Susquehanna Bancshares (SUSQ) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

or

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

For the transition period from            to            

Commission File Number 0-10674

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

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

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

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets – as of September 30, 2005 and 2004 (unaudited), and December 31, 2004	3
	Consolidated Statements of Income – for the three and nine months ended September 30, 2005 and 2004 (unaudited)	4
	Consolidated Statements of Cash Flows - for the nine months ended September 30, 2005 and 2004 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2005 and 2004 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4	Controls and Procedures	31
PART II.	OTHER INFORMATION
Item 6	Exhibits	32
SIGNATURES		34
EXHIBIT INDEX		35

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

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

3

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

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

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

4

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands) Nine months ended September 30,	2005			2004
Cash Flows from Operating Activities:
Net income	$	51,870		$	50,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		14,376			11,920
Provision for loan and lease losses		8,445			6,590
Realized gain on sales of available-for-sale securities, net		(4,188	)		(4,338	)
Deferred income taxes		(5,858	)		(9,850	)
Gain on sale of loans and leases		(5,674	)		(7,625	)
Gain on sale of other real estate owned		(172	)		(441	)
Gain on sale of branch offices		(638	)		(1,068	)
Mortgage loans originated for sale		(112,654	)		(100,547	)
Proceeds from sale of mortgage loans originated for sale		111,037			102,772
Leases acquired/originated for sale		(5,671	)		(194,852	)
Proceeds from sale of leases acquired/originated for sale		5,218			179,971
Increase in cash surrender value of bank-owned life insurance		(6,876	)		(6,694	)
Increase in accrued interest receivable		(2,169	)		(4,217	)
Increase in accrued interest payable		3,486			2,768
Increase in accrued expenses and taxes payable		28,719			21,681
Other, net		32,074			(7,646	)
Net cash provided by operating activities		111,325			39,355
Cash Flows from Investing Activities:
Net (increase) decrease in restricted short-term investments		(189	)		18,180
Activity in available-for-sale securities:
Sales		175,025			207,159
Maturities, repayments and calls		202,170			356,958
Purchases		(313,729	)		(554,884	)
Net proceeds from sale of leases in banks’ portfolios		320,754			0
Net increase in loans and leases		(453,343	)		(266,442	)
Purchase of bank-owned life insurance		0			(29,900	)
Acquisitions, net of cash acquired		(3,412	)		(36,278	)
Additions to premises and equipment		(11,953	)		(11,229	)
Net cash provided by (used in) investing activities		(84,677	)		(316,436	)
Cash Flows from Financing Activities:
Net increase in deposits		175,438			312,323
Sale of branch offices net of premium received		(6,861	)		(8,949	)
Net (decrease) increase in short-term borrowings		(46,745	)		105,266
Net decrease in FHLB borrowings		(32,963	)		(177,529	)
Repayment of long-term debt		(50,000	)		(5,000	)
Proceeds from issuance of long-term debt		0			74,356
Proceeds from issuance of common stock		4,270			3,812
Cash dividends paid		(32,196	)		(27,774	)
Net cash provided by (used in) financing activities		10,943			276,505

5

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

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

6

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands, except share data)

	Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2004	39,861,317	$	79,723	$	66,264	$	403,450		$	(2,055	)	$	547,382
Comprehensive income:
Net income							50,931						50,931
Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effect										4,554			4,554
Change in unrealized gain on recorded interest in securitized assets, net of taxes										(724	)		(724	)
Total comprehensive income													54,761
Common stock issued in acquisition	6,402,074		12,804		155,428								168,232
Common stock issued under employee benefit plans (including related tax benefit of $786)	241,550		483		3,329								3,812
Cash dividends declared ($0.66 per share)							(27,774	)					(27,774	)
Balance at September 30, 2004	46,504,941	$	93,010	$	225,021	$	426,607		$	1,775		$	746,413
Balance at January 1, 2005	46,592,930	$	93,186	$	226,384	$	435,159		$	(3,035	)	$	751,694
Comprehensive income:
Net income							51,870						51,870
Change in unrealized loss on securities available for sale, net of tax effect and reclassification adjustment										(9,442	)		(9,442	)
Change in unrealized loss on recorded interests in securitized assets, net of tax effect										626			626
Unrealized gain on cash flow hedges, net of tax effect										821			821
Total comprehensive income													43,875
Common stock issued under employee benefit plans (including related tax benefit of $599)	195,630		391		3,411								3,802
Common stock issued under contingent earnings agreement	21,012		42		426								468
Cash dividends declared ($0.69 per share)							(32,196	)					(32,196	)
Balance at September 30, 2005	46,809,572	$	93,619	$	230,221	$	454,833		$	(11,030	)	$	767,643

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

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1. Accounting Policies

The information contained in this report is unaudited and is subject to year-end adjustments. Certain prior year amounts have been reclassified to conform with current period classifications. The adjustments had no effect on gross revenues, gross expenses or net income. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended September 30, 2005 and 2004.

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 62 through 70 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Recent Accounting Pronouncements.

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

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

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

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

NOTE 2. Acquisitions

Brandywine Benefits Corporation and Rockford Pensions, LLC

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

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

Patriot Bank Corp.

        On June 10, 2004, Susquehanna acquired 100% of the outstanding voting shares of Patriot Bank Corp., a financial services company with total assets in excess of $1.0 billion, and the holding company for Patriot Bank. The results of Patriot’s operations have been included in the consolidated financial statements since that date.

        Presented below is certain unaudited pro forma information for the nine-month period ended September 30, 2004, as if Patriot had been acquired on January 1, 2004. These results combine the historical results of Patriot, including the termination of certain employee benefit programs and costs incurred in connection with the merger, with Susquehanna’s consolidated statements of income and, while certain adjustments were made for the estimated impact of purchase accounting adjustments, they are not necessarily indicative of what would have occurred had the acquisition taken place on the indicated date.

	Nine Months Ended September 30
	2005 Actual		2004
Net income	$	51,870	$	44,627
Basic EPS	$	1.11	$	0.96
Diluted EPS	$	1.11	$	0.96

8

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

NOTE 3. Investment Securities

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

	September 30, 2005				December 31, 2004
	Amortized cost		Fair value		Amortized cost		Fair value
Available-for-sale:
U.S. Government agencies	$	378,473	$	374,172	$	263,835	$	262,340
State & municipal		12,094		12,139		37,050		38,219
Mortgage-backed		667,115		653,384		872,324		868,266
Other debt securities		54,251		54,197		7,376		7,365
Equities		67,649		67,684		63,840		64,755
		1,179,582		1,161,576		1,244,425		1,240,945
Held-to-maturity:
State & municipal		6,467		6,467		4,469		4,469
Total investment securities	$	1,186,049	$	1,168,043	$	1,248,894	$	1,245,414

NOTE 4. Loans and Leases

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

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

The net investment in direct financing leases was as follows:

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

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

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

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

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

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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

NOTE 5. Borrowings

Short-term borrowings were as follows:

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

Long-term debt was as follows:

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

NOTE 6. Earnings per Share

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

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

For the three months ended September 30, 2005 and 2004, average options to purchase 7 and 362 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares; and the options were, therefore, antidilutive.

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

For the nine months ended September 30, 2005 and 2004, average options to purchase 503 and 362 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares; and the options were, therefore, antidilutive.

10

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

NOTE 7. Stock-Based Compensation

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

Pursuant to FAS No. 123, “Accounting for Stock-Based Compensation,” as amended by FAS No. 148, “Accounting for Stock-Based Compensation - Transitions and Disclosure,” disclosure requirements, pro forma net income, and earnings per share are presented in the following table as if compensation cost for stock options was determined under the fair value method and amortized to expense over the options’ vesting periods. On March 1, 2005, options to purchase 151 shares of common stock were granted to employees and directors, with an exercise price of $24.95 per share on the date of grant; the options vested immediately.

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

NOTE 8. Benefit Plans

Components of Net Periodic Benefit Cost

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

Employer Contributions

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

11

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

NOTE 9. Goodwill and Other Intangible Assets

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

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

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

NOTE 10. Derivative Financial Instruments and Hedging Activities

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

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

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

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

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

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

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

12

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Note 11. Securitization Activity

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

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

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

	As of September 30								For the Nine Months Ended September 30
	Principal Balance				Past Due 30 Days or More				Net Credit Losses (Recoveries)
	2005		2004		2005		2004		2005			2004
Leases and loans held in portfolio	$	381,457	$	460,771	$	241	$	567	$	(2	)	$	46
Leases securitized		631,400		399,748		921		406		220			114
Leases serviced for others (1)		543,204		751,933		2,505		2,795		14			100
Total leases and loans serviced	$	1,556,061	$	1,612,452	$	3,667	$	3,768	$	232		$	260

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

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

	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004
Proceeds from lease securitizations	$	0	$	0	$	345,710	$	179,971
Amounts derecognized		0		0		372,488		194,852
Servicing fees received		2,055		1,421		6,012		2,846
Other cash flows received on retained interests		4,804		2,176		12,990		3,411

Set forth below is a summary of the fair values of the interest-only strips, key economic assumptions used to arrive at the fair values, and the sensitivity of the September 30, 2005 fair values to immediate 10% and 20% adverse changes in those assumptions. The sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption: in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

As of September 30, 2005

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

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

13

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

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

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, Susquehanna’s potential exposures to various types of market risks, such as interest rate risk; credit risk; whether Susquehanna’s allowance for loan and lease losses is adequate to meet probable loan and lease losses; the impact of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) on residual loss exposure; the likelihood of an occurrence of an Early Amortization Event; and expectations regarding our branding strategy and internal realignment plans and their potential impact on our efficiency ratios and earnings. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

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

• continued levels of our loan and lease quality and origination volume;

• the adequacy of the allowance for loan and lease losses;

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

• continued relationships with major customers;

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

• adverse economic and business conditions;

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

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

• the inability to hedge certain risks economically;

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

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

• our success in managing the risks involved in the foregoing.

14

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

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

The following information refers to the parent company and its wholly owned subsidiaries: Boston Service Company, Inc., (t/a Hann Financial Service Corporation) (“Hann”), Conestoga Management Company, Susquehanna Bank PA and subsidiaries, Susquehanna Bank and subsidiaries, Susquehanna Patriot Bank and subsidiaries, Susque-Bancshares Life Insurance Co. (“SBLIC”), Valley Forge Asset Management Corp. and subsidiaries (“VFAM”), and The Addis Group, LLC (“Addis”).

Availability of Information

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

Acquisitions

Brandywine Benefits Corporation and Rockford Pensions, LLC

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

Patriot Bank Corp.

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

Other Notable Events

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

15

Results of Operations

Summary of 2005 Compared to 2004

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

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

Additional information is as follows:

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

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

(1) Supplemental Reporting of Non-GAAP Financial Measures

Susquehanna has presented a return on average tangible equity, which is a non-GAAP financial measure and is most directly comparable to the GAAP measurement of return on average equity. For purposes of computing return on average tangible equity, we have excluded the balance of intangible assets and their related amortization expense from our calculation of return on average tangible equity to allow us to review the core operating results of our company. This is consistent with the treatment by bank regulatory agencies, which excludes goodwill and other intangible assets from the calculation of risk-based capital ratios. A reconciliation of return on average tangible equity to return on average equity is set forth below.

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

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

Efficiency ratio (GAAP basis)	66.19	%	66.67	%	67.59	%	66.52	%
Effect of excluding Hann	7.70	%	7.60	%	8.50	%	4.21	%
Efficiency ratio excluding Hann	58.49	%	59.07	%	59.09	%	62.31	%

16

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential-taxable equivalent basis

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

Additional Information

Average loan balances include non-accrual loans.

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

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

17

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential - taxable equivalent basis

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

Additional Information

Average loan balances include non-accrual loans.

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

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

18

Net Interest Income — Taxable Equivalent Basis

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

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

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

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

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

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

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

Provision and Allowance for Loan and Lease Losses

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

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

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

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

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

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Susquehanna Bancshares, Inc. and Subsidiaries

(dollars in thousands)

TABLE 2 - Allowance for Loan and Lease Losses

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

TABLE 3 - Risk Assets

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

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Noninterest Income

Third Quarter 2005 Compared to Third Quarter 2004

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

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

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

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

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

• Increasedasset management fees of $2.9 million;

• Increasedcommissions on property and casualty insurance sales of $1.6 million;

• Increasedother income of $1.5 million;

• Decreasedvehicle origination, servicing, and securitization fees of $3.3 million; and

• Decreasednet gains on sales of loans and leases of $2.0 million.

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

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

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

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

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

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Noninterest Expenses

Third Quarter 2005 Compared to Third Quarter 2004

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

• Decreasedsalaries and employee benefits of $0.9 million;

• Increasedvehicle residual value expense of $0.8 million; and

• Decreasedvehicle delivery and preparation expense of $0.9 million.

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

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

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

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

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

• Increasedsalaries and employee benefits of $5.8 million;

• Increasedoccupancy expense of $2.7 million;

• Increasedvehicle residual value expense of $3.7 million; and

• Increasedother expenses of $7.7 million.

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

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

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

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

Income Taxes

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

Financial Condition

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

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

Loans and Leases

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

Risk Assets

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

Goodwill and Other Identifiable Intangible Assets

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

Investment in and Receivables from Unconsolidated Entities

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

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Borrowings

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

Capital Adequacy

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

The minimum Tier 1 capital ratio is 4%; our ratio at September 30, 2005, was 8.28%. The minimum total capital (Tiers 1and 2) ratio is 8%; our ratio at September 30, 2005, was 11.36%. The minimum leverage ratio is 4%; our leverage ratio at September 30, 2005, was 7.61%. We and each of our bank subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered “well capitalized” under regulatory guidelines.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

Equity Market Price Risk

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

Liquidity Risk

The maintenance of adequate liquidity — the ability to meet the cash requirements of our customers and other financial commitments — is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources — purchased funds, repurchase agreements, and deposit accounts — allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At September 30, 2005, our bank subsidiaries had approximately $642.5 million available to them under collateralized lines of credit with various Federal Home Loan Banks; and approximately $352.5 million more was available provided that additional collateral would have been pledged.

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

Interest Rate Risk

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

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

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

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

Derivative Financial Instruments and Hedging Activities

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

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

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

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

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

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

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

Vehicle Leasing Residual Value Risk

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

Securitizations and Off-Balance Sheet Vehicle Lease Financings

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

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

* Off-balance sheet

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

Securitization Transactions

As of September 30, 2005, the aggregate fair value of all receivables representing the present value of excess cash flows (each, a “PV Receivable”) in connection with securitizations was $5.2 million. For a description of the accounting policies for measuring the PV Receivables, the characteristics of the securitization transactions, including the gain or loss from sale, and the key assumptions used in measuring the fair value of the PV Receivables, see “Note 1 – Summary of Significant Accounting Policies” under the captions “Asset Securitizations” and “Recorded Interests in Securitized Assets” to the financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004, and “Note 11 – Securitization Activity” to the financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Summary of Recent Securitization Transactions

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

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

Summary of Prior Years’ Securitization Transactions

Late in the third quarter of 2004, Hann entered into a revolving securitization transaction (the “2004 transaction”). In connection with this transaction, Hann sells and contributes beneficial interests in automobile leases and related vehicles to a wholly owned QSPE. From time to time, the QSPE may purchase the beneficial interests in additional automobile leases and related vehicles from Hann. Transfers to the QSPE are accounted for as sales under the guidelines of FAS No. 140. The QSPE finances the purchases by borrowing funds in an amount up to $200.0 million from a non-related, asset-backed commercial paper issuer (the “lender”). There were no transfers made to the QSPE during the third quarter of 2005. During the first nine months of 2005, Hann made transfers to the QSPE of beneficial interests in $5.7 million in automobile leases and related vehicles. Neither Hann nor Susquehanna provides recourse for credit losses. However, the QSPE’s obligation to pay Hann the servicing fee each month is subordinate to the QSPE’s obligation to pay interest, principal and fees due on the loans. Therefore, if the QSPE suffers credit losses on its assets, it may have insufficient funds to pay the servicing fee to Hann. Additionally, if an early amortization event were to occur under the QSPE’s loan agreement, Hann, as servicer, would not receive payments of the servicing fee until all interest, principal and fees due on the loans have been paid (although the servicing fee will continue to accrue).

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

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

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

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

In July 2003, Hann entered into a term securitization transaction (the “2003 transaction”). In this transaction, Hann sold and contributed the beneficial interest in $239.5 million in automobile leases and related vehicles to a wholly owned QSPE. The QSPE financed the purchase of the beneficial interest primarily by issuing $233.0 million of asset-backed notes.

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

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

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

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

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

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

Agency Agreements and Lease Sales

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

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During the second quarter of 2002, Hann entered into an agency arrangement. In connection with that arrangement, we entered into an agreement under which we guarantee Auto Lenders’ performance of its obligations to the new agency client (the “Residual Interest Agreement”). Auto Lenders has agreed to purchase leased vehicles in the agency client’s portfolio at the termination of the leases for the full residual value of those vehicles. In the event the agency client incurs any losses, costs or expenses as a result of any failure of Auto Lenders to perform this purchase obligation, we will compensate the agency client for any final liquidation losses with respect to such leased vehicle. However, our liability is limited to 12% of the maximum aggregate residual value of all leases purchased by the agency client. At September 30, 2005, the total residual value of the vehicles in the portfolio for this transaction was $43.8 million, and our maximum obligation under the Residual Interest Agreement was $5.3 million.

Sale-leaseback Transactions

In December 2000, Hann sold and contributed the beneficial interest in $190 million of automobiles and related auto leases owned by the Origination Trust to a wholly owned special purpose subsidiary (the “Lessee”). The Lessee sold such beneficial interests to a lessor (the “Lessor”), and the Lessor in turn leased the beneficial interests in the automobiles and auto leases back to the Lessee under a Master Lease Agreement that has an eight-year term. For accounting purposes, the sale-leaseback transaction between the Lessee and the Lessor is treated as a sale and an operating lease and qualifies as a sale and leaseback under FAS No. 13. The Lessor held the beneficial interest in vehicles and auto leases with a remaining balance of approximately $99.3 million at September 30, 2005. To support its obligations under the Master Lease Agreement, at closing the Lessee pledged the beneficial interest in an additional $43.0 million of automobile leases and related vehicles, which were also sold or contributed to the Lessee. At September 30, 2005, the beneficial interest in additional automobile leases and related vehicles pledged by the Lessee was $47.0 million.

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

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

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

Summary of Susquehanna’s Potential Exposure under Off-Balance Sheet Vehicle Lease Financings as of September 30, 2005.

Sale-Leaseback Transaction

Under the existing sale-leaseback transaction, we guarantee certain obligations of the Lessee, which is a wholly owned special purpose subsidiary of Hann. If we fail to maintain our investment-grade senior unsecured long-term debt ratings, then we must obtain a $35.0 million letter of credit from an eligible financial institution for the benefit of the equity participants in the transaction to secure our obligations under the guarantee. We also have obtained from a third party an $8.0 million letter of credit for the benefit of an equity participant if we fail to make payments under the guarantee.

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

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

Agency Agreements and Lease Sales

Under the agency arrangements, our maximum obligation under the Residual Interest Agreement at September 30, 2005 was $5.3 million.

Miscellaneous

Additionally, we are required to maintain contingent vehicle liability insurance coverage with regard to most of these transactions. This same coverage is also maintained on vehicles within our own portfolio. The basic coverage policy is renewable annually and expires in 2006.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control over Financial Reporting

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

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PART II—OTHER INFORMATION

Item 6. Exhibits.

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

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

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SIGNATURES

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

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

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EXHIBIT INDEX

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

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