the adoption of SFAS 142 and the cessation of goodwill amortization.

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Financial Condition

Risk Assets

Table 2 shows a decrease in non-accrual loans and leases from $19.2 million at September 30, 2001 to $18.7 million at September 30, 2002. Loans past due 90 days or more and still accruing decreased from $10.5 million at September 30, 2001 to $10.1 million at September 30, 2002. The percentage of non-performing assets to period-end loans and other real estate owned (OREO) decreased from .65% at September 30, 2001 to .58% at September 30, 2002. The percentage of loan loss reserve to non-performing loans was 200% at September 30, 2001 compared with 211% at September 30, 2002.

Capital Resources

Capital elements for Susquehanna are segmented into two tiers. Tier 1 capital represents shareholders’ equity reduced by most intangible assets. Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses limited to 1.25% of risk-adjusted assets, and 45% of the unrealized gain on equity securities. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”

The minimum Tier 1 capital ratio is 4%; Susquehanna’s ratio at September 30, 2002 was 10.6%. The minimum total capital (Tier 1 and 2) ratio is 8%; Susquehanna’s ratio at September 30, 2002 was 11.9%. The minimum leverage ratio is 4%; Susquehanna’s leverage ratio at September 30, 2002 was 8.6%. Susquehanna and each of its banking subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered “well-capitalized” under regulatory guidelines.

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Susquehanna Bancshares, Inc. and Subsidiaries

TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY

Interest rates and interest differential - taxable equivalent basis

	For the Three Month Period Ended September 30, 2002						For the Three Month Period Ended September 30, 2001
(Dollars in thousands)	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short - term investments	$	72,220		$	347	1.91	$	75,688		$	755	3.96
Investment securities:
Taxable		932,696			12,572	5.35		922,342			14,016	6.03
Tax - advantaged		50,584			903	7.08		69,809			1,232	7.00
Total investment securities		983,280			13,475	5.44		992,151			15,248	6.10
Loans and leases, (net):
Taxable		3,725,523			65,012	6.92		3,476,768			70,521	8.05
Tax - advantaged		49,197			938	7.56		40,690			908	8.85
Total loans and leases		3,774,720			65,950	6.93		3,517,458			71,429	8.06
Total interest - earning assets		4,830,220		$	79,772	6.55		4,585,297		$	87,432	7.56
Allowance for loan and lease losses		(39,995	)					(38,900	)
Other non - earning assets		527,029						431,791
Total assets	$	5,317,254					$	4,978,188
Liabilities
Deposits:
Interest - bearing demand	$	1,003,663		$	3,404	1.35	$	806,493		$	4,215	2.07
Savings		465,947			1,081	0.92		420,369			1,503	1.42
Time		1,669,547			16,293	3.87		1,573,179			20,884	5.27
Short - term borrowings		239,451			945	1.57		226,618			1,932	3.38
FHLB borrowings		551,419			7,126	5.13		539,487			7,002	5.15
Vehicle financing		78,071			1,090	5.54		294,937			5,269	7.09
Long - term debt		105,000			2,002	7.56		100,272			1,951	7.72
Total interest - bearing liabilities		4,113,098		$	31,941	3.08		3,961,355		$	42,756	4.28
Demand deposits		549,638						474,480
Other liabilities		131,626						64,177
Total liabilities		4,794,362						4,500,012
Equity		522,892						478,176
Total liabilities & stockholders' equity	$	5,317,254					$	4,978,188
Net interest income / yield on average earning assets				$	47,831	3.93				$	44,676	3.87

For purposes of calculating loan yields, the average loan volume includes non-accrual loans. For purposes of calculating yields on non-taxable interest income, the taxable equivalent adjustment is made to equate non-taxable interest on the same basis as taxable interest. The marginal tax rate is 35%.

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Susquehanna Bancshares, Inc. and Subsidiaries

TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (continued)

Interest rates and interest differential - taxable equivalent basis

	For the Nine Month Period Ended September 30, 2002						For the Nine Month Period Ended September 30, 2001
(Dollars in thousands)	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short - term investments	$	73,174		$	1,047	1.91	$	86,174		$	2,949	4.58
Investment securities:
Taxable		946,872			39,688	5.60		802,805			37,612	6.26
Tax - advantaged		55,325			2,937	7.10		73,729			3,923	7.11
Total investment securities		1,002,197			42,625	5.69		876,534			41,535	6.34
Loans and leases, (net):
Taxable		3,622,841			193,831	7.15		3,426,520			212,896	8.31
Tax - advantaged		47,067			2,792	7.93		44,853			2,928	8.73
Total loans and leases		3,669,908			196,623	7.16		3,471,373			215,824	8.31
Total interest - earning assets		4,745,279		$	240,295	6.77		4,434,081		$	260,308	7.85
Allowance for loan and lease losses		(39,137	)					(38,334	)
Other non - earning assets		506,167						418,534
Total assets	$	5,212,309					$	4,814,281
Liabilities
Deposits:
Interest - bearing demand	$	954,121		$	9,312	1.30	$	810,839		$	14,862	2.45
Savings		459,483			3,261	0.95		418,338			5,096	1.63
Time		1,635,385			50,445	4.12		1,562,290			64,637	5.53
Short - term borrowings		203,538			2,417	1.59		218,799			6,994	4.27
FHLB borrowings		576,316			21,805	5.06		406,229			16,359	5.38
Vehicle financing		120,560			5,684	6.30		311,861			16,751	7.18
Long - term debt		105,000			5,995	7.63		100,092			5,835	7.79
Total interest - bearing liabilities		4,054,403		$	98,919	3.26		3,828,448		$	130,534	4.56
Demand deposits		536,045						457,660
Other liabilities		113,195						60,985
Total liabilities		4,703,643						4,347,093
Equity		508,666						467,188
Total liabilities & stockholders' equity	$	5,212,309					$	4,814,281
Net interest income / yield on average earning assets				$	141,376	3.98				$	129,774	3.91

For purposes of calculating loan yields, the average loan volume includes non-accrual loans. For purposes of calculating yields on non-taxable interest income, the taxable equivalent adjustment is made to equate non-taxable interest on the same basis as taxable interest. The marginal tax rate is 35%.

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Susquehanna Bancshares, Inc. and Subsidiaries

TABLE 2 - RISK ASSETS

(Dollars in thousands)	September 30, 2002			December 31, 2001			September 30, 2001
Nonperforming assets:
Nonaccrual loans and leases	$	18,684		$	15,516		$	19,211
Restructured accrual loans		0			0			0
Other real estate owned		3,194			3,761			3,860
Total nonperforming assets	$	21,878		$	19,277		$	23,071
As a percent of period-end loans and leases and other real estate owned		0.58	%		0.55	%		0.65	%
Coverage ratio		211.34	%		242.96	%		199.53	%
Loans and leases contractually past due 90 days and still accruing	$	10,146		$	11,498		$	10,531

TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2002			2001			2002			2001
Balance - Beginning of period	$	39,148		$	38,407		$	37,698		$	37,187
Additions charged to operating expenses		2,372			1,740			7,079			5,419
		41,520			40,147			44,777			42,606
Charge-offs		(2,606	)		(2,388	)		(7,033	)		(5,933	)
Recoveries		573			573			1,743			1,659
Net charge-offs		(2,033	)		(1,815	)		(5,290	)		(4,274	)
Balance - Period end	$	39,487		$	38,332		$	39,487		$	38,332
Net charge-offs as a percent of average loans and leases (annualized)		0.21%			0.20%			0.19%			0.16%
Allowance as a percent of period-end loans and leases		1.05%			1.09%			1.05%			1.09%
Average loans and leases	$	3,774,720		$	3,517,458		$	3,669,908		$	3,471,373
Period-end loans and leases		3,756,659			3,532,316			3,756,659			3,532,316

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Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The types of market risk exposures generally faced by banking entities include interest rate risk, liquidity risk, equity market price risk, foreign currency risk, and commodity price risk. Only interest rate and liquidity risks are significant to Susquehanna.

Liquidity Risk

Liquidity and interest rate risk are related but distinctly different from one another. The maintenance of adequate liquidity — the ability to meet the cash requirements of its customers and other financial commitments — is a fundamental aspect of Susquehanna’s asset/liability management strategy. Susquehanna’s policy of diversifying its funding sources — purchased funds, repurchase agreements, and deposit accounts — allows it to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At September 30, 2002, Susquehanna’s subsidiary banks had unused lines of credit available to them from the Federal Home Loan Bank system totaling approximately $523 million.

Liquidity, however, is not entirely dependent on increasing Susquehanna’s liability balances. Liquidity also can be generated from maturing or readily marketable assets. The carrying value of investment securities maturing within one year amounted to $103.7 million at September 30, 2002. These maturing investments represented 9.6% of total investment securities. Unrestricted short-term investments amounted to $20.0 million and represent additional sources of liquidity. Consequently, Susquehanna’s exposure to liquidity risk is not considered significant.

Interest Rate Risk

Closely related to the management of liquidity is the management of interest rate risk, which focuses on maintaining stability in the net interest margin, an important factor in earnings growth. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. Management’s objective is to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors to maximize earnings in an environment of changing interest rates. However, there is a lag in maintaining the desired matching because the repricing of products occurs at varying time intervals.

Susquehanna employs a variety of methods to monitor interest rate risk. By dividing the assets and liabilities into three groups — fixed rate, floating rate and those which reprice only at management’s discretion — strategies are developed that are designed to minimize exposure to interest rate fluctuations. Management uses gap and interest rate shock analyses to evaluate interest rate sensitivity at a given point in time. Periodic gap reports compare the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates. Management also utilizes an in-house simulation model that measures Susquehanna’s exposure to interest rate

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risk. This model calculates the income effect and the economic value of assets, liabilities and equity at current and forecasted interest rates, and at hypothetical higher and lower interest rates using one percent intervals.

Susquehanna’s policy, as approved by its Board of Directors, is for Susquehanna to 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, Susquehanna was within the Board’s approved guidelines.

At September 30, 2002, Susquehanna continues to be an asset sensitive institution and should benefit from a rise in interest rates in the future, if that should occur. If rates should fall further, Susquehanna likely will experience compression in its net interest margin.

Securitizations and Off-Balance Sheet Vehicle Lease Financings

Background. Asset securitizations and other off-balance sheet financings can further affect liquidity and interest rate risk. Susquehanna’s wholly-owned subsidiary, Hann, holds the undivided beneficial interest in Hann Auto Trust, a Delaware statutory trust formed by Hann in 1997 (the “Origination Trust”). Automobile leases originated by the Origination Trust are financed primarily in four ways: asset securitization transactions; sale-leaseback transactions; agency arrangements with other financial institutions; and other sources of funds, including internally generated sources. Assets financed in the first three of these manners generally are not reflected on Susquehanna’s consolidated balance sheet. As of September 30, 2002, Hann’s off-balance sheet, managed portfolio was funded in the following manner: asset securitization transactions, $213 million; a sale-leaseback transaction, $163 million; and agency arrangements, $712 million. In comparison, as of September 30, 2002, Hann’s on-balance sheet, managed portfolio totaled $279 million.

In connection with the securitization transactions, Hann sells the beneficial interests in automobile leases and related vehicles originated by the Origination Trust at par to a wholly-owned, qualified special purpose entity, or QSPE. These transactions have been accounted for as sales under the guidelines of SFAS 140. The QSPE retains the right to receive excess cash flows from the sold portfolio. Under SFAS 140, Hann is required to recognize a receivable representing the present value of these excess cash flows (a “PV Receivable”), which is subordinate to the rights of the QSPE’s creditors. The value of this recorded PV Receivable is subject to credit, prepayment and interest rate risk. Further, although neither Hann nor Susquehanna has retained residual risk in the vehicle leases and related vehicles, in the event of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”), the residual value guarantor, the QSPE may suffer residual losses which would decrease the value of the PV Receivable recognized by Hann. Auto Lenders, which was formed in 1990, is a used vehicle remarketer with three retail locations in New Jersey. Michael J. Wimmer, the Chief Executive Officer of Hann and a former member of the Susquehanna Board of Directors, owns 100% of the outstanding equity interest of Auto Lenders. As of September 30, 2002, the aggregate amount of all such recorded PV Receivables in connection with Hann securitizations was $7.2 million.

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Securitization Transactions. During the third quarter of 2002, Hann entered into a new revolving securitization transaction (the “third-quarter transaction”) and sold the beneficial interests in $41.0 million in automobile leases and related vehicles at par to a wholly-owned QSPE. From time to time, the QSPE may purchase the beneficial interest in additional automobile leases and related vehicles from Hann. The QSPE finances the purchase by borrowing funds in an amount up to $200.0 million from a non-related, asset-backed commercial paper issuer (“lender”); however, the lender is not committed to make loans to the QSPE. Hann continues to service the sold portfolio and Hann receives a servicing fee based upon a percentage of the dollar amount of assets serviced. The third-quarter transaction is accounted for as a sale under the guidelines of SFAS 140. Neither Hann nor Susquehanna provides recourse for credit losses. However, the QSPE’s obligation to pay Hann the servicing fee each month is subordinate to the QSPE’s obligation to pay interest, principal and fees due on the loans. Therefore, if the QSPE suffers credit losses on its assets, it may have insufficient funds to pay Hann the servicing fee after satisfying all of its obligations to the lenders. Additionally, if there is an early amortization event under the QSPE’s loan agreement, Hann, as servicer, will not receive payments of the servicing fee until all interest, principal and fees due on the loans have been paid (although the servicing fee will continue to accrue).

During the first quarter of 2002, Hann entered into a revolving securitization transaction (the “first-quarter transaction”) and, as of September 30, 2002, had sold the beneficial interests in $74.5 million in automobile leases and related vehicles at par to a wholly-owned QSPE. From time to time, this QSPE may purchase the beneficial interest in additional automobile leases and related vehicles from Hann. The QSPE finances the purchase by borrowing funds in an amount up to $80.0 million from a non-related, asset-backed commercial paper issuer, as lender, under a committed facility (subject to the satisfaction of certain conditions to additional loans). Hann continues to service the sold portfolio and Hann receives a servicing fee based upon a percentage of the dollar amount of assets serviced. Like the third-quarter transaction, the first-quarter transaction is accounted for as a sale under the guidelines of SFAS 140. Neither Hann nor Susquehanna provide recourse in the first-quarter transaction for credit losses. However, Susquehanna has reimbursement obligations to the lender under a letter of credit in an amount up to $20.0 million if Auto Lenders breaches its obligations under the first-quarter transaction to purchase leased vehicles at the scheduled termination or expiration of the leases for the full stated residual value of the vehicles.

The debt issued in each of the first-quarter transaction and the third-quarter transaction bears a floating rate of interest. In the third-quarter transaction, the QSPE is required to obtain an interest rate hedge agreement if the weighted average fixed interest rate of its assets is less than a targeted portfolio yield calculated monthly. Neither Hann nor Susquehanna has any obligation to obtain such a hedge agreement for the QSPE, but the failure of the QSPE to obtain a required hedge agreement would be an event of default under its loan documents. In the first-quarter transaction, the lender may enter into an interest rate hedge agreement at the expense of the QSPE if the amount on deposit in a yield supplement account is less than a targeted balance which takes into account the current market swap rate.

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The transaction documents for each of the first-quarter transaction and the third-quarter transaction contain several requirements, obligations, liabilities, provisions and consequences, including events of default, which become applicable upon, among other conditions, the failure of the sold portfolio to meet certain performance tests. Further, with respect to the first-quarter transaction, the occurrence of certain negative events not directly related to the QSPE (such as the imposition of a tax or ERISA lien on Hann’s assets, the entry of a large uninsured judgment against Hann or the bankruptcy of Susquehanna, Hann or Auto Lenders) will be an event of default under the related loan agreement.

The initial recorded PV Receivable for the third-quarter transaction was $0.9 million and the amount of this PV Receivable at September 30, 2002 was $0.9 million. The initial recorded PV Receivable for the first-quarter transaction was $1.8 million and the amount of this PV Receivable at September 30, 2002 was $2.4 million. The aggregate amount of all recorded PV Receivables for all securitization transactions at September 30, 2002 was $7.2 million.

Agency Agreements. During the second quarter of 2002, Hann entered into a new agency arrangement. In connection with that arrangement, Susquehanna entered into a Residual Interest Agreement under which it guarantees the performance of Auto Lenders of its obligations to the new agency client. Auto Lenders has agreed to purchase leased vehicles in the agency client’s portfolio at the expiration of the leases for the full residual value of those vehicles. In the event the agency client incurs any losses, cost or expense as a result of any failure of Auto Lenders to perform this purchase obligation, Susquehanna will compensate the agency client for any final liquidation loss with respect to such leased vehicle. However, Susquehanna’s liability is limited to 12% of the maximum aggregate residual value of all leases purchased by the agency client. At September 30, 2002, the total residual value of the vehicles in the portfolio for this transaction was $24.2 million and Susquehanna’s maximum obligation under the Residual Interest Agreement at September 30, 2002, was $2.9 million.

Summary of Susquehanna’s Potential Exposure under Off-Balance Sheet Vehicle Lease Financings as of September 30, 2002. Under certain asset securitization transactions (including the first-quarter transaction discussed above), Susquehanna has reimbursement obligations to lenders under letter of credit facilities if Auto Lenders breaches its obligations under the securitization transactions to purchase leased vehicles at the scheduled termination or expiration of the leases for the full stated residual value of the vehicles. At September 30, 2002, Susquehanna would be obligated to make payments in an amount up to $40.5 million under these letters of credit upon a breach by Auto Lenders.

Under an existing sale-leaseback transaction, Susquehanna guarantees certain obligations of the lessee, which is a wholly-owned special purpose subsidiary of Hann. If Susquehanna fails to maintain its investment grade senior unsecured long-term debt ratings, then it must obtain a $34.1 million letter of credit from an eligible financial institution for the benefit of the equity participants in the transaction to secure its obligations under the guarantee.

Under the agency arrangements, Susquehanna’s maximum obligation at September 30, 2002 was $2.9 million.

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Item 4

CONTROLS AND PROCEDURES

Susquehanna’s Chief Executive Officer and Chief Financial Officer evaluated Susquehanna’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14) on November 4, 2002. Their evaluation concluded that the disclosure controls and procedures are effective in connection with the filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

There were no significant changes in Susquehanna’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any significant deficiencies or material weaknesses of internal controls that would require corrective action.

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PART II.OTHER INFORMATION

Item 6

EXHIBITS AND REPORTS ON FORM 8-K

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

10.1 Renewal of Employment Agreement between William J. Reuter and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.1

10.2 Renewal of Employment Agreement between Gregory A. Duncan and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.2.

10.3 Renewal of Employment Agreement between Drew K. Hostetter and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.3

10.4 Renewal of Employment Agreement between Charles W. Luppert and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.4

99.1 Certification by the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements

(b) Reports on Form 8-K.

(i) On July 1, 2002, the Registrant filed a report on Form 8-K regarding its acquisition of all of the outstanding stock of The Addis Group, Inc., a property and casualty insurance brokerage located in King of Prussia, Pennsylvania.

(ii) On September 20, 2002, the Registrant filed a report on Form 8-K regarding the announcement of the appointment of Bruce A. Hepburn and M. Zev Rose to its board of directors, effective September 18, 2002.

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SIGNATURES

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

SUSQUEHANNA BANCSHARES, INC.

November 12, 2002 /s/ William J. Reuter                                                                 

William J. Reuter

Chairman, President and Chief Executive Officer

November 12, 2002 /s/ Drew K. Hostetter                                                                 

Drew K. Hostetter

Executive Vice President and Chief Financial Officer

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CERTIFICATIONS

I, William J. Reuter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Susquehanna Bancshares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

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significantly affect internal controls subsequent to the date of our most evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ William J. Reuter                                                             

William J. Reuter

Chairman of the Board, President and Chief Executive

Officer

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CERTIFICATIONS (continued)

I, Drew K. Hostetter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Susquehanna Bancshares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

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significantly affect internal controls subsequent to the date of our most evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ Drew K. Hostetter                                                     

Drew K. Hostetter

Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

Exhibit Numbers	Description and Method of Filing
(10)	Material Contracts
10.1	Renewal of Employment Agreement between William J. Reuter and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.1
10.2	Renewal of Employment Agreement between Gregory A. Duncan and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.2
10.3	Renewal of Employment Agreement between Drew K. Hostetter and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.3
10.4	Renewal of Employment Agreement between Charles W. Luppert and Susquehanna, executed August 20, 2002, but effective as of January 16, 2002 is attached hereto as Exhibit 10.4
(99)	Additional Exhibits
99.1	Certification by the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements

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