Susquehanna Bancshares (SUSQ) 10-Q 2009 Q1 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 March 31, 2009

or

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

For the transition period from                    to                    

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Yes  x    No  ¨

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

Yes  ¨    No  ¨

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

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

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

Yes  ¨    No  x

As of April 30, 2009, there were 86,242,033 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 March 31, 2009 and 2008, and December 31, 2008 (unaudited)	3
	Consolidated Statements of Income – for the three months ended March 31, 2009 and 2008 (unaudited)	4
	Consolidated Statements of Cash Flows - for the three months ended March 31, 2009 and 2008 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2009 and 2008 (unaudited)	6
	Notes to the Consolidated Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4	Controls and Procedures	31
PART II.	OTHER INFORMATION
Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3	Defaults Upon Senior Securities	32
Item 4	Submission of Matters to a Vote of Security Holders	32
Item 5	Other Information	32
Item 6	Exhibits	32
SIGNATURES		34
EXHIBIT INDEX		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31, 2009			December 31, 2008			March 31, 2008
	(in thousands, except share data)
Assets
Cash and due from banks	$	237,114		$	237,701		$	292,904
Unrestricted short-term investments		123,001			119,146			134,113
Cash and cash equivalents		360,115			356,847			427,017
Restricted short-term investments		50			214			237
Securities available for sale		1,842,063			1,870,746			2,033,924
Securities held to maturity (fair values approximate$9,092; $9,145; and $9,293)		9,092			9,145			9,293
Loans and leases, net of unearned income		9,766,063			9,653,873			8,887,005
Less: Allowance for loan and lease losses		132,164			113,749			92,995
Net loans and leases		9,633,899			9,540,124			8,794,010
Premises and equipment, net		172,186			173,269			180,306
Foreclosed assets		13,216			10,313			14,947
Accrued income receivable		41,307			40,486			44,273
Bank-owned life insurance		355,233			353,771			347,560
Goodwill		1,017,586			1,017,551			949,499
Intangible assets with finite lives		51,389			54,044			55,767
Other assets		237,064			256,478			236,274
Total Assets	$	13,733,200		$	13,682,988		$	13,093,107
Liabilities and Shareholders’ Equity
Deposits:
Demand	$	1,242,979		$	1,201,416		$	1,232,754
Interest-bearing demand		2,780,871			2,528,475			2,744,201
Savings		731,166			695,275			725,152
Time		2,976,434			3,045,653			2,739,256
Time of $100 or more		1,408,350			1,595,674			1,422,114
Total deposits		9,139,800			9,066,493			8,863,477
Short-term borrowings		898,198			910,219			510,648
FHLB borrowings		1,060,626			1,069,784			1,289,999
Long-term debt		176,255			176,284			150,298
Junior subordinated debentures		271,927			271,798			271,371
Accrued interest, taxes, and expenses payable		57,116			55,126			63,673
Deferred taxes		90,851			87,695			133,307
Other liabilities		105,164			99,671			77,026
Total Liabilities		11,799,937			11,737,070			11,359,799
Shareholders’ equity:
Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Issued:300,000 at March 31, 2009; 300,000 at December 31, 2008; and 0 at March 31, 2008		291,115			290,700			0
Common stock, $2.00 par value, 200,000,000 shares authorized; Issued: 86,242,033 at March 31, 2009; 86,174,285 at December 31, 2008; and 85,977,455 at March 31, 2008		172,484			172,349			171,955
Additional paid-in capital		1,055,809			1,055,255			1,040,052
Retained earnings		493,503			512,924			525,454
Accumulated other comprehensive loss, net of taxes of$42,887; $45,936; and $2,236, respectively		(79,648	)		(85,310	)		(4,153	)
Total Shareholders’ Equity		1,933,263			1,945,918			1,733,308
Total Liabilities and Shareholders’ Equity	$	13,733,200		$	13,682,988		$	13,093,107

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 March 31,
	2009		2008
	(in thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	137,019	$	150,757
Securities:
Taxable		19,620		22,447
Tax-exempt		3,682		2,762
Dividends		962		1,505
Short-term investments		287		1,022
Total interest income		161,570		178,493
Interest Expense:
Deposits:
Interest-bearing demand		6,818		11,239
Savings		720		1,542
Time		39,697		43,608
Short-term borrowings		1,065		3,325
FHLB borrowings		10,060		12,756
Long-term debt		7,940		7,842
Total interest expense		66,300		80,312
Net interest income		95,270		98,181
Provision for loan and lease losses		35,000		9,837
Net interest income, after provision for loan and lease losses		60,270		88,344
Noninterest Income:
Service charges on deposit accounts		9,549		11,088
Vehicle origination, servicing, and securitization fees		2,086		3,428
Asset management fees		5,969		4,845
Income from fiduciary-related activities		1,725		2,294
Commissions on brokerage, life insurance, and annuity sales		1,673		1,688
Commissions on property and casualty insurance sales		3,817		3,913
Income from bank-owned life insurance		1,637		3,526
Net gain on sale of loans and leases		1,697		1,325
Net realized gain on securities		24		88
Other		14,043		10,707
Total noninterest income		42,220		42,902
Noninterest Expenses:
Salaries and employee benefits		47,564		46,045
Occupancy		9,488		9,455
Furniture and equipment		3,751		4,080
Advertising and marketing		2,195		4,176
FDIC insurance		6,044		247
Amortization of intangible assets		2,655		2,507
Vehicle lease disposal		2,979		2,195
Other		20,152		23,256
Total noninterest expenses		94,828		91,961
Income before income taxes		7,662		39,285
Provision for income taxes		1,637		11,265
Net Income		6,025		28,020
Preferred stock dividends and accretion		4,165		0
Net Income Available to Common Shareholders	$	1,860	$	28,020
Earnings per common share:
Basic	$	0.02	$	0.33
Diluted	$	0.02	$	0.33
Cash dividends per common share	$	0.26	$	0.26
Average common shares outstanding:
Basic		86,152		85,922
Diluted		86,156		85,963

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

4

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2009			2008
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	6,025		$	28,020
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		6,510			6,372
Provision for loan and lease losses		35,000			9,837
Realized gain on available-for-sale securities, net		(24	)		(88	)
Deferred income taxes		106			(2,664	)
Gain on sale of loans and leases		(1,697	)		(1,325	)
Loss on sale of foreclosed assets		252			41
Mortgage loans originated for sale		(79,290	)		(57,102	)
Proceeds from sale of mortgage loans originated for sale		71,499			48,450
Loans and leases originated/acquired for sale, net of payments received		(44,663	)		(68,739	)
Payments received on leases transferred from held for sale to held for investment		17,040			0
Increase in cash surrender value of bank-owned life insurance		(1,462	)		(3,360	)
(Increase) decrease in accrued interest receivable		(821	)		2,492
(Decrease) increase in accrued interest payable		(1,335	)		721
Increase in accrued expenses and taxes payable		3,325			2,083
Other, net		23,454			11,799
Net cash provided by (used in) operating activities		33,919			(23,463	)
Cash Flows from Investing Activities:
Net decrease in restricted short-term investments		164			5
Activity in available-for-sale securities:
Sales		218			5,433
Maturities, repayments, and calls		111,973			180,523
Purchases		(70,758	)		(158,143	)
Net increase in loans and leases		(97,021	)		(35,549	)
Cash flows received from retained interests		4,046			5,885
Proceeds from bank-owned life insurance		0			378
Proceeds from sale of foreclosed assets		2,202			2,518
Additions to premises and equipment, net		(2,862	)		(4,363	)
Net cash used in investing activities		(52,038	)		(3,313	)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits		73,307			(81,642	)
Net decrease in short-term borrowings		(12,021	)		(57,764	)
Net increase in short-term FHLB borrowings		0			55,000
Proceeds from long-term FHLB borrowings		0			150,000
Repayment of long-term FHLB borrowings		(15,528	)		(60,760	)
Repayment of long-term debt		(29	)		(5	)
Proceeds from issuance of common stock		689			1,287
Tax benefit from exercise of stock options		0			16
Cash dividends paid		(25,031	)		(22,346	)
Net cash provided by (used in) financing activities		21,387			(16,214	)
Net change in cash and cash equivalents		3,268			(42,990	)
Cash and cash equivalents at January 1		356,847			470,007
Cash and cash equivalents at March 31	$	360,115		$	427,017
Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	67,635		$	79,591
Income tax payments	$	961		$	455
Supplemental Schedule of Noncash Activities
Real estate acquired in settlement of loans	$	5,493		$	5,604
Leases acquired in clean-up calls	$	0		$	32,140
Accretion of preferred stock discount	$	415		$	0

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

5

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share data)

	Preferred Stock		Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2008	$	0	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									28,020						28,020
Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of $57												1,146			1,146
Change in unrealized gain on recorded interests in securitized assets, net of taxes												1,854			1,854
Change in unrealized loss on cash flow hedges, net of taxes												(3,195	)		(3,195	)
Total comprehensive income															27,825
Common stock and options issued under employee benefit plans (including related tax benefit of $16)			42,140		145		1,158								1,303
Cash dividends declared ($0.26 per share)									(22,346	)					(22,346	)
Balance at March 31, 2008	$	0	85,977,455	$	171,955	$	1,040,052	$	525,454			($4,153	)	$	1,733,308
Balance at January 1, 2009	$	290,700	86,174,285	$	172,349	$	1,055,255	$	512,924			($85,310	)	$	1,945,918
Comprehensive income:
Net income									6,025						6,025
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $16												7,693			7,693
Change in unrealized gain on recorded interests in securitized assets, net of taxes												2,112			2,112
Change in unrealized loss on cash flow hedges, net of taxes												(4,143	)		(4,143	)
Total comprehensive income															11,687
Common stock and options issued under employee benefit plans			67,748		135		554								689
Accretion of discount on preferred stock		415							(415	)					0
Cash dividends paid on preferred stock									(2,625	)					(2,625	)
Cash dividends declared on common stock ($0.26 per share)									(22,406	)					(22,406	)
Balance at March 31, 2009	$	291,115	86,242,033	$	172,484	$	1,055,809	$	493,503		($	79,648	)	$	1,933,263

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

6

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. Accounting Policies

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

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

Recently Adopted Accounting Pronouncements.

In April, 2009, the Financial Accounting Standards Board issued FASB Staff Position FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141(R)-1 amends and clarifies FAS No. 141 (revised 2007), “Business Combinations,” to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141(R)-1 was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of this FSP has had no material impact on results of operation or financial condition.

In January 2009, the Financial Accounting Standards Board issued FASB Staff Position FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” FSP EITF 99-20-1 amends the impairment guidance of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. FSP EITF 99-20-1 was effective for reporting periods ending after December 15, 2008. Adoption of this FSP has had no material impact on results of operation or financial condition.

In November 2008, the Financial Accounting Standards Board reached a consensus on Emerging Issues Task Force Issue 08-6, “Equity Method Investment Accounting Considerations.” EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments and was effective for fiscal years beginning on or after December 15, 2008. Adoption of this EITF issue has had no material impact on results of operation or financial condition.

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. Susquehanna has granted share-based payment awards that contain nonforfeitable rights to dividends; however, Susquehanna has determined that their effect on the computation of EPS is immaterial.

In April 2008, 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 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Adoption of this FSP has had no material impact on results of operation or financial condition.

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 arepurchasefinancing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counter- parties, that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP No. FAS 140-3 was effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Adoption of this FSP has had no material impact on results of operation or financial condition.

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) was effective for fiscal years beginning after December 15, 2008. At March 31, 2009, adoption of this Statement has had no material impact on results of operation or financial condition.

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 was effective for fiscal years beginning after December 15, 2008. Adoption of this Statement has had no material impact on results of operation or financial condition.

Recently Issued Accounting Pronouncements.

In April 2009, the Financial Accounting Standards Board issued three final Staff Positions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly,” provides guidelines for making fair value measurements more consistent with the principles presented in FAS No. 157, “Fair Value Measurements.” FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. These FSPs are effective for interim and annual periods ending after June 15, 2009. Susquehanna has evaluated the impact of the FSPs and does not anticipate a material impact on results of operation or financial condition.

In December 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This staff position amends FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by the FSP are to be provided for fiscal years ending after December 15, 2009. Susquehanna is evaluating the impact of FSP No. FAS 132(R)-1.

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.”

8

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:

	March 31, 2009				December 31, 2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale:
U.S. Government agencies	$	402,278	$	415,514	$	427,905	$	444,022
State & municipal		344,764		343,306		316,829		308,546
Mortgage-backed		1,004,959		921,950		1,047,787		965,853
Other debt securities		28,712		16,034		28,784		6,364
Equities		147,754		145,259		147,681		145,961
		1,928,467		1,842,063		1,968,986		1,870,746
Held-to-maturity:
State & municipal		4,542		4,542		4,595		4,595
Other		4,550		4,550		4,550		4,550
		9,092		9,092		9,145		9,145
Total investment securities	$	1,937,559	$	1,851,155	$	1,978,131	$	1,879,891

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 March 31, 2009 and December 31, 2008.

	Less than 12 Months				12 Months or More				Total
March 31, 2009	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	19,931	$	69	$	0	$	0	$	19,931	$	69
States and political subdivisions		155,963		5,758		8,296		731		164,259		6,489
Mortgage-backed securities		136,469		28,482		149,134		80,170		285,603		108,652
Other debt securities		2,187		2,024		13,847		10,654		16,034		12,678
Equity securities		579		359		2,912		2,488		3,491		2,847
	$	315,129	$	36,692	$	174,189	$	94,043	$	489,318	$	130,735

The decrease in unrealized losses, from December 31, 2008 to March 31, 2009, is primarily the result of the use of cash flow models to determine the fair values of certain other debt securities in an inactive market at March 31, 2009. At December 31, 2008, Susquehanna used broker prices to determine those fair values.

	Less than 12 Months				12 Months or More				Total
December 31, 2008	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	0	$	0	$	0	$	0	$	0	$	0
States and political subdivisions		218,184		9,842		1,586		228		219,770		10,070
Mortgage-backed securities		316,874		102,907		0		0		316,874		102,907
Other debt securities		2,396		1,812		3,968		20,608		6,364		22,420
Equity securities		1,111		443		19,462		1,583		20,573		2,026
	$	538,565	$	115,004	$	25,016	$	22,419	$	563,581	$	137,423

Mortgage-backed securities include issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and $283,936 of other non-agency issuers. All of the non-agency issues were at least investment grade. None of Susquehanna’s mortgage-backed securities include subprime or Alt-A components, and management’s analysis of the underlying assets found 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. The bulk of the unrealized losses in this category were related to the pooled trust preferred securities, since the corporate synthetic collateralized debt obligations have been written down. Management believes that the unrealized losses on the pooled trust preferred securities were principally a result of decreased liquidity and larger risk premiums in the marketplace.

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 contractual 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.

9

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 4. Loans and Leases

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

	March 31, 2009			December 31, 2008
Commercial, financial, and agricultural	$	2,222,518		$	2,169,262
Real estate - construction		1,308,187			1,313,647
Real estate secured - residential		2,303,210			2,298,709
Real estate secured - commercial		2,912,866			2,875,502
Consumer		315,663			314,051
Leases		703,619			682,702
Total loans and leases	$	9,766,063		$	9,653,873
Nonaccrual loans and leases	$	153,527		$	105,313
Loans and leases contractually past due 90 days and still accruing		26,620			22,316
Home equity line of credit loans held for sale (included in “Real estate secured - residential,” above)		260,353			215,690
Net investment in direct financing leases was as follows:
	March 31, 2009			December 31, 2008
Minimum lease payments receivable	$	449,379		$	443,703
Estimated residual value of leases		333,210			318,850
Unearned income under lease contracts		(78,970	)		(79,851	)
Total leases	$	703,619		$	682,702
An analysis of impaired loans, as of March 31, 2009 and December 31, 2008, is as follows:
Impaired loans without a related reserve	$	36,268		$	21,388
Impaired loans with a reserve		84,352			62,092
Total impaired loans	$	120,620		$	83,480
Reserve for impaired loans	$	25,451		$	14,454
An analysis of impaired loans for the three months ended March 31, 2009 and 2008, is as follows:
	Three Months Ended March 31,
	2009			2008
Average balance of impaired loans	$	126,422		$	53,779
Interest income on impaired loans (cash-basis)		1,149			47

NOTE 5. Goodwill

Susquehanna tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be an impairment. Susquehanna performed its annual goodwill impairment test as of May 31, 2008 and determined that there was no impairment. However, given the continuing downturn in the economy and overall market conditions since that time and the fact that Susquehanna’s market capitalization has been below the book value of its equity, Susquehanna has performed interim goodwill impairment tests, as required by FAS No. 142, as of March 31, 2009 and December 31, 2008. This test, which requires significant judgment and analysis, involves discounted cash flows and market-price multiples of non-distressed financial institutions.

Based upon our analyses at March 31, 2009 and December 31, 2008, the fair value of each of Susquehanna’s reporting units exceeded its book value, and there was no goodwill impairment. However, due to the ongoing turmoil in market conditions, Susquehanna will continue to monitor and evaluate the carrying value of goodwill for possible future impairment.

NOTE 6. Borrowings

Short-term borrowings were as follows:

	March 31, 2009		December 31, 2008
Securities sold under repurchase agreements	$	364,415	$	375,317
Federal funds purchased		225,000		480,000
Treasury tax and loan notes		8,783		4,902
Federal Reserve term auction facility		300,000		50,000
Total short-term borrowings	$	898,198	$	910,219

10

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 7. Earnings per Share (EPS)

The following tables set forth the calculation of basic and diluted earnings per share for the three-month periods ended March 31, 2009 and 2008.

	For the Three Months Ended March 31,
	2009					2008
	Income		Average Common Shares	Per Share Amount		Income		Average Common Shares	Per Share Amount
Basic Earnings per Share:
Income available to common shareholders	$	1,860	86,152	$	0.02	$	28,020	85,922	$	0.33
Effect of Diluted Securities:
Stock options and restricted shares outstanding			4					41
Diluted Earnings per Share:
Income available to common shareholders and assuming conversion	$	1,860	86,156	$	0.02	$	28,020	85,963	$	0.33

For the three months ended March 31, 2009 and 2008, average options to purchase 2,358 and 2,327 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 three months ended March 31, 2009, warrants to purchase 3,028 shares of common stock were outstanding but were not included in the computation of diluted EPS because the warrants’ common stock equivalents were antidilutive.

NOTE 8. Share-Based Compensation

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

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

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

NOTE 9. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost

	Three Months Ended March 31,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2009			2008			2009		2008		2009		2008
Service cost	$	1,716		$	1,374		$	30	$	29	$	128	$	111
Interest cost		1,418			1,330			63		59		162		121
Expected return on plan assets		(1,892	)		(2,002	)		0		0		0		0
Amortization of prior service cost		4			9			29		31		23		28
Amortization of transition obligation (asset)		0			0			0		0		28		28
Amortization of net actuarial loss		626			0			16		12		0		0
Curtailments/settlements		204			0			0				0		0
Net periodic benefit cost	$	2,076		$	711		$	138	$	131	$	341	$	288

11

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2008, that it expected to contribute $124 to its pension plans and $594 to its other postretirement benefit plan in 2009. As of March 31, 2009, $31 of contributions have been made to its pension plans, and $149 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $93 to fund its pension plan in 2009, for a total of $124, and $445 to its other postretirement benefit plan, for a total of $594.

Changes to Susquehanna’s Retirement Program

On February 24, 2009, Susquehanna notified its employees that changes will be made to the retirement program, effective July 1, 2009. The changes will affect three groups of Susquehanna employees differently - employees for whom there will be no retirement program changes, employees for whom the cash balance plan will be “frozen,” and employees who are not yet eligible to participate in the plan, and who will not be eligible in the future.

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

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Note 10. Derivative Financial Instruments

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS No. 133), as amended and interpreted, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In addition, FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format.

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

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

At March 31, 2009, the aggregate amount of derivative assets recorded in other assets was $20,516, and the aggregate amount of derivative liabilities recorded in other liabilities was $27,145. When quoted market prices are not available, the valuation of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including interest rate curves and implied volatilities. The estimates of fair value are made by an independent third-party valuation service using a standardized methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). As part of Susquehanna’s overall valuation process, management evaluates this third-party methodology to ensure that it is representative of exit prices in Susquehanna’s principal markets. These future net cash flows, however, are susceptible to change primarily due to fluctuations in interest rates. As a result, the estimated values of these derivatives will change over time as cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on estimated valuations. Based on the nature and limited purposes of the derivatives that Susquehanna employs, fluctuation in interest rates have had only a modest effect on its results of operations. As such, fluctuations are generally expected to be countered by offsetting changes in income, expense, and/or values of assets and liabilities

In addition to making valuation estimates, Susquehanna also faces the risk that certain derivative instruments that have been designated as hedges and currently meet the hedge accounting requirements of FAS No. 133 may not qualify in the future. Further, new interpretations and guidance related to FAS No. 133 may be issued in the future, and Susquehanna cannot predict the possible impact that such guidance may have on its use of derivative instruments.

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

Derivative contracts can be exchange-traded or over-the-counter (“OTC”). Susquehanna’s OTC derivatives consist of interest rate swaps. Susquehanna has classified its OTC derivatives in Level 2 of the fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market- observable date, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection

13

of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. Susquehanna generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic swaps, model inputs can generally be verified, and model selection does not involve significant management judgment.

To comply with the provisions of FAS No. 157, “Fair Value Measurements,” Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its OTC derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure. For derivatives with two-way exposure, such as interest rate swaps, the counterparty’s credit spread is applied to Susquehanna’s exposure to the counterparty, and Susquehanna’s own credit spread is applied to the counterparty’s exposure to Susquehanna, and the net credit valuation adjustment is reflected in Susquehanna’s derivative valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. For Susquehanna’s own credit spread and for counterparties having publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third-party credit data provider. For counterparties without publicly available credit information, who are primarily commercial banking customers, the credit spreads over LIBOR used in the calculations are estimated by Susquehanna based on current market conditions, including consideration of current borrowing spreads for similar customers and transactions, review of existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings, current threshold amounts, mutual puts, and guarantees. Additionally, Susquehanna actively monitors counterparty credit ratings for significant changes.

At March 31, 2009, net credit valuation adjustments reduced the settlement values of Susquehanna’s derivative assets by $1,811 and its derivative liabilities by $4,528. During the first quarter of 2009, Susquehanna recognized income of $295 related to credit valuation adjustments on nonhedge derivative instruments, which is included in noninterest income. Various factors impact changes in the credit valuation adjustments over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

Although Susquehanna has determined that the majority of the inputs used to values its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2009, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has classified its OTC derivative valuations in Level 2 of the fair value hierarchy.

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

	Fair Values of Derivative Instruments
	Asset Derivatives March 31, 2009			Liability Derivatives March 31, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under Statement 133
Interest rate contracts				FHLB borrowings	$	7,333
Derivatives not designated as hedging instruments under Statement 133
Interest rate contracts	Other assets	$	20,516	Other liabilities		19,812
Total derivatives		$	20,516		$	27,145

14

	Asset Derivatives December 31, 2008			Liability Derivatives  December 31, 2008
	Balance Sheet     Location	Fair Value		Balance Sheet     Location	Fair Value
Derivatives designated as hedging instruments under Statement 133
Interest rate contracts				Other liabilities	$	939
Derivatives not designated as hedging instruments under Statement 133
Interest rate contracts	Other assets	$	21,895	Other liabilities		21,473
Total derivatives		$	21,895		$	22,412

The Effect of Derivative Instruments on the Statement of Income

Derivatives in Statement 133 Cash Flow Hedging Relationships	Amount of Loss Recognized             in OCI             Three months ended March 31, 2009		Location of Gain or (Loss) Reclassified from Accumulated OCI     into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI       into Income       March 31, 2009
Interest rate contracts:	($4,143	)	Interest expense	($135	)

Derivatives not Designated as Hedging Instruments under Statement 133	Location of Gain Recognized in Income on      Derivatives	Amount of Gain Recognized in Income on         Derivatives         Three months ended     March 31, 2009
Interest rate contracts:	Other income	$	295

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

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

	Principal Balance				Loans and Leases Past Due 30 Days or More				For the Three Months Ended March 31, Net Credit Losses (Recoveries)
	March 31, 2009		December 31, 2008		March 31, 2009		December 31, 2008		2009			2008
Loans and leases held in portfolio	$	9,766,063	$	9,653,873	$	311,590	$	261,504	$	16,584		$	5,411
Leases securitized		113,018		123,608		227		185		8			85
Home equity loans securitized		274,837		286,577		5,357		5,637		9			18
Leases serviced for others		26,355		31,645		562		1,060		(2	)		5
Total loans and leases serviced	$	10,180,273	$	10,095,703	$	317,736	$	268,386	$	16,599		$	5,519

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

	Three Months Ended March 31,
Automobile Leases	2009		2008
Servicing fees received	$	280	$	989
Other cash flows received from retained interests		1,469		3,587
	Three Months Ended March. 31,
	2009		2008
Home Equity Loans
Additional draws conveyed to the trusts	$	11,140	$	13,538
Servicing fees received		290		336
Other cash flows received from retained interests		2,577		2,298

There were no proceeds from securitizations nor amounts derecognized for the three-month periods ended March 31, 2009 and 2008 relating to home equity loans and automobile leases.

The following table sets forth a summary of the fair values of the interest-only strips, key economic assumptions used to arrive at the fair values, and the sensitivity of the March 31, 2009 fair values to immediate 10% and 20% adverse changes in those assumptions. The sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

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

As of March 31, 2009

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	$	539	6		4.00	%		0.05	%		8.82	%
Decline in fair value of 10% adverse change				$	1		$	2		$	2
Decline in fair value of 20% adverse change					2			5			4
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	$	9,760	43		15.00			0.15	%		9.77	%
Decline in fair value of 10% adverse change				$	428		$	53		$	245
Decline in fair value of 20% adverse change					829			106			475
Variable-rate portion	$	3,173	32		30.00			0.15	%		9.52	%
Decline in fair value of 10% adverse change				$	193		$	19		$	73
Decline in fair value of 20% adverse change					363			38			142
2005 transaction - Interest-Only Strips	$	5,761	31		30.00			0.15	%		9.46	%
Decline in fair value of 10% adverse change				$	301		$	27		$	150
Decline in fair value of 20% adverse change					570			54			290

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

16

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 March 31, 2009, Susquehanna had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value.

Assets Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at March 31, 2009 and December 31, 2008, on the consolidated balance sheets and by FAS No. 157 valuation hierarchy.

	March 31, 2009		Fair Value Measurements at Reporting Date Using
Description			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	$	1,842,063	$	3,065	$	1,816,353	$	22,645
Derivatives (1)		20,516		0		20,516		0
Interest-only strips (1)		19,233		0		0		19,233
Total	$	1,881,812	$	3,065	$	1,836,869	$	41,878
(1)    Included in Other assets
	March 31, 2009		Fair Value Measurements at Reporting Date Using
Description			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Derivatives (2)	$	27,145	$	0	$	27,145	$	0
Total	$	27,145	$	0	$	27,145	$	0
(2)    Included in Other liabilities and FHLB borrowings
	December 31, 2008		Fair Value Measurements at Reporting Date Using
Description			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	$	1,870,746	$	3,877	$	1,821,554	$	45,315
Derivatives (1)		21,895		0		21,895		0
Interest-only strips (1)		17,565		0		0		17,565
Total	$	1,910,206	$	3,877	$	1,843,449	$	62,880
(1)    Included in Other assets
	December 31, 2008		Fair Value Measurements at Reporting Date Using
Description			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Derivatives (2)	$	21,473	$	0	$	21,473	$	0
Total	$	21,473	$	0	$	21,473	$	0
(2)    Included in Other liabilities

17

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

The following tables present rollforwards of the balance sheet amounts for the three months ended March 31, 2009 and 2008, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale Securities			Interest-only Strips			Total
Balance at January 1, 2009	$	45,315		$	17,565		$	62,880
Total gains or losses (realized/unrealized) Included in other comprehensive income (Presented here gross of taxes)		9,686			3,250			12,936
Purchases, issuances, and settlements		(165	)		(1,582	)		(1,747	)
Transfers in and/or out of Level 3		(32,191	)(1)		0			(32,191	)
Balance at March 31, 2009	$	22,645		$	19,233		$	41,878
(1)    Represents four securities transferred from Level 3 to Level 2 as a result of enhanced valuation methodologies.
	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)		(7,608	)		2,853			(4,755	)
Purchases, issuances, and settlements		(470	)		(1,761	)		(2,231	)
Transfers in and/or out of Level 3		0			0			0
Balance at March 31, 2008	$	73,209		$	22,230		$	95,439

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

The following tables present the financial instruments carried at fair value at March 31, 2009 and December 31, 2008, on the consolidated balance sheets and by FAS No. 157 hierarchy.

	March 31, 2009		Fair Value Measurements Using
Description			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	58,901	$	0	$	0	$	58,901
	$	58,901	$	0	$	0	$	58,901

Specific reserves identified under FAS No. 114 during the first three months of 2009 totaled $10,997. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at March 31, 2009.

18

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	December 31, 2008		Fair Value Measurements Using
Description			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	47,638	$	0	$	0	$	47,638
	$	47,638	$	0	$	0	$	47,638

Specific reserves identified under FAS No. 114 during 2008 totaled $10,308. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at December 31, 2008.

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

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

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, Susquehanna’s potential exposures to various types of market risks, such as interest rate risk and credit risk; whether Susquehanna’s allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to maintain loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to monitor the impact of the recession moving into the commercial and industrial, commercial real estate, and consumer segments; the impact of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) on residual loss exposure; our ability to collect all amounts due under our outstanding synthetic collateralized debt obligations; and our ability to achieve our 2009 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in the automobile industry;

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

• 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;

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

20

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

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

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

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

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

Availability of Information

Our web-site address 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

Our results for the first quarter of 2009 were impacted by a number of issues related to the recession, including the industry-wide increase in FDIC insurance premiums, a reduction in net interest margin, and an increase in our provision for loan and lease losses as a result of further deterioration in credit quality. We have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered “well-capitalized.” With these factors in mind, we have updated our 2009 financial goals as follows:

Updated Financial Goals for 2009

Our updated financial goals for 2009 are as follows:

	Previously Published Goals			Updated Goals
Net interest margin		3.70	%		3.50	%
Loan growth		8.0	%		5.0	%
Deposit growth		1.0	%		1.0	%
Noninterest income growth		6.0	%		1.0	%
Noninterest expense growth		(1.0	%)		4.0	%
Tax rate		32.0	%		24.0	%
Preferred dividend and discount accretion	$	16.7 million		$	16.7 million

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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.”

Results of Operations

Summary of First Quarter 2009 Compared to First Quarter 2008

Net income available to common shareholders for the first quarter of 2009 was $1.9 million, a decrease of $26.1 million, or 93.4%, from net income available to common shareholders of $28.0 million for the first quarter of 2008. Net interest income decreased 3.0%, to $95.3 million for the first quarter of 2009, from $98.2 million for the first quarter of 2008. Noninterest income decreased 1.6%, to $42.2 million for the first quarter of 2009, from $42.9 million for the first quarter of 2008. Noninterest expenses increased 3.1%, to $94.8 million for the first quarter of 2009, from $92.0 million for the first quarter of 2008.

Additional information is as follows:

	Three Months Ended March 31,
	2009			2008
Diluted Earnings per Common Share	$	0.02		$	0.33
Return on Average Assets		0.18	%		0.87	%
Return on Average Equity		1.26	%		6.51	%
Return on Average Tangible Equity (1)		3.60	%		16.35	%
Efficiency Ratio		67.38	%		63.95	%
Net Interest Margin		3.40	%		3.71	%

(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 March 31,
	2009		2008
Return on average equity (GAAP basis)	1.26	%	6.51	%
Effect of excluding average intangible assets and related amortization	2.34	%	9.84	%
Return on average tangible equity	3.60	%	16.35	%

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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 March 31, 2009						For the Three-Month Period Ended March 31, 2008
	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	122,623		$	287	0.95	$	124,157		$	1,022	3.31
Investment securities:
Taxable		1,606,900			20,582	5.19		1,771,813			23,952	5.44
Tax-advantaged		342,659			5,665	6.70		267,357			4,249	6.39
Total investment securities		1,949,559			26,247	5.46		2,039,170			28,201	5.56
Loans and leases, (net):
Taxable		9,454,551			134,657	5.78		8,594,189			148,456	6.95
Tax-advantaged		220,691			3,634	6.68		189,878			3,540	7.50
Total loans and leases		9,675,242			138,291	5.80		8,784,067			151,996	6.96
Total interest-earning assets		11,747,424		$	164,825	5.69		10,947,394		$	181,219	6.66
Allowance for loan and lease losses		(118,005	)					(89,717	)
Other non-earning assets		2,039,130						2,091,989
Total assets	$	13,668,549					$	12,949,666
Liabilities
Deposits:
Interest-bearing demand	$	2,674,774		$	6,818	1.03	$	2,719,609		$	11,239	1.66
Savings		708,570			720	0.41		713,158			1,542	0.87
Time		4,568,870			39,697	3.52		4,140,762			43,608	4.24
Short-term borrowings		834,395			1,065	0.52		542,433			3,325	2.47
FHLB borrowings		1,054,131			10,060	3.87		1,244,179			12,756	4.12
Long-term debt		447,817			7,940	7.19		418,599			7,842	7.53
Total interest-bearing liabilities		10,288,557		$	66,300	2.61		9,778,740		$	80,312	3.30
Demand deposits		1,190,576						1,179,689
Other liabilities		246,136						259,771
Total liabilities		11,725,269						11,218,200
Equity		1,943,280						1,731,466
Total liabilities and shareholders’ equity	$	13,668,549					$	12,949,666
Net interest income / yield on average earning assets				$	98,525	3.40				$	100,907	3.71

Additional Information

Average loan balances include non-accrual loans.

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

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

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Net Interest Income — Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which decreased to $95.3 million for the first quarter of 2009, as compared to $98.2 million for the same period in 2008. Net interest income as a percentage of net interest income plus noninterest income was 69.3% for the quarter ended March 31, 2009, and 69.6% for the quarter ended March 31, 2008.

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

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

The $2.9 million decrease in our net interest income for the first quarter of 2009, as compared to the first quarter of 2008, was primarily the result of a decline in our net interest margin of 31 basis points. This reduction in margin was due primarily to a $79.1 million increase in nonaccrual loans and the slightly asset-sensitive position of our balance sheet in a declining interest-rate environment.

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

Provision and Allowance for Loan and Lease Losses

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

During the first three months of 2009, we continued to experience a challenging operating environment. Given the economic pressures that are impacting some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $79.1 million increase in nonperforming loans since March 31, 2008 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $35.0 million for the first quarter of 2009, and $9.8 million for the first quarter of 2008.

Of the $153.5 million of non-accrual loans and leases at March 31, 2009 (refer to “Table 3 – Risk Assets”), $120.6 million, or 78.6%, represented non-consumer loans greater than $0.5 million that had been evaluated and considered impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Of the $120.6 million of impaired loans, $36.3 million, or 30.1%, had no related reserve. The determination that no related reserve for these collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

Net charge-offs for the first quarter of 2009 increased to $16.6 million, or 0.70% of average loans and leases, when compared to net charge-offs for the first quarter of 2008 of $5.4 million, or 0.25% of average loans and leases.

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The allowance for loan and lease losses was 1.35% of period-end loans and leases, or $132.2 million, at March 31, 2009; 1.18% of period-end loans and leases, or $113.7 million, at December 31, 2008; and 1.05% of period-end loans and leases, or $93.0 million, at March 31, 2008.

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at March 31, 2009. There can be no assurance, however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at March 31, 2009.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses

	Three Months Ended March 31,
	2009			2008
	(dollars in thousands)
Balance - Beginning of period	$	113,749		$	88,569
Additions		35,000			9,837
		148,749			98,406
Charge-offs		(19,019	)		(7,365	)
Recoveries		2,434			1,954
Net charge-offs		(16,585	)		(5,411	)
Balance - Period end	$	132,164		$	92,995
Net charge-offs as a percentage of average loans and leases (annualized)		0.70	%		0.25	%
Allowance as a percentage of period-end loans and leases		1.35	%		1.05	%
Average loans and leases	$	9,675,242		$	8,784,067
Period-end loans and leases		9,766,063			8,887,005

Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income, was 30.7% for the first quarter of 2009, and 30.4% for the first quarter of 2008.

Noninterest income decreased $0.7 million, or 1.6%, for the first quarter of 2009, over the first quarter of 2008. This net decrease is primarily a result of the following:

• Decreasedservice charges on deposit accounts of $1.5 million;

• Decreasedvehicle origination, servicing, and securitization fees of $1.3 million;

• Increasedwealth management fee income (includesasset management fees,income from fiduciary-related activities, andcommissions on brokerage, life insurance, and annuity sales) of $0.5 million;

• Decreasedincome from bank-owned life insurance of $1.9 million; and

• Increasedother of $3.3 million.

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Service charges on deposit accounts.The 13.9% decrease primarily was the result of changes in customers’ behavior regarding overdrafts.

Vehicle origination, servicing, and securitization fees.The 39.2% decrease primarily was the result of a reduction in securitization fees, as no auto lease securitizations have occurred since February 2007 and a reduction in origination fees due to lower volumes, as new vehicle sales have declined significantly.

Wealth management fee income.The 6.1% net increase primarily was the result of the contribution from Stratton, which was acquired on April 30, 2008. However, asset management fees are based on the market value of assets being managed, which has declined as a result of market conditions. As a result, our overall fee income has declined since the third quarter of 2008.

Income from bank-owned life insurance.The 53.6% decrease was the result of a decline in the return on the underlying investments due to the economic environment.

Other.The 31.2% increase in other income is the net result of a $6.9 million gain on the sale of our Central Atlantic Merchant Services accounts in March 2009, a general decline in other commissions and fees of $2.2 million for the first quarter of 2009, and a one-time credit of $1.2 million in the first quarter of 2008 relating to Visa’s IPO redemption.

Noninterest Expenses

Noninterest expenses increased $2.9 million, or 3.1%, from $92.0 million for the first quarter of 2008, to $94.8 million for the first quarter of 2009. This net increase is primarily a result of the following:

• Increasedsalaries and employee benefitsof $1.5 million;

• Decreasedadvertising and marketing of $2.0 million;

• IncreasedFDIC insurance of $5.8 million; and

• Decreasedother of $3.1 million.

Salaries and employee benefits.The 3.3% net increase is primarily attributable to the acquisition of Stratton on April 30, 2008.

Advertising and marketing.The 47.4% decrease is the result of discretionary reductions in advertising and marketing initiatives.

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

Other.The 13.4% net decrease in other expenses is the result of various changes within this category primarily associated with cost-saving initiatives previously announced.

Income Taxes

Our effective tax rate for the first quarter of 2009 was 21.37%. Our effective tax rate for the first quarter of 2008 was 28.68%. The decrease was due to an increase in the percentage of tax-advantaged income relative to total income in 2009 compared to the percentage of tax-advantaged income relative to total income in 2008.

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Financial Condition

Summary of March 31, 2009 Compared to December 31, 2008

Total assets at March 31, 2009 were $13.7 billion, an increase of $50.2 million, as compared to total assets at December 31, 2008. Total deposits increased $73.3 million at March 31, 2009, from December 31, 2008. Equity capital was $1.9 billion at March 31, 2009, or $19.04 per common share, and $1.9 billion, or $19.21 per common share, at December 31, 2008. The decline in book value per share primarily was the result of the payment of dividends to common and preferred shareholders totaling $25.0 million in the first quarter of 2009 in excess of net income for the quarter. On April 15, 2009, our board of directors declared a second-quarter dividend of $0.05 per common share, a reduction from the first-quarter dividend of $0.26 per common share. Reducing the quarterly common dividend will enable us to retain approximately $18.0 million in additional capital quarterly.

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

Effective January 1, 2008, we adopted FAS No. 157, “Fair Value Measurements” and FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” At March 31, 2009, Susquehanna had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. For additional information about our financial assets and financial liabilities carried at fair value, refer to“Note 12. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

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

Loans and Leases

Our experience in recent months indicates that many consumers and businesses in our markets are proceeding cautiously in the current economic environment. In some cases, they appear to be delaying or changing plans for taking on additional debt, and, as a result there has been a reduced demand for loans among credit-worthy borrowers. Nevertheless, loans and leases, net of unearned income, increased a modest 1.2%, from $9.7 billion at December 31, 2008 to $9.8 billion at March 31, 2009.

Risk Assets

Total nonperforming assets increased $51.0 million, from December 31, 2008 to March 31, 2009, as presented in Table 3.

Nonaccrual loans and leases increased from $105.3 million at December 31, 2008, to $153.5 million at March 31, 2009. The net increase was primarily the result of the effects of the continuing economic deterioration on our borrowers. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus other real estate owned increased from 1.22% at December 31, 2008 to 1.73% at March 31, 2009.

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Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets

	March 31, 2009			December 31, 2008			March 31, 2008
	(dollars in thousands)
Nonperforming assets:
Nonaccrual loans and leases	$	153,527		$	105,313		$	74,462
Restructured loans		2,493			2,566			2,582
Other real estate owned		13,216			10,313			14,947
Total nonperforming assets	$	169,236		$	118,192		$	91,991
As a percentage of period-end loans and leases plus other real estate owned		1.73	%		1.22	%		1.03	%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases		85	%		105	%		121	%
Loans and leases contractually past due 90 days and still accruing	$	26,620		$	22,316		$	10,821

Goodwill

We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be an impairment. We performed our annual goodwill impairment test as of May 31, 2008, and determined that there was no impairment. However, given the continuing downturn in the economy and overall market conditions since that time and the fact that our market capitalization has been below the book value of our equity, we have performed interim goodwill impairment tests, as required by FAS No. 142, as of March 31, 2009 and December 31, 2008. This test, which requires significant judgment and analysis, involves discounted cash flows and market-price multiples of non-distressed financial institutions.

Based upon our analyses at March 31, 2009 and December 31, 2008, the fair value of each of our reporting units exceeded its book value, and there was no goodwill impairment. However, due to the ongoing turmoil in market conditions, we will continue to monitor and evaluate the carrying value of goodwill for possible future impairment.

Deposits

Total deposits increased 0.8% from December 31, 2008 to March 31, 2009. Within this category, core deposits such as demand, interest-bearing demand, and savings increased 3.5%, 10.0%, and 5.2%, respectively. We attribute these increases to customers seeking safety and security while maintaining ready access to their funds.

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 March 31, 2009 was 11.13%. The minimum total capital (Tiers 1and 2) ratio is 8%; our ratio at March 31, 2009 was 13.65%. The minimum leverage ratio is 4%; our leverage ratio at March 31, 2009 was 9.76%. We and our bank subsidiary have leverage and risk-weighted ratios well in excess of regulatory requirements, and each entity is considered “well capitalized” under regulatory guidelines.

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Securitizations and Off-Balance-Sheet Financings

Table 4 – Components of Loans and Leases Serviced

	As of March 31, 2009		As of March 31, 2008
	(dollars in thousands)
Lease Securitization Transactions*	$	113,018	$	394,026
Home Equity Loan Securitization Transactions*		274,837		317,854
Agency Arrangements and Lease Sales*		26,355		52,538
Leases and Loans Held in Portfolio		9,766,063		8,887,005
Total Leases and Loans Serviced	$	10,180,273	$	9,651,423

* Off-balance-sheet

Securitization Transactions

We use the securitization of financial assets as a source of funding and a means to manage capital. Hann and our bank subsidiary sell beneficial interests in automobile leases and related vehicles and home equity loans to qualified special purpose entities (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, 2008:

• “Securitizations and Off-Balance-Sheet-Financings” on pages 55 through 61;

• “Note 1. Summary of Significant Accounting Policies” under the captionsAsset Securitizations andServicing Fees under Securitization Transactions, Agency Agreements, and Lease Sales on pages 80 and 81; and

• “Note 21. Securitization Activity” on pages 110 through 114.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Equity Market Price Risk

Equity market price risk is the risk related to market fluctuations of equity prices in the securities markets. While we do not have significant risk in our investment portfolio, market price fluctuations may affect fee income

29

generated through our asset management operations. Generally, our fee structure is based on the market value of assets being managed at specific time frames. When market values decline, our fee income also declines.

Liquidity Risk

The maintenance of adequate liquidity — the ability to meet the cash requirements of our customers and other financial commitments — is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources — purchased funds, repurchase agreements, and deposit accounts — allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At March 31, 2009, our bank subsidiary had approximately $979.8 million available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and approximately $586.6 million more would have been available provided that additional collateral had been pledged.

Over the past few years, as an additional source of liquidity, we periodically entered into securitization transactions in which we sold the beneficial interests in loans and leases to qualified special purpose entities (QSPEs). Since our last securitization, which occurred in February 2007, adverse market conditions have made such transactions extremely difficult, as evidenced by our inability to complete the securitization forecasted for 2008. As an alternative source of funding, we have pledged the leases previously held for sale, certain auto loans, and certain commercial finance leases to obtain collateralized borrowing availability at the Federal Reserve’s Discount Window and Term Auction Facility. At March 31, 2009, we had collateralized availability of $423.4 million.

Liquidity, however, is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $123.0 million at March 31, 2009 and represented additional sources of liquidity.

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

Interest Rate Risk

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

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

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Board’s approved guidelines at an up 300 basis point shock. At March 31, 2009, our asset/liability position was slightly asset sensitive.

Derivative Financial Instruments and Hedging Activities

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

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

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

Vehicle Leasing Residual Value Risk

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

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control Over Financial Reporting

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

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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, 2008.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

10.1	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and William J. Reuter is incorporated by reference to Exhibit 10.4 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.2	Employment Agreement, as amended and restated effective dated January 1, 2009, between Susquehanna and Drew K. Hostetter is incorporated by reference to Exhibit 10.6 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.3	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael M. Quick is incorporated by reference to Exhibit 10.8 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.4	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and James G. Pierné is incorporated by reference to Exhibit 10.9 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.5	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Edward Balderston, Jr. is incorporated by reference to Exhibit 10.10 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

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10.6	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Peter J. Sahd is incorporated by reference to Exhibit 10.12 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.7	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Rodney A. Lefever is incorporated by reference to Exhibit 10.13 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.8	Employment Agreement, effective January 1, 2009, between Susquehanna and Lisa M. Cavage is incorporated by reference to Exhibit 10.14 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.9	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and John H. Montgomery is incorporated by reference to Exhibit 10.15 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.11	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael E. Hough is incorporated by reference to Exhibit 10.16 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.12	Employment Agreement, effective January 1, 2009, between Susquehanna and Joseph R. Lizza is incorporated by reference to Exhibit 10.17 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.13	Susquehanna’s Executive Deferred Income Plan, effective January 1, 2009, is incorporated by reference to Exhibit 10.21 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.14	Susquehanna’s Supplemental Executive Retirement Plan as amended and restated effective January 1, 2009, is incorporated by reference to Exhibit 10.22 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.15	Susquehanna’s Key Employee Severance Pay Plan, amended and restated as of January 1, 2009, is incorporated by reference to Exhibit 10.26 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.16	Director Compensation Schedule, effective January 1, 2009, is incorporated by reference to Exhibit 10.31 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.17	Description of grants of nonqualified stock options to Susquehanna’s non-employee directors is filed herewith as Exhibit 10.17.
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications is filed herewith as Exhibit 32.

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

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SIGNATURES

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

	SUSQUEHANNA BANCSHARES, INC.
May 7, 2009	/s/ William J. Reuter
	William J. Reuter
	Chairman and Chief Executive Officer
May 7, 2009	/s/ Drew K. Hostetter
	Drew K. Hostetter
	Executive Vice President, Treasurer, and Chief Financial Officer

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EXHIBIT INDEX

Exhibit Numbers	Description and Method of Filing
10.1	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and William J. Reuter is incorporated by reference to Exhibit 10.4 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.2	Employment Agreement, as amended and restated effective dated January 1, 2009, between Susquehanna and Drew K. Hostetter is incorporated by reference to Exhibit 10.6 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.3	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael M. Quick is incorporated by reference to Exhibit 10.8 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.4	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and James G. Pierné is incorporated by reference to Exhibit 10.9 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.5	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Edward Balderston, Jr. is incorporated by reference to Exhibit 10.10 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.6	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Peter J. Sahd is incorporated by reference to Exhibit 10.12 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.7	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Rodney A. Lefever is incorporated by reference to Exhibit 10.13 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.8	Employment Agreement, effective January 1, 2009, between Susquehanna and Lisa M. Cavage is incorporated by reference to Exhibit 10.14 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.9	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and John H. Montgomery is incorporated by reference to Exhibit 10.15 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.11	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael E. Hough is incorporated by reference to Exhibit 10.16 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.12	Employment Agreement, effective January 1, 2009, between Susquehanna and Joseph R. Lizza is incorporated by reference to Exhibit 10.17 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.13	Susquehanna’s Executive Deferred Income Plan, effective January 1, 2009, is incorporated by reference to Exhibit 10.21 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

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10.14	Susquehanna’s Supplemental Executive Retirement Plan as amended and restated effective January 1, 2009, is incorporated by reference to Exhibit 10.22 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.15	Susquehanna’s Key Employee Severance Pay Plan, amended and restated as of January 1, 2009, is incorporated by reference to Exhibit 10.26 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.16	Director Compensation Schedule, effective January 1, 2009, is incorporated by reference to Exhibit 10.31 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.17	Description of grants of nonqualified stock options to Susquehanna’s non-employee directors is filed herewith as Exhibit 10.17.
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications is filed herewith as Exhibit 32.

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

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