Susquehanna Bancshares (SUSQ) 10-Q 2008 Q2 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 June 30, 2008

or

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

For the transition period from                    to                    

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Yes  x    No  ¨

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

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

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

Yes  ¨    No  x

As of July 30, 2008, there were 86,044,328 shares of the registrant’s common stock outstanding, par value $2.00 per share.

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets – as of June 30, 2008 and 2007, and December 31, 2007 (unaudited)	3
	Consolidated Statements of Income – for the three and six months ended June 30, 2008 and 2007 (unaudited)	4
	Consolidated Statements of Cash Flows - for the six months ended June 30, 2008 and 2007 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2008 and 2007 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4	Controls and Procedures	35
PART II.	OTHER INFORMATION
Item 1	Legal Proceedings	35
Item 1A	Risk Factors	35
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3	Defaults Upon Senior Securities	35
Item 4	Submission of Matters to a Vote of Security Holders	35
Item 5	Other Information	37
Item 6	Exhibits	37
SIGNATURES		38
EXHIBIT INDEX		39

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30, 2008			December 31, 2007			June 30, 2007
	(in thousands, except share data)
Assets
Cash and due from banks	$	334,566		$	326,965		$	198,899
Unrestricted short-term investments		83,408			143,042			99,634
Cash and cash equivalents		417,974			470,007			298,533
Restricted short-term investments		238			242			214
Securities available for sale		2,024,264			2,059,160			1,406,342
Securities held to maturity (fair values approximate$9,245; $4,792; and $4,887)		9,245			4,792			4,887
Loans and leases, net of unearned income		9,227,969			8,751,590			5,574,858
Less: Allowance for loan and lease losses		96,033			88,569			61,871
Net loans and leases		9,131,936			8,663,021			5,512,987
Premises and equipment, net		179,342			179,740			107,334
Foreclosed assets		10,510			11,927			4,587
Accrued income receivable		41,357			46,765			32,075
Bank-owned life insurance		350,504			344,578			267,788
Goodwill		1,014,527			945,081			338,284
Intangible assets with finite lives		59,693			58,274			17,846
Investment in and receivables from unconsolidated entities		76,949			123,586			161,445
Other assets		188,182			170,821			161,287
Total Assets	$	13,504,721		$	13,077,994		$	8,313,609
Liabilities and Shareholders’ Equity
Deposits:
Demand	$	1,283,496		$	1,292,791		$	911,383
Interest-bearing demand		2,652,144			2,830,025			2,126,459
Savings		752,901			713,984			445,333
Time		2,681,089			2,750,867			1,592,165
Time of $100 or more		1,618,831			1,357,452			903,941
Total deposits		8,988,461			8,945,119			5,979,281
Short-term borrowings		750,864			568,412			440,672
FHLB borrowings		1,382,769			1,145,759			460,034
Long-term debt		151,293			150,303			150,031
Junior subordinated debentures		271,512			266,682			72,004
Accrued interest, taxes, and expenses payable		50,917			60,869			36,394
Deferred taxes		117,696			136,076			146,485
Other liabilities		74,753			75,760			83,568
Total Liabilities		11,788,265			11,348,980			7,368,469
Shareholders’ equity:
Common stock, $2.00 par value, 200,000,000 shares authorized;
Issued: 86,044,328 at June 30, 2008; 85,935,315 at
December 31, 2007; and 52,202,046 at June 30, 2007		172,089			171,810			104,343
Additional paid-in capital		1,043,595			1,038,894			348,897
Retained earnings		532,301			522,268			510,344
Accumulated other comprehensive loss, net of taxes of$16,977; $2,131; and $9,931, respectively		(31,529	)		(3,958	)		(18,444	)
Total Shareholders’ Equity		1,716,456			1,729,014			945,140
Total Liabilities and Shareholders’ Equity	$	13,504,721		$	13,077,994		$	8,313,609

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

3

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008		2007			2008		2007
	(in thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	145,112	$	102,795		$	295,869	$	205,240
Securities:
Taxable		21,743		15,571			44,190		31,036
Tax-exempt		3,199		426			5,961		812
Dividends		1,494		985			2,999		2,092
Short-term investments		427		1,268			1,449		2,392
Total interest income		171,975		121,045			350,468		241,572
Interest Expense:
Deposits:
Interest-bearing demand		8,574		16,466			19,813		32,864
Savings		1,296		940			2,838		2,053
Time		39,250		28,947			82,858		56,686
Short-term borrowings		2,864		3,990			6,189		7,772
FHLB borrowings		13,229		3,960			25,985		9,129
Long-term debt		7,704		3,305			15,546		6,583
Total interest expense		72,917		57,608			153,229		115,087
Net interest income		99,058		63,437			197,239		126,485
Provision for loan and lease losses		13,765		1,933			23,602		3,933
Net interest income, after provision for loan and lease losses		85,293		61,504			173,637		122,552
Noninterest Income:
Service charges on deposit accounts		11,767		7,181			22,855		13,656
Vehicle origination, servicing, and securitization fees		2,070		3,888			5,498		7,906
Asset management fees		6,911		4,792			11,756		9,403
Income from fiduciary-related activities		2,229		1,755			4,523		3,343
Commissions on brokerage, life insurance, and annuity sales		2,000		1,567			3,689		2,678
Commissions on property and casualty insurance sales		3,055		2,941			6,968		7,033
Income from bank-owned life insurance		3,406		2,641			6,932		5,299
Net gain on sale of loans and leases		1,779		1,474			3,104		5,525
Net realized gain (loss) on securities		119		(11,801	)		207		(11,740	)
Other		11,349		4,713			22,055		10,328
Total noninterest income		44,685		19,151			87,587		53,431
Noninterest Expenses:
Salaries and employee benefits		47,073		34,840			93,118		69,116
Occupancy		8,855		5,703			18,310		11,774
Furniture and equipment		4,029		2,912			8,109		5,809
Advertising and marketing		3,010		2,808			7,186		4,633
Amortization of intangible assets		2,688		623			5,195		1,246
Vehicle lease disposal		3,331		2,834			5,525		6,179
Other		21,318		17,622			44,821		33,433
Total noninterest expenses		90,304		67,342			182,264		132,190
Income before income taxes		39,674		13,313			78,960		43,793
Provision for income taxes		10,473		3,495			21,738		13,249
Net Income	$	29,201	$	9,818		$	57,222	$	30,544
Earnings per share:
Basic	$	0.34	$	0.19		$	0.67	$	0.59
Diluted	$	0.34	$	0.19		$	0.67	$	0.59
Cash dividends paid	$	0.26	$	0.25		$	0.52	$	0.50
Average shares outstanding:
Basic		85,936		52,124			85,929		52,111
Diluted		85,970		52,197			85,968		52,198

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

4

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2008			2007
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	57,222		$	30,544
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		13,051			8,213
Provision for loan and lease losses		23,602			3,933
Realized (gain) loss on available-for-sale securities, net		(207	)		11,740
Deferred income taxes		(3,534	)		46
Gain on sale of loans and leases		(3,104	)		(5,525	)
Gain on sale of foreclosed assets		(884	)		(99	)
Mortgage loans originated for sale		(111,601	)		(51,077	)
Proceeds from sale of mortgage loans originated for sale		93,991			52,754
Loans and leases originated/acquired for sale, net of payments received		(161,495	)		(221,918	)
Net proceeds from sale of loans and leases originated/acquired for sale		0			252,493
Increase in cash surrender value of bank-owned life insurance		(6,594	)		(4,828	)
Decrease (increase) in accrued interest receivable		5,408			(1,031	)
(Decrease) increase in accrued interest payable		(4,246	)		1,612
Decrease in accrued expenses and taxes payable		(5,706	)		(20,018	)
Other, net		(29,849	)		(12,982	)
Net cash (used in) provided by operating activities		(133,946	)		43,857
Cash Flows from Investing Activities:
Net decrease in restricted short-term investments		4			33,319
Activity in available-for-sale securities:
Sales		11,388			331,384
Maturities, repayments, and calls		290,950			158,338
Purchases		(309,023	)		(489,911	)
Net increase in loans and leases		(284,565	)		(98,180	)
Cash flows received from retained interests		19,650			7,893
Proceeds from bank-owned life insurance		668			1,438
Proceeds from sale of foreclosed assets		8,698			2,023
Acquisitions		(69,366	)		0
Additions to premises and equipment, net		(7,161	)		(6,328	)
Net cash used in investing activities		(338,757	)		(60,024	)
Cash Flows from Financing Activities:
Net increase in deposits		43,342			101,692
Net increase in short-term borrowings		182,452			38,708
Net increase in short-term FHLB borrowings		175,000			70,000
Proceeds from long-term FHLB borrowings		200,000			100,000
Repayment of long-term FHLB borrowings		(137,990	)		(238,654	)
Repayment of long-term debt		(10	)		(5	)
Proceeds from issuance of common stock		2,559			3,091
Tax benefit from exercise of stock options		18			148
Cash dividends paid		(44,701	)		(26,061	)
Net cash provided by financing activities		420,670			48,919

5

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

Net change in cash and cash equivalents		(52,033	)		32,752
Cash and cash equivalents at January 1		470,007			265,781
Cash and cash equivalents at June 30	$	417,974		$	298,533
Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	157,475		$	113,475
Income tax payments	$	14,206		$	15,103
Supplemental Schedule of Noncash Activities
Real estate acquired in settlement of loans	$	6,961		$	4,933
Interests retained in securitizations	$	0		$	47,920
Leases acquired in clean-up call	$	32,140		$	0
Securities purchased, not settled	$	0		$	20,107

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 (UNAUDITED)

(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, 2007	52,080,419	$	104,161	$	345,840	$	505,861		($19,576	)	$	936,286
Comprehensive income:
Net income							30,544					30,544
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $7,671									(51	)		(51	)
Change in unrealized gain on recorded interests in securitized assets, net of taxes									715			715
Change in unrealized gain on cash flow hedges, net of taxes and reclassification adjustment of $(202)									468			468
Total comprehensive income												31,676
Common stock and options issued under employee benefit plans (including related tax benefit of $148)	121,627		182		3,057							3,239
Cash dividends declared ($0.50 per share)							(26,061	)				(26,061	)
Balance at June 30, 2007	52,202,046	$	104,343	$	348,897	$	510,344		($18,444	)	$	945,140
Balance at January 1, 2008	85,935,315	$	171,810	$	1,038,894	$	522,268		($3,958	)	$	1,729,014
Cumulative-effect adjustment relating to adoption of EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”							(2,488	)				(2,488	)
Comprehensive income:
Net income							57,222					57,222
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $135									(28,069	)		(28,069	)
Change in unrealized gain on recorded interests in securitized assets, net of taxes									1,360			1,360
Change in unrealized loss on cash flow hedges, net of taxes									(862	)		(862	)
Total comprehensive income												29,651
Common stock and options issued under employee benefit plans (including related tax benefit of $18)	109,013		279		2,298							2,577
Adjustments relating to the Community acquisition					2,403							2,403
Cash dividends declared ($0.52 per share)							(44,701	)				(44,701	)
Balance at June 30, 2008	86,044,328	$	172,089	$	1,043,595	$	532,301		($31,529	)	$	1,716,456

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

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. Accounting Policies

The information contained in this report is unaudited. Certain prior year amounts have been reclassified to conform with current period classifications. The reclassifications 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 June 30, 2008 and 2007. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for the three and six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries (“Susquehanna”), as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 76 through 84 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Recently Adopted Accounting Pronouncements.

In February 2007, the Financial Accounting Standards Board issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Statement 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. Statement 159 was effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Adoption of Statement No. 159 has had no material impact on results of operations and financial condition. Since the adoption date, Susquehanna has made no elections to use fair value as an alternative measurement for selected financial assets and liabilities not previously carried at fair value.

In September 2006, the Financial Accounting Standards Board issued Statement No. 157, “Fair Value Measurements.” Statement 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. While Statement 157 does not require any new fair value measurements, the application of this Statement will change current practice for some entities. Statement 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. For the disclosures required by this Statement, see Note 12. Adoption of Statement No. 157 has had no material impact on results of operations and financial condition.

In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” FSP No. FAS 157-1 amends Statement No. 157, “Fair Value Measurements,” to exclude Statement No. 13, “Accounting for Leases,” and other pronouncements that address fair value measurements for purposes of lease classification or measurement under Statement No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under Statement No. 141, “Business Combinations,” or Statement No. 141(R), “Business Combinations,” regardless of whether those assets and liabilities are related to leases. This FSP was effective upon the initial adoption of Statement No. 157. Adoption of FSP No. FAS 157-1 has had no material impact on results of operations and financial condition.

In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP No. FAS 157-2 delays the effective date of FASB Statement No. 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. This FSP was effective upon issuance. Adoption of FSP No. FAS 157-2 has had no material impact on results of operations and financial condition.

8

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin 110. SAB 110 allows companies to continue using the simplified method of estimating the expected-term assumption for “plain vanilla” stock options in certain circumstances. Susquehanna uses historical employee exercise patterns to provide a reasonable basis for estimating its expected- term assumption and, therefore, this SAB has no impact on its results of operations and financial condition.

In September 2006, the Financial Accounting Standards Board reached a consensus on Emerging Issues Task Force Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” Issue 06-4 requires an employer to recognize a liability for future benefits in accordance with FAS No. 106, if, in substance, a postretirement benefit plan exists. The consensus in this Issue was effective for fiscal years beginning after December 15, 2007. Entities are to recognize the effects of applying the consensus in this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. Susquehanna is a party to split-dollar life insurance arrangements and has elected to recognize the effects of applying this consensus through a cumulative-effect adjustment to retained earnings of $2,488.

Recently Issued Accounting Pronouncements.

In June 2008, the Financial Accounting Standards Board issued FASB Staff Position FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities.” FSP No. EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Early application is not permitted. Susquehanna is evaluating the impact of FSP No. EITF 03-6-1.

In May 2008, the Financial Accounting Standards Board issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Statement No. 162 improves financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. Statement No. 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Susquehanna is evaluating the impact of Statement No. 162.

In April 2008, the Financial Accounting Standards Board issued FASB Staff Position FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Susquehanna is evaluating the impact of FSP No. FAS 142-3.

In March 2008, the Financial Accounting Standards Board issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related and cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Susquehanna is evaluating the impact of Statement No. 161.

In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSP No. FAS 140-3 provides guidance on arepurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counter- parties, that is entered into compemporaneously with, or in comtemplation of, the initial transfer. FSP No. FAS 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim priods within those fiscal years Earlier application is not permitted. Susquehanna is evaluating the impact of FSP No. FAS 140-3.

9

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In December 2007, the Financial Accounting Standards Board issued Statement No. 141(R), “Business Combinations.” Statement No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Statement No. 141(R) is effective for fiscal years beginning after December 15, 2008. Susquehanna is evaluating the impact of Statement No. 141(R).

In December 2007, the Financial Accounting Standards Board issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” Statement No. 160 requires that a reporting entity provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Statement No. 160 is effective for fiscal years beginning after December 15, 2008. Susquehanna is evaluating the impact of Statement No. 160.

NOTE 2. Acquisitions

Stratton Holding Company

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

The acquisition of Stratton was considered immaterial for purposes of the disclosures required by FAS No. 141, “Business Combinations.”

Community Banks, Inc.

On November 16, 2007, Susquehanna completed the acquisition of Community Banks, Inc. in a stock and cash transaction valued at $870,802. Under the terms of the merger agreement, shareholders of Community were entitled to elect to receive for each share of Community common stock that they owned, either $34.00 in cash or 1.48 shares of Susquehanna common stock. The acquisition expanded Susquehanna’s territory into the Harrisburg market and deepened its foundation in central Pennsylvania. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in Susquehanna’s consolidated financial statements.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. However, since the acquisition occurred in the fourth quarter of 2007, net adjustments increasing goodwill totaling $5,498 were made in the first six months of 2008, as additional information became available.

	Unaudited
Assets
Cash and cash equivalents	$	232,628
Securities		664,334
Loans and leases, net of allowance of $19,119		2,574,830
Premises and other equipment		64,614
Goodwill and other intangibles		651,822
Deferred taxes		20,391
Other assets		99,800
Total assets acquired	$	4,308,419
Liabilities
Deposits	$	2,830,408
Borrowings		588,376
Other liabilities		16,430
Total liabilities assumed		3,435,214
Net assets acquired	$	873,205

10

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Presented below is certain unaudited pro forma information for the three months and six months ended June 30, 2007, as if Community had been acquired on January 1, 2007. These results combine the historical results of Community, 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.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2008 Actual		2007 Pro Forma		2008 Actual		2007 Pro Forma
Net income	$	29,201	$	22,492	$	57,222	$	51,406
Basic EPS	$	0.34	$	0.26	$	0.67	$	0.60
Diluted EPS	$	0.34	$	0.26	$	0.67	$	0.60

Widmann, Siff & Co., Inc.

On August 1, 2007, Susquehanna acquired Widmann, Siff & Co. Inc., an investment advisory firm in Radnor, Pennsylvania. Widmann, Siff had more than $300,000 in assets under management, including accounts serving individuals, pension and profit- sharing plans, corporations, and family trusts. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in Susquehanna’s consolidated financial statements.

The acquisition of Widmann, Siff was considered immaterial for purposes of the disclosures required by FAS No. 141, “Business Combinations.”

11

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 3. Investment Securities

Amortized costs and fair values of securities were as follows:

	June 30, 2008				December 31, 2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale:
U.S. Government agencies	$	427,913	$	435,506	$	523,258	$	533,019
State & municipal		306,192		304,644		266,982		268,633
Mortgage-backed		1,082,532		1,064,168		1,071,001		1,078,401
Other debt securities		92,469		71,093		78,333		68,227
Equities		150,044		148,853		111,289		110,880
		2,059,150		2,024,264		2,050,863		2,059,160
Held-to-maturity:
State & municipal		4,695		4,695		4,792		4,792
Other		4,550		4,550		0		0
		9,245		9,245		4,792		4,792
Total investment securities	$	2,068,395	$	2,033,509	$	2,055,655	$	2,063,952

The following table presents Susquehanna’s investments’ gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at June 30, 2008 and December 31, 2007.

	Less than 12 Months				12 Months or More				Total
June 30, 2008	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	32,000	$	56	$	0	$	0	$	32,000	$	56
States and political subdivisions		109,842		3,937		50		1		109,892		3,938
Mortgage-backed securities		778,593		21,596		5,164		137		783,757		21,733
Other debt securities		11,517		3,978		33,810		17,141		45,327		21,119
Equity securities		17,751		738		2,645		873		20,396		1,611
	$	949,703	$	30,305	$	41,669	$	18,152	$	991,372	$	48,457
	Less than 12 Months				12 Months or More				Total
December 31, 2007	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	550	$	1	$	31,136	$	45	$	31,686	$	46
States and political subdivisions		51,144		397		18,440		202		69,584		599
Mortgage-backed securities		1,121		1,643		184,182		2,107		185,303		3,750
Other debt securities		47,961		10,217		17,438		47		65,399		10,264
Equity securities		2,589		502		16,710		369		19,299		871
	$	103,365	$	12,760	$	267,906	$	2,770	$	371,271	$	15,530

At June 30, 2008, gross unrealized losses in Susquehanna’s available-for-sale investment portfolio totaled $48,457. Included in this total are gross unrealized losses of $21,596 related to mortgage-backed securities that have been in a continuous unrealized loss position for less than twelve months and gross unrealized losses of $17,141 related to other debt securities that have been in a continuous unrealized loss position for more than twelve months.

Mortgage-backed securities include issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and other non-agency issuers that currently are all rated Triple A. None of Susquehanna’s mortgage-backed securities include subprime or Alt-A components, and management believes that the unrealized losses in this category were caused principally by decreased liquidity and larger risk premiums in the marketplace.

Other debt securities are comprised of corporate synthetic collateralized debt obligations and pooled trust preferred securities. Management believes that the unrealized losses on these securities were principally a result of decreased liquidity and larger risk premiums in the marketplace, and not deterioration in the creditworthiness of the underlying issuers.

While it is possible that, under certain conditions, defaults on these securities could result in a loss of principal, Susquehanna presently does not believe that those conditions are probable. Therefore, based on Susquehanna’s ability and intent to hold its available-for-sale securities for a sufficient time to recover all amortized costs and the fact that Susquehanna has not identified any issues related to the ultimate repayment of principal as a result of credit concerns, management has concluded that the reduction in the fair value of these securities, as well as any other individual security, is temporary at this time.

NOTE 4. Loans and Leases

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

	June 30, 2008		December 31, 2007
Commercial, financial, and agricultural	$	1,976,953	$	1,781,981
Real estate - construction		1,301,036		1,292,953
Real estate secured - residential		2,180,595		2,151,923
Real estate secured - commercial		2,770,889		2,661,841
Consumer		394,918		411,159
Leases		603,578		451,733
Total loans and leases	$	9,227,969	$	8,751,590
Leases held for sale (included in “Leases,” above)	$	349,469	$	238,351
Home equity line of credit loans held for sale (included in “Real estate secured - residential,” above)		147,697		97,320

12

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Net investment in direct financing leases was as follows:

	June 30, 2008			December 31, 2007
Minimum lease payments receivable	$	421,066		$	337,875
Estimated residual value of leases		258,635			176,400
Unearned income under lease contracts		(76,123	)		(62,542	)
Total leases	$	603,578		$	451,733
An analysis of impaired loans, as of June 30, 2008 and December 31, 2007, is as follows:
Impaired loans without a related reserve	$	19,811		$	27,716
Impaired loans with a reserve		40,883			13,033
Total impaired loans	$	60,694		$	40,749
Reserve for impaired loans	$	9,854		$	4,146
An analysis of impaired loans, for the three months and six months ended June 30, 2008 and 2007, is as follows:
	Three Months Ended June 30,
	2008			2007
Average balance of impaired loans	$	47,388		$	19,629
Interest income on impaired loans (cash-basis)		84			2
	Six Months Ended June 30,
	2008			2007
Average balance of impaired loans	$	50,584		$	18,866
Interest income on impaired loans (cash-basis)		131			4
NOTE 5. Borrowings
Short-term borrowings were as follows:
	June 30, 2008			December 31, 2007
Securities sold under repurchase agreements	$	413,813		$	387,158
Federal funds purchased		336,000			178,000
Treasury tax and loan notes		1,051			3,254
Total short-term borrowings	$	750,864		$	568,412

NOTE 6. Earnings per Share

The following tables set forth the calculation of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2008 and 2007.

	For the Three Months Ended June 30,
	2008					2007
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic Earnings per Share:
Income available to common shareholders	$	29,201	85,936	$	0.34	$	9,818	52,124	$	0.19
Effect of Diluted Securities:
Stock options and restricted shares outstanding			34					73
Diluted Earnings per Share:
Income available to common shareholders and assuming conversion	$	29,201	85,970	$	0.34	$	9,818	52,197	$	0.19

For the three months ended June 30, 2008 and 2007, average options to purchase 2,095 and 1,660 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents under FAS No. 123(R) were antidilutive.

	For the Six Months Ended June 30,
	2008					2007
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic Earnings per Share:
Income available to common shareholders	$	57,222	85,929	$	0.67	$	30,544	52,111	$	0.59
Effect of Diluted Securities:
Stock options and restricted shares outstanding			39					87
Diluted Earnings per Share:
Income available to common shareholders and assuming conversion	$	57,222	85,968	$	0.67	$	30,544	52,198	$	0.59

For the six months ended June 30, 2008 and 2007, average options to purchase 2,095 and 1,660 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents under FAS No. 123(R) were antidilutive.

13

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 7. Share-Based Compensation

On February 27, 2008, Susquehanna’s Compensation Committee granted to directors and certain employees nonqualified stock options to purchase an aggregate of 700 shares of common stock with an exercise price of $21.82. In addition, the Committee awarded to certain employees an aggregate of 26 restricted shares with a grant-date fair value of $21.82.

The fair value of $2.78 for each of the 2008 options and $4.08 for each of the 2007 options was estimated on the date of grant using the Black-Scholes-Merton model, with the assumptions noted in the following table:

	2008		2007
Volatility	19.70	%	20.59	%
Expected dividend yield	4.50	%	4.00	%
Expected term (in years)	7.0		6.5
Risk-free rate	3.33	%	4.44	%

NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost

	Three Months Ended June 30,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2008			2007			2008		2007		2008		2007
Service cost	$	1,729		$	1,082		$	28	$	26	$	111	$	138
Interest cost		1,330			1,148			59		54		121		148
Expected return on plan assets		(2,002	)		(1,759	)		0		0		0		0
Amortization of prior service cost		9			7			31		31		28		28
Amortization of transition obligation (asset)		0			0			0		0		28		28
Amortization of net actuarial loss		0			34			12		11		0		33
Net periodic benefit cost	$	1,066		$	512		$	130	$	122	$	288	$	375
	Six Months Ended June 30,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2008			2007			2008		2007		2008		2007
Service cost	$	2,748		$	2,164		$	57	$	52	$	222	$	276
Interest cost		2,660			2,296			118		108		242		296
Expected return on plan assets		(4,004	)		(3,518	)		0		0		0		0
Amortization of prior service cost		18			14			62		62		56		56
Amortization of transition obligation (asset)		0			0			0		0		56		56
Amortization of net actuarial loss		0			68			24		22		0		66
Net periodic benefit cost	$	1,422		$	1,024		$	261	$	244	$	576	$	750

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute $124 to its pension plans and $371 to its other postretirement benefit plan in 2008. As of June 30, 2008, $62 of contributions have been made to its pension plans, and $186 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $62 to fund its pension plan in 2008, for a total of $124, and $185 to its other postretirement benefit plan, for a total of $371.

NOTE 9. Derivative Financial Instruments and Hedging Activities

The following table summarizes our derivative financial instruments:

	June 30, 2008
	Notional Amount		Fair Value			Variable Rate	Fixed Rate
Cash Flow Hedges:
	$	255,795	($	3,267	)	One-month LIBOR	3.370% to 5.206	%
		25,000		(303	)	Three-month LIBOR	4.083	%
		280,795		(3,570	)
Instruments Not
Designated as Hedges:
		210,547		(1,063	)	One-month LIBOR	4.86% to 7.42	%
		210,547		1,490		One-month LIBOR	4.86% to 7.42	%
		421,094		427
Total Derivatives	$	701,889	($	3,143	)

14

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	December 31, 2007
	Notional Amount		Fair Value			Variable Rate	Fixed Rate
Cash Flow Hedges:
	$	185,244	($	3,228	)	One-month LIBOR	3.661% to 5.206	%
		25,000		81		Three-month LIBOR	3.935	%
		25,000		(163	)	Three-month LIBOR	4.083	%
Total Derivatives	$	235,244	($	3,310	)

The effective portion of changes in the fair value of cash flow hedges is initially reported in accumulated other comprehensive income and subsequently reclassified to earnings when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge, if any, is recorded in noninterest income.

Changes in the fair value of instruments not designated as hedges are recorded in other noninterest income.

NOTE 10. Goodwill

The following is the activity in the goodwill account during the periods presented:

Goodwill at January 1, 2007	$	335,005
Goodwill acquired through the Community acquisition		606,071
Goodwill acquired through the Widmann Siff acquisition		736
Additional goodwill related to contingent earn-out agreement associated with the Addis acquisition		2,000
Additional goodwill related to contingent earn-out agreement associated with the Brandywine acquisition		1,172
Other		97
Goodwill at December 31, 2007		945,081
Adjustments to goodwill related to the Community acquisition		5,498
Goodwill acquired through the Stratton acquisition		63,948
Goodwill at June 30, 2008	$	1,014,527

15

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 11. Securitization Activity

Automobile Leases

2005 Transaction

In January 2008, Susquehanna, as servicer, issued a clean-up call for this securitization and acquired $32,140 in lease receivables.

2007 Transaction

In February 2007, Susquehanna securitized $300,414 of closed-end motor vehicle leases and recorded a pre-tax gain of $2,709 (which includes a loss recognized on the associated cash-flow hedge) in noninterest income. Retained interests in the securitization totaled $51,930 and included $7,774 in subordinated notes, $40,147 in equity certificates of the securitization trust, and a $4,009 interest-only strip. The initial carrying values of these retained interests were determined by allocating the carrying value among the assets sold and retained based on their relative fair values at the date of sale. The initial carrying value of the interest-only strip was estimated at the date of sale by discounting projected future cash flows. Susquehanna has retained the right to service the leases; however, no servicing asset or liability was recognized because expected servicing costs are approximately equal to expected servicing fee income, which approximates market value. Transaction costs associated with this securitization were included as a component of gain on sale. The subordinated notes retained in the transaction, which do not bear interest, have been rated by independent rating agencies. Their final maturity date is January 14, 2013.

2002 Revolving Transaction

In July 2007, Susquehanna, as servicer, issued a clean-up call for this securitization and acquired $33,397 in lease receivables.

Key economic assumptions used in measuring certain retained interests at the date of securitization were as follows:

Automobile Leases	Gain Recognized		Weighted- average Life (in months)	Prepayment Speed		Expected Credit Losses		Annual Discount Rate		Annual Coupon Rate to Investors
2007 transaction	$	2,709	19	2.00%-4.00	%	0.05	%	5.18	%	5.25%-5.61	%

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

									For the Six Months Ended June 30
	Principal Balance				Loans and Leases Past Due 30 Days or More				Net Credit Losses (Recoveries)
	June 30, 2008		December 31, 2007		June 30, 2008		December 31, 2007		2008			2007
Loans and leases held in portfolio	$	9,227,969	$	8,751,590	$	162,237	$	187,703	$	16,138		$	4,705
Leases securitized		262,856		463,517		319		769		44			223
Home equity loans securitized		302,277		334,417		2,276		2,979		165			52
Leases serviced for others		43,665		61,551		187		1,300		(4	)		(12	)
Total loans and leases serviced	$	9,836,767	$	9,611,075	$	165,019	$	192,751	$	16,343		$	4,968

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

	Three Months Ended June 30,				Six Months Ended June 30,
Automobile Leases	2008		2007		2008		2007
Proceeds from securitizations	$	0	$	0	$	0	$	252,493
Amounts derecognized		0		0		0		300,414
Servicing fees received		890		1,910		1,879		4,074
Other cash flows received from retained interests		11,330		4,903		14,917		7,893
	Three Months Ended June 30,				Six Months Ended June 30,
Home Equity Loans	2008		2007		2008		2007
Additional draws conveyed to the trusts	$	14,628	$	16,555	$	28,166	$	32,492
Servicing fees received		318		424		654		886
Other cash flows received from retained interests		2,435		1,851		4,733		4,144

There were no proceeds from securitizations nor amounts derecognized for the six-month periods ended June 30, 2008 and June 30, 2007 relating to home equity loans.

16

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The following table sets forth a summary of the fair values of the interest-only strips, key economic assumptions used to arrive at the fair values, and the sensitivity of the June 30, 2008 fair values to immediate 10% and 20% adverse changes in those assumptions. The sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

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

As of June 30, 2008

Automobile Leases	Fair Value		Weighted- average Life (in months)	Monthly Prepayment Speed			Expected Cumulative Credit Losses			Annual Discount Rate (1)
2007 transaction - Interest-Only Strip	$	1,863	10		4.00	%		0.05	%		6.97	%
Decline in fair value of 10% adverse change				$	5		$	7		$	9
Decline in fair value of 20% adverse change					10			14			17
2006 transaction - Interest-Only Strip	$	309	3		4.00	%		0.05	%		6.71	%
Decline in fair value of 10% adverse change				$	0		$	1		$	0
Decline in fair value of 20% adverse change					0			1			1
Home Equity Loans	Fair Value		Weighted- average Life (in months)	Constant Prepayment Rate			Expected Cumulative Credit Losses			Annual Discount Rate (1)
2006 transaction - Interest-Only Strips
Fixed-rate portion	$	8,879	42		15.00			0.04	%		7.40	%
Decline in fair value of 10% adverse change				$	344		$	19		$	189
Decline in fair value of 20% adverse change					672			37			367
Variable-rate portion	$	2,634	23		40.00			0.06	%		6.99	%
Decline in fair value of 10% adverse change				$	186		$	7		$	48
Decline in fair value of 20% adverse change					348			13			93
2005 transaction - Interest-Only Strips	$	5,510	26		35.00			0.06	%		7.06	%
Decline in fair value of 10% adverse change				$	195		$	11		$	106
Decline in fair value of 20% adverse change					382			21			207

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

17

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Note 12. Fair Value Disclosures

Effective January 1, 2008, Susquehanna adopted FAS No. 157, "Fair Value Measurements." and FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." At June 30, 2008, Susquehanna had made no elections to use fair value as an alternative measurement for selected financial assets and liabilities not previously carried at fair value.

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

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

Securities

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

Derivatives

Currently, Susquehanna uses interest rate swaps to manage its interest rate risk and to assist its borrowers in managing their interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. To comply with the provisions of FAS No. 157, Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2008, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Certain Retained Interests in Securitizations

For our interest-only strips, there is a lack of similar observable transactions for similar assets in the marketplace. Therefore, Susquehanna uses the present-value approach to determine the initial and ongoing fair values of the cash flows associated with securitizations. Assumptions used, which incorporate certain market information obtained from third parties, include an estimation of an appropriate discount rate, net credit losses, and prepayment rates. Changes in the assumptions used may have a significant impact on Susquehanna’s valuation of retained interests, and accordingly, such interests are classified within Level 3 of the valuation hierarchy. For further discussion of the most significant assumptions used to value interest- only strips, as well as the applicable stress tests for those assumptions, see Note 11 of this Form 10-Q.

18

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Assets Measured at Fair Value on a Recurring Basis

The following table presents the financial instruments carried at fair value at June 30, 2008, on the consolidated balance sheet and by FAS No. 157 valuation hierarchy.

			Fair Value Measurements at Reporting Date Using
Description	June 30, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities	$	2,024,264	$	4,480	$	1,942,869	$	76,915
Derivatives (1)		3,363		0		3,363		0
Interest-only strips (1)		19,195		0		0		19,195
Total	$	2,046,822	$	4,480	$	1,946,232	$	96,110
(1)    Included in Other assets
			Fair Value Measurements at Reporting Date Using
Description	June 30, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Derivatives (2)	$	6,506	$	0	$	6,506	$	0
Total	$	6,506	$	0	$	6,506	$	0
(2)    Included in Other liabilities

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

The following table presents a rollforward of the balance sheet amounts for the three months and six months ended June 30, 2008, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale Securities			Interest-only Strips			Total
Balance at April 1, 2008	$	73,209		$	22,230		$	95,439
Total gains or losses (realized/unrealized)
Included in other comprehensive income (Presented here gross of taxes)		(1,152	)		(760	)		(1,912	)
Purchases, issuances, and settlements		4,858			(2,275	)		2,583
Transfers in and/or out of Level 3		0			0			0
Balance at June 30, 2008	$	76,915		$	19,195		$	96,110

19

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale Securities			Interest-only Strips			Total
Balance at January 1, 2008	$	81,285		$	21,138		$	102,423
Total gains or losses (realized/unrealized)
Included in earnings		2			0			2
Included in other comprehensive income (Presented here gross of taxes)		(8,760	)		2,093			(6,667	)
Purchases, issuances, and settlements		4,388			(4,036	)		352
Transfers in and/or out of Level 3		0			0			0
Balance at June 30, 2008	$	76,915		$	19,195		$	96,110

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Certain loans are evaluated for impairment under FAS No. 114, "Accounting by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and 15." To estimate the impairment of a loan, Susquehanna uses the practical expedient method which is based upon the fair value of the underlying collateral for collateral-dependent loans. Currently, all of Susquehanna’s impaired loans are secured by real estate. The value of the real estate collateral is determined through appraisals performed by independent licensed appraisers. As part of Susquehanna’s overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna’s principal markets. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs. Impaired loans are reviewed and evaluated at least quarterly for additional impairment, and reserves are adjusted accordingly.

The following table presents the financial instruments carried at fair value at June 30, 2008, on the consolidated balance sheet and by FAS No. 157 valuation hierarchy.

			Fair Value Measurements Using
Description	June 30, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	31,029	$	0	$	0	$	31,029
	$	31,029	$	0	$	0	$	31,029

Specific reserves identified under FAS No. 114 during the first six months of 2008 totaled $5,708. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at June 30, 2008.

20

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

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

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, Susquehanna’s potential exposures to various types of market risks, such as interest rate risk and credit risk; whether Susquehanna’s allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to complete the $350.0 million auto-lease sale that is scheduled for the third quarter of 2008; the impact of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) on residual loss exposure; the unlikelihood that more than 10% of the home equity line of credit loans in securitization transactions will convert from variable interest rates to fixed interest rates; expectations regarding the future performance of Hann; and our ability to achieve our 2008 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in the automobile industry;

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

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

• the adequacy of loss reserves;

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

• continued relationships with major customers;

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

• adverse national and regional economic and business conditions;

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

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

• the ability to hedge certain risks economically;

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

21

• 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.

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 DV and subsidiaries, Susquehanna Bank and subsidiaries, Valley Forge Asset Management Corp. and subsidiaries (“VFAM”), Stratton Management Company, LLC (Stratton), 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 as an inactive textual reference only.

Executive Commentary

Updated Financial Goals for 2008

Our updated financial goals for 2008, including the anticipated effects of the acquisition of Stratton Holding Company, which was completed on April 30, 2008, are as follows:

	Previously Published Goals		Updated Goals
Net interest margin	3.70	%	3.69	%
Loan growth (adjusted for securitizations)	8.0	%	10.0	%
Deposit growth	1.0	%	2.0	%
Noninterest income growth	50.0	%	45.0	%
Noninterest expense growth	30.0	%	30.0	%
Tax rate	29.0	%	28.0	%

These financial goals include a $350.0 million auto-lease sale scheduled for the third quarter of 2008. We estimate that this sale will result in a minimal pre-tax gain due to recent widening of credit spreads. However, the exact timing and amount of gain associated with this event is difficult to predict in this volatile environment. In addition, we continue to evaluate methods to consolidate our banking operations, decrease costs, increase our efficiency, and improve customer convenience.

22

Acquisitions

Stratton Holding Company

On April 30, 2008, we completed the acquisition of Stratton Holding Company, an investment management company based in Plymouth Meeting, Pennsylvania with approximately $3.0 billion in assets under management. Stratton became a wholly owned subsidiary of Susquehanna and part of the family of Susquehanna wealth management companies. The addition of Stratton brings increased diversification in our investment expertise, including experience in mutual fund management. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. The acquisition of Stratton was considered immaterial for purposes of the disclosures required by FAS No. 141, “Business Combinations.”

Community Banks, Inc.

On November 16, 2007, we completed the acquisition of Community Banks, Inc. in a stock and cash transaction valued at approximately $871.0 million. Under the terms of the merger agreement, shareholders of Community were entitled to elect to receive for each share of Community common stock that they owned, either $34.00 in cash or 1.48 shares of Susquehanna common stock. The acquisition expanded our territory into the Harrisburg market and deepened our foundation in central Pennsylvania. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. See Note 2 to our consolidated financial statements for the disclosures required by FAS No. 141, “Business Combinations.”

Widmann, Siff & Co., Inc.

On August 1, 2007, we acquired Widmann, Siff & Co., Inc., an investment advisory firm in Radnor, Pennsylvania. Widmann, Siff had more than $300.0 million in assets under management, including accounts serving individuals, pension and profit-sharing plans, corporations, and family trusts. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. The acquisition of Widmann, Siff was considered immaterial for purposes of the disclosures required by FAS No. 141, “Business Combinations.”

Results of Operations

Summary of 2008 Compared to 2007

The acquisition of Community Banks on November16, 2007 has had a significant impact on our results of operations for the second quarter of 2008 and the first six months of 2008. Consequently, comparisons to the same periods in 2007 may not be particularly meaningful. In addition, results of operations for the three and six month periods ending June 30, 2007 include a pre-tax loss of $11.8 million related to the restructuring of our investment portfolio.

Net income for the second quarter of 2008 was $29.2 million, an increase of $19.4 million, or 197.4%, over net income of $9.8 million for the second quarter of 2007. Net interest income increased 56.2%, to $99.1 million for the second quarter of 2008, from $63.4 million for the second quarter of 2007. Noninterest income increased 133.3%, to $44.7 million for the second quarter of 2008, from $19.2 million for the second quarter of 2007. Noninterest expenses increased 34.1%, to $90.3 million for the second quarter of 2008, from $67.3 million for the second quarter of 2007.

Net income for the first six months of 2008 was $57.2 million, an increase of $26.7 million, or 87.3%, over net income of $30.5 million for the first six months of 2007. Net interest income increased 55.9%, to $197.2 million for the first six months of 2008, from $126.5 million for the first six months of 2007. Noninterest income increased 63.9%, to $87.6 million for the first six months of 2008, from $53.4 million for the first six months of 2007. Noninterest expenses increased 37.9%, to $182.3 million for the first six months of 2008, from $132.2 million for the first six months of 2007.

23

Noninterest expenses increased 37.9%, to $182.3 million for the first six months of 2008, from $132.2 million for the first six months of 2007.

Additional information is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Diluted Earnings per Share	$	0.34		$	0.19		$	0.67		$	0.59
Return on Average Assets		0.89	%		0.48	%		0.88	%		0.75	%
Return on Average Equity		6.81	%		4.16	%		6.66	%		6.54	%
Return on Average Tangible Equity (1)		18.48	%		6.96	%		17.37	%		10.79	%
Efficiency Ratio		61.55	%		80.75	%		62.73	%		72.83	%
Net Interest Margin		3.66	%		3.67	%		3.69	%		3.67	%

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Return on average equity (GAAP basis)	6.81	%	4.16	%	6.66	%	6.54	%
Effect of excluding average intangible assets and related amortization	11.67	%	2.80	%	10.71	%	4.25	%
Return on average tangible equity	18.48	%	6.96	%	17.37	%	10.79	%

24

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 June 30, 2008						For the Three-Month Period Ended June 30, 2007
	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	82,325		$	427	2.09	$	100,745		$	1,268	5.05
Investment securities:
Taxable		1,777,900			23,238	5.26		1,415,256			16,556	4.69
Tax-advantaged		303,332			4,921	6.52		41,662			655	6.31
Total investment securities		2,081,232			28,159	5.44		1,456,918			17,211	4.74
				��
Loans and leases, (net):
Taxable		8,843,985			142,775	6.49		5,381,069			101,715	7.58
Tax-advantaged		194,638			3,595	7.43		89,790			1,662	7.42
Total loans and leases		9,038,623			146,370	6.51		5,470,859			103,377	7.58
Total interest-earning assets		11,202,180		$	174,956	6.28		7,028,522		$	121,856	6.95
Allowance for loan and lease losses		(93,557	)					(62,688	)
Other non-earning assets		2,107,951						1,236,989
Total assets	$	13,216,574					$	8,202,823
Liabilities
Deposits:
Interest-bearing demand	$	2,711,535		$	8,574	1.27	$	2,133,308		$	16,466	3.10
Savings		740,925			1,296	0.70		457,442			940	0.82
Time		4,079,074			39,250	3.87		2,502,428			28,947	4.64
Short-term borrowings		664,190			2,864	1.73		363,651			3,990	4.40
FHLB borrowings		1,394,087			13,229	3.82		432,975			3,960	3.67
Long-term debt		422,404			7,704	7.34		222,090			3,305	5.97
Total interest-bearing liabilities		10,012,215		$	72,917	2.93		6,111,894		$	57,608	3.78
Demand deposits		1,223,112						905,250
Other liabilities		257,621						239,705
Total liabilities		11,492,948						7,256,849
Equity		1,723,626						945,974
Total liabilities and shareholders’ equity	$	13,216,574					$	8,202,823
Net interest income / yield on average earning assets				$	102,039	3.66				$	64,248	3.67

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.

25

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 Six-Month Period Ended June 30, 2008						For the Six-Month Period Ended June 30, 2007
	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	103,241		$	1,449	2.82	$	91,720		$	2,392	5.26
Investment securities:
Taxable		1,774,857			47,190	5.35		1,421,976			33,128	4.70
Tax-advantaged		285,344			9,171	6.46		39,732			1,249	6.34
Total investment securities		2,060,201			56,361	5.50		1,461,708			34,377	4.74
Loans and leases, (net):
Taxable		8,719,087			291,230	6.72		5,396,899			203,121	7.59
Tax-advantaged		192,258			7,137	7.47		87,474			3,260	7.52
Total loans and leases		8,911,345			298,367	6.73		5,484,373			206,381	7.59
Total interest-earning assets		11,074,787		$	356,177	6.47		7,037,801		$	243,150	6.97
Allowance for loan and lease losses		(91,637	)					(62,690	)
Other non-earning assets		2,099,954						1,223,407
Total assets	$	13,083,104					$	8,198,518
Liabilities
Deposits:
Interest-bearing demand	$	2,715,572		$	19,813	1.47	$	2,104,997		$	32,864	3.15
Savings		727,042			2,838	0.78		464,889			2,053	0.89
Time		4,109,917			82,858	4.05		2,481,568			56,686	4.61
Short-term borrowings		603,311			6,189	2.06		352,302			7,772	4.45
FHLB borrowings		1,319,134			25,985	3.96		487,468			9,129	3.78
Long-term debt		420,501			15,546	7.43		222,159			6,583	5.98
Total interest-bearing liabilities		9,895,477		$	153,229	3.11		6,113,383		$	115,087	3.80
Demand deposits		1,201,401						905,971
Other liabilities		258,680						236,691
Total liabilities		11,355,558						7,256,045
Equity		1,727,546						942,473
Total liabilities and shareholders’ equity	$	13,083,104					$	8,198,518
Net interest income / yield on average earning assets				$	202,948	3.69				$	128,063	3.67

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.

26

Net Interest Income — Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased to $99.1 million for the second quarter of 2008, as compared to $63.4 million for the same period in 2007. For the six months ended June 30, 2008, net interest income increased to $197.2 million, as compared to $126.5 million for the same period in 2007.

Net interest income as a percentage of net interest income plus noninterest income was 68.9% for the quarter ended June 30, 2008, and 76.8% for the quarter ended June 30, 2007. Net interest income as a percentage of net interest income plus noninterest income was 69.2% for the six months ended June 30, 2008, and 70.3% for the six months ended June 30, 2007.

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 $35.6 million increase in our net interest income for the second quarter of 2008, as compared to the second quarter of 2007, was primarily the result of the net contribution from interest-earning assets and interest-bearing liabilities acquired from Community on November 16, 2007.

The $70.8 million increase in our net interest income for the first six months of 2008, as compared to the first six months of 2007, was primarily the result of the net contribution from interest-earning assets and interest-bearing liabilities acquired from Community on November 16, 2007.

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 and lease portfolio. The purpose of the review is to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets we serve.

During the first six months of 2008, we continued to experience a challenging operating environment. Given the economic pressures that impact some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration the $48.7 million increase in nonperforming loans since June 30, 2007 and the rising charge-off level noted below. As illustrated in Table 2, the provision for loan and lease losses was $13.8 million for the second quarter of 2008, and $1.9 million for the second quarter of 2007. The provision for the first six months of 2008 was $23.6 million and $3.9 million for the first six months of 2007.

27

Net charge-offs for the second quarter of 2008 increased to $10.7 million, or 0.48% of average loans and leases, when compared to net charge-offs for the second quarter of 2007 of $1.9 million, or 0.14% of average loans and leases. Net charge-offs for the first six months of 2008 increased to $16.1 million, or 0.36% of average loans and leases, when compared to net charge-off for the first six months of 2007 of $4.7 million, or 0.17% of average loans and leases.

The allowance for loan and lease losses was 1.04% of period-end loans and leases, or $96.0 million, at June 30, 2008; 1.01% of period-end loans and leases, or $88.6 million, at December 31, 2007; and 1.11% of period-end loans and leases, or $61.9 million, at June 30, 2007.

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 process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at June 30, 2008. There can be no assurance, however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at June 30, 2008.

Susquehanna Bancshares, Inc. and Subsidiaries

TABLE 2 - Allowance for Loan and Lease Losses

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(dollars in thousands)
Balance - Beginning of period	$	92,995		$	61,789		$	88,569		$	62,643
Additions charged to operating expenses		13,765			1,933			23,602			3,933
		106,760			63,722			112,171			66,576
Charge-offs		(12,726	)		(2,917	)		(20,091	)		(6,522	)
Recoveries		1,999			1,066			3,953			1,817
Net charge-offs		(10,727	)		(1,851	)		(16,138	)		(4,705	)
Balance - Period end	$	96,033		$	61,871		$	96,033		$	61,871
Net charge-offs as a percentage of average loans and leases (annualized)		0.48	%		0.14	%		0.36	%		0.17	%
Allowance as a percentage of period-end loans and leases		1.04	%		1.11	%		1.04	%		1.11	%
Average loans and leases	$	9,038,623		$	5,470,859		$	8,911,345		$	5,484,373
Period-end loans and leases		9,227,969			5,574,858			9,227,969			5,574,858

Noninterest Income

Second Quarter 2008 Compared to Second Quarter 2007

Noninterest income, as a percentage of net interest income plus noninterest income, was 31.1% for the second quarter of 2008, and 23.2% for the second quarter of 2007.

Noninterest income increased $25.5 million, or 133.3%, for the second quarter of 2008, over the second quarter of 2007. Unless specifically addressed in the following discussion, increases in noninterest income are attributable to the effects of the Community acquisition on November 16, 2007. Non-Community-related changes of note are as follows:

• Decreasedvehicle origination, servicing, and securitization fees of $1.8 million;

• Increasedwealth management fee income (includesasset management fees,income from fiduciary-related activities, andcommissions on brokerage, life insurance, and annuity sales) of $3.0 million; and

28

• Decreasednet realized loss on securities of $11.9 million.

Vehicle origination, servicing, and securitization fees.The 46.7% decrease primarily was the result of a reduction in securitization fees, as no auto lease securitization occurred during the first six months of 2008.

Wealth management fee income.The 37.3% increase primarily was the result of the contribution from Stratton Management Company, which was acquired on April 30, 2008.

Net realized loss on securities.During the second quarter of 2007, we restructured our available-for-sale investment portfolio and recognized an $11.8 million loss on the sale of selected securities.

Six Months ended June 30, 2008 Compared to Six Months ended June 30, 2007

Noninterest income, as a percentage of net interest income plus noninterest income, was 30.8% for the six-month period ended June 30, 2008, and 29.7% for the six-month period ended June 30, 2007.

Noninterest income increased $34.2 million, or 63.9%, for the six-month period ended June 30, 2008, over the comparable period in 2007. Unless specifically addressed in the following discussion, increases in noninterest income are attributable to the effects of the Community acquisition on November 16, 2007. Non-Community-related changes of note are as follows:

• Decreasedvehicle origination, servicing, and securitization fees of $2.4 million;

• Increasedwealth management fee income (includesasset management fees,income from fiduciary-related activities, andcommissions on brokerage, life insurance, and annuity sales) of $4.5 million;

• Decreasedgains on sales of loans and leases of $2.4 million; and

• Decreasednet realized loss on securities of $11.9 million.

Vehicle origination, servicing, and securitization fees.The 30.5% decrease primarily was the result of a reduction in securitization fees, as no auto lease securitization occurred during the first six months of 2008.

Wealth management fee income.The 29.5% increase primarily was the result of the contribution from Stratton Management Company, which was acquired on April 30, 2008.

Gains on sale of loans and leases.During the first quarter of 2007, we recognized a $2.7 million gain in an auto-lease securitization. There were no securitization transactions during the first six months of 2008.

Net realized loss on securities.During the second quarter of 2007, we restructured our available-for-sale investment portfolio and recognized an $11.8 million loss on the sale of selected securities.

Noninterest Expenses

Second Quarter 2008 Compared to Second Quarter 2007

Noninterest expenses increased $23.0 million, or 34.1%, from $67.3 million for the second quarter of 2007, to $90.3 million for the second quarter of 2008. Overall increases in noninterest expense are attributable to the effects of the Community acquisition on November 16, 2007. There were no non-Community-related changes of note.

29

Six Months ended June 30, 2008 Compared to Six Months ended June 30, 2007

Noninterest expenses increased $50.1 million, or 37.9%, from $132.2 million for the six-month period ended June 30, 2007, to $182.3 million for the six-month period ended June 30, 2008. Overall increases in noninterest expense are attributable to the effects of the Community acquisition on November 16, 2007. There were no non-Community-related changes of note.

Income Taxes

Our effective tax rate for the second quarter of 2008 was 26.4%. Our effective tax rate for the second quarter of 2007 was 26.3%.

Our effective tax rate for the first six months of 2008 was 27.5%. Our effective tax rate for the first six months of 2007 was 30.3%. The decrease was due to an increase in tax-advantaged income relative to total income for the first six months of 2008 as compared to tax-advantaged income relative to total income for first six months of 2007. The increase in tax-advantaged income is due, in part, to the acquisition of Community, which had a large municipal bond portfolio.

Financial Condition

Summary of June 30, 2008 Compared to December 31, 2007

Total assets at June 30, 2008 were $13.5 billion, an increase of $426.7 million, as compared to total assets at December 31, 2007. Total deposits increased $43.3 million at June 30, 2008, from December 31, 2007. Equity capital was $1.7 billion at June 30, 2008, or $19.95 per share, and $1.7 billion, or $20.12 per share, at December 31, 2007. The decline in book value per share primarily was the result of unrealized losses in our investment securities portfolio that were recorded in accumulated other comprehensive income in the equity section of our balance sheet. For additional information about our investment securities portfolio, see “Note 3. Investment Securities” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

Loan demand in our market area remains strong. Consequently, loans and leases, net of unearned income, increased 5.4%, from $8.8 billion at December 31, 2007 to $9.2 billion at June 30, 2008. In particular, commercial, financial, and agricultural loans grew 10.9%, from $1.8 billion at December 31, 2007, to $2.0 billion at June 30, 2008; real-estate-secured commercial loans grew 4.1%, from $2.7 billion at December 3, 2007, to $2.8 billion at June 30, 2008; and leases grew 33.6%, from $451.7 million at December 31, 2007, to $603.6 million at June 30, 2008.

Risk Assets

Total nonperforming assets increased $20.3 million, from December 31, 2007 to June 30, 2008, as presented in Table 3.

Nonaccrual loans and leases increased from $56.7 million at December 31, 2007, to $78.4 million at June 30, 2008. The net increase was primarily the result of three credits totaling $24.7 million being placed on nonaccrual status in the first six months of 2008. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus other real estate owned increased from 0.81% at December 31, 2007 to 0.99% at June 30, 2008.

30

Susquehanna Bancshares, Inc. and Subsidiaries

TABLE 3 - Risk Assets

	June 30, 2008			December 31, 2007			June 30, 2007
	(dollars in thousands)
Nonperforming assets:
Nonaccrual loans and leases	$	78,424		$	56,741		$	30,309
Restructured loans		2,582			2,582			1,997
Other real estate owned		10,510			11,927			4,587
Total nonperforming assets	$	91,516		$	71,250		$	36,893
As a percentage of period-end loans and leases plus other real estate owned		0.99	%		0.81	%		0.66	%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases		118.55	%		149.30	%		191.52	%
Loans and leases contractually past due 90 days and still accruing	$	22,033		$	12,199		$	8,053

Deposits

Total deposits increased 0.5% from December 31, 2007 to June 30, 2008. An increase in brokered certificates of deposit of $163.3 million, however, contributed to this overall net increase. The slight net change in total deposits is the result of a very competitive environment for deposit generation.

Short-term Borrowings and Federal Home Loan Bank Borrowings

Short-term borrowings increased $182.5 million from December 31, 2007 to June 30, 2008, and FHLB borrowings increased $237.0 million during the same time period.

Since our loan growth has been greater than our deposit growth, we have used short-term borrowings, primarily in the form of federal funds purchased, FHLB borrowings, and brokered certificates of deposit, to fund loans.

Capital Adequacy

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

The minimum Tier 1 capital ratio is 4%; our ratio at June 30, 2008 was 8.68%. The minimum total capital (Tiers 1and 2) ratio is 8%; our ratio at June 30, 2008 was 10.81%. The minimum leverage ratio is 4%; our leverage ratio at June 30, 2008 was 7.78%. 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.

31

Securitizations and Off-Balance-Sheet Financings

The following table summarizes the components of loans and leases serviced:

	As of June 30, 2008		As of June 30, 2007
	(dollars in thousands)
Lease Securitization Transactions*	$	262,856	$	708,814
Home Equity Loan Securitization Transactions*		302,277		387,638
Agency Arrangements and Lease Sales*		43,665		85,804
Leases and Loans Held in Portfolio		9,227,969		5,574,858
Total Leases and Loans Serviced	$	9,836,767	$	6,757,114

* Off-balance-sheet

Securitization Transactions

We use the securitization of financial assets as a source of funding and a means to manage capital. Hann and the banking subsidiaries sell beneficial interests in automobile leases and related vehicles and home equity loans to qualified special purpose entities (each a “QSPE”). These transactions are accounted for as sales under the guidelines of FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No. 125),” and a net gain or loss is recognized at the time of the initial sale.

For additional information concerning the accounting policies for initially measuring interest-only strips, the characteristics of securitization transactions, including the gain or loss from sale, the key assumptions used in measuring the fair value of the interest-only strips, and descriptions of prior years’ securitization transactions, see the following sections of our Annual Report on Form 10-K for the year ended December 31, 2007:

• “Securitizations and Off-Balance-Sheet Financings” on pages 54 through 62;

• “Note 1. Summary of Significant Accounting Policies” under the captionsAsset Securitizations andServicing Fees under Securitization Transactions, Agency Agreements, and Lease Sales on pages 79 and 80; and

• “Note 21. Securitization Activity” on pages 109 through 114.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

32

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 June 30, 2008, our bank subsidiaries had approximately $728.3 million available to them under collateralized lines of credit with various FHLBs; and approximately $891.8 million more would have been available provided that additional collateral had 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 $83.4 million at June 30, 2008 and represented additional sources of liquidity.

As an additional source of liquidity, we periodically enter into securitization transactions in which we sell the beneficial interests in loans and leases to qualified special purpose entities (QSPEs). In our last securitization, which occurred in February 2007, we entered into a term securitization transaction of leases and related vehicles. The purchase of these assets by the QSPEs was financed through the issuance of asset-backed notes to third-party investors. Net proceeds from this transaction totaled $252.5 million.

Interest Rate Risk

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

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

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Board’s approved guidelines at a down 300 basis point shock and an up 300 basis point shock. At June 30, 2008, our asset/liability position was close to neutral.

Derivative Financial Instruments and Hedging Activities

Beginning in February 2007, we entered into amortizing interest rate swaps with an aggregate current notional amount of $255.8 million. For purposes of our consolidated financial statements, the entire notional amount of the swaps is designated as a cash flow hedge of expected future cash flows associated with a forecasted sale of auto leases. These transactions are subject to FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At June 30, 2008, the unrealized loss, net of taxes, recorded in accumulated other comprehensive income was $2.1 million.

33

Beginning in 2007, we instituted a program whereby we enter into transactions with our commercial loan customers that are intended to offset or mitigate their interest rate risk. These transactions are limited to conventional interest rate swaps, interest rate caps, and interest rate collars; and upon issuance, all of these customer swaps are immediately economically hedged by offsetting derivative contracts, such that we have minimal net interest rate risk exposure resulting from the transaction. At June 30, 2008, the notional amount of interest rate swaps with our customers totaled $210.5 million. Derivatives with a fair value of $1.5 million were included in other assets, and derivatives with a fair value of $1.1 million were recorded in other liabilities.

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 variable-rate debt. One of these derivatives matured in June 2008. The risk management objective with respect to these interest rate swaps is to hedge the risk of changes in our cash flow attributable to changes in the LIBOR swap rate. At June 30, 2008, the unrealized loss, net of taxes, recorded in accumulated other comprehensive income totaled $0.2 million.

The following table summarizes our derivative financial instruments as of June 30, 2008:

Notional Amount		Fair Value			Variable Rate	Fixed Rate
(dollars in thousands)
	Cash Flow Hedges:
$	255,795	($	3,267	)	One-month LIBOR	3.37% to 5.206	%
	25,000		(303	)	Three-month LIBOR	4.083	%
$	280,795	($	3,570	)
	Instruments Not Designated as Hedges:
	210,547		(1,063	)	One-month LIBOR	4.86% to 7.42	%
	210,547		1,490		One-month LIBOR	4.86% to 7.42	%
$	421,094	$	427

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 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.

34

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control Over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material proceedings to which Susquehanna or any of our subsidiaries are a party or by which, to Susquehanna’s knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against Susquehanna or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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

None

Item 3. Defaults Upon Senior Securities

None

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

Susquehanna’s Annual Meeting of Shareholders was held on April 30, 2008. Susquehanna’s shareholders were asked to vote on a proposal to elect seven directors to the Class of 2011, two directors to the Class of 2010, and three directors for the Class of 2009. In addition, Susquehanna’s shareholders were asked to ratify the selection of PricewaterhouseCoopers LLP as Susquehanna’s independent registered public accountants for the fiscal year ending December 31, 2008.

35

The following directors were nominated by the board of directors and elected to Susquehanna’s board of directors’ Class of 2011:

Nominee	Number of Votes
PeterDeSoto
For	69,846,004
Withhold authority	2,242,205
Not voted	13,889,246
Eddie L. Dunklebarger
For	69,639,383
Withhold authority	2,448,826
Not voted	13,889,246
Russell J. Kunkel
For	70,264,318
Withhold authority	1,823,891
Not voted	13,889,246
Guy W. Miller, Jr.
For	70,307,156
Withhold authority	1,781,052
Not voted	13,889,247
Michael A. Morello
For	70,168,395
Withhold authority	1,919,814
Not voted	13,889,246
E. Susan Piersol
For	70,120,435
Withhold authority	1,967,776
Not voted	13,889,244
William J. Reuter
For	70,211,119
Withhold authority	1,877,089
Not voted	13,889,247

The following directors were nominated by the board of directors and elected to Susquehanna’s board of directors’ Class of 2010:

Nominee	Number of Votes
James A. Ulsh
For	69,180,029
Withhold authority	2,908,180
Not voted	13,889,246
Dale M. Weaver
For	69,893,038
Withhold authority	2,195,172
Not voted	13,889,245

36

The following directors were nominated by the board of directors and elected to Susquehanna’s board of directors’ Class of 2009:

Nominee	Number of Votes
Anthony J. Agnone, Sr.
For	70,267,419
Withhold authority	1,818,778
Not voted	13,891,258
Scott J. Newkam
For	69,968,946
Withhold authority	2,119,262
Not voted	13,889,247
Christine Sears
For	69,920,211
Withhold authority	2,167,998
Not voted	13,889,246

Other directors whose term of office as a director continued after the meeting are as follows: Wayne E. Alter, Jr., Bruce A. Hepburn, Donald L. Hoffman, M. Zev Rose, Roger V. Wiest, and William B. Zimmerman.

In addition, Susquehanna’s shareholders were asked to ratify the selection of PricewaterhouseCoopers LLP as Susquehanna’s independent registered public accountants for the fiscal year ending December 31, 2008. Shares of common stock were voted for as follows:

For	71,362,398
Against	437,765
Abstain	288,046
Not voted	13,889,246

No other matters were submitted for shareholder action.

Item 5. Other Information.

None

Item 6. Exhibits.

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

10.1	Employment Agreement, dated as of November 16, 2007, by and between Susquehanna Bancshares, Inc. and Jeffrey M. Seibert, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
10.2	Employment Agreement, dated as of January 27, 2006, by and between Susquehanna Bancshares, Inc. and John H. Montgomery, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
10.3	Employment Agreement, dated as of March 15, 2007, by and between Susquehanna Bancshares, Inc. and Michael E. Hough, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications. Filed herewith as Exhibit 32.

* Management contract or compensation plan or arrangement required to be filed as an exhibit.

37

SIGNATURES

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

	SUSQUEHANNA BANCSHARES, INC.
August 7, 2008	/s/ William J. Reuter
	William J. Reuter
	Chairman and Chief Executive Officer
August 7, 2008	/s/ Drew K. Hostetter
	Drew K. Hostetter
	Executive Vice President, Treasurer, and Chief Financial Officer

38

EXHIBIT INDEX

Exhibit Numbers	Description and Method of Filing
10.1	Employment Agreement, dated as of November 16, 2007, by and between Susquehanna Bancshares, Inc. and Jeffrey M. Seibert, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
10.2	Employment Agreement, dated as of January 27, 2006, by and between Susquehanna Bancshares, Inc. and John H. Montgomery, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
10.3	Employment Agreement, dated as of March 15, 2007, by and between Susquehanna Bancshares, Inc. and Michael E. Hough, is incorporated by reference to Exhibit 99.1 of Susquehanna’s Current Report on Form 8-K, filed June 5, 2008.*
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications. Filed herewith as Exhibit 32.

* Management contract or compensation plan or arrangement required to be filed as an exhibit.

39