Susquehanna Bancshares (SUSQ) 10-Q 2012 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, 2012

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 Number001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

As of April 30, 2012, there were 187,856,184 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			3
Item 1 Financial Statements (Unaudited)			3
	Consolidated Balance Sheets as of March 31, 2012 and 2011, and December 31, 2011		3
	Consolidated Statements of Income for the three months ended March 31, 2012 and 2011		4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011		5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011		6
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011		7
	Notes to Consolidated Financial Statements		8
Item  2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3 Quantitative and Qualitative Disclosures About Market Risk			57
Item 4 Controls and Procedures			59
PART II. OTHER INFORMATION			59
Item 1 Legal Proceedings			59
Item 1A Risk Factors			61
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3 Defaults Upon Senior Securities			61
Item 4 Reserved			61
Item 5 Other Information			61
Item 6 Exhibits			62
SIGNATURES
EXHIBIT INDEX

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

	March 31, 2012			December 31, 2011			March 31, 2011
	(in thousands, except share data)
Assets
Cash and due from banks	$	350,793		$	276,384		$	191,207
Unrestricted short-term investments		27,067			55,761			24,635
Cash and cash equivalents		377,860			332,145			215,842
Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		4,932			5,015			5,168
Restricted short-term investments		60,600			60,910			28,260
Securities available for sale		2,620,245			2,295,034			2,349,383
Restricted investment in bank stocks		136,591			128,073			121,586
Loans and leases, net of unearned income		12,337,688			10,257,161			9,397,786
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		183,981			190,769			210,212
Less: Allowance for loan and lease losses		194,730			188,100			193,233
Net loans and leases		12,326,939			10,259,830			9,414,765
Premises and equipment, net		196,011			168,382			165,747
Other real estate and foreclosed assets		40,748			41,716			28,212
Accrued income receivable		43,928			36,820			36,741
Bank-owned life insurance		447,686			405,296			360,312
Goodwill		1,264,892			1,018,031			1,018,031
Intangible assets with finite lives		53,662			29,081			31,912
Deferred taxes		35,776			6,344			4,828
Other assets		197,156			188,112			170,738
Total Assets	$	17,807,026		$	14,974,789		$	13,951,525
Liabilities and Shareholders’ Equity
Deposits:
Demand	$	1,947,525		$	1,569,811		$	1,387,130
Interest-bearing demand		5,496,237			4,439,488			3,669,322
Savings		1,008,042			868,709			798,979
Time		2,527,383			2,157,282			2,074,648
Time of $100 or more		1,584,354			1,255,182			1,350,778
Total deposits		12,563,541			10,290,472			9,280,857
Federal Home Loan Bank short-term borrowings		850,000			900,000			375,000
Other short-term borrowings		723,758			613,306			609,284
Federal Home Loan Bank long-term borrowings		120,673			71,020			716,125
Other long-term debt		200,611			176,030			176,036
Junior subordinated debentures		346,395			323,317			323,030
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna’s general credit		145,053			157,379			195,332
Accrued interest, taxes, and expenses payable		69,787			50,670			47,703
Deferred taxes		0			25,827			39,906
Other liabilities		274,624			177,140			188,760
Total Liabilities		15,294,442			12,785,161			11,952,033
Shareholders’ Equity:
Common stock, $2.00 par value, 400,000,000 shares authorized; Issued:188,058,669 at March 31, 2012;157,067,887 at December 31, 2011; and 129,975,635 at March 31, 2011		376,117			314,136			259,951
Treasury stock, at cost.202,485 at March 31, 2012;200,748 at December 31, 2011; and 2,527 at March 31, 2011		(1,278	)		(1,263	)		(24	)
Additional paid-in capital		1,638,562			1,397,152			1,295,979
Retained earnings		544,476			525,657			490,425
Accumulated other comprehensive loss, net of taxes of$25,305; $25,863; and $26,109, respectively		(45,293	)		(46,054	)		(46,839	)
Total Shareholders’ Equity		2,512,584			2,189,628			1,999,492
Total Liabilities and Shareholders’ Equity	$	17,807,026		$	14,974,789		$	13,951,525

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,
	2012			2011
	(in thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	148,355		$	126,799
Securities:
Taxable		12,792			15,681
Tax-exempt		3,762			3,951
Dividends		998			1,022
Short-term investments		30			28
Total interest income		165,937			147,481
Interest Expense:
Deposits:
Interest-bearing demand and savings		6,047			5,812
Time		12,026			15,181
Federal Home Loan Bank short-term borrowings		2,900			2,308
Other short-term borrowings		2,122			1,897
Federal Home Loan Bank long-term borrowings		58			8,084
Other long-term debt		8,661			9,176
Total interest expense		31,814			42,458
Net interest income		134,123			105,023
Provision for loan and lease losses		19,000			35,000
Net interest income, after provision for loan and lease losses		115,123			70,023
Noninterest Income:
Service charges on deposit accounts		7,674			7,756
Vehicle origination and servicing fees		1,924			1,904
Asset management fees		7,073			7,161
Income from fiduciary-related activities		2,622			1,834
Commissions on brokerage, life insurance, and annuity sales		1,907			2,255
Commissions on property and casualty insurance sales		5,058			3,985
Other commissions and fees		4,643			5,987
Income from bank-owned life insurance		1,472			1,106
Net gain on sale of loans and leases		3,750			4,051
Net realized gain on sales of securities		385			1,869
Total other-than-temporary impairment, net of recoveries		(2,706	)		(2,372	)
Portion of loss recognized in other comprehensive income (before taxes)		2,562			140
Net impairment losses recognized in earnings		(144	)		(2,232	)
Other		3,151			1,791
Total noninterest income		39,515			37,467
Noninterest Expenses:
Salaries and employee benefits		57,958			50,992
Occupancy		10,810			9,655
Furniture and equipment		3,617			3,066
Advertising and marketing		3,054			2,347
FDIC insurance		5,178			3,381
Legal fees		2,053			2,074
Amortization of intangible assets		2,753			2,163
Vehicle lease disposal		1,836			2,437
Merger related		11,479			535
Other		21,617			19,233
Total noninterest expenses		120,355			95,883
Income before income taxes		34,283			11,607
Provision for (benefit from) income taxes		10,810			1,846
Net Income	$	23,473		$	9,761
Earnings per common share:
Basic	$	0.14		$	0.08
Diluted	$	0.14		$	0.08
Cash dividends per common share	$	0.03		$	0.01
Average common shares outstanding:
Basic		171,326			129,727
Diluted		171,973			129,796

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

4

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Net Income	$	23,473		$	9,761
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period		686			7,851
Less: Reclassification adjustment for losses included in net income		(1,623	)		(89	)
		(937	)		7,762
Defined benefit pension plans:
Net loss arising during period		0			(301	)
Cash flow hedges:
Unrealized gain on cash flow hedges		1,698			3,835
Total other comprehensive income		761			11,296
Comprehensive income	$	24,234		$	21,057

5

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	23,473		$	9,761
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		11,476			8,459
Provision for loan and lease losses		19,000			35,000
Realized (gain) loss on available-for-sale securities, net		(241	)		363
Deferred income taxes		13,778			(20	)
Gain on sale of loans and leases		(3,750	)		(4,051	)
(Gain) loss on sale of foreclosed assets		(607	)		73
Mortgage loans originated for sale		(113,772	)		(67,883	)
Proceeds from sale of mortgage loans originated for sale		119,668			77,590
Payments received on loans and leases transferred from held for sale to held for investment, net of advances on home equity lines of credit		38,503			33,888
Increase in cash surrender value of bank-owned life insurance		(1,273	)		(918	)
Increase in accrued interest receivable		(8,866	)		(620	)
Increase (decrease) in accrued interest payable		1,029			(793	)
(Decrease) increase in accrued expenses and taxes payable		(18,629	)		2,047
Other, net		(1,658	)		(4,650	)
Net cash provided by operating activities		78,131			88,246
Cash Flows from Investing Activities:
Net decrease in restricted short-term investments		9,564			8,267
Activity in available-for-sale securities:
Sales		10,350			88,403
Maturities, repayments, and calls		163,205			155,323
Purchases		(299,694	)		(217,911	)
Net decrease (increase) in restricted investment in bank stock		4,059			(40	)
Net increase in loans and leases		(158,684	)		(61,849	)
Purchase of bank-owned life insurance		(1,874	)		0
Proceeds from bank-owned life insurance		2,259			185
Proceeds from sale of foreclosed assets		12,792			5,580
Acquisitions, net of subsequent divestitures		(2,487	)		0
Additions to premises and equipment, net		(1,211	)		(3,448	)
Net cash provided by (used in) investing activities		(261,721	)		(25,490	)
Cash Flows from Financing Activities:
Net increase in deposits		198,697			89,650
Net increase (decrease) in other short-term borrowings		100,224			(161,339	)
Net (decrease) increase in short-term FHLB borrowings		(50,000	)		75,000
Repayment of long-term FHLB borrowings		(4,605	)		(85,050	)
Repayment of long-term debt		(12,328	)		(11,706	)
Proceeds from issuance of common stock		1,986			226
Purchase of treasury stock		(15	)		(24	)
Redemption of warrant		0			(5,269	)
Cash dividends paid		(4,654	)		(1,300	)
Net cash provided by (used in) financing activities		229,305			(99,812	)
Net change in cash and cash equivalents		45,715			(37,056	)
Cash and cash equivalents at January 1		332,145			252,898
Cash and cash equivalents at March 31	$	377,860		$	215,842
Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	30,784		$	43,250
Income tax payments		809			820
Supplemental Schedule of Noncash Activities
Real estate acquired in settlement of loans	$	11,144		$	13,017
Securities purchased not settled		80,557			78,760

6

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements Of Changes In Shareholders’ Equity (Unaudited)

(In thousands, except share data)

	Shares of Common Stock		Common Stock		Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at January 1, 2011		129,965,635	$	259,931	$	0		$	1,301,042		$	481,964		$	(58,135	)	$	1,984,802
Comprehensive income:
Net income												9,761						9,761
Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of $235															7,851			7,851
Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $51															(89	)		(89	)
Change in unrealized loss on cash flow hedges, net of taxes of $2,218															3,835			3,835
Adjustment to postretirement benefit obligations, net of taxes of $162															(301	)		(301	)
Total comprehensive income																		21,057
Issuance of common stock and options under employee benefit plans		10,000		20					206									226
Treasury stock purchased						(24	)											(24	)
Redemption of warrant									(5,269	)								(5,269	)
Cash dividends paid on common stock ($0.01 per share)												(1,300	)					(1,300	)
Balance at March 31, 2011		129,975,635	$	259,951	$	(24	)	$	1,295,979		$	490,425		$	(46,839	)	$	1,999,492
Balance at January 1, 2012		157,067,887	$	314,136	($	1,263	)	$	1,397,152		$	525,657		$	(46,054	)	$	2,189,628
Comprehensive income:
Net income												23,473						23,473
Change in unrealized gain on securities available for sale, net of taxes and reclassification adjustment of $391															686			686
Non-credit related unrealized loss on other-than-temporarily impaired debt securities, net of taxes of $939															(1,623	)		(1,623	)
Change in unrealized loss on cash flow hedges, net of taxes of $1,106															1,698			1,698
Total comprehensive income																		24,234
Issuance of common stock in Tower Bancorp, Inc. purchase		30,760,933		61,522					239,883									301,405
Issuance of common stock and options under employee benefit plans		229,849		459					1,527									1,986
Treasury stock purchased						(15	)											(15	)
Cash dividends paid on common stock ($0.03 per share)												(4,654	)					(4,654	)
Balance at March 31, 2012		188,058,669	$	376,117	$	(1,278	)	$	1,638,562		$	544,476		$	(45,293	)	$	2,512,584

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

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share

NOTE 1. Accounting Policies

The information contained in this report is unaudited. In the opinion of management, the information reflects all normal recurring adjustments necessary for a fair statement of results for the periods ended March 31, 2012 and 2011. Certain prior-year amounts have been reclassified to conform to current period classifications and those reclassifications are not material to previously issued financial statements. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

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 83 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Susquehanna has reclassified and seperately presented restricted investment in bank stock from its securities available for sale. Restricted stock consists of Federal Reserve Bank (“FRB”) stock, Federal Home Loan Bank (“FHLB”) stock, and Atlantic Central Bankers Bank stock. Federal law requires a member institution of the FRB and FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership. The carrying amount of restricted investment in bank stock approximates fair value and considers the limited marketability of such securities.

Recently Adopted Accounting Guidance

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

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

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) -Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted. This guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. Adoption of this guidance has not had a material impact on results of operations or financial condition. In conjunction with the adoption of ASU 2011-04, Susquehanna also elected to apply the portfolio exception in 820-10-35-18D with respect to measuring counterparty risk for all of its derivative transactions subject to master netting arrangements.

In April 2011, FASB issued ASU 2011-03, Transfer and Servicing (Topic 860) –Reconsideration of Effective Control for Repurchase Agreements.This ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation

8

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

guidance related to that criterion. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Adoption of this guidance has not had a material impact on results of operations or financial condition.

Recently Issued Accounting Guidance

In December 2011, FASB issued ASU 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities. This ASU requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of ASU 2011-11 is to make financial statements that are prepared under U.S. generally accepted accounting principles (“GAAP”) more comparable to those prepared under International Financial Reporting Standards (“IFRS”). The new disclosures will give financial statement users information about both gross and net exposures. ASU 2011-11 is effective for interim and annual reporting periods beginning after January 1, 2013 and will be applied on a retrospective basis. The adoption of the amendment is not expected to have a material impact the financial condition, results of operations or liquidity.

NOTE 2. Acquisitions

Abington Bancorp, Inc.

On October 1, 2011, Susquehanna acquired all of the outstanding common stock of Abington Bancorp, Inc. (“Abington”), headquartered in Jenkintown, Pennsylvania, in a stock-for-stock transaction in which Abington was merged with and into Susquehanna. Abington operated 20 offices in Pennsylvania at the date of acquisition. The results of operations acquired in the Abington transaction have been included in Susquehanna’s financial results since the acquisition date, October 1, 2011. Abington shareholders received 1.32 shares of Susquehanna stock in exchange for each outstanding share of Abington common stock, resulting in Susquehanna issuing a total of 26.7 million common shares.

Tower Bancorp, Inc.

On February 17, 2012, Susquehanna acquired all of the outstanding common stock of Tower Bancorp, Inc. (“Tower”), headquartered in Harrisburg, Pennsylvania, through the merger of Tower with and into Susquehanna. The results of operations acquired in the Tower transaction have been included in Susquehanna’s financial results since the acquisition date, February 17, 2012. Tower shareholders received, at their election, either 3.4696 shares of Susquehanna common stock, or $28.00 in cash, or some combination of shares and cash, for each share of Tower common stock held immediately prior to the effective time of the Tower merger, with $88.0 million of the aggregate merger consideration being paid in cash. A total of 30.8 million shares of Susquehanna common stock were issued in connection with the Tower merger.

9

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The Tower transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at estimated fair value on the acquisition date. Assets acquired totaled $2,391,669, including $1,975,488 of loans and leases (including $854,993 of commercial real estate loans, $136,979 of commercial loans and leases, and $758,803 of residential real estate loans). Liabilities assumed aggregated $2,249,120, including $2,074,372 of deposits. The transaction added $301,405 to the Susquehanna shareholders’ equity. Goodwill of $246,861 was recorded as a result of the transaction. The consideration transferred for Tower’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:

Purchase price:
Value of:
Common shares issued and options assumed	$	301,405
Cash		88,005
Total purchase price		389,410
Identifiable assets:
Cash and due from banks		85,518
Unrestricted short-term investments		9,171
Securities available for sale		137,254
Loans and leases		1,975,488
Intangible assets		27,334
Other assets		156,904
Total identifiable assets		2,391,669
Liabilities:
Deposits		2,074,372
Short-term borrowings		10,228
Long-term borrowings		103,923
Other liabilities		60,597
Total liabilities		2,249,120
Net goodwill resulting from acquisition	$	246,861

In many cases, determining the fair value of the acquired assets and assumed liabilities required Susquehanna to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the valuation of acquired loans.

The following is a summary of the loans acquired in the Tower acquisition:

	Acquired Impaired Loans		Acquired Non- Impaired Loans		Total Acquired Loans
Contractually required principal and interest at acquisition	$	348,889	$	2,376,071	$	2,724,960
Contractual cash flows not expected to be collected		127,318		135,736		263,054
Expected cash flows at acquisition		221,571		2,240,335		2,461,906
Interest component of expected cash flows		54,418		432,000		486,418
Basis in acquired loans at acquisition - estimated fair value	$	167,153	$	1,808,335	$	1,975,488

The core deposit intangible of $24,005 is being amortized over an estimated useful life of approximately 10 years.

10

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The fair value of checking, savings and money market deposit accounts acquired from Tower was assumed to be approximately the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates expected contractual payments discounted at market rates for similar certificates.

In connection with the Tower acquisition, Susquehanna incurred merger-related expenses related to personnel, occupancy and equipment, and other costs of integrating and conforming acquired operations with and into Susquehanna. Those expenses consisted largely of costs related to professional services, conversion of systems and/or integration of operations, and, termination of existing contractual arrangements of Tower to purchase various services; initial marketing and promotion expenses designed to introduce Susquehanna to its new customers; travel costs; and printing, postage, supplies, and other costs of completing the transaction and commencing operations in new markets and offices. A summary of merger-related expenses included in the consolidated statement of income follows:

At March 31, 2012	Abington		Tower		Total
Salaries and employee benefits	$	0	$	1,350	$	1,350
Consulting		66		3,949		4,015
Legal		37		733		770
Branch writeoffs		0		1,371		1,371
Net occupancy and equipment		0		2,809		2,809
All other		0		1,164		1,164
	$	103	$	11,376	$	11,479
At March 31, 2011	Abington		Tower		Total
Legal	$	520	$	0	$	520
All other		15		0		15
	$	535	$	0	$	535

Pro Forma Condensed Combined Financial Information

If the Abington acquisition had been completed on January 1, 2011, total revenue, net of interest expense, and net income, would have been approximately $151.2 million and $11.3 million, respectively, for the three months ended March 31, 2011.

If the Tower acquisition had been completed on January 1, 2011, total revenue, net of interest expense, would have been approximately $188.5 million and $172.2 million for the three months ended March 31, 2012 and 2011, respectively, and net income from continuing operations would have been approximately $23.6 million and $10.0 million for the same periods.

Pro forma results of operations do not include the impact of conforming certain acquiree accounting policies to Susquehanna’s policies. The pro forma financial information does not indicate the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.

11

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 3. Investment Securities

The amortized cost and fair values of investment securities at March 31, 2012 and December 31, 2011 were as follows:

At March 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	119,064	$	1,521	$	0	$	120,585
Obligations of states and political subdivisions		372,461		24,110		258		396,313
Agency residential mortgage-backed securities		1,869,543		29,215		901		1,897,857
Non-agency residential mortgage-backed securities		74,394		80		9,481		64,993
Commercial mortgage-backed securities		52,477		2,282		0		54,759
Other structured financial products		24,879		0		16,858		8,021
Other debt securities		54,200		1,813		1,024		54,989
Other equity securities		22,401		906		579		22,728
Total available-for-sale securities	$	2,589,419	$	59,927	$	29,101	$	2,620,245

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
At December 31, 2011	Cost		Gains		Losses		Value
Available-for-Sale:
U.S. Government agencies	$	146,580	$	1,906	$	1	$	148,485
Obligations of states and political subdivisions		376,819		25,235		75		401,979
Agency residential mortgage-backed securities		1,503,836		28,177		608		1,531,405
Non-agency residential mortgage-backed securities		79,225		0		10,154		69,071
Commercial mortgage-backed securities		54,973		1,846		0		56,819
Other structured financial products		24,831		0		11,538		13,293
Other debt securities		54,176		670		3,711		51,135
Other equity securities		22,283		791		227		22,847
Total available-for-sale securities	$	2,262,723	$	58,625	$	26,314	$	2,295,034

At March 31, 2012 and December 31, 2011, investment securities with carrying values of $1,701,175 and $1,673,419, respectively, were pledged to secure public funds and for other purposes as required by law.

The amortized cost and fair value of U.S. Government agencies, obligations of states and political subdivisions, synthetic collateralized debt obligations, other structured financial products, other debt securities, and residential and commercial mortgage-backed securities, at March 31, 2012 and December 31, 2011, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Within one year	$	9,501	$	9,688	$	9,595	$	9,821
After one year but within five years		140,884		143,395		169,739		172,613
After five years but within ten years		865,326		873,596		602,385		609,935
After ten years		1,551,307		1,570,838		1,458,719		1,479,816
Total available-for-sale securities	$	2,567,018	$	2,597,517	$	2,240,439	$	2,272,185

12

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

	Available-for-sale Securities
	Three Months Ended March 31,
	2012			2011
Gross gains	$	392		$	3,601
Gross losses		(7	)		(1,732	)
Other-than-temporary impairment		(144	)		(2,232	)
Net gains	$	241		$	(363	)

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, 2012 and December 31, 2011.

March 31, 2012	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	500	$	0	$	0	$	0	$	500	$	0
Obligations of states and political subdivisions		13,993		258		0		0		13,993		258
Agency residential mortgage-backed securities		351,209		901		0		0		351,209		901
Non-agency residential mortgage-backed securities		20,769		1,470		55,191		8,011		75,960		9,481
Other structured financial products		0		0		8,020		16,858		8,020		16,858
Other debt securities		23,527		712		1,483		312		25,010		1,024
Other equity securities		587		385		822		194		1,409		579
	$	410,585	$	3,726	$	65,516	$	25,375	$	476,101	$	29,101

December 31, 2011	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	0	$	0	$	6,500	$	1	$	6,500	$	1
Obligations of states and political subdivisions		0		0		925		75		925		75
Agency residential mortgage-backed securities		126,645		608		0		0		126,645		608
Non-agency residential mortgage-backed securities		6,187		563		62,884		9,591		69,071		10,154
Other structured financial products		0		0		13,293		11,538		13,293		11,538
Other debt securities		21,237		2,988		10,102		723		31,339		3,711
Other equity securities		16		1		921		226		937		227
	$	154,085	$	4,160	$	94,625	$	22,154	$	248,710	$	26,314

Non-agency residential mortgage-backed securities.At March 31, 2012, Susquehanna held 11 securities that had unrealized losses. Seven of those securities were rated below investment grade. None of Susquehanna’s non-agency residential mortgage-backed securities were backed by loans identified by the issuer as subprime or Alt-A collateral. Management has analyzed the collateral underlying these securities with respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that four of these securities are other-than-temporarily impaired.

Susquehanna recorded other-than-temporary impairment losses as presented in the following table.

13

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

	Three Months Ended March 31,
	2012		2011
Balance - beginning of period	$	5,055	$	1,737
Additions:
Amount related to credit losses for which an other-than-temporary impairment was not previously recognized		0		2,232
Additional amount related to credit losses for which an other-than-temporary impairment was previously recognized		144		0
Balance - end of period	$	5,199	$	3,969

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

Based on the expected cash flows derived from the model, Susquehanna expects to recover the unrealized loss in accumulated other comprehensive income ($4,144 and $89 at March 31, 2012 and 2011, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

	Weighted-
As of March 31, 2012	Average
Conditional repayment rate (1)		9.9	%
Loss severity (2)		46.6	%
Conditional default rate (3)		6.0	%

(1) Conditional repayment rate represents a rate equal to the proportion of principal balance paid off voluntarily over a certain period of time on an annualized basis.

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

(3) Conditional default rate is an annualized rate of default on a group of mortgages, and represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the home being past due 60 days, 90 days, or possibly already in the foreclosure process.

14

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Other structured financial products. Susquehanna’s structured financial product investments are comprised of four pooled trust preferred securities which have an aggregate unrealized loss of $16,859 and $10,725 at March 31, 2012 and 2011, respectively. All of these securities are below investment grade but are of the more senior tranche of the specific issue. Susquehanna has contracted with a third-party financial advisory firm (“third party firm”) to assist in its other-than-temporary impairment (“OTTI”) analysis of its structured financial product investments. Management has assisted with the development of, and reviews and comments on the results of, this valuation methodology, and believes that the valuation analysis and methodology reasonably supports the value and projected performance of the specific trust preferred securities. Management believes this valuation methodology presents an appropriate approach in the determination of other-than-temporary impairment charges in accordance with GAAP.

The third party firm uses a proprietary methodology to determine the other-than-temporary impairment of Susquehanna’s pooled trust preferred securities. Using publicly available financial information, the third party firm’s valuation analysis compares the present value of the expected base cash flows with the amortized cost basis of the trust preferred securities to determine whether Susquehanna expects to receive the entire amortized cost basis of such securities. To make this comparison, the third party firm evaluates two scenarios consisting of three phases each. The two scenarios are: (1) the first dollar loss scenario, and, (2) the expected or forecasted scenario. The three phases associated with each scenario are production of cash flows, application of the cash flows to the percent owned, and assessment of OTTI.

To determine expected cash flows, the valuation analysis considers credit default rates, call options and deferrals, waterfall structure, and covenants relating to the trust preferred securities. The third party firm determines short-term default risk using ratios, including the Texas rating, that relate to the issuers capitalization, asset quality, profitability, and liquidity. To determine longer term default probabilities, the third party firm uses an internal scoring approach that relies on key historical financial performance ratios. Management believes that future cash flows for these securities can be reasonably developed and supported. In addition, the trust indenture documentation and the trustee reports for each specific trust preferred security issuance provides information regarding, deferral rights, call options, various triggers, including over-collateralization triggers, and waterfall structure, which management believes is essential in determining projected base cash flows.

If collateral is in default at the assessment date, a recovery rate specific to the issuer of the collateral is incorporated into the expected cash flows with a twenty-four month lag in timing of receipt of those expected cash flows. The third party firm calculates a terminal default rate based upon certain key financial ratios of the active issuers in the security to all Federal Deposit Insurance Corporation insured bank institutions. The active issuers of the collateral are summarized as a weighted average based on issue size according to status of deferral and default assumption. To enhance the analysis, the third party firm calculates the standard deviation across the issuers for each ratio and removes any issuer that falls more than three standard deviations above or below the average for that ratio. No recovery is incorporated into the expected cash flows for any issuers that exceed the terminal default rate. For issuers currently making interest payments and for those currently deferring interest payments, Susquehanna makes an estimate using publicly available financial information as to the likelihood and timing of any default, after which the estimated cash flow reflects a recovery rate specific to the issuer. Issuers that are currently deferring interest payments and not expected to default are assumed to continue to defer interest payments for twenty quarters, the full contractually permitted deferral, from the period of initial deferral.

In considering the amount and timing of expected cash flows on the pooled trust preferred securities, management considers the right of the issuers of the securities underlying the pooled trust preferred securities to call those collateral securities. Management assesses any projected exercise of the call option, incorporating changes in economic and market conditions and the impact of any change in timing of expected cash flows in the measurement of fair value and other-than-temporary impairment. As of March 31, 2012 and 2011, management determined that the likelihood was remote that any call option will be exercised.

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

15

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

As of March 31, 2012	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Class		B			B			B			A2L
Class face value	$	35,000		$	58,363		$	87,962		$	45,500
Book value	$	3,000		$	7,096		$	8,033		$	6,750
Fair value		967			2,438			2,718			1,897
Unrealized loss	$	(2,033	)	$	(4,658	)	$	(5,315	)	$	(4,853	)
Present value of expected cash flows for class noted above and all subordinated classes (1)	$	151,043		$	171,529		$	277,791		$	142,866
Lowest credit rating assigned		CCC-			Ca			Ca			Ca
Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		352,028			300,200			470,831			344,600
Actual defaults		10,000			51,580			44,000			74,500
Actual deferrals		107,400			120,690			135,150			43,080
Projected future defaults		72,893			71,392			60,702			46,548
Actual defaults as a % of original collateral		1.6	%		10.3	%		6.3	%		15.3	%
Actual deferrals as a % of original collateral (2)		17.2			24.1			19.3			8.8
Actual defaults and deferrals as a % of original collateral		18.8	%		34.4	%		25.6	%		24.1	%
Projected future defaults as a % of original collateral (3)		11.7	%		14.2	%		8.7	%		9.5	%
Actual institutions deferring and defaulted as a % of total institutions		19.4			37.5			30.4			30.9
Projected future defaults as a % of performing collateral plus deferrals		15.9			17.0			10.0			12.0

16

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

As of March 31, 2011	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Class		B			B			B			A2L
Class face value	$	35,000		$	57,677		$	87,107		$	45,500
Book value	$	3,000		$	7,012		$	7,955		$	6,750
Fair value		1,874			4,138			4,240			3,740
Unrealized loss	$	(1,126	)	$	(2,874	)	$	(3,715	)	$	(3,010	)
Present value of expected cash flows for class noted above and all subordinated classes (1)	$	162,872		$	115,023		$	167,210		$	110,675
Lowest credit rating assigned		CCC-			Caa3			Ca			CCC-
Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		393,728			329,200			530,135			325,700
Actual defaults		3,000			27,580			93,500			66,500
Actual deferrals		77,400			144,690			76,900			95,480
Projected future defaults		108,000			152,420			159,500			104,500
Actual defaults as a % of original collateral		0.5	%		5.5	%		13.3	%		13.6	%
Actual deferrals as a % of original collateral (2)		12.4			28.9			11.0			19.6
Actual defaults and deferrals as a % of original collateral		12.9	%		34.4	%		24.3	%		33.2	%
Projected future defaults as a % of original collateral (3)		17.3	%		30.4	%		22.8	%		21.4	%
Actual institutions deferring and defaulted as a % of total institutions		13.2			36.8			28.4			38.9
Projected future defaults as a % of performing collateral plus deferrals		22.9			32.2			26.3			24.8

(1) Susquehanna determines whether it expects to recover the entire amortized cost basis by comparing the present value of the expected cash flows to be collected with the amortized cost basis, using documented assumptions. The present value of the expected cash flows for Susquehanna’s specific class and all subordinate classes is listed above. As of March 31, 2012 and 2011, the present value of the current estimated cash flows is equal to or greater than the face amount of the specific class for all trust preferred securities and consequently, there is no other-than-temporary impairment.

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

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

17

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 4. Loans and Leases

For presentation, legacy loans exclude loans acquired through merger transactions consummated after September 30, 2011, and acquired loans include loans acquired through merger transactions consummated after September 30, 2011.

Loans and Leases, Net of Unearned Income

	March 31,		December 31,
	2012		2011
Commercial, financial, and agricultural	$	2,088,948	$	1,871,027
Real estate - construction		993,819	��	829,221
Real estate secured - residential		3,945,565		3,212,562
Real estate secured - commercial		4,022,788		3,136,887
Consumer		775,913		722,329
Leases		694,636		675,904
Total loans and leases	$	12,521,669	$	10,447,930
Legacy loans	$	9,846,856	$	9,829,963
Acquired loans		2,674,813		617,967
Total loans and leases	$	12,521,669	$	10,447,930
Nonaccrual loans and leases	$	133,489	$	156,478
Loans and leases contractually past due 90 days and still accruing		9,758		10,077
Troubled debt restructurings		72,081		72,852
Unearned income		161,077		162,849
Deferred origination costs		14,356		13,857
All overdrawn deposit accounts, reclassified as loans and evaluated for collectability		1,982		3,390

Net Investment in Direct Financing Leases

	March 31,			December 31,
	2012			2011
Minimum lease payments receivable	$	499,727		$	489,574
Estimated residual value of leases		263,844			255,152
Unearned income under lease contracts		(68,935	)		(68,822	)
Total leases	$	694,636		$	675,904

18

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

							Three Months Ended March 31, 2012
	Commercial			Real Estate - Construction			Real Estate Secured - Residential			Real Estate Secured - Commercial			Consumer			Leases			Unallocated			Total
Allowance for credit losses:
Balance at January 1, 2012	$	28,567		$	36,868		$	28,839		$	78,414		$	3,297		$	10,561		$	1,554		$	188,100
Charge-offs		(3,892	)		(3,587	)		(3,965	)		(5,631	)		(1,299	)		(906	)		0			(19,280	)
Recoveries		1,784			757			312			3,360			371			326			0			6,910
Provision		7,237			54			8,520			792			1,191			2,477			(1,271	)		19,000
Balance at March 31, 2012	$	33,696		$	34,092		$	33,706		$	76,935		$	3,560		$	12,457		$	284		$	194,730
Balance at March 31, 2012:
Individually evaluated for impairment:
Legacy loans	$	7,843		$	5,037		$	3,388		$	9,827		$	205		$	0					$	26,300
Acquired loans		0			0			0			0			0			0						0
Total	$	7,843		$	5,037		$	3,388		$	9,827		$	205		$	—					$	26,300
Collectively evaluated for impairment:
Legacy loans	$	25,853		$	29,056		$	30,317		$	67,108		$	3,355		$	12,457		$	284		$	168,430
Acquired loans		0			0			0			0			0			0			0			0
Total	$	25,853		$	29,056		$	30,317		$	67,108		$	3,355		$	12,457		$	284		$	168,430
Financing receivables:
Balance at March 31, 2012	$	2,088,948		$	993,819		$	3,945,565		$	4,022,788		$	775,913		$	694,636					$	12,521,669
Balance at March 31, 2012:
Individually evaluated for impairment:
Legacy loans	$	18,826		$	31,346		$	25,188		$	64,940		$	538		$	0					$	140,838
Acquired loans		28,456			71,174			39,771			176,451			289			0						316,141
Total	$	47,282		$	102,520		$	64,959		$	241,391		$	827		$	—					$	456,979
Collectively evaluated for impairment:
Legacy loans	$	1,814,588		$	640,825		$	2,923,800		$	2,871,222		$	760,947		$	694,636					$	9,706,018
Acquired loans		227,078			250,474			956,807			910,174			14,139			0						2,358,672
Total	$	2,041,666		$	891,299		$	3,880,607		$	3,781,396		$	775,086		$	694,636					$	12,064,690

							Three Months Ended March 31, 2011
	Commercial			Real Estate - Construction			Real Estate Secured - Residential			Real Estate Secured - Commercial			Consumer			Leases			Unallocated		Total
Allowance for credit losses:
Balance at January 1, 2011	$	31,608		$	50,250		$	28,320		$	70,137		$	2,841		$	8,643		$	35	$	191,834
Charge-offs		(4,893	)		(10,984	)		(4,480	)		(16,170	)		(2,305	)		(1,743	)		0		(40,575	)
Recoveries		1,193			2,830			677			1,728			226			320			0		6,974
Provision		3,231			5,628			4,392			18,161			1,913			1,656			19		35,000
Balance at March 31, 2011	$	31,139		$	47,724		$	28,909		$	73,856		$	2,675		$	8,876		$	54	$	193,233
Balance at March 31, 2011:
Individually evaluated for impairment	$	3,502		$	3,844		$	3,625		$	11,451		$	0		$	0				$	22,422
Collectively evaluated for impairment	$	27,637		$	43,880		$	25,284		$	62,405		$	2,675		$	8,876		$	54	$	170,811
Financing receivables:
Balance at March 31, 2011	$	1,798,986		$	824,680		$	2,689,467		$	2,984,262		$	626,504		$	684,099				$	9,607,998
Balance at March 31, 2011:
Individually evaluated for impairment	$	26,577		$	54,071		$	31,706		$	114,969		$	0		$	0				$	227,323
Collectively evaluated for impairment	$	1,772,409		$	770,609		$	2,657,761		$	2,869,293		$	626,504		$	684,099				$	9,380,675

The following tables present Susquehanna’s credit quality indicators by internally assigned grading and by payment activity at March 31, 2012 and December 31, 2011.

19

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Credit Quality Indicators, at March 31, 2012

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade

	Commercial		Real Estate - Construction (1)		Real Estate - Secured - Commercial (2)			Total Commercial Credit Exposure
Legacy loans
Grade:
Pass (3)	$	1,749,568	$	465,688	$	3,225,177		$	5,440,433
Special mention (4)		64,804		62,204		185,111			312,119
Substandard (5)		54,784		64,618		200,462			319,864
Total	$	1,869,156	$	592,510	$	3,610,750	��	$	6,072,416
Acquired loans
Grade:
Pass (3)	$	187,482	$	175,461	$	1,063,955		$	1,426,898
Special mention (4)		9,298		43,205		87,759			140,262
Substandard (5)		23,012		81,770		189,335			294,117
Total	$	219,792	$	300,436	$	1,341,049		$	1,861,277
Total loans
Grade:
Pass (3)	$	1,937,050	$	641,149	$	4,289,132		$	6,867,331
Special mention (4)		74,102		105,409		272,870			452,381
Substandard (5)		77,796		146,388		389,797			613,981
Total	$	2,088,948	$	892,946	$	4,951,799		$	7,933,693

Other Credit Exposure

Credit-risk Profile based on Payment Activity

	Real Estate - Secured - Residential		Consumer		Leases		Total Other Credit Exposure
Legacy loans
Performing	$	2,289,826	$	760,127	$	693,096	$	3,743,049
Nonperforming (6)		28,492		1,358		1,539		31,389
Total	$	2,318,318	$	761,485	$	694,635	$	3,774,438
Acquired loans
Performing	$	786,093	$	14,405	$	0	$	800,498
Nonperforming (6)		13,016		23		0		13,039
Total	$	799,109	$	14,428	$	0	$	813,537
Total loans
Performing	$	3,075,919	$	774,532	$	693,096	$	4,543,547
Nonperforming (6)		41,508		1,381		1,539		44,428
Total	$	3,117,427	$	775,913	$	694,635	$	4,587,975

20

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Credit Quality Indicators, at December 31, 2011

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade

	Commercial		Real Estate - Construction (1)		Real Estate - Secured - Commercial (2)		Total Commercial Credit Exposure
Legacy loans
Grade:
Pass (3)	$	1,745,672	$	545,177	$	3,203,010	$	5,493,859
Special mention (4)		54,902		60,945		173,308		289,155
Substandard (5)		59,978		60,096		219,737		339,811
Total	$	1,860,552	$	666,218	$	3,596,055	$	6,122,825
Acquired loans
Grade:
Pass (3)	$	8,711	$	16,359	$	118,287	$	143,357
Special mention (4)		1,164		36,307		17,363		54,834
Substandard (5)		600		34,659		28,236		63,495
Total	$	10,475	$	87,325	$	163,886	$	261,686
Total loans
Grade:
Pass (3)	$	1,754,383	$	561,536	$	3,321,297	$	5,637,216
Special mention (4)		56,066		97,252		190,671		343,989
Substandard (5)		60,578		94,755		247,973		403,306
Total	$	1,871,027	$	753,543	$	3,759,941	$	6,384,511

Other Credit Exposure

Credit-risk Profile based on Payment Activity

	Real Estate - Secured - Residential		Consumer		Leases		Total Other Credit Exposure
Legacy loans
Performing	$	2,277,379	$	720,441	$	674,510	$	3,672,330
Nonperforming (6)		31,809		1,607		1,394		34,810
Total	$	2,309,188	$	722,048	$	675,904	$	3,707,140
Acquired loans
Performing	$	355,096	$	279	$	0	$	355,375
Nonperforming (6)		903		2		0		905
Total	$	355,999	$	281	$	0	$	356,280
Total loans
Performing	$	2,632,475	$	720,720	$	674,510	$	4,027,705
Nonperforming (6)		32,712		1,609		1,394		35,715
Total	$	2,665,187	$	722,329	$	675,904	$	4,063,420

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

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

(3) Includes loans identified as having acceptable risk, which are loans for which the possibility of loss is considered unlikely.

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

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

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

21

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The following tables detail the age analysis of Susquehanna’s past due financing receivables as of March 31, 2012 and December 31, 2011.

Age Analysis of Past Due Financing Receivables, as of March 31, 2012

Financing Receivables that are Accruing

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	6,033	$	4,072	$	697	$	10,802	$	2,057,530	$	2,068,332
Real estate - construction		4,714		414		1,375		6,503		956,672		963,175
Real estate secured - residential		18,609		2,727		5,931		27,267		3,885,161		3,912,428
Real estate secured - commercial		11,537		4,256		526		16,319		3,959,046		3,975,365
Consumer		7,256		671		854		8,781		766,627		775,408
Leases		3,671		995		375		5,041		688,431		693,472
Total	$	51,820	$	13,135	$	9,758	$	74,713	$	12,313,467	$	12,388,180
Legacy loans	$	42,908	$	9,731	$	8,365	$	61,004	$	9,581,926	$	9,642,930
Acquired loans		8,912		3,404		1,393		13,709		2,731,541		2,745,250
Total	$	51,820	$	13,135	$	9,758	$	74,713	$	12,313,467	$	12,388,180

Financing Receivables that are Nonaccruing

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	764	$	1,799	$	9,476	$	12,039	$	8,577	$	20,616
Real estate - construction		1,711		420		25,796		27,927		2,717		30,644
Real estate secured - residential		913		63		21,328		22,304		10,833		33,137
Real estate secured - commercial		1,057		852		23,988		25,897		21,526		47,423
Consumer		0		0		505		505		0		505
Leases		0		57		629		686		478		1,164
Total	$	4,445	$	3,191	$	81,722	$	89,358	$	44,131	$	133,489
Legacy loans	$	4,445	$	3,191	$	80,965	$	88,601	$	44,052	$	132,653
Acquired loans		0		0		757		757		79		836
Total	$	4,445	$	3,191	$	81,722	$	89,358	$	44,131	$	133,489

22

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Age Analysis of Past Due Financing Receivables, as of December 31, 2011

Financing Receivables that are Accruing

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	7,843	$	2,473	$	778	$	11,094	$	1,845,548	$	1,856,642
Real estate - construction		342		416		56		814		790,680		791,494
Real estate secured - residential		21,330		7,247		6,303		34,880		3,135,760		3,170,640
Real estate secured - commercial		4,011		1,043		884		5,938		3,069,452		3,075,390
Consumer		7,688		1,442		1,609		10,739		711,590		722,329
Leases		4,014		867		447		5,328		669,629		674,957
Total	$	45,228	$	13,488	$	10,077	$	68,793	$	10,222,659	$	10,291,452
Legacy loans	$	44,439	$	12,325	$	9,732	$	66,495	$	9,638,391	$	9,704,886
Acquired loans		789		1,163		345		2,298		584,268		586,566
Total	$	45,228	$	13,488	$	10,077	$	68,793	$	10,222,659	$	10,291,452

Financing Receivables that are Nonaccruing

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables
Commercial	$	454	$	1,032	$	6,319	$	7,805	$	6,580	$	14,385
Real estate - construction		122		7,443		27,292		34,857		2,870		37,727
Real estate secured - residential		2,569		517		27,603		30,689		11,233		41,922
Real estate secured - commercial		2,946		1,722		32,020		36,688		24,809		61,497
Consumer		0		0		0		0		0		0
Leases		0		59		413		472		475		947
Total	$	6,091	$	10,773	$	93,647	$	110,511	$	45,967	$	156,478
Legacy loans	$	6,091	$	10,332	$	86,635	$	103,059	$	45,930	$	148,989
Acquired loans		0		441		7,012		7,452		37		7,489
Total	$	6,091	$	10,773	$	93,647	$	110,511	$	45,967	$	156,478

23

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Impaired Loans at March 31, 2012

	Unpaid Principal Balance			Related Charge-offs		Related Allowance		Average Unpaid Principal Balance (2)		Interest Income Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	29,951		$	425			$	33,396	$	346
Real estate - construction		81,288			711				82,344		614
Real estate secured - residential		44,313			436				40,048		494
Real estate secured - commercial		178,338			14,038				184,192		2,272
Consumer		320			0				280		6
Total impaired loans without a related reserve		334,210	(1)		15,610				340,260		3,732
Impaired loans with a related reserve:
Commercial, financial, and agricultural		12,403			9,192	$	7,843		12,578		73
Real estate - construction		17,502			1,211		5,037		18,765		29
Real estate secured - residential		21,574			31,960		3,388		21,701		219
Real estate secured - commercial		48,805			5,692		9,827		49,643		486
Consumer		538			2,870		205		554		6
Total impaired loans with a related reserve		100,822			50,925		26,300		103,241		813
Total impaired loans:
Commercial, financial, and agricultural		42,354			9,617		7,843		45,974		419
Real estate - construction		98,790			1,922		5,037		101,109		643
Real estate secured - residential		65,887			32,396		3,388		61,749		713
Real estate secured - commercial		227,143			19,730		9,827		233,835		2,758
Consumer		858			2,870		205		834		12
Total impaired loans	$	435,032		$	66,535	$	26,300	$	443,501	$	4,545
Impaired loans without a related reserve:
Legacy loans	$	40,017		$	15,610			$	41,072	$	269
Acquired loans		294,193			0				299,188		3,463
Total impaired loans without a related reserve		334,210			15,610				340,260		3,732
Impaired loans with a related reserve:
Legacy loans	$	100,822		$	50,925	$	26,300	$	103,241	$	813
Acquired loans		0			0		0		0		0
Total impaired loans with a related reserve		100,822			50,925		26,300		103,241		813
Total impaired loans:
Legacy loans	$	140,839		$	66,535	$	26,300	$	144,313	$	1,082
Acquired loans		294,193			0		0		299,188		3,463
Total impaired loans	$	435,032		$	66,535	$	26,300	$	443,501	$	4,545

(1) $6,972 of the $334,210 total impaired loans without a related reserve represents loans that had been written down to the fair value of the underlying collateral through direct charge-offs of $15,610.

(2) Average unpaid principal balance is calculated based on daily balances.

24

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Impaired Loans at December 31, 2011

	Unpaid Principal Balance			Related Charge-offs		Related Allowance		Average Unpaid Principal Balance (2)		Interest Income Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	6,621		$	0			$	11,159	$	291
Real estate - construction		25,968			26,833				29,464		761
Real estate secured - residential		17,540			2,871				16,473		788
Real estate secured - commercial		35,490			33,979				41,612		1,479
Consumer		0			0				37		4
Total impaired loans without a related reserve		85,619	(1)		63,683				98,745		3,323
Impaired loans with a related reserve:
Commercial, financial, and agricultural		6,870			0	$	3,421		9,085		239
Real estate - construction		15,015			6,598		2,243		22,022		307
Real estate secured - residential		16,227			1,084		2,807		15,733		558
Real estate secured - commercial		53,288			19,194		11,871		59,222		2,224
Consumer		658			0		654		202		8
Total impaired loans with a related reserve		92,058			26,876		20,996		106,264		3,336
Total impaired loans:
Commercial, financial, and agricultural		13,491			0		3,421		20,244		530
Real estate - construction		40,983			33,431		2,243		51,486		1,068
Real estate secured - residential		33,767			3,955		2,807		32,206		1,346
Real estate secured - commercial		88,778			53,173		11,871		100,834		3,703
Consumer		658			0		654		239		12
Total impaired loans	$	177,677		$	90,559	$	20,996	$	205,009	$	6,659
Impaired loans without a related reserve:
Legacy loans	$	43,689		$	63,633			$	88,262	$	2,713
Acquired loans		41,930			50				10,483		610
Total impaired loans without a related reserve		85,619			63,683				98,745		3,323
Impaired loans with a related reserve:
Legacy loans	$	92,058		$	26,876	$	20,996	$	106,264	$	3,336
Acquired loans		0			0		0		0		0
Total impaired loans with a related reserve		92,058			26,876		20,996		106,264		3,336
Total impaired loans:
Legacy loans	$	135,747		$	90,559	$	20,996	$	194,526	$	6,049
Acquired loans		41,930			0		0		10,483		610
Total impaired loans	$	177,677		$	90,559	$	20,996	$	205,009	$	6,659

(1) $48,234 of the $85,619 total impaired loans without a related reserve represents loans that had been written down to the fair value of the underlying collateral through direct charge-offs of $63,683.

(2) Average unpaid principal balance is calculated based on daily balances.

25

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Loans that were modified as troubled debt restructurings during the three month periods ended March 31, 2012 and 2011, respectively, for which there was a subsequent payment default are as follows:

Modifications

As of March 31, 2012

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial, financial, and agricultural		1	$	310	$	304
Real estate - construction		0		0		0
Real estate secured - residential		10		3,438		3,442
Real estate secured - commercial		4		10,662		10,662
Consumer		0		0		0
Legacy loans		8	$	11,871	$	11,870
Acquired loans		7		2,539		2,538

	Number of Loans		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted during the current period
Commercial, financial, and agricultural		0	$	0
Real estate - construction		1		908
Real estate secured - residential		3		1,339
Real estate secured - commercial		0		0
Consumer		0		0
Legacy loans		3	$	1,339
Acquired loans		1		908

26

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Modifications

As of March 31, 2011

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial, financial, and agricultural		0	$	0	$	0
Real estate - construction		0		0		0
Real estate secured - residential		11		6,060		1,577
Real estate secured - commercial		5		2,412		533
Consumer		0		0		0

	Number of Loans		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted during the current period
Commercial, financial, and agricultural		1	$	462
Real estate - construction		0		0
Real estate secured - residential		0		0
Real estate secured - commercial		2		10,385
Consumer		0		0

The changes in the accretable discount related to the credit impaired acquired loans are as follows:

Balance at January 1, 2012	$	4,881
Tower acquisition		54,418
Accretion recognized, to date		(2,500	)
Net reclassification from accretable to non-accretable		0
Balance at March 31, 2012	$	56,799

NOTE 5. Goodwill

Goodwill is allocated to Susquehanna’s reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identified with the reporting unit as a whole. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.

The goodwill impairment analysis is done in two steps. The first step requires a comparison of the fair value of the individual reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for the reporting unit.

Susquehanna assesses goodwill for impairment on an annual basis, or more often if events or circumstances indicate that goodwill may be impaired. This assessment requires significant judgment and analysis.

27

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Susquehanna performed its annual goodwill impairment assessments in the second quarter of 2011 and determined that the fair value of each of its reporting units exceeded its book value, and that there was no goodwill impairment. However, taking into consideration qualitative indicators for testing goodwill for impairment and current market conditions, Susquehanna determined it would be appropriate to perform an interim assessment of its bank reporting unit’s goodwill at March 31, 2012. As a result of this interim assessment, Susquehanna determined that there was no goodwill impairment as each reporting unit’s fair value exceeded its carrying value.

Bank Reporting Unit

Goodwill assigned to the bank reporting unit at the annual assessment date, May 31, 2011, was $915,421. Fair value of the bank reporting unit was determined using a market approach, which uses prices and other relevant information reported for market transactions involving recent non-distressed sales of comparable financial institutions in Susquehanna’s market to value the bank reporting unit. Susquehanna considered two key ratios in measuring the fair value of the bank reporting unit: price to book and price to tangible book. The following table shows the ratios at May 31, 2011.

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

Fair value of the bank reporting unit exceeded carrying value by 13.0% at May 31, 2011. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is unnecessary.

Wealth Management Reporting Unit

Goodwill assigned to the wealth management reporting unit at both March 31, 2012 and the annual assessment date, May 31, 2011 was $82,746. Fair value of the wealth management reporting unit was determined utilizing the market approach and the income approach. The market approach measures the fair value of the reporting unit using transaction multiples reported for market transactions involving comparable wealth management business. The income approach measures the fair value of the reporting unit by converting the reporting unit’s future earnings over ten years, assuming a weighted increase in the reporting unit’s revenues and a weighted increase in the reporting unit’s expenses, to a single present (discounted) amount, based on a discount rate. In keeping with market participant’s current valuations of wealth management institutions, Susquehanna predominantly uses the income approach. The following table shows the factors used in the income approach at May 31, 2011.

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

Fair value of the wealth management reporting unit exceeded carrying value by 59.7% at March 31, 2012 and May 31, 2011. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is unnecessary.

Property and Casualty Insurance Reporting Unit

Goodwill assigned to the property and casualty insurance reporting unit at both March 31, 2012 and the annual assessment date, May 31, 2011 was $17,177. Fair value of the property and casualty insurance reporting unit was determined using the market approach, which measures the fair value of the reporting unit using recent sales of

28

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

comparable property and casualty insurance companies in Susquehanna’s market. Susquehanna uses two key ratios to measure the fair value of the property and casualty insurance reporting unit: average price to book and median price to earnings. The following table shows the ratios used at May 31, 2011.

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

Fair value of the property and casualty insurance reporting unit exceeded carrying value by 48.4% at March 31, 2012 and May 31, 2011. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is not required.

NOTE 6. Borrowings

Other short-term borrowings

	March 31, 2012		December 31, 2011
Securities sold under repurchase agreements (1)	$	299,968	$	292,616
Federal funds purchased		422,000		318,000
Swap collateral		1,790		2,690
Total short-term borrowings	$	723,758	$	613,306

(1) Securities sold under agreement to repurchase are classified as secured short-term borrowings and are recorded at the amount of cash received in connection with the transaction. The securities underlying the repurchase agreements remain in available-for-sale investment securities.

NOTE 7. Earnings per Share (“EPS”)

The following tables set forth the calculation of basic and diluted EPS for the three month periods ended March 31, 2012 and 2011.

Basic earnings per common share
	Three Months Ended March 31,
	2012		2011
Net income available to common shareholders	$	23,473	$	9,761
Average common shares outstanding		171,326		129,727
Basic earnings per common share	$	0.14	$	0.08

29

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Diluted earnings per common share
	Three Months Ended March 31,
	2012		2011
Net income available to common shareholders	$	23,473	$	9,761
Average common shares outstanding		171,326		129,727
Dilutive potential common shares		647		69
Total diluted average common shares outstanding		171,973		129,796
Diluted earnings per common share	$	0.14	$	0.08

For the three months ended March 31, 2012 and 2011, average options to purchase 1,991 and 2,046 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents were antidilutive.

NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost
	Three Months Ended March 31,
	Pension Benefits						SERP				Other Postretirement Benefits
	2012			2011			2012		2011		2012		2011
Service cost	$	1,201		$	1,248		$	34	$	31	$	272	$	194
Interest cost		1,776			1,694			75		71		201		185
Expected return on plan assets		(2,349	)		(2,563	)		0		0		0		0
Amortization of prior service cost		6			6			28		29		29		16
Amortization of transition obligation		0			0			0		0		28		28
Amortization of net actuarial (gain) or loss		805			1,020			54		36		16		0
Curtailment		0			0			0		0		0		0
Special termination benefits		0			0			0		0		0		0
Net periodic postretirement benefit cost		1,439			1,405			191		167		546		423

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2011, that it expected to contribute $282 to its pension plans and $615 to its other postretirement benefit plan in 2012. As of March 31, 2012, $71 of contributions had been made to its pension plans, and $154 of contributions had been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $211 to fund its pension plans in 2012, for a total of $282, and an additional $461 to it other postretirement benefit plan, for a total of $615.

NOTE 9. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Susquehanna is exposed to certain risks arising from both its business operations and economic conditions. Susquehanna manages economic risk exposures, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Susquehanna enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are impacted by changes in interest rates. Susquehanna’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally those related to certain variable-rate liabilities. Susquehanna also has derivatives that are a result of a service it provides to certain qualifying customers. Susquehanna manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its interest rate risk resulting from such transactions. All derivatives are recorded at fair value.

Derivatives may expose Susquehanna to market, credit or liquidity risks in excess of the amounts recorded on the consolidated balance sheets. Market risk of a derivative is the exposure created by potential fluctuations in

30

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

interest rates and other factors and is a function of the type of derivative, the tenor and terms of the agreement, and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held is not adequate to cover such losses. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted in periods of high volatility and financial stress at a reasonable cost.

All freestanding derivatives are recorded on the balance sheet at fair value.

Cash Flow Hedges of Interest Rate Risk

Susquehanna uses interest rate derivatives to manage its exposure to interest rate movements and add stability to interest income and expense. Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For example, Susquehanna may issue variable rate long-term debt and then enter into a receive-variable pay-fixed-rate interest rate swap with the same payment timing and notional amount to convert the interest payments to a net variable-rate basis. As of March 31, 2012, Susquehanna had fourteen interest rate swaps with an aggregate notional amount of $1,160,778 that were designated as cash flow hedges of interest-rate risk.

Susquehanna applies hedge accounting to certain interest rate derivatives entered into for risk management purposes. However, Susquehanna does not seek to apply hedge accounting to all of the derivatives involved in Susquehanna’s risk management activities, such as the interest rate derivatives entered into to offset the derivatives offered to qualifying borrowers. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, key aspects of achieving hedge accounting are documentation of hedging strategy and hedge effectiveness at the hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting either changes in the fair value or cash flows of the hedged item for the risk being hedged. Any ineffectiveness in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes changes in the value of the hedged item that are unrelated to the risks being hedged. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

Amounts recorded in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Susquehanna’s variable-rate liabilities. During the next 12 months, Susquehanna estimates that $17,462 will be reclassified as an increase to interest expense.

Non-designated Derivatives

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

Susquehanna offers qualifying commercial banking customers derivatives to enable such customers to transfer, modify or reduce their interest rate risks. The credit risk associated with derivatives entered into with these customers is essentially the same as that involved in extending loans and is subject to our normal credit policies. Susquehanna obtains collateral based upon its assessment of the customers’ credit quality. Susquehanna actively manages the market risks from its exposure to these derivatives by entering into offsetting derivative transactions, controls focused on pricing, and reporting of positions to senior managers to minimize its exposure resulting from such transactions.

At March 31, 2012, Susquehanna had 95 derivative transactions related to this program with an aggregate notional amount of $682,447. For the three month period ended March 31, 2012, Susquehanna recognized a net loss of $14 related to changes in fair value of the derivatives in this program.

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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Credit-risk-related Contingent Features

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

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

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

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

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

• if Susquehanna’s credit rating is reduced below investment grade, then a termination event will be deemed to have occurred and Susquehanna’s counterparty would have the right, but not the obligation, to terminate all transactions under the agreement.

At March 31, 2012, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $48,529. At March 31, 2012, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $60,600. If Susquehanna had breached any of the above provisions at March 31, 2012, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

Fair Value of Derivative Instruments

	Fair Values of Derivative Instruments March 31, 2012
	Asset Derivatives				Liability Derivatives
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	3,356		Other liabilities	$	48,918
Derivatives not designated as hedging instruments
Interest rate contracts		Other assets		22,910		Other liabilities		19,230
Total derivatives			$	26,266			$	68,148

32

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	Fair Values of Derivative Instruments December 31, 2011
	Asset Derivatives				Liability Derivatives
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	3,693		Other liabilities	$	52,028
Derivatives not designated as hedging instruments
Interest rate contracts		Other assets		22,770		Other liabilities		21,133
Total derivatives			$	26,463			$	73,161

The Effect of Derivative Instruments on Earnings

Three Months Ended March 31, 2012
Derivatives in cash flow hedging relationships	Amount of  Gain Recognized in OCI		Location of Loss Reclassified from Accumulated OCI into Income	Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)		Amount of Loss Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	1,698	Interest expense	$	(4,280	)		Other expense	$	—

Derivatives not designated as hedging instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
Interest rate contracts:	Other income	$	17
	Other expense		(31	)

Three Months Ended March 31, 2011
Derivatives in cash flow hedging relationships	Amount of  Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income	Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)		Amount of Loss Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(15,300	)	Interest expense	$	(1,476	)		Other expense	$	(103	)

Derivatives not designated as hedging instruments	Location of Loss Recognized in Income on Derivatives	Amount of Loss Recognized in Income on Derivatives
Interest rate contracts:	Other income	$	889
	Other expense		(2	)

NOTE 10. Securitizations and Variable Interest Entities (“VIEs”)

In 2005 and 2006, Susquehanna entered into term securitization transactions in which it sold portfolios of home equity loans to securitization trusts. Both of the securitization trusts VIEs, and Susquehanna is the primary beneficiary of the VIEs. The VIEs were consolidated, and upon consolidation, Susquehanna removed retained interests of $23,705 and recorded interest-bearing deposits of $7,537, aggregate loans balances of $248,333, and long term-debt of $239,936 on January 1, 2010. In addition, Susquehanna recognized a cumulative-effect adjustment that reduced retained earnings by $5,805 and an adjustment that reduced accumulated other comprehensive income by $6,922. Susquehanna entered into these securitization transactions primarily to achieve low-cost funding for the growth of its loan and lease portfolios and to manage capital. The investors and the VIEs have no recourse to Susquehanna’s general creditors for failure of debtors to pay when due.

33

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2006 Transaction

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

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

2005 Transaction

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

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

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

									For the Three Months Ended March 31,
	As of March 31,								Net Credit Losses
	Principal Balance				Risk Assets (1)				(Recoveries)
	2012		2011		2012		2011		2012			2011
Loans and leases held in portfolio	$	12,337,688	$	9,397,786	$	179,624	$	249,958	$	12,370		$	33,601
Home equity loans held by VIEs		183,981		210,212		3,258		4,424		240			191
Leases serviced for others		0		599		0		11		0			4
Total loans and leases serviced	$	12,521,669	$	9,608,597	$	182,882	$	254,393	$	12,610	��	$	33,796

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

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

Home Equity Loans
	Three Months Ended March 31,
	2012		2011
Additional draws conveyed	$	6,013	$	7,808
Servicing fees received		210		231
Other cash flows received		1,263		1,640

34

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 11. Fair Value Disclosures

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

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

Securities

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

Derivatives

The fair values of interest rate swaps are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices. The methodology nets the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds, mutual settlements, and guarantees.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2012, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

35

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at March 31, 2012 and December 31, 2011, on the consolidated balance sheets and by levels within the valuation hierarchy.

			Fair Value Measurements at Reporting Date Using
Description	March 31, 2012		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	120,585	$	0	$	120,585	$	0
Obligations of states and political subdivisions		396,313				396,313
Agency residential mortgage-backed securities		1,897,857				1,897,857
Non-agency residential mortgage-backed securities		64,993				44,856		20,137
Commercial mortgage-backed securities		54,759				54,759
Other structured financial products		8,021				0		8,021
Other debt securities		54,989				54,989
Other equity securities		22,728		247		19,291		3,190
Derivatives: (1)
Designated as hedging instruments		3,356				3,356
Not designated as hedging instruments		22,303				22,303
Total	$	2,645,904	$	247	$	2,614,309	$	31,348
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	48,918	$	0	$	48,918	$	0
Not designated as hedging instruments		19,230				19,230
Total	$	68,148	$	0	$	68,148	$	0

(1) Included in Other assets

(2) Included in Other liabilities

			Fair Value Measurements at Reporting Date Using
Description	December 31, 2011		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities:
U.S. Government Agencies	$	148,485	$	0	$	148,485	$	0
Obligations of states and political subdivisions		401,979				401,979
Agency residential mortgage-backed securities		1,531,404				1,531,404
Non-agency residential mortgage-backed securities		69,071				69,071
Commercial mortgage-backed securities		56,819				56,819
Other structured financial products		13,293				0		13,293
Other debt securities		51,135				51,135
Other equity securities		22,847		221		19,196		3,430
Derivatives: (1)
Designated as hedging instruments		3,693				3,693
Not designated as hedging instruments		22,770				22,770
Total	$	2,321,496	$	221	$	2,304,552	$	16,723
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	52,028	$	0	$	52,028	$	0
Not designated as hedging instruments		21,133				21,133
Total	$	73,161	$	0	$	73,161	$	0

(1) Included in Other assets

(2) Included in Other liabilities

36

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

The following tables present roll-forwards of the balance sheet amounts for the three months ended March 31, 2012 and 2011, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

	Available-for-sale Securities
	Equity Securities			Other Structured Financial Products			Non-agency Residential Mortgage- backed Securities		Total
Balance at January 1, 2012	$	3,430		$	13,293		$	0	$	16,723
Total gains or losses (realized/unrealized):
Other-than-temporary impairment (1)		(144	)		0			0		(144	)
Included in other comprehensive income (before taxes)		(96	)		(5,272	)		0		(5,368	)
Transfer in from Level II		0			0			20,137		20,137
Balance at March 31, 2012	$	3,190		$	8,021		$	20,137	$	31,348
Balance at January 1, 2011	$	3,381		$	12,503		$	0	$	15,884
Total gains or losses (realized/unrealized):
Included in other comprehensive income (before taxes)		18			1,489			0		1,507
Balance at March 31, 2011	$	3,399		$	13,992		$	0	$	17,391

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

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Impaired collateral dependent loans and other loans where the carrying value is based on the fair value of the underlying collateral, such as residential mortgage loans charged off in accordance with regulatory guidance, are measured at fair value on a nonrecurring basis. The fair value of the underlying collateral is incorporated into the estimate of the impairment of a loan. Most of Susquehanna’s impaired collateral dependent loans are secured by real estate. The value of the real estate collateral is determined through appraisals performed by third-party, licensed appraisers. As part of Susquehanna’s overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna’s principal markets. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Impaired loans are reviewed at least quarterly for additional impairment, and reserves are adjusted accordingly.

Foreclosed Assets

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

The following tables present assets measured at fair value on a nonrecurring basis at March 31, 2012 and December 31, 2011, on the consolidated balance sheets and by the valuation hierarchy.

37

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Description	March 31, 2012		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	74,522	$	0	$	0	$	74,522
Foreclosed assets		36,456		0		0		36,456
	$	110,978	$	0	$	0	$	110,978
Description	December 31, 2011		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	71,062	$	0	$	0	$	71,062
Foreclosed assets		41,050		0		0		41,050
	$	112,112	$	0	$	0	$	112,112

The following table details the quantitative information about Level 3 fair value measurements:

Asset	Fair Value at March 31, 2012 (in thousands)		Valuation Technique(s)	Unobservable Input	Input
Non-agency residential mortgage-backed securities	$	20,137	Discounted cash flow	Conditional repayment rate Loss severity Conditional default rate		9.9 46.6 6.0	%  %  %
Other structured financial products		8,021	Discounted cash flow	Credit default rates, call options and deferrals, waterfall structure, and covenants.		Varies by individual security
Other equity securities		3,190	Discounted cash flow	Timing of cash flows from dividends and terminal value
Impaired loans		74,522	Discounted cash flow	Timing of cash flows based upon current discount rates and terminal value		3.8% - 5.7	%
Foreclosed assets		36,456	Discounted cash flow	Third party appraisals less estimated selling costs

The significant unobservable inputs used in the fair value measurement of Susquehanna’s other structured financial products are conditional repayment rate, loss severity, and conditional default rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and directionally opposite change in the assumption used for repayment rate.

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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Additional Disclosures about Fair Value of Financial Instruments

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

Cash and due from banks and short-term investments

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

Investment securities

Refer to the above discussion on securities.

Loans and leases

Variable-rate loans, which do not expose Susquehanna to interest-rate risk, have a fair value that approximates their carrying value, discounted for estimated future credit losses. The fair value of fixed-rate loans and leases was based upon the present value of projected cash flows using discount rates applicable to the individual loan or lease’s remaining term.

Deposits

The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date; recognition of the inherent funding value of these instruments is not permitted. The carrying value of variable-rate time deposits represents a reasonable estimate of fair value. The fair value of fixed-rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity, using the U.S. Treasury yield curve.

Short-term borrowings

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

FHLB borrowings and long-term debt

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

Derivatives

The fair values of commitments to originate mortgage loans to be held for sale and their corresponding forward-sales agreements are calculated as the reasonable amounts that Susquehanna would agree to pay to transfer the liability or receive to sell the asset, after considering the likelihood of the commitments expiring. For additional information regarding derivatives, refer to“Note 9 – Derivative Financial Instruments” above.

Off-balance-sheet items

The fair values of unused commitments to lend and standby letters of credit are considered to be the same as their contractual amounts.

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Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	350,793	$	350,793	$	276,384	$	276,384
Short-term investments		92,599		92,599		121,686		121,686
Investment securities		2,620,245		2,620,245		2,303,441		2,303,441
Restricted investment in bank stocks		136,591		136,591		128,073		128,073
Loans and leases		12,521,669		12,323,688		10,263,668		10,348,804
Derivatives		26,266		26,266		26,463		26,463
Financial liabilities:
Deposits		12,563,541		12,214,875		10,290,472		9,953,598
Short-term borrowings		723,758		723,758		613,306		613,306
FHLB borrowings		970,673		961,762		971,020		967,163
Long-term debt		692,059		667,176		656,726		622,167
Derivatives		68,148		68,148		73,161		73,161

NOTE 12. Income Taxes

For the year ended December 31, 2011, Susquehanna’s provision for income taxes during interim reporting periods was computed based on the actual effective tax rate for the year-to-date by applying the discrete method. As of March 31, 2012, Susquehanna determined that as small changes in estimated “ordinary” income resulted in significant changes to the estimated annual effective tax rate, the estimated annual effective tax rate method would not provide a reliable estimate of its interim taxes and therefore computed its interim taxes discretely.

For the reporting period ended March 31, 2012, Susquehanna determined that small changes in estimated “ordinary” income would no longer result in significant changes to the estimated annual effective tax rate. Therefore, Susquehanna has calculated its interim taxes by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items). Our effective tax rate for the first quarter of 2012 was 31.5%. The estimated annual effective rate for the reporting period ended March 31, 2012 is impacted by the level of permanent differences, including tax-advantaged income, resulting in an effective rate below statutory rates for the interim reporting periods.

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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, general economic conditions; the impact of new regulations on our business; our potential exposures to various types of market risks, such as interest rate risk and credit risk; expectations regarding future acquisitions; whether our allowance for loan and lease losses is adequate to meet probable loan and lease losses; the expected values of assets and liabilities acquired in connection with the Tower merger; the improvement in the credit quality of our loan portfolio; our ability to maintain market share and monitor and manage our portfolios; our ability to evaluate loan guarantors; our ability to offset loan prepayment penalties through decreased interest expense on FHLB borrowings; our ability to achieve loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; and our ability to achieve our 2012 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market-risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in regional real estate values;

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

• decreases in our loan and lease quality and origination volume;

• the adequacy of loss reserves;

• impairment of goodwill or other assets;

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

• continued relationships with major customers;

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

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

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

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

• the ability to hedge certain risks effectively and economically;

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

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

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

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

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

• the effects of and changes in the rate of Federal Deposit Insurance Corporation (“FDIC”) premiums;

• costs associated with the integration of Tower; 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 our 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 Bancshares, Inc. and its wholly owned subsidiaries: Boston Service Company, Inc. (t/a Hann Financial Service Corporation) (“Hann”), Susquehanna Bank and subsidiaries, Valley Forge Asset Management Corp. (“VFAM”), Stratton Management Company and subsidiary (“Stratton”), and The Addis Group, LLC (“Addis”).

Availability of Information

Our web-site address 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 Overview

Susquehanna’s management continues to monitor the effect of the downturn in the local, national, and global economy on our customers and our financial performance, as well as potential new regulations which would affect financial institutions and the national economy in general. While the economy remained sluggish in 2011, we expect that 2012 will show improvement, but still continuing to be a challenging operating environment. Although economic conditions have impacted our financial results in recent reporting periods, we have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered “well capitalized”.

We are closely watching the new regulatory changes that will be implemented in the coming months and years as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and closely monitoring the results of the Act’s previously enacted regulations.

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With these factors in mind, our 2012 financial goals are as follows:

	Updated Target			Original Target
Net interest margin (FTE)		3.93	%		3.75	%
Loan growth		25.0	%		25.0	%
Deposit growth		27.0	%		27.0	%
Noninterest income growth		-13.0	%		-11.0	%
Noninterest expense growth		-1.0	%		-5.0	%
Effective tax rate		31.0	%		29.0	%

Acquisitions

Acquisition of Tower Bancorp, Inc.

On February 17, 2012, we completed the acquisition of Tower Bancorp, Inc. (“Tower”), a Pennsylvania chartered bank holding company based in Harrisburg, Pennsylvania with approximately $2.5 billion of assets, through a merger of Tower with and into Susquehanna. In connection with the Tower merger, Tower’s wholly-owned banking subsidiary, Graystone Tower Bank, was merged into Susquehanna’s wholly-owned banking subsidiary Susquehanna Bank, with Susquehanna Bank being the surviving institution. The acquisition of Tower enhances Susquehanna’s footprint in Pennsylvania and Maryland. The acquisition was accounted for under the acquisition method.

Results of Operations

Summary of First Quarter 2012 Compared to First Quarter 2011

Net income available to common shareholders for the first quarter of 2012 was $23.5 million, an increase of $13.7 million when compared to net income available to common shareholders of $9.8 million for the first quarter of 2011. Net interest income increased 27.7%, to $134.1 million for the first quarter of 2012, from $105.0 million for the first quarter of 2011. The provision for loan and lease losses decreased 45.7% to $19.0 million for the first quarter of 2012, from $35.0 million for the first quarter of 2011. Noninterest income increased 5.5%, to $39.5 million for the first quarter of 2012, from $37.5 million for the first quarter of 2011. Noninterest expenses increased 25.5%, to $120.4 million for the first quarter of 2012, from $95.9 million for the first quarter of 2011. Excluding merger-related expenses, non-interest expense increased $13.5 million, or 14.2%, for the first quarter of 2012, over the same period in 2011.

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Additional information is as follows:

	Three Months Ended March  31,
	2012			2011
Diluted Earnings per Common Share	$	0.14		$	0.08
Return on Average Assets		0.58	%		0.28	%
Return on Average Equity		4.02	%		2.00	%
Return on Average Tangible Equity (1)		8.36	%		4.86	%
Efficiency Ratio		61.39	%		65.28	%
Net Interest Margin		3.94	%		3.63	%

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

Return on average tangible equity is a non-GAAP-based financial measure calculated using non-GAAP amounts. The most directly related 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,
	2012			2011
Return on average equity (GAAP basis)		4.02	%		2.00	%
Effect of excluding average intangible assets and related amortization		4.34	%		2.86	%
Return on average tangible equity		8.36	%		4.86	%

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

Interest Rates and Interest Differential - Tax Equivalent Basis

	For the Three Month Period Ended March 31, 2012							For the Three Month Period Ended March 31, 2011
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
	(Dollars in thousands)
Assets
Short-term investments	$	106,583		$	30		0.11	$	79,350		$	28		0.14
Investment securities:
Taxable		2,166,578			13,790		2.56		2,079,482			16,703		3.26
Tax-advantaged		380,830			5,787		6.11		398,293			6,078		6.19
Total investment securities		2,547,408			19,577		3.09		2,477,775			22,781		3.73
Loans and leases, (net):
Taxable		11,065,149			145,219		5.28		9,291,685			124,108		5.42
Tax-advantaged		346,443			4,825		5.60		292,413			4,141		5.74
Total loans and leases		11,411,592			150,044		5.29		9,584,098			128,249		5.43
Total interest-earning assets		14,065,583			169,651		4.85		12,141,223			151,058		5.05
Allowance for loan and lease losses		(191,305	)						(191,213	)
Other noninterest-earning assets		2,400,495							2,015,740
Total assets	$	16,274,773						$	13,965,750
Liabilities
Deposits:
Interest-bearing demand	$	4,990,291		$	5,718		0.46	$	3,686,930		$	5,519		0.61
Savings		929,499			329		0.14		780,484			293		0.15
Time		3,746,848			12,026		1.29		3,435,868			15,181		1.79
Short-term borrowings		642,128			2,122		1.33		747,763			1,897		1.03
FHLB borrowings		985,294			2,958		1.21		1,100,358			10,392		3.83
Long-term debt		673,722			8,661		5.17		700,526			9,176		5.31
Total interest-bearing liabilities		11,967,782			31,814		1.07		10,451,929			42,458		1.65
Demand deposits		1,687,899							1,339,573
Other liabilities		270,766							190,688
Total liabilities		13,926,447							11,982,190
Equity		2,348,326							1,983,560
Total liabilities & shareholders’ equity	$	16,274,773						$	13,965,750
Net interest income / yield on average earning assets				$	137,837		3.94				$	108,600		3.63

(1) Additional Information

Average loan balances include non-accrual loans.

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

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

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Table 1a - Changes in Net Interest Income - Tax Equivalent Basis

	Three months ended March 31, 2012 versus March 31, 2011 Increase (Decrease) Due to Change in (1)
	Average Volume			Average Rate			Total
	(Dollars in thousands)
Interest Income
Other short-term investments	$	9		$	(7	)	$	2
Investment securities:
Taxable		710			(3,623	)		(2,913	)
Tax-advantaged		(226	)		(65	)		(291	)
Total investment securities		484			(3,688	)		(3,204	)
Loans (net of unearned income):
Taxable		24,292			(3,181	)		21,111
Tax-advantaged		787			(103	)		684
Total loans		25,079			(3,284	)		21,795
Total interest-earning assets	$	25,572		$	(6,979	)	$	18,593
Interest Expense
Deposits:
Interest-bearing demand	$	1,722		$	(1,523	)	$	199
Savings		56			(20	)		36
Time		1,333			(4,488	)		(3,155	)
Short-term borrowings		(293	)		518			225
FHLB borrowings		(985	)		(6,449	)		(7,434	)
Long-term debt		(304	)		(211	)		(515	)
Total interest-bearing liabilities		1,529			(12,173	)		(10,644	)
Net Interest Income (FTE)	$	24,043		$	5,194		$	29,237

(1) Changes that are due in part to volume and in part to rate are allocated in proportion to their relationship to the amounts of changes attributed directly to volume and rate.

Net Interest Income-Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased 27.7% to $134.1 million for the first quarter of 2012, as compared to $105.0 million for the same period in 2011. Net interest income as a percentage of net interest income plus noninterest income was 77.2% and 73.7%, respectively, for each of the quarters ended March 31, 2012 and March 31, 2011.

Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the cost of the funds required to support earning assets. Income

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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 increase of $29.1 million in our taxable equivalent net interest income for the first quarter of 2012, as compared to the first quarter of 2011, was the result of an $1.9 billion increase in first quarter average interest-earning assets versus the prior year having a greater impact than the $1.5 billion increase in average interest bearing liabilities, and a 31 basis point increase in the net interest margin, which was the result of the rate paid on interest-bearing liabilities declining 58 basis points while the yield earned on average interest-earning assets declined by only 20 basis points.

Variances do occur in the net interest margin, as an exact repricing of assets and liabilities is not possible. A further explanation of the impact of asset and liability repricing is found inItem 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.

As was the case throughout 2011, we experienced a challenging operating environment for the first quarter of 2012. However, we continue to see signs of stabilization, which we believe is reflected in the improvement in the credit quality of our loan portfolio. Net charge-offs for the first quarter of 2012 decreased to $12.4 million, or 0.44% of average loans and leases, when compared to net charge-offs for the first quarter of 2011 of $33.6, or 1.42% of average loans and leases. In addition, on a linked-quarter basis, net charge-offs for the first quarter of 2012 were $12.4 million, and net-charge-offs for the fourth quarter of 2011 were $24.9 million. As a result, we decreased the provision for loan and lease losses from $35.0 million for the first quarter of 2011 to $19.0 million for the first quarter of 2012.

The allowance for loan and lease losses was 1.56% of period-end loans and leases, or $194.7 million, at March 31, 2012; 1.80% of period-end loans and leases, or $188.1 million, at December 31, 2011; and 2.01% of period-end loans and leases, or $193.2 million, at March 31, 2011.

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at March 31, 2012. 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, 2012.

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Table 2 - Provision and Allowance for Loan and Lease Losses

	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Allowance for loan and lease losses, January 1	$	188,100		$	191,834
Additions		19,000			35,000
Charge-offs:
Commercial, financial, and agricultural		(3,892	)		(4,893	)
Real estate - construction		(3,587	)		(10,984	)
Real estate secured - residential		(3,965	)		(4,480	)
Real estate secured - commercial		(5,631	)		(16,170	)
Consumer		(1,299	)		(2,305	)
Leases		(906	)		(1,743	)
Total charge-offs		(19,280	)		(40,575	)
Recoveries:
Commercial, financial, and agricultural		1,784			1,193
Real estate - construction		757			2,830
Real estate secured - residential		312			677
Real estate secured - commercial		3,360			1,728
Consumer		371			226
Leases		326			320
Total recoveries		6,910			6,974
Net charge-offs		(12,370	)		(33,601	)
Allowance for loan and lease losses, March 31	$	194,730		$	193,233
Average loans and leases outstanding	$	11,411,592		$	9,584,098
Period-end loans and leases		12,521,669			9,607,998
Net charge-offs as a percentage of average loans and leases (annualized)		0.44	%		1.42	%
Allowance as a percentage of period-end loans and leases		1.56	%		2.01	%

Noninterest Income

First Quarter 2012 Compared to First Quarter 2011

Noninterest income, as a percentage of net interest income plus noninterest income, was 22.8% for the first quarter of 2012 and 26.3% for the first quarter of 2011.

Noninterest income increased $2.0 million, or 5.5%, for the first quarter of 2012, as compared to the first quarter of 2011. This net increase was primarily the result of the following:

• Increasedcommissions on property and casualty insurance salesof $1.1 million;

• Decreasedother commissions and fees of $1.3 million; and

• Increasedother non-interest income of $1.4 million.

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Commissions on property and casualty insurance sales.The 26.9% increase primarily is the result of increased volume at Addis, as well as higher premium rates from their carriers.

Other commissions and fees. The 22.5% decrease is primarily the result of $2.0 million lower debit card fees, resulting from the Dodd-Frank Act regulatory changes, partially offset by other miscellaneous commissions and fees.

Other non-interest income. The 75.9% increase primarily is the result of additional income received from borrowers in repayment of loans, and increased gains on sale of other real estate owned.

Noninterest Expenses

First Quarter 2012 Compared to First Quarter 2011

Noninterest expenses increased $24.5 million, or 25.5%, from $95.9 million for the first quarter of 2011, to $120.4 million for the first quarter of 2012. This net increase was primarily the result of:

• Increasedsalaries and employee benefits of $7.0 million;

• Increasedoccupancy of $1.2 million;

• IncreasedFDIC insurance of $1.8 million; and,

• Increasedother noninterest expense of $2.4 million.

Salaries and employee benefits. The 13.7% increase is the result of the additional employees acquired through the Abington and Tower transactions, coupled with increased commission compensation, incentive bonus’, and annual merit increases.

Occupancy. The increase of 12.0% is primarily the result of additional rent expense due to offices acquired through the Abington and Tower transactions, plus increased general maintenance costs.

FDIC insurance. The 53.2% increase is the result of acquiring $2.9 billion of deposits through the Abington and Tower transactions.

Other non-interest expenses. The 12.4% increase is the result of increased: consulting; foreclosure, repossession, and other real estate owned expenses; telephone and data communications; and, other operating expenses related to the Abington and Tower acquisitions.

Income Taxes

Our provision for income taxes during interim reporting periods in 2011 was computed based on the actual effective tax rate for the year-to-date by applying the discrete method. We determined that as small changes in estimated “ordinary” income resulted in significant changes to the estimated annual effective tax rate, the estimated annual effective tax rate method would not provide a reliable estimate of our interim taxes and therefore computed our interim taxes discretely.

For the reporting period ended March 31, 2012, we determined that small changes in estimated “ordinary” income would no longer result in significant changes to the estimated annual effective tax rate. Therefore, we calculated our interim taxes by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items). Our effective tax rate for the first quarter of 2012 was 31.5%. The estimated annual effective rate for the reporting period ended March 31, 2012 is impacted by the level of permanent differences, including tax-advantaged income, resulting in an effective rate below statutory rates for the interim reporting periods.

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Financial Condition

Summary of March 31, 2012 Compared to December 31, 2011

Total assets at March 31, 2012 were $17.8 billion, an increase of $2.8 billion from December 31, 2011. Total loans at March 31, 2012 were $12.5 billion, an increase of $2.1 billion from December 31, 2011. Total deposits increased $2.3 billion from December 31, 2011. Excluding the Tower transaction, total assets, loans, and deposits increased $0.4 billion, $0.1 billion, and $0.2 billion, respectively. Total equity capital was $2.5 billion at March 31, 2012, or $13.38 per share and $2.2 billion at December 31, 2011 or $13.96 per share, at December 31, 2011.

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

At March 31, 2012, we had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. For additional information about our financial assets and financial liabilities carried at fair value, refer to“Note 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

Securities available for sale increased 14.2%, or $325.2 million. Excluding the securities acquired in the Tower transaction, securities available for sale increased 8.7%, or $200.5 million. For additional information about our investment securities portfolio, refer to“Note 3. Investment Securities” and “Note 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

Total loans and leases increased 19.9%, or $2.1 billion, from December 31, 2011 to March 31, 2012. Excluding the loans acquired through the Tower transaction, loans and leases increased 1.1%, or $117.0 million. For additional information about our loan portfolio, refer to“Note 4. Loans and Leases” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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Risk Assets

Table 3 - Risk Assets

	March 31, 2012			December 31, 2011			March 31, 2011
	(Dollars in thousands)
Non-performing assets:
Nonaccrual loans and leases:
Commercial, financial, and agricultural	$	20,616		$	14,385		$	19,972
Real estate - construction		30,644			37,727			56,446
Real estate secured - residential		33,137			41,922			55,930
Real estate secured - commercial		47,423			61,497			77,533
Consumer		505			0			0
Leases		1,164			947			3,060
Total nonaccrual loans and leases		133,489			156,478			212,941
Foreclosed real estate		36,456			41,050			26,739
Total non-performing assets	$	169,945		$	197,528		$	239,680
Total non-performing assets as a percentage of period-end loans and leases and foreclosed real estate		1.35	%		1.88	%		2.49	%
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases		146	%		120	%		91	%
Loans contractually past due 90 days and still accruing	$	9,758		$	10,077		$	10,278
Troubled debt restructurings		72,081			72,852			78,459

One of the more significant fair value adjustments in our purchase accounting for the Tower transaction was to loans. As of February 17, 2012, certain of the loans acquired from Tower had evidence of credit deterioration since origination, and it was probable that we would not collect all contractually required principal and interest payments. Such loans identified at the time of acquisition are accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). SOP 03-3 requires that acquired credit-impared loans be recorded at fair value and prohibits carryover of the related allowance for loans losses.

Loans subject to SOP 03-3 were written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3 are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due.

As a result of the application of SOP 03-3 accounting to Tower’s loan portfolios, certain credit-related ratios of the Company, including, for example, the growth rate in non-performing assets since December 31, 2011, may not necessarily be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions.

Nonperforming assets decreased from $197.5 million at December 31, 2011, to $169.9 million at March 31, 2012. The net decrease was primarily the result of the effects of our efforts to work with our customers to increase the credit quality of our loan portfolio. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus foreclosed real estate decreased from 1.88% at December 31, 2011 to 1.35% at March 31, 2012.

Troubled debt restructurings, decreased $0.8 million, from $72.9 million at December 31, 2011 to $72.1 million at March 31, 2012.

Of the $227.3 million of impaired loans (nonaccrual, non-consumer loan relationships greater than $0.5 million plus accruing restructured loans), $101.9 million, or 44.8%, had no related reserve (refer to“Note 4. Loans and Leases – Impaired Loans” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.)The determination that no related reserve for collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

At March 31, 2012, real estate – construction loans comprised only 7.9% of our total loan and lease portfolio, but accounted for 23.0% of nonaccrual loans and leases and 17.5% of our allowance for loan and lease losses. In addition, for the three months ended March 31, 2012, this loan type accounted for 22.9% of total net charge-offs. As a result, we consider real estate - construction loans to be higher-risk loans. Additional information about our real estate – construction loan portfolio is presented in Tables 4, 5, and 6. Categories within these tables are defined as follows:

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

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

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

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

Category	Balance at March 31, 2012		% of Total Construction			Past Due 30-89 Days			Past Due 90 Days and Still Accruing			Nonaccrual			Other Internally Monitored (1)			Net Charge-offs (2)			Reserve (3)
	(Dollars is thousands)
1-4 Family:
Construction	$	213,080		21.4	%		0.6	%		0.4	%		8.2	%		22.0	%		5.1	%		4.1	%
Land development		227,621		22.9			0.5			0.2			0.3			15.4			0.6			3.6
Raw land		10,055		1.0			5.4			0.0			0.0			14.1			22.8			0.9
		450,756		45.4			0.7			0.3			4.0			18.5			3.4			3.8
All Other:
Construction:
Investor		229,320		23.1			0.0			0.0			0.1			8.8			1.7			2.3
Owner-occupied		70,981		7.1			0.0			0.0			0.3			8.9			0.0			3.5
Land development:
Investor		191,680		19.3			1.1			0.0			6.4			28.3			0.4			4.0
Owner-occupied		11,742		1.2			0.0			0.0			0.0			24.1			1.7			3.1
Raw land:
Investor		38,543		3.9			0.0			0.5			0.0			20.7			7.6			3.1
Owner-occupied		797		0.1			0.0			0.0			0.0			0.0			0.0			0.3
		543,063		54.6			0.4			0.0			2.3			16.9			1.5			3.2
Total	$	993,819		100.0			0.5			0.1			3.1			17.6			2.4			3.4

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

(2) Represents the amount of net charge-offs in each category for the last three months divided by the category loan balance at March 31, 2012 plus the net charge-offs.

(3) Represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at March 31, 2012.

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

	Balance at March 31, 2012		Geographical Location by %
Category			Maryland			New Jersey			Pennsylvania			Other
			(Dollars in thousands)
1-4 Family:
Construction	$	213,080		40.8	%		2.6	%		54.3	%		2.3	%
Land development		227,621		42.5			4.4			38.9			14.3
Raw land		10,055		0.1			1.9			98.0			0.0
		450,756		40.7			3.5			47.5			8.3
All Other:
Construction:
Investor		229,320		27.3			5.0			65.9			1.8
Owner-occupied		70,981		25.8			33.8			39.8			0.6
Land development:
Investor		191,680		16.0			4.0			67.6			12.5
Owner-occupied		11,742		46.8			0.0			53.2			0.0
Raw land:
Investor		38,543		25.6			0.9			66.7			6.7
Owner-occupied		797		49.4			0.0			50.6			0.0
		543,063		23.5			8.0			62.8			5.7
Total	$	993,819		31.3			6.0			55.9			6.9

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

Category	Balance at March 31, 2012		Global Debt Coverage  Ratio Less than 1.1 Times (1)			Average Loan to Value (current)
	(Dollars in thousands)
1-4 Family:
Construction	$	213,080		24.4	%		70.0	%
Land development		227,621		9.7			70.7
Raw land		10,055		0.0			63.1
		450,756		16.7			70.0
All Other:
Construction:
Investor		229,320		10.0			61.7
Owner-occupied		70,981		2.8			59.0
Land development:
Investor		191,680		17.8			65.8
Owner-occupied		11,742		36.2			57.6
Raw land:
Investor		38,543		16.5			67.8
Owner-occupied		797		0.0			85.7
		543,063		13.2			64.4
	$	993,819		14.9			67.4

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

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

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

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

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

During this process, we also review the liquidity of any guarantors (the secondary source for continuance of the project) to determine if their liquidity will support any extension of the project due to slower than expected absorption (units leased or sold). If the result of any of the determinations set forth above is negative, we consider the loan to be impaired, and it is included in our evaluation of the allowance for loan and lease losses. If a loan is

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determined to be impaired, the net realizable value of the loan is calculated by using a current appraisal, and the short fall is charged off. All partially charged-off loans become part of the calculation for the allowance for loan and lease losses.

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

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

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

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

We continue to aggressively review our portfolio, contact customers to evaluate their financial situation and where necessary, to work with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We believe that the remainder of 2012 will be challenging, with the volatility of key commodity prices continuing to impact the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame and to minimize the effect on our earnings.

Goodwill

The Tower transaction created $246.9 million of additional goodwill. For additional information about goodwill, refer to“Note 2. Acquisitions” and “Note 5. Goodwill” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Deposits

Total deposits increased 22.1%, or $2.3 billion, from December 31, 2011 to March 31, 2012. Within this category, core deposits such as demand, interest-bearing demand, and savings increased 24.1%, 23.8%, and 16.0%, respectively. Excluding the $2.0 billion of deposits acquired through the Tower transaction, deposits increased 2.4%, or $241.6 million. Core deposits of demand, interest-bearing demand, and savings increased 0.8%, 4.2%, and 3.8%, respectively.

Time deposits less than $0.1 million increased 17.2%, or $370.1 million, from December 31, 2011 to March 31, 2012. Excluding the $421.0 million acquired through the Tower transaction, this category declined 2.4%, or $50.9 million. This decrease, in part, reflects the results of our continuing plan to improve our mix of deposits by allowing high-cost, single-service certificates of deposit to run off. However, we also want to maintain market share

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at appropriate levels, and we intend to monitor and manage this portfolio to avoid excessive runoff. Time deposits greater than $0.1 million increased 26.2%, or $329.2 million, from December 31, 2011 to March 31, 2012. Excluding the $267.3 million acquired through the Tower transaction, this category increased $61.9 million, or 4.9% due to the interest rate environment.

Shareholders’ Equity

On February 17, 2012, Susquehanna completed its acquisition of Tower, issuing 30.8 million shares of Susquehanna common stock, par value $2.00, in connection with the transaction. The Tower acquisition increased total shareholders’ equity by $301.4 million.

Capital Adequacy

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

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

Our capital ratios are as follows:

	At March 31, 2012			Well-capitalized Threshold			Preliminary Minimum Basel III Requirements
Tangible Common Ratio (1)		7.55	%		N/A			N/A
Tier 1 Common Ratio		9.83	%		N/A			7.0	%
Leverage Ratio		10.79	%		5.0	%		4.0	%
Tier 1 Capital Ratio		12.54	%		6.0	%		8.5	%
Total Risk-based Capital Ratio		14.30	%		10.0	%		10.5	%

(1) Includes deferred tax liability of $50.0 million associated with intangibles.

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Recently Adopted or Issued Accounting Guidance

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

There has not been any material changes in the market risks to Susquehanna as reported in Form 10-K for the fiscal year ended December 31, 2011.

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 equity market price risk in our investment portfolio, market price fluctuations may affect fee income generated through our asset management operations. Generally, our fee structure is based on the market value of assets being managed at specific time frames. When market values decline, our fee income also declines.

Liquidity Risk

The maintenance of adequate liquidity – the ability to meet the cash requirements of our customers and other financial commitments – is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources – purchased funds, repurchase agreements, and deposit accounts – allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At March 31, 2012, our bank subsidiary had approximately $1.6 billion available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and approximately $2.4 billion more would have been available provided that additional collateral had been pledged. Furthermore, at March 31, 2012, we had unused federal funds lines of $1.0 billion.

In addition, we have pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment securities to obtain collateralized borrowing availability at the Federal Reserve’s Discount Window. At March 31, 2012, we had unused collateralized availability of $978.4 million.

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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 $27.1 million at March 31, 2012 and represented additional sources of liquidity.

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

Interest Rate Risk

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

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

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Board’s approved guidelines at an up 300 basis point shock. At March 31, 2012, our asset/liability position was asset sensitive.

Derivative Financial Instruments and Hedging Activities

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

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

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

Vehicle Leasing Residual Value Risk

In an effort to manage the vehicle residual value risk arising from the auto leasing business of Hann and our bank subsidiary, Hann and the bank have entered into arrangements with Auto Lenders pursuant to which Hann or the bank, as applicable, effectively transferred to Auto Lenders all residual value risk of its respective auto lease portfolio, and all residual value risk on any new leases originated over the term of the applicable agreement. Auto Lenders, which was formed in 1990, is a used-vehicle remarketer with four retail locations in New Jersey and has access to various wholesale facilities throughout the country. Under these arrangements, Auto Lenders agrees to purchase the beneficial interest in all vehicles returned by the obligors at the scheduled expiration of the related leases for a purchase price equal to the stated residual value of such vehicles. Stated residual values of new leases are set in accordance with the standards approved in advance by Auto Lenders. Under a servicing agreement with Auto Lenders, Hann also agrees to make monthly guaranty payments to Auto Lenders based upon a negotiated

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schedule covering a three-year period. At the end of each year, the servicing agreement may be renewed by the mutual agreement of the parties for an additional one-year term, beyond the current three-year term, subject to renegotiation of the payments for the additional year. During the renewal process, we periodically obtain competitive quotes from third parties to determine the best remarketing and/or residual guarantee alternatives for Hann and our bank subsidiary.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control Over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Susquehanna and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers through offices in Pennsylvania, Maryland, New Jersey and West Virginia. Although we have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.

Overdraft Litigation

On July 29, 2011, Susquehanna Bank was named as a defendant in a purported class action lawsuit filed by two New Jersey customers of the bank in the United States District Court of Maryland. The suit challenges the manner in which checking account overdraft fees were charged and the policies related to the posting order of debit card and other checking account transactions. The suit makes claims under New Jersey’s consumer fraud act and under the common law for breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, conversion and unjust enrichment. The case was transferred for pretrial proceedings to pending multi-district litigation in the U.S. District Court for the Southern District of Florida. No class has been certified and, at this stage of the lawsuit, it is not yet possible for us to estimate potential loss, if any. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of this proceeding will have a material adverse effect on our financial position, or cash flows; although, at the present time, management is not in a position to determine whether such proceeding will have a material adverse effect on our results of operations in any future quarterly reporting period.

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Shareholder Litigation Related to the Merger with Tower

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

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

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

On September 26, 2011, a class action and derivative complaint was filed in the United States District Court for the Middle District of Pennsylvania against Tower and the members of its board of directors. The complaint in the lawsuit,Edgar L. Johnston, Jr. vs. Andrew S. Samuel, et al., Case No. 11-1777, asserts that the members of Tower’s board of directors (“Individual Defendants”) breached their fiduciary duties by causing Tower to enter into the Tower merger and further asserts that Susquehanna aided and abetted those alleged breaches of fiduciary duties (the “Tower Federal Action”). The lawsuit also alleged that the disclosure provided in the joint proxy statement/prospectus of Susquehanna and Tower (the “Tower Joint Proxy/Prospectus”) included in the registration statement on Form S-4 filed by Susquehanna with the SEC (File No. 333-176367), failed to provide required material information necessary for Tower’s shareholders to make a fully informed decision concerning the Tower merger in violation of Section 14(a) of the Exchange Act. The complaint seeks, among other relief, an order declaring that the Individual Defendants breached their fiduciary duties and that the Tower Joint Proxy/Prospectus is materially misleading in violation of the Exchange Act, accounting for and awarding damages on behalf of Tower for the alleged breaches of fiduciary duties by the Individual Defendants (including punitive and actual damages, plaintiff’s counsel fees and experts’ fees) and enjoining or rescinding the Tower merger (if consummated).

On September 28, 2011, solely to avoid the costs, risks and uncertainties inherent in litigation and without admitting any of the allegations in the complaint, Susquehanna, Tower and the other named defendants entered into

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a Memorandum of Understanding (the “MOU”). Under the terms of the MOU, Tower, the other named defendants and Susquehanna and all plaintiffs agreed to settle the Tower Federal Action, Tower State Action, the Bushansky Demand and the Duffey Demand, subject to court approval.If the court approves the settlement contemplated in the memorandum, the lawsuits will be dismissed with prejudice. In connection with the settlement, plaintiffs intend to seek an award of attorneys’ fees and expenses not to exceed $332,500 subject to court approval, and Tower and Susquehanna have agreed not to oppose plaintiffs’ application. The amount of the fee award to class counsel will ultimately be determined by the court. This payment will not affect the amount of merger consideration paid in the Tower merger. If the settlement is finally approved by the court, it is anticipated that it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the Tower merger or merger agreement, and any disclosure made in connection therewith. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the MOU may be terminated.

Other Legal Proceedings

From time to time, Susquehanna receives subpoenas and other requests for information from various federal and state governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. Susquehanna’s policy is to be fully cooperative with such inquiries. Susquehanna and certain of its subsidiaries have been named as defendants in various legal actions arising out of the normal course of business, including claims against entities to which Susquehanna is a successor as a result of business combinations. In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on Susquehanna’s business, consolidated financial position or results of operations. It is possible, however, that future developments could result in an unfavorable ultimate outcome for or resolution of any one or more of the lawsuits in which Susquehanna or its subsidiaries are defendants, which may be material to Susquehanna’s results of operations for a particular quarterly reporting period. Litigation is inherently uncertain, and management cannot make assurances that Susquehanna will prevail in any of these actions, nor can management reasonably estimate the amount of damages that Susquehanna might incur.

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, 2011.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Reserved

Item 5. Other Information.

None.

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Item 6. Exhibits.^†

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

3.1	Amended and Restated Articles of Incorporation, dated May 6, 2011, incorporated by reference to Exhibit 3.1 to Susquehanna’s Quarterly Report on Form 10-Q, filed August 8, 2011.
3.2	Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.
10.1	Consulting Services Agreement, dated December 20, 2011, effective January 1, 2012, between Edward Balderston, Jr. and Susquehanna Bancshares, Inc., incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed December 20, 2011.*
10.2	Employment Agreement, dated June 20, 2011, effective as of February 17, 2012, between Susquehanna Bancshares, Inc., Susquehanna Bank and Andrew Samuel, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed February 21, 2012.*
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications are filed herewith as Exhibit 32.
The Exhibits filed** as part of this report are as follows:
101.INS	XBRL Instance Document.**
101.SCHXBRL	Taxonomy Extension Schema Document.**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.**

^† Upon request by the SEC, the registrant agrees to furnish to the SEC a copy of any instrument with respect to unregistered long-term debt of the registrant in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K promulgated under the Exchange Act.

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

** These interactive data files are being filed as part of this Report, and, in accordance with Rule 402 of Regulation S-1, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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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 9, 2012	/s/ William J. Reuter
	William J. Reuter
	Chairman and Chief Executive Officer
May 9, 2012	/s/ Drew K. Hostetter
	Drew K. Hostetter
	Executive Vice President, Treasurer, and Chief
	Financial Officer

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EXHIBIT INDEX

3.1	Amended and Restated Articles of Incorporation, dated May 6, 2011, incorporated by reference to Exhibit 3.1 to Susquehanna’s Quarterly Report on Form 10-Q, filed August 8, 2011.
3.2	Amended and Restated By-Laws, dated February 24, 2011, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.
10.1	Consulting Services Agreement, dated December 20, 2011, effective January 1, 2012, between Edward Balderston, Jr. and Susquehanna Bancshares, Inc., incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed December 20, 2011.*
10.2	Employment Agreement, dated June 20, 2011, effective as of February 17, 2012, between Susquehanna Bancshares, Inc., Susquehanna Bank and Andrew Samuel, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed February 21, 2012.*
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications are filed herewith as Exhibit 32.
101.INS	XBRL Instance Document.**
101.SCHXBRL	Taxonomy Extension Schema Document.**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.**

64