Susquehanna Bancshares (SUSQ) 10-K 2013 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year endedDecember 31, 2013

OR

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

For the transition period from                    to                    

Commission file number0-133872

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
common stock, par value $2.00 per share	The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one):

Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $2,371,163,032 as of June 28, 2014, based upon the closing price quoted on the Nasdaq Global Select Market for such date. Shares of common stock held by each executive officer and director have been excluded because such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares issued and outstanding of the registrant’s common stock as of February 17, 2014, was 187,457,535.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 2, 2014 are incorporated by reference into Part III of this Annual Report.

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

		Page
Part 1
Item 1.	Business		4
Item 1A.	Risk Factors		15
Item 1B.	Unresolved Staff Comments		21
Item 2.	Properties		22
Item 3.	Legal Proceedings		23
Item 4.	Mine Safety Disclosures		24
Part II
Item 5.	Market for Susquehanna’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		25
Item 6.	Selected Financial Data		27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		60
Item 8.	Financial Statements and Supplementary Data		61
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		140
Item 9A.	Controls and Procedures		140
Item 9B.	Other Information		140
Part III
Item 10.	Directors, Executive Officers and Corporate Governance		141
Item 11.	Executive Compensation		141
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		141
Item 13.	Certain Relationships and Related Transactions, and Director Independence		141
Item 14.	Principal Accountant Fees and Services		141
Part IV
Item 15.	Exhibits and Financial Statement Schedules		142

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Unless the context otherwise requires, the terms “Susquehanna,” “we,” “us,” and “our” refer to Susquehanna Bancshares, Inc. and its subsidiaries.

PART I

Forward-Looking Statements.

We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Annual Report on Form 10-K, contain “forward-looking statements,” for which we claim the protection of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These include statements pertaining to our future business plans; regulatory capital and capital resources generally; management; general economic conditions; the impact of new regulations on our business; accounting policies and estimates; 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 appropriate to meet probable loan and lease losses; our ability to evaluate loan collateral and guarantors; our ability to achieve loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; and our ability to achieve our 2014 operating and financial goals. Forward-looking statements are often accompanied by, and identified with, terms such as “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors 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:

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

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

• decreases in our loan and lease origination volume;

• our ability to make accurate assumptions and judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers, guarantors, and lessees, and the value of the assets securing the loans;

• adverse changes in regional real estate values;

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

• changes in consumer confidence, spending and savings habits impacting our bank and non-bank financial products and services;

• impairment of the our goodwill or other assets;

• our ability to recruit and retain executive officers and other key employees;

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

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

• our ability to hedge certain market risks effectively and economically;

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

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

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

• cyber-security risks impacting us or our vendors, including “denial of service,” “hacking” and “identity theft,” that could adversely affect our business and financial performance, or our reputation;

• operational risks, such as the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk and external events;

• 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 FDIC premiums; 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.

Item 1. Business

General

Susquehanna Bancshares, Inc. (“Susquehanna”) is a financial holding company organized in 1982 under the laws of the Commonwealth of Pennsylvania. Our executive offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543. Our telephone number is (717) 626-4721 and our web site address iswww.susquehanna.net. Our common stock is traded on the Nasdaq Global Select Market under the symbol SUSQ. 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 (“SEC”). We include our web site address in this Annual Report on Form 10-K as a textual reference only and do not intend it to be an active link to our web site.

Susquehanna and its bank and nonbank subsidiaries are subject to extensive regulation, supervision and examination at the federal and state levels, including by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities. In addition, our retail (consumer) banking and financial activities are regulated, supervised and examined by the Consumer Financial Protection Bureau (“CFPB”). Federal and state financial laws and regulations give our federal and state regulatory authorities broad discretion in the administration and enforcement of their regulatory responsibilities, and their regulatory and supervisory activities, as well as changes in federal and state financial laws and regulations, could have a significant impact on the Company and its operations. See “Supervision and Regulation” below.

Susquehanna conducts its business operations primarily through its commercial bank subsidiary, Susquehanna Bank, and other subsidiaries in the mid-Atlantic region to provide a wide range of retail and commercial banking and financial products and services. In addition to Susquehanna Bank, we operate a trust and investment company, an asset management company, an investment advisory and brokerage firm, a property and casualty insurance brokerage company, and a vehicle leasing company. Our only reportable segment is community banking, and all services offered by us relates to community banking. As of December 31, 2013, we had total assets of approximately $18.5 billion, consolidated net loans and leases of $13.6 billion, deposits of $12.9 billion, and shareholders’ equity of $2.7 billion.

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The following table sets forth information, for the year ended December 31, 2013, regarding our bank subsidiary and each of our non-bank subsidiaries that had annual revenues in excess of $5.0 million:

Table 1

Susquehanna Bancshares, Inc. Subsidiaries

(Dollars in thousands)

Subsidiary	Assets			Percent of Total
Bank Subsidiary:
Susquehanna Bank	$	18,379,566			99.5	%
Non-Bank Subsidiaries:
Valley Forge Asset Management Corp.		37,059			0.2
Stratton Management Company		79,257			0.4
Boston Service Company, Inc. (t/a Hann Financial Services Corp.)		196,090			1.1
The Addis Group, LLC		48,333			0.2
Consolidation adjustments and other non-bank subsidiaries		(266,816	)		(1.4	)
Total	$	18,473,489			100.0	%

We manage our business activities using a long-term perspective, with financial objectives determined and evaluated on a consolidated basis that emphasize loan quality, balance sheet liquidity, and earnings stability. Consistent with this approach, we emphasize a loan portfolio derived from our local markets. In addition, we focus on avoiding a concentration of any portion of our business on a single customer or limited group of customers or a substantial portion of our loans or investments concentrated within a single industry or a group of related industries.

As of December 31, 2013, our total loans and leases (net of unearned income) in dollars and by percentage were as follows:

Table 2

Loans and Leases

(Dollars in thousands)

Commercial, financial and agricultural	$	2,394,847	17.6	%
Real estate – construction		735,877	5.4
Real estate secured – residential		4,204,430	31.0
Real estate secured – commercial		4,068,816	30.0
Consumer		953,000	7.0
Leases		1,219,116	9.0
Total loans and leases	$	13,576,086	100.0	%

As of December 31, 2013, core deposits funded 66.6% of our lending.

Products and Services

Our Bank Subsidiary. Our commercial bank subsidiary, Susquehanna Bank, is a Pennsylvania state-chartered commercial bank that operated 245 banking offices as of December 31, 2013. It provides a wide range of retail banking services, including checking, savings and club accounts, check cards, debit cards, money market accounts, certificates of deposit, individual retirement accounts, home equity lines of credit, residential mortgage loans, home improvement loans, automobile loans, personal loans, and internet and mobile banking services. It also provides an extensive selection of commercial banking services, including business checking accounts, cash management services, money market accounts, land acquisition and development loans, commercial loans, floor plan, equipment and working capital lines of credit, small business loans, and internet banking services. We provide our bank subsidiary guidance in the areas of credit policy and administration, risk assessment, investment advisory administration, strategic planning, investment portfolio management, asset liability management, liquidity management and other financial, administrative and control services.

Our Non-bank Subsidiaries. Our non-bank subsidiaries offer a variety of financial services to complement our core banking operations, broaden our customer base, and diversify our revenue sources. Our objective is to offer our customers a broad array of

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products and services to meet all their financial needs. The Addis Group, LLC provides commercial, property and casualty insurance, and risk management programs for medium and large sized companies. Valley Forge Asset Management Corp. offers investment advisory, asset management and brokerage services for institutional and high net worth individual clients, and retirement planning services. Stratton Management Company manages mutual funds and provides investment management services to institutions, pensions, endowments and high net worth individuals. Boston Service Company, Inc. (t/a Hann Financial Service Corp.) provides comprehensive consumer vehicle financing services.

Market Areas

Our Bank Subsidiary. We operate through a regional community-banking model with 12 regional leadership teams reporting into three divisions:

• The Pennsylvania Division includes 115 banking offices operating primarily in the central Pennsylvania market area, including Adams, Berks, Centre, Cumberland, Dauphin, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Northampton, Northumberland, Schuylkill, Snyder, Union, and York counties.

• The Maryland Division includes 61 banking offices operating primarily in the market areas of Maryland and southwestern central Pennsylvania, including Allegany, Anne Arundel, Baltimore, Carroll, Garrett, Harford, Howard, Washington, and Worcester counties and the City of Baltimore in Maryland, Berkeley County in West Virginia and Bedford, Franklin, and Fulton counties in Pennsylvania.

• The Delaware Valley Division includes 69 banking offices operating primarily in the suburban Philadelphia, Pennsylvania and southern New Jersey market areas, including Philadelphia, Bucks, Chester, Delaware, and Montgomery, counties in Pennsylvania and Atlantic, Burlington, Camden, Cumberland, and Gloucester counties in New Jersey.

Our senior management team uses the input and feedback from our regional leadership teams to evaluate, develop strategies and allocate resources among the Bank’s market areas.

Our Non-bank Subsidiaries. Valley Forge Asset Management Corp. is licensed to do business in a majority of states throughout the United States. Stratton Management Company is licensed to do business in approximately one third of the states throughout the United States. The Addis Group, LLC operates primarily in southeastern Pennsylvania, southern New Jersey, and northern Delaware. Boston Service Company, Inc. (t/a Hann Financial Service Corp.) operates primarily in New York, New Jersey, eastern Pennsylvania, and Connecticut.

Employees

As of December 31, 2013, we had 3,296 full-time and 99 part-time employees.

Competition

Financial holding companies and their subsidiaries compete with many institutions for deposits, loans, trust services and other banking-related and financial services and products. We are subject to robust competition in our market areas. We compete with larger national, international and regional banks that have more resources than we do. We also compete with other types of financial institutions that are less heavily regulated such as brokerage firms, money market funds, credit unions, mortgage companies, consumer finance and credit card companies, and other financial services companies. Further, competition among providers of financial services and products continues to increase, with consumers having the opportunity to choose from a variety of traditional and non-traditional banking alternatives.

The market areas that we serve are currently experiencing slow to moderate economic growth. Our markets have a diverse employment base consisting primarily of manufacturing, agriculture, wholesale and retail trade, technology, health care and governmental sectors. We believe that our community banking approach to providing client service provides us with a competitive advantage over national, international and other regional banks and strengthens our ability to compete with community banks in our markets that may lack our financial resources and broad range of deposit, lending and other financial services and products. We believe our market area will support growth in assets and deposits in the future, which we expect to contribute to our ability to maintain or grow profitability. In addition, we will continue to seek customer relationships that can generate fee income whether or not we also have a lending relationship with the customer. We anticipate that this approach will help mitigate profit fluctuations that are caused by movements in interest rates, business and consumer loan cycles, and local economic factors.

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in 2010, and a substantial increase in regulatory oversight and enforcement in recent years, additional costs and potential risks are associated with the operations of financial holding companies and banks. These regulatory trends have negatively affected the business and consolidated results of operations for such entities.

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As a result of the Dodd-Frank Act and other state and federal legislation and rulemaking, as well as the increase in supervisory burden, consolidation in the industry is expected to continue.

Our Long-Term Strategy

We manage our business for sustained long-term growth and profitability, with an objective to be a high performing financial services company. Our primary strategy is organic growth through expansion of our customer base in existing markets, supplemented by strategic acquisitions. This growth is supported by our core business strategy of leveraging the product and service offerings, balance sheet strength and risk management structure of a regional financial services company through a customer-focused “community bank” delivery model, highlighted by a regional leadership structure that empowers local community bankers with the decision-making authority required to build enduring relationships with customers. The primary objectives of our current strategic plan are to continue to increase lower-cost core deposits, grow our diverse loan portfolio with an increased focus on commercial and small business lending, increase noninterest income as a component of total revenue, deliver a consistent and differentiating customer experience, build a workplace that employees find engaging and rewarding, and effectively manage risk through a governance framework and risk culture commensurate with our size, complexity, strategy and growth. These objectives are aligned with and support our mission, “to help customers achieve their financial goals, to deliver a superior return for shareholders, and help to build the economic strength of our communities.”

Mergers and Acquisitions

On October 1, 2011, we completed our acquisition of Abington Bancorp, Inc. (“Abington”) in a merger of Abington with and into Susquehanna. On February 17, 2012, we completed our acquisition of Tower Bancorp, Inc. (“Tower”) in a merger with and into Susquehanna. For additional information regarding these transactions refer to“Note 2. Acquisitions” in the Notes to Consolidated Financial Statements appearing in Part II,Item 8.

From time to time, we evaluate possible acquisitions of other banks, and may also seek to enter businesses closely related to banking or that are financial in nature, or to acquire existing companies already engaged in such activities, including investment advisory services and insurance brokerage services. Any acquisition by us may require notice to or approval of the Federal Reserve Board, the Pennsylvania Department of Banking, other regulatory agencies and, in some instances, our shareholders. We apply a disciplined approach to considering acquisition opportunities, with a primary focus on building long-term shareholder value and advancing our mission and strategic objectives. In this regard, we generally consider, as a guideline, specific financial criteria, including whether the proposed transaction would be accretive to earnings per share in the first year after completion, provide for restoration of any tangible book value dilution in fewer than five years, result in an internal rate of return of 15% or better and be more beneficial to our shareholders than repurchasing our stock. While any such acquisition may occur in any market area, the areas that are currently of interest to us for potential bank acquisitions are contiguous markets to the south of our current market area, and market areas that would fill gaps in the markets we presently serve. We currently have no formal commitments with respect to the acquisition of any entities.

Supervision and Regulation

General Overview

Susquehanna is a financial holding company registered with the Federal Reserve Board and is subject to regulation under the Bank Holding Company Act of 1956, as amended. The Bank Holding Company Act requires prior approval of an acquisition of all or substantially all of the assets of a bank or of ownership or control of voting shares of any bank if the share acquisition would result in a person or entity owning more than 5% of the voting shares of any bank or bank holding company. It also imposes restrictions, summarized below, on the assets or voting shares of non-banking companies that we may acquire, as well as on the types of activities in which we may engage.

Susquehanna Bank is also subject to regulation and supervision. It is a Pennsylvania state-chartered commercial bank and trust company subject to regulation and periodic examination primarily by the Pennsylvania Department of Banking and Securities, the Federal Reserve Board, and to a lesser extent by the FDIC. The bank is also examined by, and subject to the enforcement authority of, the CFPB as to its compliance with consumer financial laws and regulations.

The following discussion is a summary description of the extensive regulatory framework applicable to Susquehanna and Susquehanna Bank, and is not intended to be a comprehensive review of all financial services laws and regulations that apply to us. In addition proposals to change laws and regulations governing the banking industry are often introduced in the U.S. Congress, in state legislatures and before the various bank regulatory agencies. Of note, certain rulemakings of the Dodd-Frank Act are still being finalized and may affect our future financial condition and results of operations. Certain of the final rules issued under the

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Dodd-Frank Act, such as the new mortgage servicing rules discussed below, will increase our legal and compliance costs. Also, as discussed below, we are currently conducting stress testing required under the Dodd-Frank Act, the results of which must be reported to bank regulators in March 2014 and to the public starting in June 2015. This stress testing, together with enhanced regulatory capital requirements adopted by the federal banking agencies in July 2013 could require us to hold more capital or cease or reduce certain activities that could reduce our profitability. The timing and likelihood of any future changes and their potential impact on Susquehanna are impossible to predict with any certainty. Further, a change in applicable laws or regulations, or a change in the interpretation of such laws or regulations, could have a material impact on our business, operations, and earnings. The following briefly describes the significant state and federal laws to which we are currently subject; however, such descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions.

Pennsylvania Regulation and Supervision

In December 2012, the “Banking Law Modernization Package” became effective. The law permits banks to disclose formal enforcement actions initiated by the Pennsylvania Department of Banking and Securities, clarifies that the Department has examination and enforcement authority over subsidiaries as well as affiliates of regulated banks, and bolsters the Department’s enforcement authority over its regulated institutions by clarifying its ability to remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice or breach of fiduciary duty. The Department also may assess civil money penalties of up to $25,000 per violation.

Susquehanna Trust & Investment Company is a Pennsylvania non-depository trust company subject to regulation and periodic examination by the Pennsylvania Department of Banking and Securities and the Federal Reserve Board. All of our subsidiaries are subject to examination by the Federal Reserve Board even if not otherwise regulated by the Federal Reserve Board.

Federal Regulation and Supervision

Consistent with the requirements of the Bank Holding Company Act, our only lines of business in 2013 consisted of providing our customers with banking, trust and other financial products and services. These included commercial banking through Susquehanna Bank, trust and related services through Susquehanna Trust & Investment Company, consumer vehicle financing through Boston Service Company, Inc. (t/a Hann Financial Service Corp.), investment advisory, asset management, retirement plan consulting and brokerage services through Valley Forge Asset Management Corp. and Stratton Management Company, and property and casualty insurance brokerage services through The Addis Group, LLC. Of these activities, banking activities accounted for 91% of our gross revenues in 2013 and 93% of our gross revenues in 2012.

Our bank subsidiary is subject to comprehensive federal and state laws and regulations dealing with a wide variety of subjects, including reserve requirements, loan limitations, restrictions as to interest rates on loans and deposits, restrictions as to dividend payments, requirements governing the establishment of branches, and numerous other aspects of its operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders.

Regulations governing our bank subsidiary restrict extensions of credit by the bank to Susquehanna and, with some exceptions, the other Susquehanna affiliates. For these purposes, extensions of credit include loans and advances to and guarantees and letters of credit on behalf of Susquehanna and such affiliates. These regulations also restrict investments by our bank subsidiary in the stock or other securities of Susquehanna and the covered affiliates, as well as the acceptance of such stock or other securities as collateral for loans to any borrower, whether or not related to Susquehanna.

Federal Financial Regulatory Reform

In response to the recent financial crisis, the United States Congress and government (particularly the U.S. Department of the Treasury (the “U.S. Treasury”), the Federal Reserve Board, and the FDIC) have taken numerous steps to stabilize the financial markets and to provide additional regulatory oversight of financial institutions.

Dodd-Frank Act. As a result of the Dodd-Frank Act, there is additional regulatory oversight and supervision of Susquehanna and its subsidiaries. The Dodd-Frank Act materially changed the regulation of financial institutions and the financial services industry and created a framework for regulatory reform. Many of the rules required by the Dodd-Frank Act are still being drafted and implemented. The Dodd-Frank Act and the regulations thereunder, include provisions affecting large and small financial institutions alike, including several provisions that affect the regulation of community banks and bank holding companies.

The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The legislation also calls for the FDIC to raise its ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion.

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Final debit card interchange rules adopted under the Durbin Amendment to the Dodd-Frank Act that cap a debit card issuer’s base fee at 21 cents per transaction and allow an additional 5-basis point charge per transaction to help cover fraud losses became operational in October 2011. On July 31, 2013, a United States District Court in Washington D.C., granted summary judgment to several retailers and retail trade associations regarding their claims that the Federal Reserve had not properly evaluated and set debit card interchange fees consistent with the Durbin Amendment to the Dodd-Frank Act, and the Federal Reserve is appealing this ruling. If the Federal Reserve’s appeals fail, the Federal Reserve may be directed to revisit its interchange fees analysis and may further change permissible interchange fees from those it initially determined under the Durbin Amendment, which could adversely affect our revenue from these activities. The District Court judgment has been stayed pending the appeal.

The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly-traded companies and allows financial institutions to pay interest on business checking accounts. The legislation also restricts proprietary trading by banking organizations, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of banks and their affiliates. The Dodd-Frank Act establishes the Financial Stability Oversight Council to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.

Consumer Financial Protection Bureau. The Dodd-Frank Act also establishes the CFPB as an independent entity within the Federal Reserve Board. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s rules contain provisions on mortgage-related matters such as steering incentives, and determinations as to a borrower’s ability to repay, loan servicing, and prepayment penalties. The CFPB has primary examination and enforcement authority over Susquehanna Bank and other banks with over $10 billion in assets as to consumer financial products.

On January 10, 2013, the CFPB issued a final regulation defining a “qualified mortgage” for purposes of the Dodd-Frank Act, and setting standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. This regulation, which became effective on January 10, 2014, also affords safe harbor legal protections for lenders making qualified loans that are not “higher priced.” On January 17, 2013, the CFPB issued a final regulation containing new mortgage servicing rules applicable to our bank subsidiary, which took effect on January 10, 2014. The announced goal of the CFPB is to bring greater consumer protection to the mortgage servicing market. These changes affect notices to be given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers are prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

The servicer must provide direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred. We expect these new standards to add to the cost of conducting our mortgage servicing business.

Stress Testing. The Dodd-Frank Act requires stress testing of bank holding companies and banks, such as Susquehanna and Susquehanna Bank, that have more than $10 billion but less than $50 billion of consolidated assets. Stress tests assess the potential impact of scenarios on the consolidated earnings, balance sheet and capital of a bank holding company or bank over a designated planning horizon of nine quarters, taking into account the organization’s current condition, risks, exposures, strategies, and activities, and such factors as the regulators may request of a specific organization. These are tested against baseline, adverse, and severely adverse economic scenarios specified by the Federal Reserve Board.

In May 2012, the federal banking agencies issued final supervisory guidance for stress testing practices applicable to banking organizations with more than $10 billion in total consolidated assets, such as us and our subsidiary bank, which became effective on July 23, 2012. This guidance outlines general principles for a satisfactory stress-testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organization. Subsequently, the Federal Reserve Board published final rules that became effective on November 12, 2012, that implement the Dodd-Frank Act requirement for annual company-run stress tests for banking organizations with total consolidated assets over $10 billion. For affected banking companies with less than $50 billion of consolidated assets, the stress testing requirements became effective in September 2013. Susquehanna and our bank subsidiary are in the process of completing stress testing as required and intend to report the results to the Federal Reserve Board prior to the March 31, 2014 deadline.

Additional Activities. Susquehanna is a “financial holding company” (an “FHC”) under the Bank Holding Company Act. As an FHC, we are permitted to engage, directly or through subsidiaries, in a wide variety of activities that are financial in nature or are incidental or complementary to a financial activity, in addition to all of the activities otherwise allowed to us. The additional activities permitted to us as an FHC (if we so determine to conduct them) include, among others, insurance and securities underwriting, merchant banking activities, issuing and selling annuities and securitized interests in financial assets, and engaging domestically in activities that bank holding companies previously have been permitted to engage in only overseas. All of these listed activities can be conducted, through an acquisition or on a start-up basis, generally without prior Federal Reserve Board approval and with only notice to the Federal Reserve Board afterward.

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As an FHC, Susquehanna is generally subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the Federal Reserve Board. To preserve our FHC status, we must remain well-capitalized and well-managed and ensure that Susquehanna Bank remains well-capitalized and well-managed for regulatory purposes and earns “satisfactory” or better ratings on its periodic Community Reinvestment Act (“CRA”) examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances.

If the Federal Reserve Board determines that we or any of the FHC’s subsidiary depository institutions are either not well-capitalized or not well-managed, we or the subsidiary must notify the Federal Reserve Board. Until compliance is restored, the Federal Reserve Board has broad discretion to impose appropriate limitations on the FHC’s activities. If compliance is not restored within 180 days, the Board may ultimately require the FHC to divest its depository institutions or in the alternative, to discontinue or divest any activities that are permitted only to non-FHC bank holding companies.

If the Federal Reserve Board determines that the FHC or its subsidiaries do not satisfy the CRA requirements, the potential restrictions are different. In that case, until all the subsidiary institutions are restored to at least “satisfactory” CRA rating status, the FHC may not engage, directly or through a subsidiary, in any of the additional activities permissible under the Bank Holding Company Act nor make additional acquisitions of companies engaged in the additional activities. However, completed acquisitions and additional activities and affiliations previously begun are left undisturbed, as the Bank Holding Company Act does not require divestiture for this type of situation.

Capital Adequacy. Under the risk-based capital requirements presently applicable to us, we must maintain a ratio of total capital to risk-weighted assets (including the asset equivalent of certain off-balance sheet activities such as acceptances and letters of credit) of not less than 8% (10% in order to be considered “well-capitalized”). At least 4% of the total capital (6% to be well-capitalized) must be composed of common stock, related surplus, retained earnings, qualifying perpetual preferred stock and minority interests in the equity accounts of certain consolidated subsidiaries, after deducting goodwill and certain other intangibles (“Tier 1 capital”). The remainder of total capital (“Tier 2 capital”) may consist of certain perpetual debt securities, mandatory convertible debt securities, hybrid capital instruments and limited amounts of subordinated debt, qualifying preferred stock, allowance for loan and lease losses, allowance for credit losses on off-balance-sheet credit exposures, and unrealized gains on equity securities.

At December 31, 2013, our Tier 1 capital and total capital (i.e., Tier 1 plus Tier 2) ratios were 11.7% and 13.0%, respectively. At December 31, 2012, our Tier 1 capital and total capital ratios were 11.1% and 12.6%, respectively.

The Federal Reserve Board has also established minimum leverage ratio guidelines for bank holding companies. These guidelines mandate a minimum leverage ratio of Tier 1 capital to adjusted quarterly average total assets less certain amounts (“leverage amounts”) equal to 3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating). All other banking organizations are generally required to maintain a leverage ratio of at least 3% plus an additional cushion of at least 100 basis points and in some cases more. The Federal Reserve Board’s guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a “tangible Tier 1 leverage ratio” (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. At December 31, 2013 and 2012, our leverage ratios were 9.6% and 9.0%, respectively.

Susquehanna Bank is subject to similar capital standards promulgated by the Federal Reserve Board. The Federal Reserve Board has not advised the bank of any specific minimum leverage ratios applicable to it.

New Capital Rules. The Federal Reserve Board and other federal banking agencies approved final capital rules (“New Capital Rules”) in July 2013 that substantially amend the existing capital rules for bank holding companies and banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.

The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including Susquehanna and Susquehanna Bank, as compared to the current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach. The New Capital Rules are effective for Susquehanna and Susquehanna Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions.

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The New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements.

Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:

• 4.5% CET1 to risk-weighted assets;

• 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

• 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

• 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

The New Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to the Susquehanna and Susquehanna Bank will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including Susquehanna, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of Susquehanna’s periodic regulatory reports in the beginning of 2015.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

With respect to Susquehanna Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.

The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.

We believe that Susquehanna and Susquehanna Bank will be able to comply with the targeted capital ratios upon implementation of the revised requirements, as finalized.

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The New Capital Rules implement a new capital ratio of common equity Tier 1 capital to risk based assets. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”). We intend to exercise a one-time irrevocable option to exclude certain components of AOCI. Both Susquehanna and the bank will be required to have a common equity Tier 1 capital ratio of 4.5%. In addition, both are required to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. Susquehanna also will be required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each relevant capital measure. Adequately capitalized institutions include depository institutions that meet but do not significantly exceed the required minimum level for each relevant capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements for any relevant capital measure. Critically undercapitalized refers to depository institutions with minimal capital and at serious risk for government seizure.

Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately capitalized but not well-capitalized cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

The federal bank regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

• prohibiting the payment of principal and interest on subordinated debt;

• prohibiting the holding company from making distributions without prior regulatory approval;

• placing limits on asset growth and restrictions on activities;

• placing additional restrictions on transactions with affiliates;

• restricting the interest rate the institution may pay on deposits;

• prohibiting the institution from accepting deposits from correspondent banks; and

• in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. As of December 31, 2013 and 2012, Susquehanna Bank exceeded the required capital ratios for classification as “well capitalized.”

Under the banking agencies new regulatory capital requirements, the prompt corrective action rules, have been modified to include a common equity Tier 1 risk-based ratio and to increase certain other capital requirements for the various thresholds. For example, the requirements for the bank to be considered well-capitalized under the rules are a 5.0% Tier 1 leverage ratio, a 6.5% common equity Tier 1 risk-based ratio, an 8.0% Tier 1 risk-based capital ratio and a 10.0% total risk-based capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%. 6.0% and 8.0%, respectively.

Federal Deposit Insurance. The increases in deposit insurance described above under “Federal Financial Regulatory Reform,” the FDIC’s expanded authority to increase insurance premiums, as well as the recent increase in the number of bank failures, is expected to result in an increase in deposit insurance assessments for all banks, including Susquehanna Bank. The FDIC, absent extraordinary circumstances, is required by the Dodd-Frank Act to return the insurance reserve ratio to a 1.35% ratio no later than

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September 30, 2020. Following seven quarters of decline, the Deposit Insurance Fund became positive in the second quarter of 2011, with reported balances of $37.9 billion at June 30, 2013. FDIC staff projects that the insurance reserve ratio will reach 1.15% by the end of 2018. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion of increasing the reserve ratio from 1.15% to 1.35%. FDIC staff intends to present a proposed rule to the FDIC Board of Directors to implement this requirement when the deposit insurance reserve ratio is closer to 1.15%.

If the FDIC is appointed conservator or receiver of a bank upon the bank’s insolvency or the occurrence of other events, the FDIC may sell some, part or all of a bank’s assets and liabilities to another bank or repudiate or disaffirm most types of contracts to which the bank was a party if the FDIC believes such contract is burdensome. In resolving the estate of a failed bank, the FDIC as receiver will first satisfy its own administrative expenses, and the claims of holders of U.S. deposit liabilities also have priority over those of other general unsecured creditors.

Source of Strength Doctrine. Under new provisions in the Dodd-Frank Act, as well as existing Federal Reserve Board policy and regulation, a bank holding company must serve as a source of financial and managerial strength to each of its subsidiary banks and is expected to stand prepared to commit resources to support each of them. Consistent with this, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the organization’s capital needs, asset quality, and overall financial condition.

USA Patriot Act of 2001. A major focus of governmental policy applicable to financial institutions in recent years has been the effort to combat money laundering and terrorism financing. The USA Patriot Act of 2001 (“Patriot Act”) was enacted to strengthen the ability of the U.S. law enforcement and intelligence communities to achieve this goal. The Patriot Act requires financial institutions, including our banking and broker-dealer subsidiaries, to assist in the prevention, detection and prosecution of money laundering and the financing of terrorism. The Patriot Act established standards to be followed by institutions in verifying client identification when accounts are opened and provides rules to promote cooperation among financial institutions, regulators and law enforcement organizations in identifying parties that may be involved in terrorism or money laundering.

Regulation of Non-bank Subsidiaries. In addition to Susquehanna Trust & Investment Company, we have other primary non-bank subsidiaries whose activities subject them to licensing and regulation. Boston Service Company, Inc. (t/a Hann Financial Service Corp.) is organized under the laws of New Jersey. It is regulated by Connecticut and Rhode Island as a motor vehicle leasing company, by Delaware as a finance or small loan agency and a motor vehicle lessor, and by New Jersey and Pennsylvania as a sales finance company. Valley Forge Asset Management Corp. is organized under the laws of Pennsylvania. It is registered with the SEC as an investment advisor and broker dealer and is a member of the Financial Industry Regulatory Authority (“FINRA”). It is licensed to do business as a broker dealer in 28 states and as an investment advisor in 26 states. In addition, VFAM also carries an insurance license with 7 states. Stratton Management Company is registered as an investment advisor with the SEC and makes Notice filings with 17 states in which the firm has clients. The Addis Group, LLC is organized under the laws of Pennsylvania. It is licensed with the Pennsylvania Insurance Commissioner and the insurance commissioners of 47 other states. As a result of changes contained in the Dodd-Frank Act, the Federal Reserve may examine any subsidiary of a bank holding company.

National Monetary Policy. In addition to being affected by general economic conditions, the earnings and growth of Susquehanna and our subsidiaries are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market operations in U.S. Government securities, adjustments of the discount rate, and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments, and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our future business, earnings, and growth cannot be predicted.

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Executive Officers of the Registrant

As of February 1, 2014, the executive officers of Susquehanna, their ages and their positions with Susquehanna, are set forth in the following table:

Name	Age	Title
William J. Reuter	64	Chairman of the Board and Chief Executive Officer
Andrew S. Samuel	51	President
Michael W. Harrington	50	Executive Vice President and Chief Financial Officer and Treasurer
Gregory A. Duncan	58	Executive Vice President and Chief Operating Officer
Michael M. Quick	65	Executive Vice President and Chief Corporate Credit Officer
Carl D. Lundblad	43	Executive Vice President, Chief Legal and Administrative Officer
Kevin J. Burns	44	Executive Vice President and Chief Risk Officer

William J. Reuter, Chairman of the Board and Chief Executive Officer, joined Susquehanna in 1989 and has held multiple positions with the organization since then. He has been a Director of Susquehanna since 1999 and became Chairman in May 2002. He has been Chief Executive Officer since May 2001, and also served as President from January 2000 until June 2008. Mr. Reuter serves as a director of several of Susquehanna’s subsidiaries, including as Chairman of the Board of Susquehanna Bank and Valley Forge Asset Management Corp. He also serves on the boards of Boston Service Company, Inc. (t/a Hann Financial Service Corp.), The Addis Group, LLC, Stratton Management Company, and Semper Trust Company. Prior to joining Susquehanna, Mr. Reuter served in various officer positions at other financial institutions including Equitable Trust Company and Farmers and Merchants Bank.

Andrew S. Samuel, President and Director, joined Susquehanna in February 2012 in connection with Susquehanna’s acquisition of Tower Bancorp, Inc. Prior to joining Susquehanna, beginning in 2005, Mr. Samuel served as Chairman, Chief Executive Officer and President of Tower Bancorp, Inc. and Graystone Financial Corp. Mr. Samuel has served in various executive positions at other financial institutions dating back to 1984 including Waypoint Financial Corp., Sovereign Bank, Fulton Bank and Commonwealth National Bank/Mellon. He serves as a director of several of Susquehanna’s subsidiaries, including Susquehanna Bank, Valley Forge Asset Management Corp., and Susquehanna Commercial Finance Inc.

Michael W. Harrington has served as Executive Vice President and Chief Financial Officer and Treasurer of Susquehanna since January 1, 2014. Mr. Harrington served as the Executive Vice President and Treasurer of Susquehanna since June 2012 and as Chief Financial Officer and Treasurer of Susquehanna Bank since January 2013. From April 2011 through June 2012, Mr. Harrington served as Treasurer and Chief Investment Officer of First Niagara Financial Group, a multi-state community-oriented bank, where he served in a variety of financial, capital management and investment roles. He previously served as Chief Financial Officer of First Niagara Financial Group from December 2006 through April 2011. Mr. Harrington succeeded Drew K. Hostetter as Chief Financial Officer, who retired effective December 31, 2013.

Gregory A. Duncan, Executive Vice President and Chief Operating Officer, rejoined Susquehanna in January 2011. From September 2009 to August 2010, he served as Executive Vice President and Chief Operating Officer of First Interstate Bancsystem, Inc. and served as its Chief Banking Officer from May 2008 to September 2009. From October 2005 until joining First Interstate Bancsystem, Inc. in May 2008, Mr. Duncan served as President and Chief Executive Officer of Susquehanna Bank PA. Previously Mr. Duncan served in a number of leadership roles with Susquehanna or its subsidiaries from 1987 through 2008.

Michael M. Quick, Executive Vice President and Chief Corporate Credit Officer, joined Susquehanna in February 1997 in conjunction with Susquehanna’s acquisition of Equity National Bank. He was named Executive Vice President and Chief Corporate Credit Officer in July 2007. Since 2004, Mr. Quick has served in numerous executive positions with Susquehanna or its subsidiaries, including as a director of Susquehanna Bank and its predecessor banks. Mr. Quick began his banking career in 1970 and served as an officer of several financial institutions including Industrial Valley Bank and Trust Company; Midlantic National BankSouth; and Equity National Bank. Mr. Quick is also a past chairman of the New Jersey Bankers Association.

Carl D. Lundblad, Executive Vice President and Chief Legal and Administrative Officer, joined Susquehanna in February 2012 in connection with Susquehanna’s acquisition of Tower Bancorp, Inc. Mr. Lundblad served as Senior Vice President, Strategic Planning and Investor Relations from February 2012 to August 2013 and as Senior Vice President and Chief Legal and Administrative Officer from September 2013 until January 2014. From April 2009 until January 2012 Mr. Lundblad served as Executive Vice President and General Counsel of Tower and Graystone Tower Bank. From August 2007 to March 2009 Mr. Lundblad served as General Counsel and Secretary of Graystone Financial Corp. and Graystone Bank. Mr. Lundblad was a Partner and attorney at Rhoads & Sinon LLP from 1997 until joining Graystone in 2007.

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Kevin J. Burns, Executive Vice President and Chief Risk Officer, joined Susquehanna in January 2014. From May 2008 through December 2013, Mr. Burns served as Director, Governance, Regulatory and Risk Management, Financial Services Industry – Banking, at Deloitte & Touche LLP, a national public accounting firm. From September 1999 through May 2008, Mr. Burns served in various Risk Management positions of several financial institutions including Bank of America Corporation, LaSalle Bank Corporation, JP Morgan Chase Corporation, NA, and Bank One Corporation.

Mr. Drew K. Hostetter served as Susquehanna’s Executive Vice President and Chief Financial Officer until his retirement effective December 31, 2013.

There are no family relationships among the executive officers of Susquehanna. The executive officers are elected or appointed by the Board of Directors of Susquehanna and serve until the appointment or election and qualification of their successor or their earlier death, resignation, termination or removal. There are no arrangements or understandings between any of them and any other person pursuant to which any of them was selected as an officer of Susquehanna.

Item 1A. Risk Factors

Current conditions in the capital markets and the economy continue to pose significant challenges and may materially adversely affect our business and results of operations.

Our results of operations are materially affected by conditions in the capital markets and the economy generally, which continue to be uncertain and include sluggish economic growth, accompanied by high unemployment and historically low interest rates. In recent years, the economic downturn produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies’ underlying financial strength.

In recent years, concerns over unemployment, energy costs, the availability and cost of credit, the U.S. mortgage market, a depressed U.S. real estate market and geopolitical issues such as sovereign-debt defaults and euro-zone political uncertainty have contributed to increased volatility and diminished expectations for the economy and the capital and credit markets in the near term. Dramatic declines in the housing market in recent years, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions. While conditions have improved, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Deteriorating conditions in the regional economy we serve could drive losses beyond those provided for in our allowance for loan losses. The markets for fixed income instruments have experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also experienced periods of heightened volatility and turmoil, with issuers (such as Susquehanna) that have exposure to the real estate, mortgage, automobile and credit markets particularly affected. These events and other market disturbances may have an adverse effect on us, in part because we have a large investment portfolio and also because we are dependent upon customer behavior. Our revenues are susceptible to decline in such circumstances, and our profit margins could erode. In addition, in the event of extreme and prolonged market events, such as the global credit crisis, we could incur significant losses.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition. The economic slowdown has resulted in legislative and regulatory actions including the enactment of the Dodd-Frank Act that has impacted our business and will further impact our business in the future. In addition, we cannot predict whether there will be additional legislative or regulatory actions, when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

Changes in interest rates may adversely affect our earnings and financial condition.

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

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Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events, and changes in the United States and other financial markets.

We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest- rate-sensitive assets and interest-rate-sensitive liabilities. However, interest-rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.

We may not be able to continue to grow our business, which may adversely impact our results of operations.

Our total assets have grown from approximately $13.7 billion at December 31, 2008, to $18.5 billion at December 31, 2013. Our long-term business strategy calls for continued expansion. Our ability to continue to grow depends, in part, upon our ability to successfully attract deposits, identify favorable loan and investment opportunities, and acquire other bank and non-bank entities. In the event that we do not continue to grow, our results of operations could be adversely impacted.

Our ability to grow successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as obtaining regulatory approvals, national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in funding transactions could be adversely affected by the actions and failure of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. As a result, defaults by, or even questions or rumors about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or other institutions. Many of these transactions expose us to operational and credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Losses related to these credit risks could materially and adversely affect our results of operations or earnings.

We may be required to pay significantly higher Federal Deposit Insurance Corporation premiums in the future.

Following the recent financial crisis, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund (“DIF”). In addition, the Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per account, which placed additional stress on the DIF.

The Dodd-Frank Act broadened the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The legislation also increases the required minimum reserve ratio for the DIF from 1.15% to 1.35% of insured deposits, removes the statutory cap for the reserve ratio, leaving the FDIC with discretion to set this cap going forward, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets. Recent FDIC regulations revise the risk-based assessment system for all large insured depository institutions (generally institutions with at least $10 billion in total assets, such as Susquehanna Bank). Under the regulations, the FDIC uses a scorecard method to calculate assessment rates for all such institutions.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If additional bank or financial institution failures occur, we may be required to pay even higher FDIC premiums than the recently increased levels. Further, the FDIC may make material changes to the calculation of the prepaid assessment from the current proposal. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition and our ability to continue to pay dividends on our common shares at the current rate or at all.

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The Dodd-Frank Act and related legislation regarding the financial services industry could detrimentally affect our business.

As a publicly traded financial holding company, we are subject to various requirements and restrictions under the Dodd-Frank Act. See “Supervision and Regulation” above. The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments and requires that listed companies implement and disclose “clawback” policies for recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, affect retention of key personnel, require us to increase our regulatory capital, require us to invest significant management attention and resources and limit our ability to pursue business opportunities in an efficient manner.

Government regulation significantly affects our business.

Apart from the Dodd-Frank Act, the banking industry is heavily regulated, and such regulations are intended primarily for the protection of depositors and the federal deposit insurance funds, not shareholders. See “Item 1. Business- Supervision and Regulation.” As a financial holding company, we are subject to regulation by the Federal Reserve Board. Our bank subsidiary is also regulated by the Federal Reserve Board and is subject to regulation by the Pennsylvania Department of Banking and Securities and recently, by the CFPB as to consumer financial services and products. These regulations affect lending practices, capital structure, investment practices, dividend policy, and growth. In addition, we have non-bank operating subsidiaries from which we derive income. Several of these non-bank subsidiaries engage in providing investment management and insurance brokerage services, industries that are also heavily regulated on both a state and federal level. In addition, newly enacted and amended laws, regulations, and regulatory practices affecting the financial service industry may result in higher capital requirements, higher insurance premiums and limit the manner in which we may conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and leases and achieve satisfactory spreads, and may also result in the imposition of additional costs on us. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as any applicable rules or regulations promulgated by the SEC and The NASDAQ Stock Market, LLC. Complying with these existing and any newly enacted standards, rules and regulations may impose administrative costs and burdens on us.

Geographic concentration in one market may unfavorably impact our operations.

Substantially all of our business is with customers located within Pennsylvania, Maryland, and New Jersey, and our operations are heavily concentrated in the Mid-Atlantic region. As a result of this geographic concentration, our results depend largely on economic conditions in these and surrounding areas. Deterioration in economic conditions in this market could:

• increase loan delinquencies;

• increase problem assets and foreclosures;

• increase claims and lawsuits;

• decrease the demand for our products and services; and

• decrease the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with nonperforming loans and collateral coverage.

Generally, we make loans to small to mid-sized businesses whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions in our market area could reduce our growth rate, affect our borrowers’ ability to repay their loans and, consequently, adversely affect our financial condition and performance. For example, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave many of our loans inadequately collateralized. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings could be adversely affected.

The inability to hire or retain key personnel could adversely affect our business.

Susquehanna and its subsidiaries face intense competition with various other financial institutions, as well as from non-bank providers of financial services, such as credit unions, brokerage firms, insurance agencies, consumer finance companies and

17

government organizations, for the attraction and retention of key personnel, specifically those who generate and maintain our customer relationships and serve in other key operation positions in the areas of finance, credit oversight and administration, and wealth management. These competitors may offer greater compensation and benefits, which could result in the loss of potential and/or existing substantial customer relationships and may adversely affect our ability to compete effectively.

Our exposure to credit risk, which is heightened by our focus on commercial lending, could adversely affect our earnings and financial condition.

There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of a loan backed by collateral, risks resulting from uncertainties about the future value of the collateral.

Commercial loans, including commercial real estate, are generally viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Our consolidated commercial lending operations include commercial, financial and agricultural lending, real estate construction lending, and commercial mortgage lending, which comprised 17.6%, 5.4% and 30.0% of our total loan portfolio, respectively, as of December 31, 2013. Construction financing typically involves a higher degree of credit risk than commercial mortgage lending. Risk of loss on a construction loan depends largely on the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated cost (including interest) of construction. If the estimated property value proves to be inaccurate, the loan may be inadequately collateralized.

Because our loan portfolio contains a significant number of commercial real estate, commercial and industrial loans, and construction loans, the deterioration of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could cause an increase in loan charge-offs and a corresponding increase in the provision for loan losses, which could adversely impact our financial condition and results of operations.

Changes in our accounting policies, as well as estimates we make, could materially affect how we report our financial condition or results of operations.

Our accounting policies are fundamental to understanding our financial condition and results of operations, and are based on current accounting rules. Certain of our accounting policies, as well as estimates we make, are “critical”, as they are both important to the presentation of our financial condition and results of operations, and they require management to make particularly difficult, complex, or subjective judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from our estimates and the use of different judgments and assumptions related to these policies and estimates could have a material impact on our consolidated financial statements. For a description of our critical accounting policies, refer to“Note 1. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements appearing in Part II,Item 8.

From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes are beyond our control, can be difficult to predict, and could materially impact how we report our financial condition and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior financial statements by material amounts. The implementation of new or revised guidance could result in material adverse effects to our reported capital.

If our allowance for loan and lease losses is not sufficient to cover actual loan and lease losses, our earnings would decrease.

To absorb probable, incurred loan and lease losses that we may realize, we recognize an allowance for loan and lease losses based on, among other things, national and regional economic conditions, historical loss experience, and delinquency trends. However, we cannot estimate loan and lease losses with certainty, and we cannot assure you that charge-offs in future periods will not exceed the allowance for loan and lease losses. If charge-offs exceed our allowance, our earnings would decrease. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan and lease losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan and lease losses, such as a prolonged economic downturn or continued weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control, could reduce our earnings.

Our controls and procedures could fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our business, results of operations and financial condition.

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Susquehanna Bank could be required to repurchase mortgage loans or indemnify mortgage loan purchasers due to breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could have a material adverse impact on our liquidity, results of operations and financial condition.

Susquehanna Bank is the successor to Graystone Tower Bank and its predecessor, the First National Bank of Chester County (“FNBCC”). FNBCC operated a significant amount of mortgage banking activities through its American Home Bank Division (“AHB Division”). When FNBCC or Graystone Tower Bank sold mortgage loans through this division, they were required to make customary representations and warranties to purchasers about the mortgage loans and the manner in which they were originated. The whole loan sale agreements assumed by Susquehanna Bank through the Tower merger require it to repurchase or substitute mortgage loans in the event there was a breach of any of these representations or warranties. In addition, Susquehanna Bank may be required to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. Likewise, Susquehanna Bank is required to repurchase or substitute mortgage loans if it breaches a representation or warranty that was previously made in connection with a securitization. Although Susquehanna Bank may have remedies available against the originating broker or correspondent in these situations, those remedies may not be as broad as the remedies available to a purchaser of mortgage loans against Susquehanna Bank, and Susquehanna Bank faces further risk that the originating broker or correspondent may not have the financial capacity to perform remedies that otherwise may be available to it. Therefore, if a purchaser enforces its remedies, Susquehanna Bank may not be able to recover its losses from the originating broker or correspondent. If repurchase and indemnity demands increase significantly, our liquidity, results of operations and financial condition may be adversely affected.

Competition from other financial institutions in originating loans, attracting deposits and providing various financial services may adversely affect our profitability.

Our banking subsidiary faces substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies, and other lenders. Many of our competitors enjoy advantages over Susquehanna, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that our banking subsidiary originates and the interest rates it may charge on these loans.

In attracting business and consumer deposits, our bank subsidiary faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages over Susquehanna, including greater financial resources, more aggressive marketing campaigns and better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations. As a result, we may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.

Our banking and non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance companies and governmental organizations which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our banking operations. As a result, such non-bank competitors may have advantages over our banking and non-banking subsidiaries in providing certain products and services. This competition may reduce or limit our margins on banking and non-banking services, reduce our market share, and adversely affect our earnings and financial condition.

Our growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. The Dodd-Frank Act sets a statutory floor for risk-based and leverage capital standards, and the federal banking agencies have adopted new rules that increase our regulatory capital requirements. See “Supervision and Regulation” above. We anticipate that our current capital levels will satisfy our regulatory requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. Our ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, our existing shareholders’ interests in us could be diluted.

We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements, which could reduce our ability to effectively compete.

The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables

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financial service institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business.

As part of our business we collect, process, and retain sensitive and confidential client and customer information in both paper and electronic form. We have taken reasonable and prudent security measures to prevent the loss of this information, including steps to detect and deter cyber-related crimes intended to electronically infiltrate our network, capture sensitive client and customer information, deny service to customers via our website, and harm our electronic processing capability. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses or compromises, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business.

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or by international hostilities.

Neither the occurrence nor the potential impact of disasters, terrorist activities and international hostilities can be predicted. However, these occurrences could impact us directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact on our borrowers, the value of collateral, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. For example, a significant earthquake could impact us directly by disrupting our business operations or could lead to an increase in delinquencies, bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.

Negative public opinion could damage our reputation and adversely affect our earnings.

Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including activities in our private and business banking operations and investment and trust operations; our management of actual or potential conflicts of interest and ethical issues; and our protection of confidential client information. Negative public opinion can adversely affect our ability to keep and attract clients and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in the way we conduct our business activities and deal with our clients, communities and vendors, these steps may not be effective.

The Pennsylvania business corporation law and various anti-takeover provisions under our articles of incorporation could impede the takeover of the company.

Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire Susquehanna, even if the acquisition would be advantageous to shareholders. In addition, we have various anti-takeover measures in place under our articles of incorporation. Any one or more of these measures may impede the takeover of Susquehanna without the approval of our board of directors and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.

Acquisitions may place additional burdens on our business and dilute our shareholders’ value.

From time to time, we evaluate merger and acquisition opportunities related to possible transactions with other financial institutions. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We consider merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or

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expanded services. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses, litigation, or unexpected future operating expenses such as unanticipated costs to integrate the two businesses, increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on our results of operations and financial condition following a merger or acquisition. In addition, if actual costs are materially different than expected costs, such a merger or acquisition could have a significant dilutive effect on our earnings per share.

We have been and will likely continue to be involved in a variety of litigation arising out of our business operations and acquisitions.

From time to time, we may be involved in a variety of litigation, claims or legal action arising out of our business operations or acquisitions. In recent years we have been the target of various lawsuits, ranging from ordinary disputes brought by counterparties with whom we have done business to suits brought by class action firms alleging business practices that are unfair to consumers.

Any claims asserted, regardless of merit or eventual outcome, may harm our reputation and may cause us to incur significant expense. Our insurance coverage may not cover all claims that may be asserted against us. In addition, we may not be able to obtain appropriate types or levels of insurance coverage in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all. Substantial legal liability could materially adversely affect our business, financial condition or results of operations.

We may incur impairments to goodwill.

At December 31, 2013, we had approximately $1.3 billion recorded as goodwill. We evaluate goodwill for impairment, at least annually during the second quarter, of the fiscal year. Significant negative industry or economic trends, including the decline in the market price of our common stock, or reduced estimates of future cash flows or disruptions to our business could result in impairments to goodwill. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If our analysis results in impairment to goodwill, we would be required to record an impairment charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our results of operations and stock price.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

We reimburse our subsidiaries for space and services utilized. Our executive offices are located at 26 North Cedar Street, Lititz, Pennsylvania, which we lease from our subsidiary, Susquehanna Bank. We also lease office space located at 13511 Label Lane, Hagerstown, Maryland, for our loan servicing center.

As of December 31, 2013, our bank subsidiary operated 245 branches and 48 free-standing automated teller machines. It owned 94 of the branches and leased the remaining 151. On December 23, 2013 our bank subsidiary sold a portfolio of 30 of its branch bank properties and simultaneously entered into long-term lease agreements for those branch locations. In addition, in the fourth quarter of 2013, Susquehanna Bank completed the consolidation of 14 of its branch locations into other Susquehanna Bank branches. Thirty-two additional locations were owned or leased by Susquehanna Bank to facilitate operations and expansion. We believe that the properties currently owned and leased by our subsidiaries are adequate for present levels of operation.

As of December 31, 2013, the offices (including executive offices) of our bank subsidiary were as follows:

Subsidiary	Location of Executive Office	Executive Office Owned / Leased	Location of Offices (including executive office)
Susquehanna Bank	1570 Manheim Pike Lancaster, Pennsylvania	Owned	245 banking offices in Adams, Bedford, Berks, Bucks, Centre, Chester, Cumberland, Dauphin, Delaware, Franklin, Fulton, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Montgomery, Northampton, Northumberland, Philadelphia, Schuylkill, Snyder, Union and York counties, Pennsylvania; Baltimore City, Allegany, Anne Arundel, Baltimore, Carroll, Garrett, Harford, Howard, Washington and Worcester counties, Maryland; Atlantic, Burlington, Camden, Cumberland and Gloucester counties, New Jersey; and Berkeley County, West Virginia

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As of December 31, 2013, the offices (including executive offices) of our non-bank subsidiaries were as follows:

Subsidiary	Location of Executive Offices	Executive Office Owned / Leased	Location of Offices (including executive office)
Boston Service Company, Inc., t/a Hann Financial Service Corp.	One Centre Drive Jamesburg, New Jersey	Leased	2 offices located in Gloucester and Middlesex counties, New Jersey
Valley Forge Asset Management Corp.	150 South Warner Road, Suite 200 King of Prussia, Pennsylvania	Leased	3 offices located in Lancaster and Montgomery counties, Pennsylvania, and New Castle County, Delaware
The Addis Group, LLC	2500 Renaissance Boulevard King of Prussia, Pennsylvania	Leased	1 office located in Montgomery County, Pennsylvania
Stratton Management Company	150 South Warner Road, Suite 400 King of Prussia, Pennsylvania	Leased	1 office located in Montgomery County, Pennsylvania

Item 3. 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 throughout 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. In the ordinary course of operations, Susquehanna and our subsidiaries are subject to routine litigation incidental to our business.

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.

To avoid the costs, risks and uncertainties inherent in litigation and without admitting any of the allegations in the complaint, Susquehanna in good faith participated in mediation with plaintiffs’ counsel and as a result of negotiations following from the mediation, on December 20, 2012, Susquehanna and counsel for plaintiffs entered into a Summary Agreement, subject to preliminary and final approval of the settlement and dismissal of the action with prejudice by the Court. On October 25, 2013, Susquehanna and the plaintiffs entered into a comprehensive agreement to settle the action. On November 13, 2013, the United States District Court for the Southern District of Florida preliminarily approved the settlement agreement and directed that notice of the settlement be sent to prospective class members.

Management, after consultation with legal counsel, currently does not anticipate that the aggregate settlement amount arising out of this proceeding will have a material adverse effect on our results of operation, financial position, or cash flows.

Lehman Litigation

In September 2010, Lehman Brothers Special Financing, Inc. (“LBSF”) filed suit in the United States Bankruptcy court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate holders who received distributions from the trustees, including Susquehanna, to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate collateralized debt obligation transactions (“CDO”). In June 2007, two of our affiliates each purchased $5.0 million in AAA rated Class A Notes of a CDO offered by Lehman Brothers, Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with LBSF. Lehman Brothers Holdings, Inc. (“LBHI”) guaranteed LBSF’s obligations to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an Event of Default under the indenture occurred, and the trustee declared the notes to be immediately due and payable. Susquehanna was repaid its principal on the notes in September 2008.

This legal proceeding is in its early stages of discovery; thus 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

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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.

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 fully cooperate 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 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Susquehanna’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information. Our common stock is listed for quotation on the Nasdaq Global Select Market under the symbol “SUSQ”. Set forth below are the quarterly high and low sales prices of our common stock as reported on the Nasdaq Global Select Market for the years 2013 and 2012, and cash dividends paid.

Table 3

Quarterly Summary of Market Price and Cash Dividends Declared on Common Stock

		Cash Dividends Paid		Price Range Per Share
Year	Period			Low		High
2013	1st Quarter	$	0.00	$	10.66	$	12.59
	2nd Quarter		0.08		11.18		12.95
	3rd Quarter		0.08		12.31		14.35
	4th Quarter		0.08		11.54		13.39
2012	1st Quarter	$	0.03	$	8.31	$	10.27
	2nd Quarter		0.05		8.87		10.64
	3rd Quarter		0.06		9.95		11.27
	4th Quarter(1)		0.14		9.19		10.85

⁽¹⁾  Includes acceleration of payment of 1st quarter 2013 dividend of $0.07.

As of February 17, 2014, there were 11,705 record holders of Susquehanna common stock.

Dividend Policy. Dividends paid to our shareholders are provided from dividends paid to us by our subsidiaries. Our ability to pay dividends is largely dependent upon the receipt of dividends from Susquehanna Bank. Both federal and state laws impose restrictions on the ability of Susquehanna Bank to pay dividends. These include the Pennsylvania Banking Code of 1965, the Federal Reserve Act and the applicable regulations under such laws. In addition, the net capital rules of the SEC under the Securities Exchange Act of 1934 limit the ability of Valley Forge Asset Management Corp. and Stratton Management Company to pay dividends to us. In addition to the specific restrictions summarized below, the banking and securities regulatory agencies also have broad authority to prohibit otherwise permitted dividends proposed to be made by an institution regulated by them if the agency determines that their distribution would constitute an unsafe or unsound practice, or otherwise result in noncompliance with applicable requirements.

The Federal Reserve Board has issued policy statements which provide that, as a general matter, insured banks and bank holding companies should pay dividends only out of current operating earnings.

For state-chartered banks which are members of the Federal Reserve System, the approval of the Federal Reserve Board is required for the payment of cash dividends by the bank subsidiary in any calendar year if the total of all dividends declared by the bank in that calendar year, including the proposed dividend, exceeds the current year’s net income combined with the retained net income for the two preceding calendar years. “Retained net income” for any period means the net income for the period less any common or preferred stock dividends declared in that period. Moreover, no dividends may be paid by such bank in excess of its undivided profits account.

Dividends by a Pennsylvania state-chartered bank payable in cash or property other than shares may be paid only out of accumulated net earnings and are restricted by the requirement that the bank set aside to a surplus fund each year at least 10% of its net earnings until the bank’s surplus equals the amount of its capital (a requirement presently satisfied in the case of Susquehanna Bank). Furthermore, a Pennsylvania bank may not pay such a dividend if the payment would result in a reduction of the surplus account of the bank.

Stock Performance Graph. The following graph compares for fiscal years 2008 through 2013 the yearly change in the cumulative total return to holders of our common stock with the cumulative total return of the Nasdaq Composite Index, a broad market in which we participate, and the SNL Mid-Cap U.S. Bank Index (which includes Susquehanna), a broad index that includes all publically traded banks in SNL’s coverage universe with $1B to $5B total Common Market Capitalization. The graph depicts the total return on an investment of $100 based on both stock price appreciation and reinvestment of dividends for Susquehanna, the companies represented by the Nasdaq Index, and the SNL Mid-Cap U.S. Bank Index.

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	Period Ending
Index	12/31/08		12/31/09		12/31/10		12/31/11		12/31/12		12/31/13
Susquehanna Bancshares, Inc.		100.00		38.52		63.60		55.61		71.45		89.29
NASDAQ Composite		100.00		145.36		171.74		170.38		200.63		281.22
SNL Mid Cap U.S. Bank Index		100.00		84.77		98.57		86.65		97.11		144.26

Source: SNL Financial LC, Charlottesville, VA © 2013

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Item 6. Selected Financial Data

Susquehanna Bancshares, Inc. & Subsidiaries

Years ended December 31,	2013			2012(1)			2011(2)			2010			2009
	(Dollars and shares in thousands, except per share data)
Interest income	$	688,382		$	710,630		$	594,768		$	613,695		$	643,824
Interest expense		102,442			119,392			161,618			187,189			235,008
Net interest income		585,940			591,238			433,150			426,506			408,816
Provision for loan and lease losses		31,000			64,000			110,000			163,000			188,000
Noninterest income		183,729			166,759			182,668			152,148			163,699
Noninterest expenses		490,840			490,017			460,180			382,650			382,472
Income before taxes		247,829			203,980			45,638			33,004			2,043
Net income		173,679			141,172			54,905			31,847			12,675
Preferred stock dividends and accretion		0			0			0			15,572			16,659
Net income (loss) applicable to common shareholders		173,679			141,172			54,905			16,275			(3,984	)
Cash dividends declared on common stock		44,900			51,393			11,212			4,757			31,898
Per Common Share Amounts
Net income (loss):
Basic	$	0.93		$	0.77		$	0.40		$	0.13		$	(0.05	)
Diluted		0.92			0.77			0.40			0.13			(0.05	)
Cash dividends declared on common stock		0.24			0.28			0.08			0.04			0.37
Dividend payout ratio		25.9	%		36.4	%		20.4	%		29.2	%		n/m	(3)
Financial Ratios
Return on average total assets		0.95	%		0.81	%		0.38	%		0.23	%		0.09	%
Return on average shareholders’ equity		6.56			5.62			2.67			1.53			0.65
Return on average tangible shareholders’ equity(4)		13.57			12.03			6.01			3.69			2.19
Average equity to average assets		14.54			14.33			14.31			15.00			14.31
Net interest margin		3.79			4.01			3.60			3.67			3.58
Efficiency ratio(4) (5) (6)		62.55			60.37			66.83			64.62			65.28
Capital Ratios
Leverage		9.55	%		8.98	%		10.73	%		10.27	%		9.73	%
Tier 1 risk-based capital		11.71			11.08			13.65			12.65			11.17
Total risk-based capital		13.04			12.63			15.41			14.72			13.48
Credit Quality
Net charge-offs/Average loans and leases		0.44	%		0.55	%		1.16	%		1.46	%		1.32	%
Nonperforming assets/Loans and lease plus foreclosed real estate		0.86			0.96			1.88			2.23			2.48
ALLL/Nonaccrual loans and leases		156			188			120			97			79
ALLL/Total loans and leases		1.16			1.43			1.80			1.99			1.75
Year-End Balances
Total assets	$	18,473,489		$	18,037,667		$	14,974,789		$	13,954,085		$	13,689,262
Investment securities		2,533,456			2,730,335			2,431,515			2,417,611			1,875,267
Loans and leases, net of unearned income		13,576,086			12,894,741			10,447,930			9,633,197			9,827,279
Deposits		12,869,372			12,580,046			10,290,472			9,191,207			8,974,363
Total borrowings		2,540,282			2,530,040			2,083,673			2,371,161			2,512,894
Shareholders’ equity		2,717,587			2,595,909			2,189,628			1,984,802			1,981,081
Selected Share Data
Common shares outstanding (period end)		187,363			186,554			156,867			129,966			86,474
Average common shares outstanding:
Basic		186,927			182,896			136,509			121,031			86,257
Diluted		187,835			183,578			136,876			121,069			86,257
Common shareholders of record		11,751			12,631			12,747			11,301			11,668
At December 31:
Book value per common share	$	14.50		$	13.92		$	13.96		$	15.27		$	19.53
Tangible book value per common share(4)		7.52			6.88			7.28			7.18			7.25
Market price per common share		12.84			10.48			8.38			9.68			5.89

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⁽¹⁾  On February 17, 2012, we completed our acquisition of Tower Bancorp, Inc. All transactions since the acquisition date are included in our consolidated financial statements.

⁽²⁾  On October 1, 2011, we completed our acquisition of Abington Bancorp, Inc. All transactions since the acquisition date are included in our consolidated financial statements.

⁽³⁾  Not meaningful.

⁽⁴⁾  Refer to “Table 4, Reconciliation of Non-GAAP Measures” for additional information.

⁽⁵⁾  2012 adjusted for merger related expenses, and loss on extinguishment of debt.

⁽⁶⁾  2011 adjusted for net realized gain on acquisition, merger related expenses, and loss on extinguishment of debt.

Table 4

Reconciliation of Non-GAAP Measures

(Dollars in thousands, except per share)

	2013			2012			2011			2010			2009
Tangible Book Value per Common Share
End of period balance sheet data
Shareholders’ Equity	$	2,717,587		$	2,595,909		$	2,189,628		$	1,984,802		$	1,981,081
Preferred shares		0			0			0			0			(292,359	)
Goodwill and other intangible assets		(1,307,701	)		(1,311,691	)		(1,047,112	)		(1,052,107	)		(1,061,544	)
Tangible common equity (numerator)	$	1,409,886		$	1,284,218		$	1,142,516		$	932,695		$	627,178
Common shares outstanding (denominator)		187,363			186,554			156,867			129,966			86,474
Tangible book value per common share	$	7.52		$	6.88		$	7.28		$	7.18		$	7.25

Tangible book value per share is a non-GAAP based financial measure calculated using non-GAAP based amounts. The most directly comparable GAAP based measure is book value per share. In order to calculate tangible book value per share, we divide tangible common equity, which is a non-GAAP based measure calculated as common shareholders’ equity less intangible assets, by the number of shares of common stock outstanding. In contrast, book value per share is calculated by dividing total common shareholders’ equity by the number of shares of common stock outstanding. Management uses tangible book value per share to assess our capital position and ratios.

	2013			2012			2011			2010			2009
Return on Average Tangible Shareholders’ Equity
Return on average shareholders’ equity (GAAP basis)		6.56	%		5.62	%		2.67	%		1.53	%		0.65	%
Effect of excluding average intangible assets and related amortization		7.01	%		6.41	%		3.34	%		2.16	%		1.54	%
Return on average tangible shareholders’ equity		13.57	%		12.03	%		6.01	%		3.69	%		2.19	%

Return on average tangible equity is a non-GAAP based financial measure calculated using non-GAAP based amounts. The most directly comparable GAAP-based measure is return on average equity. 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.

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	2013			2012			2011			2010			2009
Efficiency Ratio
Other expense	$	490,840		$	490,017		$	460,180		$	382,650		$	382,472
Less: Merger-related expenses		0			(17,351	)		(14,991	)		0			0
Loss on extinguishment of debt		0			(5,860	)		(50,020	)		0			0
Noninterest operating expense (numerator)	$	490,840		$	466,806		$	395,169		$	382,650		$	382,472
Taxable-equivalent net interest income	$	600,945		$	606,529		$	447,800		$	440,036		$	422,207
Other income		183,729			166,759			182,668			152,148			163,699
Less: Net realized gain on acquisition		0			0			(39,143	)		0			0
(denominator)	$	784,674		$	773,288		$	591,325		$	592,184		$	585,906
Efficiency ratio		62.55	%		60.37	%		66.83	%		64.62	%		65.28	%

The efficiency ratio is a non-GAAP based financial measure. Management excludes merger-related expenses and certain other selected items when calculating this ratio, which is used to measure the relationship of operating expenses to revenues.

	2013			2012			2011			2010			2009
Net Interest Margin (excluding purchase accounting)
Reported net interest margin (GAAP basis)		3.79	%		4.01	%		3.60	%		3.67	%		3.58	%
Adjustments for purchase accounting:
Loans and leases		(0.20	)%		(0.17	)%		(0.02	)%		(0.02	)%		(0.02	)%
Deposits		(0.05	)%		(0.11	)%		(0.03	)%		0.00	%		0.00	%
Borrowings		(0.01	)%		(0.04	)%		(0.01	)%		(0.01	)%		(0.01	)%
Net Interest Margin (excluding purchase accounting)		3.53	%		3.69	%		3.54	%		3.64	%		3.55	%

Net interest margin (excluding purchase accounting) is a non-GAAP based financial measure using non-GAAP based amounts. The most directly comparable GAAP based measure is net interest margin. In order to calculate net interest margin (excluding purchase accounting) we subtract the effects of amortizing/accreting purchase accounting valuation amounts from net interest income, and divide the remainder by average earning assets. Our management uses net interest margin (excluding purchase accounting) to measure and monitor the impact of the current economic environment on our net interest income and believes that this measure is more representative of our ongoing earnings power because it excludes the effect of valuation variables used to arrive at the acquisition fair value recorded on the acquisition date. We believe this non-GAAP measure, when taken together with the corresponding GAAP measure, provides meaningful supplemental information to investors regarding our performance. However, this non-GAAP measure should be considered in addition to, and not as a substitute for or preferable to, net interest margin prepared in accordance with GAAP.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following pages of this report present management’s discussion and analysis of the consolidated financial condition and results of operations of Susquehanna Bancshares, Inc.

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.

Critical Accounting Estimates

Susquehanna’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and conform to general practices within the banking industry. Application of these principles involves complex judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.

Our most significant accounting estimates are presented in“Note 1. Summary of Significant Accounting Policies” to the consolidated financial statements appearing in Part II,Item 8. Furthermore, we believe that the determination of the allowance for loan and lease losses, the evaluation of goodwill, the analysis of certain debt securities to measure other-than-temporary impairment exists, and the determination of the fair value of certain financial instruments to be the accounting areas that require the most subjective and complex judgments.

The allowance for loan and lease losses represents management’s estimate of probable incurred credit losses in the loan and lease portfolio as of the balance sheet date. Determining the amount of the allowance for loan and lease losses is considered a complex accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet. For additional information about our process for determining the allowance for loan and lease losses, referto“Results of Operations—Provision and Allowance for Loan and Lease Losses”below, and “Note 6. Allowance for Loan and Lease Losses” to the consolidated financial statements appearing in Part II,Item 8.

Goodwill is evaluated for impairment on an annual basis and more often if situations or the economic environment warrant it. In performing these evaluations, management makes estimates to determine the fair value of its reporting units. Such estimates include assumptions used in determining cash flows and evaluation of appropriate market multiples. For additional information about goodwill, refer to“Note 8. Goodwill and Other Intangibles” to the consolidated financial statements appearing in Part II,Item 8.

Certain debt securities that are in unrealized loss positions are analyzed to determine if they are other-than- temporarily impaired. This analysis consists of calculating expected cash flows, taking into consideration credit default and severity rates, prepayments, deferrals, waterfall structure, covenants relating to the securities, and appropriate discount rates. Furthermore, if a security is found to be other-than-temporarily impaired, additional analysis is required to determine the portion of the loss attributable to credit quality. For additional information about other-than-temporary impairment of debt securities, refer to“Note 4. Investment Securities” to the consolidated financial statements appearing in Part II,Item 8.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dates. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As defined in U.S. GAAP, 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 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. For additional information about our financial assets and financial liabilities carried at fair value, refer to“Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II,Item 8.

Any material effect on the consolidated financial statements related to these complex accounting areas is also discussed in this Annual Report on Form 10-K.

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Recent Regulatory Developments

In July 2013, the Federal Reserve Board, Office of the Comptroller of the Currency, and FDIC approved final rules to implement the Basel III capital framework. The rules will be effective on January 1, 2014 and phased-in over a multiple year period becoming fully effective on January 1, 2019. The new capital rules call for higher quality capital with higher minimum capital level requirements. Consistent with the international Basel framework, the rules include a new minimum ratio of common equity tier I capital to risk-weighted assets of 4.5 percent, and a common equity tier I capital conservation buffer of 2.5 percent of risk-weighted assets. The rules also raise the minimum ratio of tier I capital to risk-weighted assets from 4.0 percent to 6.0 percent, and include a minimum leverage ratio of 4.0 percent. Management has evaluated these new rules and believes that Susquehanna, and Susquehanna Bank, would have had sufficient capital to meet the increased requirement at December 31, 2013.

Other Recent Developments

During the fourth quarter of 2013, Susquehanna completed a branch consolidation plan in which 14 branch locations were merged into other Susquehanna branches. The total expense incurred, and recognized in the fourth quarter, in connection with the consolidation process was $6.6 million, with $2.7 million incurred to shorten the useful life of premises and equipment, and $3.9 million incurred for contract termination and other related costs.

On December 23, 2013, Susquehanna sold a portfolio of 30 of its owned branch bank properties, and simultaneously entered into lease agreements of either 15 years or 26 years, for each property sold with the buyer of the properties. The sale of the properties resulted in an aggregate pretax gain of approximately $38.2 million, net of transaction expenses of $2.8 million. Of the total gain, approximately $33.3 million was recorded as deferred revenue and will be recognized over the terms of the leases. The remaining pretax gain of $4.9 million was recognized in Susquehanna’s consolidated financial statements for the period ended December 31, 2013. The monthly base rents in the lease agreements will be recognized as expense evenly over the lease terms at an annual average rate of $1.8 million for the 15 year leases and $2.5 million for the 26 year leases. Susquehanna anticipates that these monthly base rents, as noted, will be substantially offset by the deferred gain on the sale of the properties and the elimination of depreciation on the properties. Additionally, the transaction allowed Susquehanna to realize $4.0 million of deferred tax assets, which were previously subject to a valuation allowance. The proceeds from the transaction will be used for general corporate purposes, including supporting lending and investing activities, and repayment of short-term borrowings.

Executive Overview

Consolidated net income available to common shareholders was $173.7 million for 2013, or $0.93 basic earnings per share and diluted earnings per share of $0.92. Return on average assets was 0.95% compared to 0.81% in 2012. The non-GAAP ratio of return on average tangible equity was 13.57% compared to 12.03% in 2012. For additional information on non-GAAP ratios, refer to “Table 4, Reconciliation of Non-GAAP Measures”.

The following table compares our 2013 financial targets to actual results.

Table 5

Key Susquehanna Financial Targets and Results

	2013
	Target			Actual
Net interest margin (FTE)		3.90	%		3.79	%
Loan growth		5.0	%		5.3	%
Deposit growth		6.0	%		2.3	%
Noninterest income growth		8.0	%		10.2	%
Noninterest expense growth		(2.0	)%		0.2	%
Effective tax rate		32.0	%		29.9	%

During 2013, we continued to execute a strategy to strengthen our focus on building enduring relationships with customers. This strategy is designed to enhance our earnings power make us a more attractive franchise, and position us to more effectively compete with other regional financial holding companies in our footprint.

Loan originations during 2013 totaled over $4 billion, with strong growth in the consumer and leasing portfolios, as well as increases in commercial and real estate secured lending. This loan growth was complemented by better credit metrics. Our net charge-offs to average loans and leases ratio improved from 0.55% in 2012 to 0.44% in 2013. Additionally, our non-performing assets ratio declined from 0.96% in 2012 to 0.86% in 2013. The improvement of our credit quality allowed us to reduce our provision for loan and lease losses from $64 million in 2012 to $31 million in 2013.

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Deposits grew by 2.3% during 2013, with core deposits increasing 2.4%. We introduced the Stellar Checking with Smart Rewards product, which generated approximately 28,000 new accounts, and provides cash rewards to customers for everyday activities like using a debit card or paying bills online. We also strategically exited relationships with certain higher-priced non-relationship accounts. We expect to continue to focus on increased deposit growth.

Noninterest income increased by 10.2%. In addition to the $4.9 million gain from the sale leaseback transaction in December 2013, the major contributors to this increase were our capital markets and wealth management groups, whose revenues increased by 8% or greater. In addition, our mortgage division had a record origination year, and is selling more than 50% of the originations to investors. We also elected to retain the servicing on the sold loans, thus providing us the opportunity to communicate with and cross-sell to these customers.

Noninterest expenses, excluding certain non-recurring items, increased 3.7%. As noted earlier, we executed a branch consolidation plan to create greater efficiency in our branch network and to reduce overall occupancy costs in the future. In addition, we continue to make investments in technology to enhance the experience of our customers, develop regulatory mandated stress testing, and enhance enterprise risk management to create a foundation for future growth.

At December 31, 2013, all of Susquehanna’s risk-based capital ratios exceeded the regulatory requirements for well-capitalized institutions.

Results of Operations

Table 6

Summary of 2013 Compared to 2012

	Years Ended December 31,
	2013		2012		% Change
	(Dollars in thousands)
Net income	$	173,679	$	141,172		23.0	%
Net interest income		585,940		591,238		(0.9	)
Provision for loan and lease losses		31,000		64,000		(51.6	)
Non-interest income		183,729		166,759		10.2
Non-interest expense		490,840		490,017		0.2
Non-interest expense excluding merger-related expenses, branch consolidation costs, and loss on extinguishment of debt		484,237		466,806		3.7

Table 7

Key Susquehanna Financial Measures

	Twelve Months Ended
	December 31,
	2013			2012
Diluted Earnings per Common Share	$	0.92		$	0.77
Return on Average Assets		0.95	%		0.81	%
Return on Average Shareholders’ Equity		6.56	%		5.62	%
Return on Average Tangible Shareholders’ Equity(1)		13.57	%		12.03	%
Efficiency Ratio(1)		62.55	%		60.37	%
Net Interest Margin		3.79	%		4.01	%

⁽¹⁾  For information regarding Supplemental Reporting of Non-GAAP-based Financial Measurements, refer to Table 4 - Reconciliation of Non-GAAP Measures.

Net Interest Income - Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets.

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

Table 8 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. Table 9 illustrates the changes in net interest income caused by changes in average volume, rates, and yields.

2013 compared to 2012

Net interest income on a fully taxable-equivalent basis totaled $600.9 million in 2013 compared to $606.5 million in 2012, a 0.9%, or $5.6 million decline. The decline in net interest income was driven by the decrease in interest earned on earning assets exceeding the decrease in interest paid on rate related liabilities.

The net interest margin for 2013 was 3.79%, a 22 basis point decline from 4.01% in 2012. The decline in the net interest margin results primarily from the runoff of higher yielding earning assets, replaced by lower yields on loans, and partially offset by lower funding costs of deposits and borrowings. Net interest margin (excluding purchase accounting), which eliminates the effect of purchase accounting amounts, declined 16 basis points from 3.69% in 2012 to 3.53% in 2013. For additional information related to our net interest margin (excluding purchase accounting), refer to “Table 4, Reconciliation of Non-GAAP Measures”.

Interest income on a fully-taxable basis declined by $22.5 million, or 3.1%. Interest earned on the investment portfolio decreased $8.1 million, or 10.6%, as management strategically elected to reinvest cash flows from the investment portfolio into higher yielding loans and leases. The average balance of the investment portfolio declined $130.3 million, or 4.8%. The fully taxable-equivalent yield on the investment securities portfolio declined 17 basis points from 2.81% in 2012 to 2.64% in 2013 as higher yielding investments were either called or paid down. Interest earned, on a fully taxable-equivalent basis, on loans and leases declined $14.4 million, or 2.2%. Average loans and leases totaled $13.2 billion in 2013, compared to $12.3 billion in 2012; however the growth in loans and leases balances were offset by the decline in yield earned, which decreased 45 basis points from 5.27% in 2012 to 4.82% in 2013, as the primary driver of the balance growth was in lower yielding consumer lending and leases.

Interest expense declined by $17.0 million, or 14.2%. Interest paid on deposits declined $8.5 million, or 12.3%, even as the average balance increased by $0.5 billion. The average rate paid on deposits declined 9 basis points from 0.56% to 0.47% in 2013. This improvement is the result of a 9 basis point decrease in rates paid on interest-bearing demand and savings deposits, and a 9 basis point reduction in rates paid on time deposits. Interest paid on short-term borrowings and Federal Home Loan Bank borrowings (primarily short-term) increased $2.6 million due primarily to the 2013 average balance increasing $181.8 million. The average rate paid on these borrowings increased 2 basis points to 1.26% from 1.24% in 2012. Long-term debt interest declined $11.1 million resulting from the net redemption of $137.1 million of long-term debt with interest rates ranging from 6.05% to 11.00%, in 2012.

2012 compared to 2011

Net interest income on a fully taxable-equivalent basis totaled $606.5 million in 2012 compared to $447.8 million in 2011, a 33.5% increase. The increase in net interest income was driven by the higher volumes of earning assets and rate-related liabilities resulting from the Tower and Abington acquisitions in February 2012 and October 2011, respectively.

The net interest margin for 2012 was 4.01%, a 41 basis point increase from 2011’s 3.60%. The increase in the net interest margin results primarily from the 2012 $2.7 billion increase in average interest-earning assets compared to 2011, having a greater impact than the $2.2 billion increase in average interest-bearing liabilities. Net interest margin (excluding purchase accounting), which eliminates the effect of purchase accounting amounts, increased 15 basis points to 3.69% in 2012 from 3.54% in 2011. For additional information related to our net interest margin (excluding purchase accounting), refer to “Table 4, Reconciliation of Non-GAAP Measures”.

Interest income on a fully-taxable basis increased by $116.5 million, or 19.1%. Interest earned on the investment portfolio decreased $10.0 million, or 11.6%, resulting from lower rates earned on the reinvestment of cash flows from securities that were called or paid down during 2012. The average balance of the investment portfolio increased $178.0 million, or 7.0% due to the Abington and Tower acquisitions. The fully taxable-equivalent yield on the investment securities portfolio declined 60 basis points from 3.41% in 2011 to 2.81% in 2012. Interest earned, on a fully taxable-equivalent basis, on loans and leases increased $126.5 million, or 24.2%. Average loans and leases average balances totaled $12.3 billion in 2012, compared to $9.8 billion in 2011, however the growth in loans and leases balances were offset by the decline in yield earned which decreased 7 basis points from 5.34% in 2011 to 5.27% in 2012, as the primary driver of the balance growth was in lower yielding consumer lending and leases.

Interest expense declined by $42.2 million, or 26.1%. Interest paid on deposits dropped $7.8 million, or 10.2%, even as the average interest-bearing balances increased by $0.5 billion. The average rate paid on deposits declined 24 basis points from 0.80% to 0.56% in 2012. This improvement is the result of changes in deposit mix. Interest paid on short-term borrowings and Federal Home Loan Bank borrowings (primarily short-term) decreased $27.7 million due to the restructuring in 2011 of the FHLB borrowings.

33

Average balances in this category increase $26.9 million in 2012, while the average rate paid declined 157 basis points from 2.81% in 2011, to 1.24% in 2012. Long-term debt interest declined $6.7 million resulting from the net redemption of $137.1 million of long-term debt with interest rates ranging from 6.05% to 11.00% in the later part of 2012.

Variances do occur in the net interest margin, as an exact repricing of assets and liabilities is not feasible. A further explanation of the impact of asset and liability repricing is found in the section entitled“Market Risks—Interest Rate Risk.”

Table 8

Distribution of Assets, Liabilities and Shareholders’ Equity

	2013								2012								2011
				Taxable Equivalent								Taxable Equivalent								Taxable Equivalent
	Average Balance			Interest			Rate (%)		Average Balance			Interest			Rate (%)		Average Balance			Interest			Rate (%)
	(Dollars in thousands)
Assets
Short-term investments	$	96,825		$	108			0.11	$	108,408		$	144			0.13	$	98,424		$	108			0.11
Investment securities:
Taxable		2,182,121			46,248			2.12		2,320,582			53,659			2.31		2,129,908			61,845			2.90
Tax-advantaged		395,086			21,835			5.53		386,926			22,518			5.82		399,554			24,355			6.10
Total investment securities		2,577,207			68,083			2.64		2,707,508			76,177			2.81		2,529,462			86,200			3.41
Loans and leases, (net):
Taxable		12,772,845			614,158			4.81		11,934,701			628,426			5.27		9,492,521			505,607			5.33
Tax-advantaged		416,654			21,038			5.05		386,627			21,175			5.48		311,342			17,503			5.62
Total loans and leases		13,189,499			635,196			4.82		12,321,328			649,601			5.27		9,803,863			523,110			5.34
Total interest-earning assets		15,863,531			703,387			4.43		15,137,244			725,922			4.80		12,431,749			609,418			4.90
Allowance for loan and lease losses		(176,782	)							(189,368	)							(194,746	)
Other noninterest-earning assets		2,514,410								2,583,421								2,125,775
Total assets	$	18,201,159							$	17,531,297							$	14,362,778
Liabilities
Deposits:
Interest-bearing demand	$	5,968,726		$	16,661			0.28	$	5,453,701		$	20,603			0.38	$	3,884,182		$	21,323			0.55
Savings		1,070,248			1,144			0.11		989,123			1,208			0.12		815,066			1,161			0.14
Time		3,833,262			42,713			1.11		3,939,528			47,168			1.20		3,482,801			54,294			1.56
Short-term borrowings		743,718			8,695			1.17		732,209			8,711			1.19		658,477			8,133			1.24
FHLB borrowings		1,247,209			16,329			1.31		1,076,962			13,723			1.27		1,123,801			42,024			3.74
Long-term debt		483,888			16,900			3.49		662,027			27,979			4.23		684,065			34,683			5.07
Total interest-bearing liabilities		13,347,051			102,442			0.77		12,853,550			119,392			0.93		10,648,392			161,618			1.52
Demand deposits		1,905,502								1,873,755								1,413,077
Other liabilities		302,267								292,388								245,592
Total liabilities		15,554,820								15,019,693								12,307,061
Equity		2,646,339								2,511,604								2,055,717
Total liabilities & shareholders’ equity	$	18,201,159							$	17,531,297							$	14,362,778
Net interest income / yield on average earning assets					600,945			3.79					606,530			4.01					447,800			3.60
Taxable equivalent adjustment					(15,005	)							(15,292	)							(14,650	)
Net interest income - as reported				$	585,940							$	591,238							$	433,150

Additional Information

Average loan balances include non-accrual loans.

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

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

34

Table 9

Changes in Net Interest Income - Tax Equivalent Basis

	2013 versus 2012 Increase (Decrease) Due to Change in									2012 versus 2011 Increase (Decrease) Due to Change in
	Average Volume			Average Rate			Total			Average Volume			Average Rate			Total
	(Dollars in thousands)
Interest Income
Other short-term investments	$	(14	)	$	(22	)	$	(36	)	$	12		$	23		$	35
Investment securities:
Taxable		(3,091	)		(4,320	)		(7,411	)		5,192			(13,378	)		(8,186	)
Tax-advantaged		468			(1,151	)		(683	)		(756	)		(1,081	)		(1,837	)
Total investment securities		(2,623	)		(5,471	)		(8,094	)		4,436			(14,459	)		(10,023	)
Loans (net of unearned income):
Taxable		42,420			(56,688	)		(14,268	)		128,657			(5,838	)		122,819
Tax-advantaged		1,581			(1,718	)		(137	)		4,133			(461	)		3,672
Total loans		44,001			(58,406	)		(14,405	)		132,790			(6,299	)		126,491
Total interest-earning assets	$	41,364		$	(63,899	)	$	(22,535	)	$	137,238		$	(20,735	)	$	116,503
Interest Expense
Deposits:
Interest-bearing demand	$	1,811		$	(5,753	)	$	(3,942	)	$	7,099		$	(7,819	)	$	(720	)
Savings		94			(158	)		(64	)		227			(180	)		47
Time		(1,247	)		(3,208	)		(4,455	)		6,523			(13,649	)		(7,126	)
Short-term borrowings		136			(152	)		(16	)		885			(307	)		578
FHLB borrowings		2,220			386			2,606			(1,683	)		(26,618	)		(28,301	)
Long-term debt		(6,735	)		(4,344	)		(11,079	)		(1,087	)		(5,617	)		(6,704	)
Total interest-bearing liabilities		(3,721	)		(13,229	)		(16,950	)		11,964			(54,190	)		(42,226	)
Net Interest Income	$	45,085		$	(50,670	)	$	(5,585	)	$	125,274		$	33,455		$	158,729

Additional Information

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.

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

2013 compared to 2012

Susquehanna recorded a provision for loan and lease losses of $31.0 million in 2013, a decrease of $33.0 million, or 51.6%, compared to 2012. The decrease in the provision for loan and lease losses was primarily due to improving credit quality as shown by credit metrics, as net charge-offs in 2013 were 0.44% of total average loans and leases, compared to 0.55% of total average loans and leases in 2012. The ratio of non-performing assets to loans and leases plus foreclosed real estate was 0.86% at December 31, 2013 compared to 0.96% at December 31, 2012.

2012 compared to 2011

Susquehanna recorded a provision for loan and lease losses of $64.0 million in 2012, a decrease of $46.0 million, or 41.8%, compared to 2011. The decrease in the provision for loan and lease losses was primarily due to the improved credit quality of our commercial real estate and construction portfolios, as net charge-offs in 2012 for these portfolios combined was $27.3 million, a decline of $21.9 million, or 44.5%, from the prior year’s total of $49.2 million. The ratio net charge-offs to total average loans and leases was 0.55%, compared to 1.16% of total average loans and leases in 2011. The ratio of non-performing assets to loans and leases plus foreclosed real estate was 0.96% at December 31, 2012 compared to 1.88% at December 31, 2011.

35

For additional information on our accounting policy for our allowance for loan and lease losses, refer to“Note 1. Summary of Significant Accounting Policies” to the consolidated financial statements appearing in Part II,Item 8.

Table 10

Provision and Allowance for Loan and Lease Losses

	2013			2012			2011			2010			2009
	(Dollars in thousands)
Allowance for loan and lease losses, January 1	$	184,020		$	188,100		$	191,834		$	172,368		$	113,749
Additions to provision for loan and lease losses charged to operations		31,000			64,000			110,000			163,000			188,000
Loans and leases charged-off during the year:
Commercial, financial, and agricultural		(28,717	)		(22,758	)		(25,552	)		(22,604	)		(33,887	)
Real estate - construction		(14,831	)		(17,598	)		(36,585	)		(65,709	)		(65,906	)
Real estate secured - residential		(13,606	)		(14,343	)		(18,663	)		(18,562	)		(7,441	)
Real estate secured - commercial		(23,210	)		(27,509	)		(45,213	)		(43,086	)		(20,593	)
Consumer		(3,082	)		(3,364	)		(3,922	)		(3,464	)		(3,641	)
Leases		(4,164	)		(4,463	)		(5,310	)		(8,710	)		(11,873	)
Total charge-offs		(87,610	)		(90,035	)		(135,245	)		(162,135	)		(143,341	)
Recoveries of loans and leases previously charged-off:
Commercial, financial, and agricultural		8,636			9,515			5,835			4,478			4,779
Real estate - construction		7,893			3,561			7,106			6,974			1,306
Real estate secured - residential		2,990			1,930			1,916			923			286
Real estate secured - commercial		7,503			4,610			3,795			3,744			5,685
Consumer		1,241			1,228			1,371			1,254			1,120
Leases		1,935			1,111			1,488			1,228			784
Total recoveries		30,198			21,955			21,511			18,601			13,960
Net charge-offs		(57,412	)		(68,080	)		(113,734	)		(143,534	)		(129,381	)
Allowance for loan and lease losses, December 31	$	157,608		$	184,020		$	188,100		$	191,834		$	172,368
Average loans and leases outstanding	$	13,189,499		$	12,321,328		$	9,803,863		$	9,799,673		$	9,809,873
Period-end loans and leases		13,576,086			12,894,741			10,447,930			9,633,197			9,827,279
Net charge-offs as a percentage of average loans and leases		0.44	%		0.55	%		1.16	%		1.46	%		1.32	%
Allowance as a percentage of period-end loans and leases		1.16	%		1.43	%		1.80	%		1.99	%		1.75	%

In management’s opinion, the allowance for loan and lease losses is appropriate to meet probable incurred loan and lease losses at December 31, 2013. There can be no assurance, however, that we will not sustain losses in future periods that could be greater than the size of the allowance at December 31, 2013. The allowance for loan and lease losses as a percentage of non-accrual loans and leases (coverage ratio) decreased to 156% at December 31, 2013, from 188% at December 31, 2012. Loans acquired through the Abington and Tower transactions were acquired at their fair value on the acquisition date, with both specific and general credit write-downs taken. This method allows for loan and lease balances to increase on Susquehanna’s balance sheet without recording an additional allowance for loan and lease losses. The coverage ratio, excluding acquired loans, was 192% at December 31, 2013, compared to 202% at December 31, 2012. For more information on our accounting policy for purchased loans, refer to“Note 1. Summary of Significant Accounting Policies” to the consolidated financial statements appearing in Part II,Item 8.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the level of the allowance for loan and lease losses and may require additions to the allowance based upon their judgments about information available to them at the time of examination.

36

Noninterest Income

Noninterest income represents a significant portion of our revenue. Noninterest income includes service charges on deposit accounts, vehicle origination and servicing fees, wealth management commissions and fees, insurance income, mortgage banking income, gains and losses on securities transactions, and commissions and fees from other business activities. Management is continually evaluating additional opportunities for revenue to augment the traditional spread-based interest income. The following table presents a breakdown of our noninterest income.

Table 11

Noninterest Income

								% Change
								2013 vs. 2012			2012 vs. 2011
	Years Ended December 31,
	2013			2012		2011
	(Dollars in thousands)
Service charges on deposit accounts	$	36,989		$	34,428	$	31,728		7.4	%		8.5	%
Vehicle origination and servicing fees		11,725			10,366		7,862		13.1			31.8
Wealth management commissions and fees		51,333			47,705		43,688		7.6			9.2
Commissions on property and casualty insurance sales		16,797			15,894		14,047		5.7			13.1
Other commissions and fees		24,776			21,510		23,728		15.2			(9.3	)
Income from bank-owned life insurance		6,013			6,471		4,931		(7.1	)		31.2
Mortgage banking revenue		12,828			17,805		9,292		(28.0	)		91.6
Net realized (loss) gain on sales of securities		(1,394	)		1,433		514		(197.3	)		178.8
Other		19,717			11,147		7,735		76.9			44.1
		178,784			166,759		143,525		7.2			16.2
Realized gain on sale of branch properties		4,945			0		0		nm	(1)		nm	(1)
Net realized gain on acquisition		0			0		39,143		nm	(1)		nm	(1)
Total noninterest income	$	183,729		$	166,759	$	182,668		10.2			(8.7	)

⁽¹⁾  Not meaningful.

2013 compared to 2012

Noninterest income totaled $183.7 million in 2013 compared to $166.8 million in 2012. Noninterest income as a percentage of total revenue (net interest income plus noninterest income) was 24% in 2013 compared to 22% in 2012. Excluding the gain on sale of branch properties, noninterest income totaled $178.8 million in 2013, and represented 23% of total revenue.

Service charges on deposit accounts totaled $37.0 million, an increase of $2.6 million, or 7.4% compared to 2012. This increase represents recognizing a full year of service charges on deposit accounts acquired via the Tower merger, compared to ten and one-half months in 2012.

Vehicle origination and servicing fees were $11.7 million in 2013 compared to $10.4 million in 2012. Leasing volume at our Hann subsidiary increased 42.9%, from $343 million in 2012 to $490 million in 2013 due primarily to expanded territory coverage.

Wealth management commissions and fees increased $3.6 million, or 7.6%, to $51.3 million in 2013, compared to $47.7 million in 2012. Despite a slight increase in assets under management, the mix of managed assets migrated to areas of the fee-based business that are more profitable.

Other commissions and fees totaled $24.8 million, for a $3.3 million increase over 2012’s amount of $21.5 million. The main contributor to this increase was our expanded capital markets group, whose fee-based revenue from interest rate swaps increased $2.7 million, or 87.1% to $5.9 million. The other main contributor to the increase is debit card and interchange fees of $0.6 million, or 4.6% to $13.5 million, due to increased card usage.

Mortgage banking revenue decreased $5.0 million, or 28.0%, to $12.8 million in 2013. The decrease in the mortgage banking revenue was primarily due to a 25% reduction in premiums paid by investors due to industry wide margin compression in a rising interest rate environment. Also contributing to 2013’s decline was a 4.0%, or $22.2 million decrease in the volume of loans sold.

37

Other income increased $8.6 million, or 76.9%, to $19.7 million in 2013, compared to $11.1 million in 2012. Primary contributors to the 2013 increase were: $2.7 million increase in insurance death benefits; $1.6 million increase in debit/credit card incentives; $0.7 million increase in checkbook income; $0.6 million increase in gain on sale of SBA loans; and, $2.3 million increase in miscellaneous income. Partially offsetting these increases are decreased gains on sales of Other Real Estate Owned and other assets of $0.9 million.

During 2013, we realized $1.4 million of net losses on securities sales compared to $1.4 million of net gains in 2012. Included in 2013’s net loss is $1.3 million loss from the sale of non-agency residential mortgage-backed securities (“RMBS”). Also contributing to the loss was $0.5 million of other-than-temporary impairment charges, of which $0.4 million was realized during 2013 on the RMBS securities prior to being sold. Included in 2012’s net gain is a $2.1 million loss on RMBS for which other-than-temporary impairment had previously been recognized. Additionally, in 2012 we recognized $0.2 million of other-than-temporary impairment charges.

2012 compared to 2011

Noninterest income totaled $166.8 million in 2012 compared to $182.7 million in 2011. Excluding the bargain purchase gain of $39.1 million recognized on the Abington merger, 2011’s noninterest income was $143.5 million. Noninterest income as a percentage of total revenue (net interest income plus noninterest income) was 22% in 2012 compared to 30% in 2011. Excluding the bargain purchase gain 2011’s percentage of noninterest income to total revenue was 25%.

Service charges on deposit accounts totaled $34.4 million, an increase of $2.7 million over 2011. This increase is primarily the result of the Abington and Tower transactions.

Vehicle origination and servicing fees were $10.4 million in 2012 compared to $7.9 million in 2011. Leasing volume at our Hann subsidiary increased 83.4%, from $187 million in 2011 to $343 million in 2012 due to expanded territory coverage and leasing to customers who needed to replace cars damaged by hurricane Sandy.

Wealth management commissions and fees increased $4.0 million, or 9.2%, to $47.7 million in 2012, compared to $43.7 million in 2011. During 2012, assets under management increased $707 million, or 10.2%.

Commissions on property and casualty insurance sales increased $1.8 million to $15.9 million in 2012. The 13.1% increase primarily is the result of increased volume at our Addis subsidiary, as well as higher premium rates received from their carriers.

Other commissions and fees decreased $2.2 million, or 9.3%, to $21.5 million in 2012 compared to 2011. The decrease is primarily the result of reduced debit card fees of $5.9 million resulting from the Dodd-Frank Act regulatory changes, partially offset by an increase in other miscellaneous commissions and fees.

Mortgage banking revenue increased $8.5 million, or 91.6%, in 2012 to $17.8 million, compared to 2011’s $9.3 million. The increased revenue was generated by an additional $238.9 million of loans sold in 2012, plus a 25 basis point increase in premiums received from investors.

Other income increased $3.4 million, or 44.1%, to $11.1 million in 2012, compared to $7.7 million in 2011. Primary contributors to the increase were: $1.1 million increased gain on sale of various assets; $1.0 million increase in safe deposit box and real estate rental income; and $2.3 million increase in miscellaneous income. Partially offsetting these increases was a decreased gain on sale of Small Business Administration (“SBA”) loans of $1.0 million.

In 2012, we realized a net gain on sale of investment securities of $1.4 million compared to a net gain of $0.5 million in 2011. 2012’s net gain includes a $2.1 million loss on RMBS for which other-than-temporary impairment had previously been recognized. Additionally, recognized in 2012 is $0.2 million of other-than-temporary impairment charges. During 2011, Susquehanna recognized $3.3 million of other-than-temporary impairment.

38

Noninterest Expenses

The following table presents a breakdown of Susquehanna’s noninterest expense.

Table 12

Noninterest Expense

							% Change
							2013 vs. 2012			2012 vs. 2011
	Years Ended December 31,
	2013		2012		2011
	(Dollars in thousands)
Salaries and employee benefits	$	262,638	$	251,583	$	209,235		4.4	%		20.2	%
Occupancy		45,448		45,231		37,446		0.5			20.8
Furniture and equipment		14,851		15,725		12,596		(5.6	)		24.8
Professional and technology services		25,137		26,166		19,351		(3.9	)		35.2
Advertising and marketing		12,054		12,317		11,470		(2.1	)		7.4
FDIC insurance		19,878		20,486		16,602		(3.0	)		23.4
Legal fees		7,422		8,150		9,302		(8.9	)		(12.4	)
Amortization of intangible assets		11,626		12,525		8,705		(7.2	)		43.9
Vehicle lease disposal		5,012		6,342		10,584		(21.0	)		(40.1	)
Other		80,171		68,281		59,878		17.4			14.0
		484,237		466,806		395,169		3.7			18.1
Branch consolidation costs		6,603		0		0		nm	(1)		nm	(1)
Merger related		0		17,351		14,991		nm	(1)		15.7
Loss on extinguishment of debt		0		5,860		50,020		nm	(1)		(88.3	)
Total noninterest expenses	$	490,840	$	490,017	$	460,180		0.2			6.5

⁽¹⁾  not meaningful.

2013 compared to 2012

Total noninterest expenses for the year ended December 31, 2013 were $490.8 million, an increase of $0.8 million, or 0.2%, from the year ended December 31, 2012 when total noninterest expenses were $490.0 million. Excluding the branch consolidation costs incurred in 2013, and the merger related and loss on extinguishment of debt costs in 2012, total noninterest expenses increased 3.7%, or $17.4 million, in 2013 compared to 2012.

Salaries and benefits are our largest single noninterest expense and include salaries, wages, commissions, stock-based compensation, incentives, pension and other employee benefit costs. Total salaries and benefits expense increased $11.1 million, or 4.4% over 2012. This increase is due to a full year of salaries and benefits for personnel acquired in the Tower acquisition, and normal salary increases, partially offset by lower sales commissions, and other performance incentives.

Vehicle lease disposal expenses declined by $1.3 million, or 21.0%, to $5.0 million in 2013. This decrease is the result of fewer vehicles coming off lease because more customers are buying the cars rather than turning them in for liquidation.

Other expenses in 2013 increased 17.4%, or $11.9 million. Contributing to this growth were increased employee welfare and education costs of $2.0 million, software costs related to technology initiatives of $1.8 million, operating risk losses of $1.7 million, and increased charitable donations of $1.2 million.

The remaining noninterest expenses decreased $4.2 million, or 3.0% compared to 2012. Refer to Table 12 for detail of fluctuations in other categories of noninterest expense.

2012 compared to 2011

Total noninterest expenses for the year ended December 31, 2012 were $490.0 million, an increase of $29.8 million, or 6.5%, from the year ended December 31, 2011 when total noninterest expenses were $460.2 million. Excluding the merger related and loss on extinguishment of debt costs in both years, total noninterest expenses increased 18.1%, or $71.6 million, in 2012 compared to 2011.

39

Salaries and benefits increased $42.3 million, or 20.2% in 2012 compared to 2011. This increase is primarily the result of an additional 447 employees acquired through the Abington and Tower transactions, and increased commission compensation, incentive bonus, and annual merit increases.

Occupancy expense increased 20.8%, or $7.8 million in 2012, primarily the result of additional rent expense due to offices acquired through the Abington and Tower transactions, and increased general maintenance costs.

Furniture and equipment expenses increased $3.1 million, or 24.8%, resulting from additional depreciation expense due to the Abington and Tower transactions, and increased general maintenance costs.

FDIC insurance costs increased $3.9 million, or 23.4%. The primary reason for the increase is the increase in the assessment base due to the assets acquired through the Abington and Tower transactions.

Amortization of intangible assets expense increased $3.8 million, or 43.9% in 2012, resulting from the amortization of additional intangibles recorded through the Abington and Tower transactions.

Vehicle lease disposal expenses declined by $4.2 million, or 40.1% primarily due to lower residual value expense and fewer cars returned to our Hann subsidiary after the maturity of the lease because more customers are buying the cars rather than turning them in.

Other noninterest expenses increased $8.4 million, or 14.0% as a result of increased expenses relating to: insurance - $3.2 million; consulting - $2.1 million; foreclosure, repossession and other real estate owned - $1.5 million; telephone and data communications expenses - $0.8 million; and, other operating expenses related to the Abington and Tower transactions.

Income Taxes

2013 compared to 2012

Our effective tax rates for 2013 and 2012 were 29.9% and 30.8%, respectively. The decrease in our rate in 2013 was primarily due to the release of a valuation allowance on a deferred tax asset, in the amount of $4.0 million. The completion of a branch sale leaseback transaction in December 2013 enabled us to realize the deferred tax asset.

2012 compared to 2011

Our effective tax rates for 2012 and 2011 were 30.8% and (20.3%), respectively.

The increase in our rate in 2012 was primarily due to the effect of the non-taxable bargain purchase accounting from the Abington acquisition, occurring in 2011. With the exception of the bargain purchase accounting, items impacting the effective tax rate in 2012, including tax-advantaged investment and loan income, were comparable to 2011.

For additional information about our income taxes, refer to“Note 12. Income Taxes” to the consolidated financial statements appearing in Part II,Item 8.

Financial Condition

Table 13

Summary of 2013 Compared to 2012

	At December 31,
	2013		2012		% Change
	(Dollars in thousands, except per share)
Total assets	$	18,473,489	$	18,037,667		2.4
Investment securities available for sale		2,375,224		2,577,901		(7.9	)
Loans and leases		13,576,086		12,894,741		5.3
Deposits		12,869,372		12,580,046		2.3
Shareholders’ equity		2,717,587		2,595,909		4.7
Book value per common share		14.50		13.92		4.2
Tangible book value per common share		7.52		6.88		9.3

40

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

At December 31, 2013, 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. In addition, non-financial assets and non-financial liabilities have not been measured at fair value because we have made the determination that the impact on our financial statements would be minimal. For additional information about our financial assets and financial liabilities carried at fair value, refer to“Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II,Item 8.

Investment Securities

Our investment activities are governed by the Corporate Investment Committee (“CIC”) utilizing a Board of Directors approved policy. The CIC meets regularly to review the economic environment and establish investment strategies based on the interest rate environment, balance sheet mix, anticipated loan demand, funding opportunities, and our overall interest rate sensitivity. The investment portfolio is managed to attain the goals of: (1) providing sufficient liquid assets to meet unexpected loan demand or deposit fluctuations and overall funds management objectives; (2) providing eligible securities to pledge to secure deposits and borrowings; and, (3) earning the maximum yield attainable on the portfolio while meeting objectives 1 and 2.

Our procedures for evaluating investments in securities under our investment policy is done based on the guidance issued by the Federal Reserve for investing in securities without reliance on nationally recognized statistical rating agencies. We consider credit ratings in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

Available-for-sale securities decreased $202.7 million, or 7.9%, at December 31, 2013 compared to December 31, 2012. In 2013, the CIC made a strategic decision to not reinvest the cash flows back into the securities portfolio due to the low yields available, but to use the cash flows to fund higher yielding loans and leases. This decrease follows the 2012 increase from 2011 in the investment portfolio due to the Tower acquisition. Excluding portfolios acquired in the Tower acquisition, the investment portfolio increased by $145.6 million, or 6.3%.

Table 14 details the composition of Susquehanna’s available-for-sale securities portfolio for the years presented, and Table 15 presents the maturities and yields of the portfolio at December 31, 2013 and December 31, 2012. We had no single concentration in a state or municipal bond greater than 10% of shareholders’ equity at December 31, 2013 or 2012.

Table 14

Fair Value of Investment Securities

	Available-for-sale
At December 31,	2013		2012		2011
	(Dollars in thousands)
U.S. Government agencies	$	110,148	$	114,408	$	148,485
State and municipal		398,510		435,777		401,979
Mortgage-backed
Agency residential mortgage-backed		1,778,192		1,880,562		1,531,405
Non-agency residential mortgage-backed		565		27,450		69,071
Commercial mortgage-backed		8,734		40,380		56,819
Other debt obligations
Other structured financial products		11,297		9,550		13,293
Other debt securities		44,086		45,255		51,135
Other equity securities		23,692		24,519		22,847
Total investment securities	$	2,375,224	$	2,577,901	$	2,295,034

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Table 15

Maturities of Investment Securities

At December 31, 2013	Within 1 Year			After 1 Year but Within 5 Years			After 5 Years but Within 10 Years			After 10 Years			Total
	(Dollars in thousands)
Available-for-Sale
U.S. Government agencies
Fair value	$	1,532		$	104,828		$	3,788		$	0		$	110,148
Amortized cost		1,523			104,704			4,000			0			110,227
Yield		3.25	%		1.54	%		1.56	%		0.00	%		1.56	%
State and municipal securities
Fair value	$	7,213		$	16,189		$	113,234		$	261,874		$	398,510
Amortized cost		7,101			15,618			113,373			253,107			389,199
Yield		3.75	%		4.29	%		4.38	%		4.59	%		4.50	%
Agency residential mortgage-backed securities
Fair value	$	260		$	0		$	829,697		$	948,235		$	1,778,192
Amortized cost		246			0			828,230			957,657			1,786,133
Yield		4.00	%		0.00	%		2.95	%		2.93	%		2.94	%
Non-agency residential mortgage-backed securities
Fair value	$	0		$	0		$	35		$	530		$	565
Amortized cost		0			0			34			538			572
Yield		0.00	%		0.00	%		2.53	%		5.61	%		5.43	%
Commercial mortgage-backed securities
Fair value	$	0		$	3,858		$	0		$	4,876		$	8,734
Amortized cost		0			3,858			0			4,709			8,567
Yield		0.00	%		5.65	%		0.00	%		5.33	%		5.48	%
Other structured financial products
Fair value	$	0		$	0		$	0		$	11,297		$	11,297
Amortized cost		0			0			0			25,038			25,038
Yield		0.00	%		0.00	%		0.00	%		0.93	%		0.93	%
Other debt securities
Fair value	$	0		$	5,216		$	0		$	38,870		$	44,086
Amortized cost		0			4,996			0			38,160			43,156
Yield		0.00	%		2.70	%		0.00	%		5.21	%		4.92	%
Equity securities
Fair value	$	0		$	0		$	0		$	23,692		$	23,692
Amortized cost		0			0			0			24,318			24,318
Yield		0.00	%		0.00	%		0.00	%		0.02	%		0.02	%
Total Securities at December 31, 2013
Fair value	$	9,005		$	130,091		$	946,754		$	1,289,374		$	2,375,224
Amortized cost		8,870			129,176			945,637			1,303,527			2,387,210
Yield		3.67	%		2.04	%		3.12	%		3.23	%		3.12	%
Total Securities at December 31, 2012
Fair value	$	8,781		$	143,713		$	952,679		$	1,448,209		$	2,577,901
Amortized cost		8,690			141,362			935,795			1,410,880			2,520,824
Yield		4.21	%		2.22	%		2.00	%		3.23	%		2.72	%

Additional Information

• Weighted-average yields are based on amortized cost. For presentation in this table, yields on tax-exempt securities have been calculated on a tax-equivalent basis.

• Information presented in this table regarding mortgage-backed securities is based on final contractual maturities. For additional information about our investment securities portfolio, refer to“Note 4. Investment Securities” and “Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

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Loans and Leases

To build enduring customer relationships, management believes that it must offer loan products that help consumers achieve their financial goals, while being profitable to Susquehanna. Our lending process incorporates an in-depth knowledge of the markets we serve, an understanding of the needs and goals of borrowers, and use of prudent conservative underwriting standards.

During 2013, we experienced a modest increase in lending activity. As a result loans and leases, net of unearned income, increased $681.3 million, or 5.3%, from $12.9 billion at December 31, 2012, to $13.6 billion at December 31, 2013. This increase follows 2012’s increase in loans and leases (excluding the loans acquired in the Tower transaction) of 4.5%. Commercial, financial, and agricultural loans increased $121.2 million in 2013, compared to $265.6 million (excluding Tower) in 2012. Real estate construction loans, which we consider to be higher-risk loans, decreased by $111.9 million in 2013 compared to a $190.9 million decline (excluding Tower) in 2012. For additional information about our real estate construction portfolio, refer to the discussion under“- Risk Assets” presented below.Consumer loans increased by $110.4 million in 2013 compared to $105.2 million (excluding Tower) in 2012. Loans secured by commercial real estate increased by $104.2 million in 2013 compared to 2012’s decline of $27.3 million (excluding Tower). During 2013, loans secured by residential real estate increased by $138.6 million compared to 2012’s growth of $94.5 million (excluding Tower), and leasing assets increased by $318.7 million in 2013, following $224.5 million in growth in 2012. These increases in leasing assets results from our expanded territories for leasing activities, and the need for customers to replace vehicles damaged by Hurricane Sandy.

Table 16 presents loans outstanding, by type of loan, in our portfolio for the past five years. Our bank subsidiary historically has reported a significant amount of loans secured by real estate. Many of these loans have real estate collateral taken as additional security not related to the acquisition of the real estate pledged. Open-ended home equity loans totaled $1.5 billion at December 31, 2013. Senior liens on 1-4 family residential properties totaled $2.2 billion at December 31, 2013, and much of the $3.8 billion in loans secured by non-farm, non-residential properties represented collateralization of operating lines of credit or term loans that finance equipment, inventory, or receivables. Loans secured by farmland totaled $269.0 million, while loans secured by multi-family residential properties totaled $343.0 million at December 31, 2013.

There were no predominant concentrations of loans in any particular industry or group of industries in 2013 and 2012. The three largest industry sector concentrations (and their percentage of total loans and leases at December 31, 2013 and 2012) are: real estate – residential (6.3% and 6.6%); real estate – retail (3.8% and 3.9%); and, lessors of professional offices (3.4% and 3.6%). All other industry sectors have a loan to total loans and leases ratio of less than 3.0%.

Table 16

Loan and Lease Portfolio

At December 31,	2013					2012					2011					2010					2009
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial, financial, and agricultural	$	2,394,847		17.6	%	$	2,273,611		17.6	%	$	1,871,027		17.9	%	$	1,816,519		18.9	%	$	2,050,110		21.0	%
Real estate:
construction		735,877		5.4			847,781		6.6			829,221		7.9			877,223		9.1			1,114,709		11.3
residential		4,204,430		31.0			4,065,818		31.5			3,212,562		30.8			2,666,692		27.7			2,369,380		24.1
commercial		4,068,816		30.0			3,964,608		30.8			3,136,887		30.0			2,998,176		31.0			3,060,331		31.1
Consumer		953,000		7.0			842,552		6.5			722,329		6.9			603,084		6.3			482,266		4.9
Leases		1,219,116		9.0			900,371		7.0			675,904		6.5			671,503		7.0			750,483		7.6
Total	$	13,576,086		100.0	%	$	12,894,741		100.0	%	$	10,447,930		100.0	%	$	9,633,197		100.0	%	$	9,827,279		100.0	%

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Table 17 presents the allocation of the allowance for loan and lease losses by type of loan.

Table 17

Allocation of Allowance for Loan and Lease Losses

At December 31,	2013		2012		2011		2010		2009
	(Dollars in thousands)
Commercial, financial, and agricultural	$	40,591	$	30,207	$	30,086	$	31,608	$	27,350
Real estate - construction		26,189		25,171		36,868		50,250		54,305
Real estate secured - residential		24,076		40,292		28,839		28,321		22,815
Real estate secured - commercial		47,434		68,673		77,672		69,623		56,623
Consumer		2,236		3,568		3,263		2,805		3,090
Leases		15,259		13,341		10,561		8,643		7,958
Purchased loans now impaired(2)		0		1,087		0		0		0
Loans newly funded and overdrafts		856		1,432		777		549		158
Unallocated		967		249		35		35		69
Total	$	157,608	$	184,020	$	188,100	$	191,834	$	172,368
Reserve for unfunded commitments(1)	$	4,082	$	3,732	$	975	$	975	$	975

⁽¹⁾  Included in Other liabilities.

⁽²⁾  Non-impaired at acquisition.

Risk Assets

Non-performing assets consist of nonaccrual loans and leases and foreclosed real estate. Loans, other than consumer loans, are placed on nonaccrual status when principal or interest is past due ninety days or more and the loan is not well-collateralized and in the process of collection or immediately, if, in the opinion of management, full collection is doubtful. Foreclosed real estate is property acquired through foreclosure or other means and is recorded at the lower of the loan’s carrying value or the fair market value of the related real estate collateral at the transfer date less estimated selling costs.

Troubled debt restructurings are loans for which we, for legal or economic reasons related to a debtor’s financial difficulties, have granted a concession to the debtor that we otherwise would not have considered. Concessions that result in the categorization of a loan as a troubled debt restructuring include:

• Reduction (absolute or contingent) of the stated interest rate;

• Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;

• Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the instrument or other agreement; or

• Reduction (absolute or contingent) of accrued interest.

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Table 18 is a presentation of the five-year history of risk assets.

Table 18

Risk Assets

At December 31,	2013			2012			2011			2010			2009
	(Dollars in thousands)
Non-performing assets:
Nonaccrual loans and leases:
Commercial, financial, and agricultural	$	16,827		$	10,464		$	14,385		$	20,012		$	20,282
Real estate - construction		13,230			14,817			37,727			57,779			97,717
Real estate secured - residential		23,365			28,440			41,922			50,973			37,254
Real estate secured - commercial		46,147			42,621			61,497			65,313			59,181
Consumer		47			43			0			1			27
Leases		1,199			1,382			947			2,817			5,093
Total nonaccrual loans and leases		100,815			97,767			156,478			196,895			219,554
Foreclosed real estate		16,555			26,245			41,050			18,489			24,292
Total non-performing assets	$	117,370		$	124,012		$	197,528		$	215,384		$	243,846
Total non-performing assets as a percentage of period-end loans and leases and foreclosed real estate		0.86	%		0.96	%		1.88	%		2.23	%		2.48	%
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases		156	%		188	%		120	%		97	%		79	%
Loans contractually past due 90 days and still accruing(1)	$	9,757		$	8,209		$	10,077		$	20,588		$	14,820
Troubled debt restructurings		72,133			67,775			72,852			114,566			58,244

⁽¹⁾  Loans contractually ninety days past due and still accruing interest are those loans that are well secured and in the process of collection.

Nonaccrual loans and leases increased from $97.8 million at December 31, 2012, to $100.8 million at December 31, 2013. As a result of our increased total loan balances and a decline in foreclosed real estate, total nonperforming assets as a percentage of period-end loans and leases plus foreclosed real estate decreased from 0.96% at December 31, 2012 to 0.86% at December 31, 2013.

Nonaccrual loans and leases decreased from $156.5 million at December 31, 2011, to $97.8 million at December 31, 2012. The net decrease was primarily the result of the resolution of many real estate – construction and real estate secured – commercial credits during 2012. As a result, 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 0.96% at December 31, 2012.

Real Estate - Construction

At December 31, 2013, real estate – construction loans comprised only 5.4% of our total loan and lease portfolio but accounted for 13.1% of total nonaccrual loans and leases, 16.6% of our allowance for loan and lease losses, and 12.1% of total net charge-offs. At December 31, 2012, these ratios were 6.6%, 15.2% 13.7%, and 20.6%, respectively. As a result, we consider these real-estate construction loans to be a category of higher-risk loans.

Additional information about our real estate – construction loan portfolio is presented in Tables 19, 20, and 21. Categories within these tables are defined as follows:

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

• 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.

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Table 19

Construction, Land Development, and Other Land Loans – Portfolio Status

Category	Balance at December 31, 2013		% of Total Construction			Past Due 30-89 Days			Past Due 90 Days and Still Accruing			Non Accrual			Other Internally Monitored (1)			Net Charge- Offs (2)			Reserve (3)
	(Dollars in thousands)
1-4 Family:
Construction	$	137,544		18.7	%		0.7	%		0.0	%		3.8	%		7.1	%		(0.7	)%		4.0	%
Land development		184,446		25.0			0.3			0.2			0.4			10.9			(1.0	)		3.7
Raw land		1,181		0.2			2.8			0.0			0.0			0.0			39.3			4.7
		323,171		43.9			0.5			0.1			1.8			9.2			(0.7	)		3.9
All Other:
Construction:
Investor		230,457		31.3			0.0			0.0			1.7			6.0			2.3			3.3
Owner-occupied		32,252		4.4			0.0			0.0			1.8			0.0			0.0			2.9
Land development:
Investor		114,426		15.6			0.7			0.0			1.8			26.1			3.2			3.8
Owner-occupied		9,521		1.3			0.0			0.0			8.7			3.7			3.0			3.1
Raw land:
Investor		25,265		3.4			0.3			0.0			0.0			6.9			(1.8	)		1.8
Owner-occupied		785		0.1			0.0			0.0			0.0			0.0			0.0			1.8
		412,706		56.1			0.2			0.0			1.8			11.1			2.2			3.3
Total	$	735,877		100.0			0.3			0.1			1.8			10.3			0.9			3.6

⁽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 twelve months divided by the category loan balance at December 31, 2013 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 December 31, 2013.

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Table 20

Construction, Land Development, and Other Land Loans – Collateral Locations

	Balance at		Geographical Location by %
Category	December 31, 2013		Maryland			New Jersey			Pennsylvania			Other
	(Dollars in thousands)
1-4 Family:
Construction	$	137,544		53.7	%		3.0	%		38.3	%		5.0	%
Land development		184,446		43.5			4.0			36.1			16.5
Raw land		1,181		0.0			15.9			84.1			0.0
		323,171		47.7			3.6			37.2			11.5
All Other:
Construction:
Investor		230,457		54.8			19.3			25.7			0.2
Owner-occupied		32,252		0.5			8.6			90.9			0.0
Land development:
Investor		114,426		30.5			5.1			47.8			16.6
Owner-occupied		9,521		33.9			0.0			66.1			0.0
Raw land:
Investor		25,265		18.0			1.5			77.7			2.7
Owner-occupied		785		52.5			0.0			47.5			0.0
		412,706		41.1			13.0			41.1			4.9
Total	$	735,877		44.0			8.8			39.4			7.8

Table 21

Construction, Land Development, and Other Land Loans – Portfolio Characteristics

			Global Debt
	Balance at		Coverage Ratio			Average Loan to
Category	December 31, 2013		Less than 1.1 Times (1)			Value (current)
	(Dollars in thousands)
1-4 Family:
Construction	$	137,544		6.7	%		93.5	%
Land development		184,446		10.6			73.9
Raw land		1,181		0.0			68.6
		323,171		9.1			86.7
All Other:
Construction:
Investor		230,457		18.3			86.4
Owner-occupied		32,252		14.9			58.7
Land development:
Investor		114,426		6.7			86.1
Owner-occupied		9,521		70.5			47.4
Raw land:
Investor		25,265		18.3			71.2
Owner-occupied		785		46.8			85.7
		412,706		16.0			81.9
	$	735,877		12.3			84.4

⁽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 continuous reviews of real estate – construction relationships throughout the year in order to identify potential problem loans. For those loan relationships under $0.75 million, the evaluation of risk is based upon delinquency. Included in this review is a comparison of absorption numbers (units leased or sold), market conditions, and performance to original projections. Lenders prepare cash flow projections for the loan being reviewed and all of the construction projects that the borrower may have

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financed with other lending institutions. An analysis of these cash flow projections determines whether the borrowing entity’s liquidity is sufficient to complete not only the project being financed by us but any other projects in the borrower’s portfolio, as well. The liquidity of any guarantors (the secondary source for continuance of the project) is also reviewed during this process to determine if it will support any extension of the project due to slower than expected absorption.

Loans designated as potential problem loans in the real estate - construction loan portfolio are reviewed quarterly by our loan review department (“Loan Review”) and executive management. This review consists of an analysis of the project’s historical results; the project’s projected results over the next four quarters; current financial information of the borrower and any guarantors; and a fifteen-month rolling cash flow of the projects financed by us and other lending institutions. In these meetings, we determine which loans are to be placed on nonaccrual and any downgrades or upgrades in ratings.

All potential problem real estate - construction loans are evaluated quarterly for impairment, using the following criteria or it will be considered impaired:

• The debt coverage ratio (“DCR”) of the borrower must be at least 1.10X for the project. DCR is defined as annualized cash flow available for debt service divided by annual debt service.

• If the DCR of the borrower is less than 1.10X, then the ratio of global cash flow of the borrower plus the guarantor divided by annual debt service (“GCF”) must be greater than 1.10X.

• If the DCR and the GCF are not greater than 1.10X, then a fifteen-month rolling cash flow projection must show that the borrower/guarantor will achieve a 1.10X DCR within six months. This projection must be verified and supported by contracts or leases.

Potential problem loans are generally assigned to our special-asset group or work-out department. While the loans are assigned to these areas:

• These groups work under the same process that was used to determine that the loan was impaired (as described above) to monitor the collectability of these loans.

• Collateral is appraised by outside vendors. Appraisals are generally kept current (no more than one-year old).

• Work-out plans are established with loan benchmarks that, if achieved, will result in our upgrading the loan. If it is not feasible to upgrade the loan, we will develop a plan to exit the loan through non-bank financing, sale of assets, or an orderly liquidation.

We use independent third-party appraisal firms to determine the value of collateral. Real estate – construction collateral is generally valued on an annual basis, or in the event of deterioration in geographic areas of the markets we serve (as demonstrated by analytics from regional and national publications), on an as-needed basis. For ongoing real estate construction projects, we use independent inspectors to verify the progress of construction. Other collateral-based loans, such as loans secured by receivables and/or inventory, are generally valued on an annual basis using balance sheet information and field examinations performed by auditors who are independent of the borrowers.

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. 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 determined to be impaired, the fair value of the underlying collateral is calculated by using a current appraisal, and any short fall including selling costs is charged off. All partially charged-off loans are included in the calculation for the loan and lease loss reserve.

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 even if the loan having a guarantor. Our evaluation of guarantors includes examining their ability to repay and their reputation and willingness to work with us. We consistently assess 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 rates.

We are well equipped to underwrite the credit worthiness of our sponsors. Over half of our clients have been successfully operating their businesses within our markets for 15 or more years. In addition, many of our sponsors have been either direct clients or have had successful banking relationships with our Credit Relationship Managers at other financial institutions that exceed 10 years. All of the Commercial Real Estate team’s leadership has 20 plus years of in market lending and portfolio management experience. Therefore, we have a strong historical perspective as to how our sponsors performed during all stages of an economic cycle.

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),

48

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.

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.

Troubled Debt Restructurings (“TDRs”)

Troubled debt restructurings have increased from $67.8 million at December 31, 2012 to $72.1 million at December 31, 2013 due to increased consumer bankruptcies. Additional charge-offs subsequent to the restructuring during the years ended December 31, 2013 and 2012, totaled $7.2 million and $1.1 million, respectively. This compares to 2012’s decrease in restructurings of $5.1 million, from $72.9 million at December 31, 2011, when additional charge-offs subsequent to the restructuring totaled $15.7 million. The reduction in 2012 was due to cures, pay downs, transfers to non-accrual and charge-offs.

A borrower with a restructured loan must maintain a 1.10X DCR as a stand-alone entity or a 1.10X GCF together with its guarantor. If the borrower fails to maintain that ratio or cannot recover to a 1.10X DCR or GCF within a six-month period, the restructured loan will be returned to nonaccrual status. Also, if a borrower is over ninety days past due, the restructured loan will be returned to nonaccrual status. Loans that have been restructured but have not recovered to a 1.10X DCR or GCF will remain on nonaccrual even when a forbearance agreement has been executed. When the borrower achieves a DCR or GCF of 1.10X or greater, the loan will be considered for return to restructured accruing status so long as the loan is current as to the restructured terms.

At the time a loan is restructured, we consider the following factors to determine whether the loan should accrue interest:

• Whether there is six months of payment history under the current terms;

• Whether the loan is current under the restructured terms; and

• Whether we expect the loan to continue to perform under the restructured terms with a DCR or GCF of 1.10X.

We also review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; current financial information of the borrower and any guarantors; and a fifteen-month rolling cash flow of the borrower. All troubled debt restructurings are reviewed quarterly to determine the amount of any impairment.

In situations where the restructuring results in an interest-only period (greater than 3 months but not longer than 14 months), our analysis of the borrower’s historical cash flow must conclude that the borrower can make the interest-only payments. Furthermore, the fifteen-month rolling projections must demonstrate that the borrower will achieve cash flow levels that will support a return to payments of principal and interest at a market rate within the timeframe prescribed in the forbearance agreement.

At the time of restructuring, the amount of the loan for which we are not reasonably assured of repayment is charged-off, but not forgiven. We have not had any additional charge-offs during 2013 and 2012 for any portion of the loans (after the initial charge-offs were taken at the time of the restructuring) for any of our troubled debt restructurings that accrue interest at the time the loans are restructured.

A borrower with a restructured loan must make six consecutive monthly payments at the restructured level and be current as to both interest and principal to be on accrual status. Furthermore, for a loan to be no longer considered restructured, it must cross over a calendar year-end and be at a market rate of interest at the time of restructuring.

Impaired Loans

Of the $262.9 million of impaired loans (nonaccrual, non-consumer relationships greater than $0.75 million plus accruing restructured loans) at December 31, 2013, $195.0 million, or 74.2%, had no related specific reserve. This compares to $282.7 million of impaired loans at December 31, 2012, where $201.2 million, or 71.2% had no related specific reserve, and $177.7 million of impaired loans at December 31, 2011, where $85.6 million, or 48.2% had no related specific reserve. The increase in impaired loans in 2012 compared to 2011 is the result of the Tower acquisition. The determination that no related reserve for these collateral-dependent loans was required was based on the fair value of the underlying collateral.

Impaired loans have a fair value that is based on a recent appraisal (generally less than one year) of the collateral. That fair value is calculated by the loan officer, reviewed by Loan Review and finally reviewed by our credit risk department. If the fair value minus selling costs is greater than the loan amount, then no impairment loss exists. If the fair value minus selling costs is less than the loan amount, a specific reserve is established for a period of up to ninety days to allow time for the borrower to pledge additional collateral. If the borrower is unable or unwilling to pledge additional collateral, a charge-off is recorded.

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As part of our loan quality department meetings and loan work out meetings, these loans are reviewed quarterly to ensure that appraisals are kept current. If, based on general economic and geographic information from outside sources, we believe that the value of collateral is decreasing, we will obtain a new appraisal and make adjustments accordingly.

Charge-offs only are taken based on the fair market value of the underlying collateral, from a current appraisal minus selling costs. All partially charged-off loans remain on nonaccrual status until they are brought current as to both principal and interest and have six months of payment history.

All impaired loans have an independent third-party appraisal to determine the fair value of the underlying collateral. Once we have identified further deterioration of an impaired loan, we obtain an updated appraisal. Prior to receiving the updated appraisal, we will establish a specific reserve for that estimated deterioration, based upon our assessment of market conditions. Once the updated appraisal is received, we record any additional impairment indicated by the appraisal.

Loans that are determined to be impaired are written down to their current value, based upon a current appraisal at the time of impairment. No additional value is assigned to any guarantee with regard to this appraisal. We exercise our rights under the full extent of the law to pursue all assets of the borrower and guarantors.

Potential Problem Loans

Potential problem loans, as shown in Table 22, consist of loans that are performing under contract but for which potential credit problems have caused us to place them on our internally monitored loan list. The decrease in potential problem loans, which are included in Table 23, can be attributed to a stabilization of economic conditions, offset in part by an increase in real estate secured – residential of $27.6 million. Continuing difficulties in the economy and the accompanying impact on these borrowers, as well as future events, such as regulatory examination assessments, may result in these loans and others being classified as non-performing assets in the future.

Table 22

Potential Problem Loans by Loan Category

December 31,	2013		2012		2011
	(Dollars in thousands)
Commercial, financial, and agricultural	$	48,122	$	50,215	$	49,316
Real estate - construction		21,189		48,020		57,796
Real estate secured - residential		40,899		13,260		9,490
Real estate secured - commercial		156,804		166,032		157,208
Total potential problem loans	$	267,014	$	277,527	$	273,810

Loans with principal and/or interest delinquent ninety days or more and still accruing interest totaled $9.8 million at December 31, 2013, an increase of $1.6 million, from the $8.2 million delinquent ninety days or more and still accruing interest at December 31, 2012. Loans with principal and/or interest delinquent ninety days or more and still accruing interest totaled $10.1 million at December 31, 2011.

Adverse changes in the economy may negatively affect certain other borrowers and may cause additional loans to become past due beyond ninety days or to be placed on non-accrual status because of the uncertainty of receiving full payment of either principal or interest on these loans.

For additional information about the credit quality of loans and leases, refer to“Note 5. Loans and Leases” to the consolidated financial statements appearing in Part II,Item 8.

We continue to take the following measures to recognize and resolve troubled credits:

• We review all credit relationships in the categories of Commercial Real Estate, Commercial Construction-Real Estate, and Residential Real Estate Development with aggregate exposure of $5.0 million and loans of $1.0 million once a year to determine the borrower’s ability to meet the terms and conditions of the loan agreements. This review includes a stress test for an increase of 2.0% in interest rates;

• We hold credit quality meetings during the second month of each quarter to review all criticized and classified loans. This includes reviewing global cash flows and the borrower’s progress in meeting obligations;

• We complete a fifteen-month rolling projection of potential non-accrual loans, charge-offs, loans ninety days past due and still accruing, and loans with specific reserves, and recoveries over $1.0 million during the third month of every quarter. These projections are reviewed and discussed by executive management;

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• We hold monthly meetings with our work-out officers to review their portfolios and strategy to either upgrade or exit particular credit relationships;

• We have instituted an ongoing review in our Consumer Lending area of all home equity line of credit loans to determine which property values and FICO scores have been negatively affected; and

• We are in the process of implementing risk-based pricing to reflect the cost of loans progressing through our risk-rating system.

We believe that in 2014 we will continue to see modest improvement in our credit metrics. However, 2014 will still be a challenging year in confronting the effects of the current economic and regulatory environments which affect the commercial and industrial, commercial real estate, and consumer credit segments. We also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame.

Goodwill and Other Identifiable Intangible Assets

We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. This test, which requires significant judgment and analysis, involves discounted cash flows and market-price multiples of non-distressed financial institutions.

We performed our annual goodwill impairment tests in the second quarter of 2013, and determined that the fair value of each of our reporting units significantly exceeded its book value, and there was no goodwill impairment. As a result, we did not perform interim goodwill impairment tests at interim dates in 2013.

For additional information about goodwill, refer to“Note 8. “Goodwill and Other Intangible Assets” to the consolidated financial statements appearing in Part II,Item 8.

Deposits

Our deposit base is consumer-oriented, consisting of time deposits, primarily certificates of deposit with various terms, interest-bearing demand accounts, savings accounts, and demand deposits. Average deposit balances by type and the associated average rate paid are summarized in Table 23.

Table 23

Average Deposit Balances

Year ended December 31,	2013					2012					2011
	Average		Average			Average		Average			Average		Average
	Balance		Rate Paid			Balance		Rate Paid			Balance		Rate Paid
	(Dollars in thousands)
Demand deposits	$	1,905,502		0.00	%	$	1,873,755		0.00	%	$	1,413,077		0.00	%
Interest-bearing demand deposits		5,968,726		0.28			5,453,701		0.38			3,884,182		0.55
Savings deposits		1,070,248		0.11			989,123		0.12			815,066		0.14
Time deposits		3,833,262		1.11			3,939,528		1.20			3,482,601		1.56
Total	$	12,777,738		0.47		$	12,256,107		0.56		$	9,594,926		0.80

Total deposits increased $289.3 million, or 2.3%, from December 31, 2012 to December 31, 2013. Time deposits increased 2.1% while our core deposits, which consist of noninterest-bearing demand deposits, interest-bearing demand deposits, and savings deposits, increased 2.4%. This compares to 2012’s growth (excluding the deposits acquired in the Tower transaction), total deposits increased 2.1%, including core deposits which increased 9.8%, while time deposits declined 13.5%. Deposit growth continues to be a top priority for us, as we continue to enhance our deposit products to meet our customer’s needs. During 2013, we made a strategic decision to exit certain non-relationship deposits, which were typically higher-cost. This resulted in downward pressure on overall deposit growth, but it contributed to a significant improvement in deposit costs, which improved from 56 basis points in 2012 to 47 basis points in 2013.

We do not rely upon time deposits of $100 thousand or more as a principal source of funds, as they represent only 13.3% of total deposits. Table 24 presents a breakdown by maturity of time deposits of $100 thousand or more as of December 31, 2013.

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Table 24

Deposit Maturity

Time of $100,000 or more

	December 31,
(Dollars in thousands)	2013		2012
Three months or less	$	531,902	$	438,880
Over three months through six months		254,148		222,404
Over six months through twelve months		494,075		390,481
Over twelve months		431,107		430,915
Total	$	1,711,232	$	1,482,680

Borrowings

We utilize borrowings as a supplement to our main funding source, deposits. Our borrowings consist of both short-term borrowings to meet funding needs, and long-term debt to provide funding and, to a lesser extent, regulatory capital. Average short-term borrowings in 2013 were $1.9 billion at a cost of 1.26%, compared to $1.7 billion at a cost of 1.26% in 2012. Average long-term debt totaled $574.6 million at a cost of 3.14% in 2013, compared to $769.9 million at a cost of 3.76% in 2012.

During the latter half of 2012, we redeemed $287.1 million of long-term debt at an average coupon rate of 8.8%, and issued $150.0 million of long-term debt at a coupon rate of 5.375%, which reduced both the average balance and cost of long-term debt in 2013.

For additional information about borrowings, refer to“Note 10. Borrowings” to the consolidated financial statements appearing in Part II,Item 8.

Contractual Obligations and Commercial Commitments

Table 25 presents certain of our contractual obligations and commercial commitments at December 31, 2013 and their expected year of payment or expiration.

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Table 25

Contractual Obligations and Commercial Commitments

Contractual Obligations

	Payments Due by Period
At December 31, 2013	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Certificates of deposit	$	3,819,616	$	2,671,056	$	925,006	$	190,912	$	32,642
FHLB borrowings		1,531,282		1,460,218		23,186		47,878		0
Long-term debt		405,229		75,000		0		25,227		305,002
Operating leases		254,818		25,688		48,152		41,462		139,516
Residual value guaranty fees		10,500		3,000		7,500		0		0

	Payments Due by Period
At December 31, 2012	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Certificates of deposit	$	3,740,005	$	2,447,348	$	961,570	$	259,639	$	71,448
FHLB borrowings		1,199,062		1,109,857		33,538		6,860		48,807
Long-term debt		405,948		785		75,000		236		329,927
Operating leases		166,182		20,884		37,349		33,199		74,750
Residual value guaranty fees		9,300		3,000		6,300		0		0

Other Commercial Commitments

	Commitment Expiration by Period
At December 31, 2013	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Standby letters of credit	$	331,235	$	216,293	$	80,803	$	34,111	$	28
Commercial commitments		1,076,397		892,980		95,959		61,067		26,391
Real estate commitments		411,631		240,461		164,650		5,836		684

	Commitment Expiration by Period
At December 31, 2012	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Standby letters of credit	$	386,763	$	270,146	$	116,488	$	101	$	28
Commercial commitments		968,884		821,769		55,133		82,618		9,364
Real estate commitments		327,304		177,045		134,229		14,981		1,049

Shareholders’ Equity

Common Stock

On January 19, 2011, we repurchased the warrant that was issued to the U.S. Treasury on December 12, 2008 in conjunction with our participation in the TARP Capital Purchase Program. The warrant entitled the U.S. Treasury to purchase up to 3.0 million shares of our common stock at a price of $14.86 per share. We paid $5.3 million to the Treasury to repurchase the warrant. The repurchase of the warrant concluded Susquehanna’s participation in the Capital Purchase Program.

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On October 1, 2011, we completed our acquisition of Abington, issuing a total of 26.7 million shares of Susquehanna common stock, par value $2.00, in connection with the transaction. The Abington acquisition increased total shareholders’ equity by $150.8 million.

On February 17, 2012, we completed our acquisition of Tower, issuing a total of 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 $302.1 million.

Risk Management

As a financial services company we assume or incur risk in conjunction with the execution of our day-to-day business activities. The most significant risks we face fall into six main categories: credit risk, market risk, operational risk, legal and regulatory compliance risk, reputation risk, and strategic risk. While we recognize that legal and regulatory compliance risk is typically a component of operational risk, we believe the significance of this sub-category and impact on our operations warrants its own assessment and reporting category. Our risk management activities are centered on the proper identification, measurement, monitoring, reporting, and management of these material risks.

Our Board of Directors (“Board”) is ultimately accountable for the oversight of how management assumes and manages risks in pursuit of preserving shareholder value and driving financial returns. The Board approves the Susquehanna’s risk appetite, assesses the effectiveness of the enterprise risk management framework and governance processes, and oversees management’s handling of issues related to risk mitigation.

To this end, the Board has established a Risk Committee whose primary purpose is to exercise oversight of management’s identification of material risks facing the Company and the management and mitigation of these material risks by the management team. The Board Risk Committee is responsible for the oversight over the enterprise risk management program.

Our risk management governance approach is designed to ensure clear lines of risk management accountability and a structured escalation process for key risk information. We adhere to a concept of the “three lines of defense” whereby the lines of business represent the first line of defense owning risks impacting their businesses as well as the control activities to successfully manage those risks. Risk management personnel comprise the second line of defense providing independent and centralized oversight over all risk categories by aggregating, analyzing and reporting upon risk information. Internal Audit represents the third line of defense providing an independent assessment and testing of the effectiveness of policies, practices, and controls within the first and second lines of defense.

Within our risk appetite framework, we have established specific qualitative and quantitative risk principles as well as risk ranges and limits to facilitate the monitoring of risk across our primary risk categories as such risks are incurred by the lines of business during the ordinary course of conducting their business.

The Risk Management Committee of the Board of Directors formally convenes no less than quarterly to discuss with management the status of the our current and prospective risk profile as measured by risk attributes within each of our key risk categories (credit, market, operational, legal and regulatory compliance, reputation, strategic). Matters of material risk identified by the first, second, or third line of defense would be escalated to the Board of Directors more frequently than the quarterly discussion.

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 includes only common equity.

On July 2, 2013, the Board of Governors of the Federal Reserve System approved New Capital Rules that are applicable to bank holding companies and state member banks, relating to the implementation of revised capital standards to reflect the requirements of the Dodd-Frank Act as well as the Basel III international capital standards. The New Capital Rules are effective as of January 1, 2014 but have a mandatory compliance date of January 1, 2015 for Susquehanna.

Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5 percent and a Common Equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The New Capital Rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4 percent to 6 percent and include a minimum leverage ratio of 4 percent for all banking organizations.

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The New Capital Rules emphasize Common Equity Tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. These new minimum capital requirements will be phased in over a period of years, beginning in 2015 for Susquehanna, and ending on January 1, 2019. The changes to the risk-weighted assets calculation will be effective beginning January 1, 2015.

The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital for institutions with over $15 billion in assets as of December 31, 2009. An institution such as Susquehanna, which had less than $15 billion in assets as of December 31, 2009, but that exceeded this threshold before January 1, 2014, the effective date of the New Capital Rules, will be permitted to continue to include these securities in Tier 1 capital, until such a time as the institution acquires another depository institution.

Based on a preliminary analysis of the New Capital Rules, management believes that we would be fully compliant with the revised standards as of December 31, 2013 if they had been effective on that date.

We actively review our capital strategies in light of current and anticipated business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings stability, competitive forces, economic conditions, and strength of management. At December 31, 2013, the capital ratios of Susquehanna exceed the “well-capitalized” thresholds under current capital requirements.

For additional information related to our risk-based capital ratios, see“Note 23. Regulatory Requirements and Other Restrictions” to the consolidated financial statements appearing in Part II,Item 8.

Market Risks

The types of market risk exposures generally faced by us include:

• equity market price risk;

• liquidity risk;

• interest rate risk; and

Due to the nature of our operations, foreign currency and commodity price risk are not significant to us.

Equity Market Price Risk

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

Liquidity Risk

Company Liquidity

Our primary sources of liquidity at the parent holding company level are dividends from Susquehanna Bank, dividends from non-bank subsidiaries, investment income, proceeds from the sale of investments, and net proceeds from borrowings and capital offerings. During the years ended December 31, 2013 and 2012, our primary uses of liquidity at the parent holding company level were the payment of principal and interest to holders of notes and capital securities, the payment of dividends to common shareholders, the repurchase of our common stock, the purchase of investment securities, and operating expenses of the parent holding company. During the years ended December 31, 2013 and 2012, a total of 56,000 and 57,000, shares of common stock were repurchased at annual costs of $681,000 and $587,000, respectively. There are certain restrictions on the payment of dividends by Susquehanna Bank. At December 31, 2013, $7.9 million was available for dividend distribution to the parent holding company from its banking subsidiary. During the years ended December 31, 2013 and 2012, Susquehanna Bank paid dividends to the parent holding company of $180.5 million and $185.5 million, respectively. Additional liquidity is available to us through equity or debt offerings. The ability to execute these transactions could be affected by adverse credit ratings or market conditions.

Management is not aware of any events that are reasonably likely to have a material adverse effect on the parent holding company’s liquidity.

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Bank Liquidity

Management believes the sources of liquidity at the Bank are sufficient to support our banking operations.

Susquehanna Bank’s primary sources of liquidity are deposit accounts, purchased funds, repurchase agreements, borrowings, and the sale, maturity, or call of investment securities. Susquehanna’s primary use of liquidity is the origination and purchase of loans; extension of credit; purchase of investment securities; management of working capital; and funding debt and capital service. Deposits represented 83.5% and 83.3% of total bank funding as of December 31, 2013 and 2012, respectively. Brokered deposits at December 31, 2013 and 2012 were $566.6 million and $392.8 million representing 4.4% and 3.1% of total deposits, respectively. At December 31, 2013 and 2012, Susquehanna Bank had approximately $4.1 billion and $2.7 billion, respectively, available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and $2.5 billion and $2.4 billion, respectively, of additional borrowing capacity subject to the pledge of additional collateral. Susquehanna Bank pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment securities to the Federal Reserve’s Discount Window to obtain collateralized borrowing availability. At December 31, 2013 and 2012, Susquehanna Bank had unused collateralized borrowing availability at the Federal Reserve’s Discount Window of $1.5 and $1.1 billion, respectively.

At December 31, 2013 and 2012, Susquehanna Bank had unrestricted investment securities with a market value of $1.0 billion and $0.9 billion, respectively.

In December 2013, Susquehanna entered into a sale leaseback transaction for 30 of its owned branch bank properties. The properties sold had a carrying value of $14.1 million. Susquehanna received cash proceeds of approximately $52.3 million, net of selling costs, resulting in a gain of approximately $38.2 million. Approximately $33.3 million of the gain was deferred and is being recognized over the term of the leases. The leases have original terms of fifteen or twenty-six years, and Susquehanna has the right, at its option, to extend the term of certain of the leases for three additional years. None of the transactions included repurchase options. Proceeds from the transaction will be used to support lending and investing activities, and to repay short-term debt.

The Board has designated a management Asset and Liability Committee (“ALCO”) to develop strategies, policies, and procedures to identify, measure, monitor, and control liquidity risk pursuant to its liquidity management policy. The liquidity management policy is commensurate with the complexity, risk profile, and scope of operations of the Bank and reflects its risk appetite, tolerances, key risk indicators, and reporting requirements that are deemed appropriate in order to operate in a safe and sound manner. The liquidity management policy includes the Bank’s contingency funding plan that assesses liquidity needs that may arise from certain stress events that are bank-specific, as well as the result of external factors.

Interest Rate Risk

We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment. The Asset Liability & Interest Rate Risk Management Policy (the “ALM Policy”) provides a comprehensive management process for identifying, measuring, monitoring, and managing interest rate risk. The ALM Policy is commensurate with the complexity, risk profile, and scope of operations and reflects the risk appetite, interest rate risk tolerances, and key risk indicators of the Company. The Board has designated the Asset Liability Committee (“ALCO”), through the treasury group, to implement the ALM Policy and to develop strategies to manage interest rate risk.

Our interest rate risk principally consists of reprice, option, basis risk, and yield curve risk. Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepay options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue for the Company. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to the adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.

We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.

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Earnings at risk is defined as the change in net interest income (excluding provision for loan and lease losses and income tax expense) due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons. We compute earnings at risk on a monthly basis over one and two-year time horizons.

Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity. Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time. We compute equity at risk on a monthly basis.

We conduct scenario analyses across a range of instantaneous, parallel, and sustained interest rate shocks and measures the percent of change in earnings and equity relative to a base case scenario assuming no movement in interest rates. The range of interest rate shocks includes upward and downward movements of rates through 400 basis points in 100 basis point increments, subject to market conditions that may render certain rate shocks impracticable. For example, during the current period of ultra-low interest rates, downward interest rate shocks have been suspended. The ALM Policy defines this series of scenario analysis as Core Scenarios. The size and composition of the balance sheet is held constant for the Core Scenarios. Measures of earnings at risk computed over a one-year time horizon and equity at risk produced from the Core Scenarios are defined as key risk indicators and are compared to risk tolerances established by the ALCO and the Board.

We conduct scenario analysis across a range of other changes in interest rates including ramped rate changes, non-parallel rate changes, and changes in key interest rates that do not move in tandem for upward and downward interest rate shocks. The specific interest rate scenarios that are analyzed are developed by the treasury group in consultation with the ALCO. We also conduct scenario analyses assuming changes in the size and composition of the balance sheet to support business planning, budgeting, and forecasting.

Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. Furthermore, equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. For example, higher levels of interest rate sensitivity of deposits to upward movements in interest rates may adversely impact net interest income. Additionally, slower prepayment speeds of loans may adversely impact the economic value of equity in a rising interest rate environment. Key simulation assumptions are subject to stress testing to assess the impact of assumptions changes on earnings at risk and equity at risk. We also use back-testing to assess the effectiveness of simulation analysis in identifying, measuring, monitoring, and managing interest rate risk.

From time to time, key model assumptions may be modified to improve the effectiveness of simulation analysis. Management modified certain key assumptions during calendar year 2013 and in the assessment of our interest rate risk profile as of December 31, 2013. The model assumptions modifications included changes to the prepayment speeds of residential mortgage loans (the assumption changes generally reflected slower loan prepayment speeds); increases in the price sensitivity of certain deposit products; increases in the present value discount rates applied to cash flows of the loan portfolio for upward interest rate shocks; and changes to the non-maturity deposit attrition rates (an acceleration of attrition rates resulting in shorter assumed average lives). Model assumptions were also modified to discount deposit liabilities using a yield curve from the Federal Home Loan Bank of Pittsburgh cost of funds for bullet debt maturities rather than discount deposit liabilities using a single market rate applied to the respective deposit balances. The use of the yield curve from the FHLB bullet debt results in applying higher discount rates to non-maturity deposit liabilities based on their assumed average lives that are derived from deposit attrition rates.

Tables 26 and 27 summarize the results of the Core Scenarios for equity at risk and earnings at risk assuming instantaneous, parallel, and sustained upward interest rate shocks of 100 and 200 basis points at December 31, 2013 and 2012. The results for equity at risk assuming a 200 basis point increase in interest rates produces a negative 2.7% change in equity while the results for earnings at risk assuming a 200 basis point increase in interest rates produces a 3.7% change in net interest income over a one-year time horizon. Equity at risk and earnings at risk may not produce highly correlated results due to the fundamental nature of the two simulation techniques. Equity at risk measures cash flows over time horizons that capture the interest rate characteristics of assets and liabilities that may change within one year and beyond one year. In contrast, the calculation of earnings at risk is focused on the interest rate characteristics of assets and liabilities that may alter earnings within a one-year time horizon.

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Table 26

Equity at Risk

	Base
	Present
At December 31, 2013	Value			+1%			+2%
	(Dollars in thousands)
Assets
Cash and due from banks	$	305,357		$	305,357		$	305,357
Short-term investments		83,227			83,225			83,222
Securities available for sale		2,529,787			2,437,647			2,344,297
Loans and leases, net of unearned income		13,306,068			13,054,116			12,823,143
Other assets		2,132,971			2,132,971			2,132,971
Total assets	$	18,357,410		$	18,013,316		$	17,688,990
Liabilities
Deposits:
Non-interest bearing	$	1,676,558		$	1,599,646		$	1,528,975
Interest-bearing		10,224,541			10,042,311			9,860,796
Total borrowings		2,519,499			2,490,085			2,458,748
Other liabilities		345,843			345,843			345,843
Total liabilities		14,766,441			14,477,885			14,194,362
Total economic equity		3,590,969			3,535,431			3,494,628
Total liabilities and equity	$	18,357,410		$	18,013,316		$	17,688,990
Change in economic value of equity	$	0		$	(55,538	)	$	(96,341	)
% change in economic value of equity		0	%		(1.5	)%		(2.7	)%
Risk tolerance policy					(15.0	)%		(25.0	)%
	Base
	Present
At December 31, 2012	Value			+1%			+2%
	(Dollars in thousands)
Assets
Cash and due from banks	$	277,042		$	277,042		$	277,042
Short-term investments		119,176			119,173			119,169
Securities available for sale		2,726,271			2,646,344			2,543,536
Loans and leases, net of unearned income		12,770,898			12,664,080			12,577,992
Other assets		2,200,392			2,200,392			2,200,392
Total assets	$	18,093,779		$	17,907,031		$	17,718,131
Liabilities
Deposits:
Non-interest bearing	$	1,973,664		$	1,973,664		$	1,973,664
Interest-bearing		10,570,405			10,403,078			10,244,420
Total borrowings		2,497,100			2,451,996			2,406,215
Other liabilities		331,671			331,671			331,671
Total liabilities		15,372,840			15,160,409			14,955,970
Total economic equity		2,720,939			2,746,622			2,762,161
Total liabilities and equity	$	18,093,779		$	17,907,031		$	17,718,131
Change in economic value of equity	$	0		$	25,683		$	41,222
% change in economic value of equity		0	%		0.9	%		1.5	%
Risk tolerance policy					(15.0	)%		(25.0	)%

58

Table 27

Earnings at Risk

	Base
At December 31, 2013	Scenario			+1%				+2%
	(Dollars in thousands)
Interest income:
Short-term investments	$	296		$	1,664			$	3,038
Investments		58,869			62,046				65,467
Loans and leases		591,349			649,571				713,848
Total interest income		650,514			713,281				782,353
Interest expense:
Interest-bearing demand and savings		14,249			46,447				74,845
Time		32,086			41,677				53,182
Total borrowings		50,954			66,705				80,406
Total interest expense		97,289			154,829				208,433
Net interest income	$	553,225		$	558,452			$	573,920
Net interest income at risk	$	0		$	5,227			$	20,695
% change in net interest income at risk		0	%		1.0	%			3.7	%
Risk tolerance policy					(7.5	)%			(10.0	)%
	Base						��
At December 31, 2012	Scenario			+1%				+2%
	(Dollars in thousands)
Interest income:
Short-term investments	$	387		$	2,104			$	3,844
Investments		87,128			92,404				96,510
Loans and leases		660,138			716,778				780,515
Total interest income		747,653			811,286				880,869
Interest expense:
Interest-bearing demand and savings		19,176			46,895				73,976
Time		40,595			48,806				57,938
Total borrowings		46,516			63,813				78,848
Total interest expense		106,287			159,514				210,762
Net interest income	$	641,366		$	651,772			$	670,107
Net interest income at risk	$	0		$	10,406			$	28,741
% change in net interest income at risk		0	%		1.6	%			4.5	%
Risk tolerance policy					(7.5	)%			(10.0	)%

The Company uses a variety of strategies to manage interest rate risk including, but not limited to, modifications to the size and composition of various assets and liabilities; modifications to the pricing and structure of the loan and deposit products; and the use of derivative financial instruments and hedging strategies. Derivative financial instruments are used to add stability to our interest income and expense, modify the duration of specific assets and liabilities, and 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 interest rate risk exposure resulting from such transactions. We do not participate in speculative derivatives trading or use credit default swaps in our investment or hedging operations.

For additional information about our derivative financial instruments, refer to“Note 20. Derivative Financial Instruments”and“Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II,Item 8.

59

Vehicle Leasing Residual Value Risk

In an effort to manage the vehicle residual value risk arising from the auto leasing business of Hann and our affiliate bank, Hann and the bank have entered into arrangements with Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) pursuant to which Hann or the bank, as applicable, effectively transferred to Auto Lenders substantially 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 five 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 agrees to make monthly guaranty payments to Auto Lenders based upon a negotiated schedule covering a three-year period. At the end of each year, the servicing agreement may be renewed by the mutual agreement of the parties for an additional one-year term, beyond the current three-year term, subject to renegotiation of the payments. For a schedule of future payment commitments, refer to“Table 25, Contractual Obligations and Commercial Commitments”. During the renewal process, we periodically evaluate the best remarketing and/or residual guarantee alternatives for Hann and our bank subsidiary.

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. Summary of Significant Accounting Policies” to the financial statements appearing in Part II,Item 8.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The discussion concerning the effects of liquidity risk and interest rate risk on us is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risks” in Item 7 hereof.

60

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements of Susquehanna are submitted herewith:

	Page
	Reference
Reference
Consolidated Balance Sheets at December 31, 2013 and 2012		62
Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011		63
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011		64
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011		65
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December  31, 2013, 2012, and 2011		67
Notes to Consolidated Financial Statements		68
Management’s Responsibility for Financial Statements and Report on Internal Control over Financial Reporting		138
Report of Independent Registered Public Accounting Firm		139

61

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

Years ended December 31,	2013			2012
	(in thousands, except share data)
Assets
Cash and due from banks	$	305,357		$	277,042
Unrestricted short-term investments		37,967			39,550
Cash and cash equivalents		343,324			316,592
Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		2,347			4,423
Restricted short-term investments		42,913			75,203
Securities available for sale		2,375,224			2,577,901
Restricted investment in bank stocks		158,232			152,434
Loans and leases, net of deferred costs and fees		13,503,392			12,728,082
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		72,694			166,659
Less: Allowance for loan and lease losses		157,608			184,020
Net loans and leases		13,418,478			12,710,721
Premises and equipment, net		173,542			188,983
Other real estate and foreclosed assets		17,573			31,017
Accrued interest receivable		41,690			40,304
Bank-owned life insurance		449,320			450,270
Goodwill		1,275,439			1,270,359
Intangible assets with finite lives		32,262			41,332
Deferred income tax assets		6,472			4,685
Other assets		136,673			173,443
Total Assets	$	18,473,489		$	18,037,667
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	1,913,526		$	1,973,664
Interest-bearing		10,955,846			10,606,382
Total deposits		12,869,372			12,580,046
Federal Home Loan Bank short-term borrowings		1,450,000			1,098,000
Other short-term borrowings		555,740			817,577
Federal Home Loan Bank long-term borrowings		81,282			101,062
Other long-term debt		250,227			251,021
Junior subordinated debentures		155,002			154,927
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna’s general credit		48,031			107,453
Accrued interest, taxes, and expenses payable		82,150			81,808
Deferred income tax liabilities		70,308			14,475
Other liabilities		193,790			235,389
Total Liabilities		15,755,902			15,441,758
Shareholders’ equity:
Common stock, $2.00 par value, 400,000,000 shares authorized; Issued:187,676,711 atDecember 31, 2013, and 186,811,642 at December 31, 2012		375,353			373,623
Treasury stock, at cost:313,568 at December 31, 2013, and 257,556 at December 31, 2012		(2,531	)		(1,850	)
Additional paid-in capital		1,652,116			1,645,958
Retained earnings		744,215			615,436
Accumulated other comprehensive loss, net of taxes of$25,039 and $20,672		(51,566	)		(37,258	)
Total Shareholders’ Equity		2,717,587			2,595,909
				��
Total Liabilities and Shareholders’ Equity	$	18,473,489		$	18,037,667

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

62

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31,	2013			2012		2011
	(in thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	627,833		$	642,190	$	516,984
Securities:
Taxable		40,990			49,215		57,846
Tax-exempt		14,193			14,637		15,831
Dividends		5,258			4,444		3,999
Short-term investments		108			144		108
Total interest income		688,382			710,630		594,768
Interest Expense:
Deposits:
Interest-bearing demand and savings		17,806			21,811		22,492
Time		42,712			47,168		54,286
Federal Home Loan Bank short-term borrowings		15,187			12,747		11,376
Other short-term borrowings		8,694			8,711		8,133
Federal Home Loan Bank long-term borrowings		1,142			976		30,648
Other long-term debt		16,901			27,979		34,683
Total interest expense		102,442			119,392		161,618
Net interest income		585,940			591,238		433,150
Provision for loan and lease losses		31,000			64,000		110,000
Net interest income, after provision for loan and lease losses		554,940			527,238		323,150
Noninterest Income:
Service charges on deposit accounts		36,989			34,428		31,728
Vehicle origination and servicing fees		11,725			10,366		7,862
Wealth management commissions and fees		51,333			47,705		43,688
Commissions on property and casualty insurance sales		16,797			15,894		14,047
Other commissions and fees		24,776			21,510		23,728
Income from bank-owned life insurance		6,013			6,471		4,931
Mortgage banking revenue		12,828			17,805		9,292
Net realized (loss) gain on sales and impairment of securities		(1,394	)		1,433		514
Net realized gain on acquisition		0			0		39,143
Realized gain on sale of branch properties		4,945			0		0
Other		19,717			11,147		7,735
Total noninterest income		183,729			166,759		182,668
Noninterest Expenses:
Salaries and employee benefits		262,638			251,583		209,235
Occupancy		45,448			45,231		37,446
Furniture and equipment		14,851			15,725		12,596
Professional and technology services		25,137			26,166		19,351
Advertising and marketing		12,054			12,317		11,470
FDIC insurance		19,878			20,486		16,602
Legal fees		7,422			8,150		9,302
Amortization of intangible assets		11,626			12,525		8,705
Vehicle lease disposal		5,012			6,342		10,584
Merger related		0			17,351		14,991
Loss on extinguishment of debt		0			5,860		50,020
Branch consolidation costs		6,603			0		0
Other		80,171			68,281		59,878
Total noninterest expenses		490,840			490,017		460,180
Income before income taxes		247,829			203,980		45,638
Provision for (benefit from) income taxes		74,150			62,808		(9,267	)
Net Income	$	173,679		$	141,172	$	54,905
Earnings per common share:
Basic	$	0.93		$	0.77	$	0.40
Diluted	$	0.92		$	0.77	$	0.40
Cash dividends per common share	$	0.24		$	0.28	$	0.08
Average common shares outstanding:
Basic		186,927			182,896		136,509
Diluted		187,835			183,578		136,876

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

63

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended December 31,	2013			2012			2011
	(in thousands)
Net Income	$	173,679		$	141,172		$	54,905
Other comprehensive income (loss):
Change in unrealized (loss) gain on securities available for sale		(69,948	)		22,043			56,046
Tax effect and reclassification adjustment		25,232			(7,910	)		(20,142	)
		(44,716	)		14,133			35,904
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities		884			2,723			(3,096	)
Tax effect		(324	)		(998	)		1,135
		560			1,725			(1,961	)
Change in unrealized gain (loss) on cash flow hedges		20,398			(1,812	)		(22,522	)
Tax effect		(7,445	)		579			8,254
		12,953			(1,233	)		(14,268	)
Changes in postretirement benefit obligations		25,992			(8,967	)		(11,684	)
Tax effect		(9,097	)		3,138			4,090
		16,895			(5,829	)		(7,594	)
Total other comprehensive (loss) income		(14,308	)		8,796			12,081
Total comprehensive income	$	159,371		$	149,968		$	66,986

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

64

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31,	2013			2012			2011
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	173,679		$	141,172		$	54,905
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		54,863			52,153			37,388
Provision for loan and lease losses		31,000			64,000			110,000
Realized loss (gain) on available-for-sale securities, net		1,394			(1,433	)		(514	)
Deferred income tax expense (benefit)		63,031			64,076			(14,639	)
Gain on sale of loans and leases		(14,055	)		(20,244	)		(12,747	)
Gain on sale of foreclosed assets		(351	)		(2,168	)		(1,105	)
Gain on sale of fixed assets		(4,600	)		0			0
Gain on acquisition		0			0			(39,143	)
Mortgage loans originated for sale		(509,985	)		(586,382	)		(335,248	)
Proceeds from sale of mortgage loans originated for sale		543,378			591,347			326,136
Increase in cash surrender value of bank-owned life insurance		(9,359	)		(5,751	)		(3,591	)
(Increase) decrease in accrued interest receivable		(1,386	)		1,866			2,880
Decrease in accrued interest payable		(534	)		(1,330	)		(9,192	)
Increase (decrease) in accrued expenses and taxes payable		876			(13,263	)		(6,572	)
Other, net		33,554			41,366			26,513
Net cash provided by operating activities		361,505			325,409			135,071
Cash Flows from Investing Activities:
Net decrease (increase) in restricted short-term investments		34,366			(4,530	)		(12,332	)
Activity in available-for-sale securities:
Sales		53,993			157,278			339,312
Maturities, repayments, and calls		610,403			680,332			686,923
Purchases		(552,350	)		(995,869	)		(671,982	)
Net increase in restricted investment in bank stock		(5,798	)		(11,784	)		0
Net increase in loans and leases		(774,511	)		(544,642	)		(319,568	)
Purchase of bank-owned life insurance		(6,050	)		(4,087	)		(5,161	)
Proceeds from bank-owned life insurance		16,359			6,366			7,088
Proceeds from sale of foreclosed assets		22,716			37,188			32,405
Acquisitions		0			(2,487	)		99,250
Deletions (additions) to premises and equipment, net		2,257			(9,919	)		(9,400	)
Net cash (used in) provided by investing activities		(598,615	)		(692,154	)		146,535
Cash Flows from Financing Activities:
Net increase in deposits		289,326			215,202			241,934
Net (decrease) increase in other short-term borrowings		(261,837	)		194,043			(179,521	)
Net increase in short-term FHLB borrowings		352,000			198,000			600,000
Proceeds from long-term FHLB borrowings		0			0			5,000
Repayment of long-term FHLB borrowings		(17,738	)		(22,237	)		(809,362	)
Proceeds from issuance of long-term debt		0			149,025			0
Repayment of long-term debt		(60,216	)		(337,042	)		(49,665	)
Proceeds from issuance of common stock		7,888			6,181			6,596
Purchase of treasury stock		(681	)		(587	)		(860	)
Redemption of warrant		0			0			(5,269	)
Cash dividends paid		(44,900	)		(51,393	)		(11,212	)
Net cash provided by (used in) financing activities		263,842			351,192			(202,359	)
Net change in cash and cash equivalents		26,732			(15,553	)		79,247
Cash and cash equivalents at January��1		316,592			332,145			252,898
Cash and cash equivalents at December 31	$	343,324		$	316,592		$	332,145

65

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

Years ended December 31,	2013			2012		2011
	(in thousands)
Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	102,976		$	120,721	$	170,810
Income tax (refunds) payments		(21,809	)		16,873		1,371
Supplemental Schedule of Noncash Activities
Real estate acquired in settlement of loans		14,940			24,125		62,327
Acquisitions:

	Tower		Abington
Common stock issued		302,112		150,813
Fair value of assets acquired (noncash)		2,302,604		1,066,720
Fair value of liabilities acquired (noncash)		2,255,413		976,014

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

66

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements Of Changes In Shareholders’ Equity

Years Ended December 31, 2013, 2012, and 2011	Shares of Common Stock			Common Stock			Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	(In thousands, except share data)
Balance at January 1, 2011		129,965,635		$	259,931		$	0		$	1,301,042		$	481,964		$	(58,135	)	$	1,984,802
Total comprehensive income														54,905			12,081			66,986
Treasury stock purchased								(860	)											(860	)
Redemption of warrant											(5,269	)								(5,269	)
Issuance of common stock in Abington Bancorp, Inc. acquisition		26,723,143			53,446			(403	)		97,770									150,813
Issuance of common stock and share-based awards under employee benefit plans		379,109			759						3,609									4,368
Cash dividends paid on common stock ($0.08 per share)														(11,212	)					(11,212	)
Balance, December 31, 2011		157,067,887			314,136			(1,263	)		1,397,152			525,657			(46,054	)		2,189,628
Total comprehensive income														141,172			8,796			149,968
Issuance of common stock in Tower Bancorp, Inc. purchase		30,760,933			61,522						240,590									302,112
Retirement of common stock related to acquired employee benefit plans		(1,861,580	)		(3,723	)					3,723									0
Issuance of common stock and share-based awards under employee benefit plans		844,402			1,688						4,493									6,181
Treasury stock purchased								(587	)											(587	)
Cash dividends paid on common stock ($0.28 per share)														(51,393	)					(51,393	)
Balance at December 31, 2012		186,811,642			373,623			(1,850	)		1,645,958			615,436			(37,258	)		2,595,909
Total comprehensive income														173,679			(14,308	)		159,371
Issuance of common stock and share-based awards under employee benefit plans		865,069			1,730						6,158									7,888
Treasury stock purchased								(681	)											(681	)
Cash dividends paid on common stock ($0.24 per share)														(44,900	)					(44,900	)
Balance at December 31, 2013		187,676,711		$	375,353		$	(2,531	)	$	1,652,116		$	744,215		$	(51,566	)	$	2,717,587

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

67

Notes to Consolidated Financial Statements

Years Ended December 31, 2013, 2012, and 2011

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

1. Summary of Significant Accounting Policies

Susquehanna Bancshares, Inc. and subsidiaries (collectively “Susquehanna”) is a financial holding company that operates a commercial bank with 245 branches and non-bank subsidiaries that provide leasing; trust and related services; consumer vehicle financing; investment advisory, asset management, and brokerage services; and property and casualty insurance brokerage services. Susquehanna’s primary source of revenue is derived from loans to business customers who are predominately small and middle-market businesses, and middle-income individuals.

The accounting and reporting policies of Susquehanna conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and, where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. The more significant accounting policies follow:

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the parent company 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”), The Addis Group, LLC (“Addis”), Stratton Management Company and subsidiary (“Stratton”). The consolidated financial statements also include subsidiaries over which Susquehanna exercises control, as is the case with securitization-related variable interest entities. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations or assets acquired and liabilities assumed are included only from the dates of acquisition.

Reclassifications.Certain prior year amounts have been reclassified to conform to current period classifications. The reclassifications had no effect on gross revenues, gross expenses, net income, shareholders’ equity, or the net change in cash and cash equivalents and are not material to previously issued financial statements.

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and contingent amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the estimated residual value of leases; determination of the allowance for loan and lease losses; the fair value of financial instruments, such as loans, investment securities, and derivatives; measurement and assessment of goodwill, intangible assets, and other purchase accounting related adjustments; benefit plan obligations and expenses; and income tax assets, liabilities and expenses.

Significant Concentrations of Credit Risk. The majority of Susquehanna’s loans and leases are to enterprises and individuals in its market area. There is no concentration of loans to borrowers in any one industry or related industries that exceeds 10% of total loans.

Cash and Cash Equivalents. Cash and cash equivalents include cash, balances due from banks, and unrestricted short-term investments. Unrestricted short-term investments consist of interest-bearing deposits in other banks, federal funds sold, commercial paper, and money market funds with an original maturity of three months or less.

Securities Sold Under Agreements to Repurchase. Securities sold under agreements 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 pledged to secure the repurchase agreements remain in the available-for-sale securities portfolio, and total $404.3 million and $416.6 million at December 31, 2013 and 2012, respectively.

Restricted Investment in Bank Stocks. Restricted investment in bank stocks consist of Philadelphia Federal Reserve Bank (“FRB”) stock, Pittsburgh Federal Home Loan Bank (“FHLB”) stock, and Atlantic Central Bankers Bank (“ACBB”) stock. Federal law requires a member institution of the district 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 restricted investment in bank stock is carried at cost. Quarterly, we evaluate the bank stocks for impairment. We evaluate recent and long-term operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history, and impact of legislative and regulatory changes.

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Securities. Susquehanna classifies debt and marketable equity securities as available for sale on the date of purchase. Susquehanna did not have any securities classified as trading at December 31, 2013 or 2012. Securities are classified as available for sale and reported at fair value. Interest income and dividends are recognized in interest income on an accrual basis. Premiums and discounts on debt securities are amortized as an adjustment to interest income using the effective interest method.

Changes in unrealized gains and losses, net of related deferred taxes, for available-for-sale securities are recorded in accumulated other comprehensive income. The credit component of other-than-temporary impairment is recorded in noninterest income, and the non-credit component is recorded in accumulated other comprehensive income in the period in which the impairment is recognized. Realized gains and losses on securities are recognized using the specific identification method and are included in noninterest income.

Securities classified as available for sale include investments that management intends to use as part of its asset/liability management strategy. Those securities that have long-term unrealized gains, for which fair value is greater than cost, may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. Susquehanna does not have the intent to sell any of its available-for-sale securities that are in an unrealized loss position, and it is more likely than not that Susquehanna will not be required to sell these securities before recovery of its amortized cost basis.

Loans and Leases. The accounting methods for loans and leases differ depending on whether the loans are originated or purchased, and if purchased, whether or not the purchased loans reflected credit deterioration since the date of origination such that it is probable on the purchase date that Susquehanna will be unable to collect all contractually required payments.

Originated loans and leases.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at their recorded investment, which incorporates outstanding unpaid principal balances, net of any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans and charge-offs. Direct financing leases are carried at the aggregate of lease payments plus estimated guaranteed residual value of the leased property, less unearned income.

Interest income on loans and leases is computed using the effective interest method. Loan and lease origination fees and certain direct loan and lease origination costs are deferred, and the net amount is recognized as an adjustment to the yield on the related loans over the contractual life of the loans.

Non-accrual classification: Nonaccrual loans are those loans for which the accrual of interest has ceased and all previously accrued-but-not-collected interest is reversed against interest income. Loans are placed on nonaccrual status when principal or interest is past due ninety days or more and the loan is not well-collateralized and in the process of collection or immediately, if, in the opinion of management, full collection is doubtful. Susquehanna does not accrue interest on impaired loans. While a loan is considered impaired or on nonaccrual status, subsequent cash interest payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal and interest until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are current and future payments are reasonably assured. In any case, the deferral or non-recognition of interest does not constitute forgiveness of the borrower’s obligation.

Troubled debt restructuring classification:Troubled debt restructurings are loans for which Susquehanna, for legal or economic reasons related to a debtor’s financial difficulties, has granted a concession to the debtor that it otherwise would not have considered. Concessions, whether negotiated or imposed by bankruptcy, include:

• Reduction (absolute or contingent) of the stated interest rate

• Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk

• Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the instrument or other agreement

• Reduction (absolute or contingent) of accrued interest

A concession does not include an insignificant delay or shortfall in contractually required principal or interest payments, which may arise depending on specific facts and circumstances from a borrower’s temporary operational downturns or seasonal delays.

Once classified as a troubled debt restructuring, a loan is only removed from such classification under the following circumstances: the loan is paid off, the loan is charged off and any collateral transferred to other real estate owned, the loan is transferred to non-accrual status, or if, at the beginning of a fiscal year, the loan has performed in accordance with the renegotiated terms for a minimum of six consecutive months and is current with principal and interest payments, and at the time of renegotiation the loan’s interest rate represented a then current market interest rate for a loan of similar risk.

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Impaired loan classification:Susquehanna considers a loan to be impaired, based upon current information and events, if it is probable that Susquehanna will be unable to collect payments of principal or interest according to the contractual terms of the loan agreement. Non-accrual commercial loans greater than $0.75 million are evaluated for impairment on an individual basis. An insignificant delay or shortfall in the amounts of payments, when considered independently of other factors, would not cause a loan to be rendered impaired. Insignificant delays or shortfalls may include, depending on specific facts and circumstances, those that are associated with temporary operational downturns or seasonal delays.

Management performs quarterly reviews of Susquehanna’s loan portfolio to identify impaired loans. The measurement of impaired loans is based upon the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the net realizable value of the collateral.

Loans continue to be classified as impaired until they are brought fully current, and the continued collection of scheduled interest and principal is considered probable as a result of the borrower performing in accordance with the contractual terms with six consecutive months of payments.

Purchased Loans.

Purchased loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk, and liquidity risk.

As part of its acquisition due diligence process, Susquehanna reviewed the acquired institutions’ loan grading system and the associated risk ratings of loans. In performing this review, Susquehanna considers cash flows, debt service coverage, delinquency status, accrual status, and collateral for the loan. Where necessary, Susquehanna’s loan review group developed or updated the risk ratings on the acquired loans. This process allowed Susquehanna to clearly identify the population of acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that Susquehanna would be unable to collect all contractually required payments. All loans identified by Susquehanna as substandard or non-performing were considered to be within the scope of ASC 310-30, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”.

For the acquisition of Tower Bancorp, Inc. (“Tower”) on February 17, 2012, Susquehanna aggregated purchased credit impaired (“PCI”) loans into six pools based on loan type. The individual pools each were then accounted for as a single asset with a composite interest rate and an aggregate expectation of cash flows. For all PCI loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require Susquehanna to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which Susquehanna then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Susquehanna’s evaluation of the amount of future cash flows that it expects to collect is based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk, and liquidity risk. Charge-offs of the principal amount on purchased loans are first applied to the non-accretable discount.

On the date of acquisition, PCI loans are initially recognized at fair value, which incorporates the present value of amounts estimated to be collectible. Purchased credit impaired loans are not classified as 90 days past due and still accruing, or nonaccrual, even though they may be contractually past due, where we expect to fully collect the recorded investment of such loans.

As a result of the application of this accounting methodology, certain credit-related ratios of Susquehanna, including, for example, the growth rate in non-performing assets, may not necessarily be directly comparable with periods prior to the acquisition of the PCI loans, or with credit-related ratios of other financial institutions.

For purchased loans that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.

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Allowance for Loan and Lease Losses. The allowance for loan and lease losses is determined on a quarterly basis, as losses are estimated to be probable and incurred, through a provision for loan and lease losses charged to earnings. Loan and lease losses are charged against the allowance when management determines that all or a portion of the loan is uncollectable. Recoveries on previously charged-off loans and leases are credited to the allowance when received. The allowance is allocated to loan and lease portfolio segments on a quarterly basis, but the entire balance is available to cover losses from any of the portfolio segments when those losses are confirmed.

Management uses internal policies and bank regulatory guidance in periodically evaluating loans for collectability. On origination, as periodically thereafter, commercial loans and commercial real estate loans of $0.75 million or greater are assigned an internal loan grade using a standard rating system as part of the loan monitoring process. Management uses the following internal loan grades: pass loans are loans graded 1 through 5; special mention loans are loans graded 6; substandard loans are loans graded 7; doubtful loans are loans graded 8; loss loans (which are charged off) are loans graded 9. The definitions of special mention, substandard, doubtful and loss are consistent with bank regulatory definitions.

Management reviews all pass graded individual commercial and commercial real estate loans and/or total loan concentration to one borrower no less frequently than annually. As part of the credit monitoring process, loan officers perform formal reviews based upon the credit attributes of the respective loans. Pass graded loans are continually monitored through the review of current information related to each loan. The nature of the current information available and used includes, as applicable, review of payment status and delinquency reporting, receipt and analysis of interim and annual financial statements, rent roll data, delinquent property tax searches, periodic loan officer inspections of properties, and loan officer knowledge of their borrowers, as well as the business environment in their respective market areas. Management performs a formal review on a more frequent basis if the above considerations indicate that such review is warranted. Further, based upon consideration of the above information, if appropriate, loan grading can be reevaluated prior to the scheduled full review.

Other credit exposures, such as consumer loans, residential real estate loans, and leases, are monitored in relation in the aggregate to as they are of relatively small dollar size and homogeneous in nature.

Individually evaluated loans.

Management evaluates the following loans individually for impairment: originated commercial, commercial real estate, and real estate – construction loans greater than $1.0 million, when current information and events indicate that it is probable that the contractual amounts due will not be collected, and loans that are classified as a TDR. The extent of loss is estimated using one of three methods: the fair value of the loan’s collateral if the loan is collateral dependent (collateral method), the present value of expected future cash flows discounted at the loan’s effective interest rate (cash flow method), or the loan’s observable market price.

The fair value of the loan’s collateral is estimated using independent appraisals and internal evaluations. Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third-party appraiser, certified and licensed, and approved by Susquehanna. Appraisals incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value of the property. Appraisals are ordered and reviewed by employees independent of the lending transaction. Internal evaluations provide a property’s market value based on the property’s actual physical condition and characteristics, and the economic market conditions that affect the property’s market value. Evaluations incorporate multiple sources of data to arrive at a property’s market value, including physical inspection, tax values, independent third-party automated tools, comparable sales analysis, and local market information.

Updated appraisals or evaluations are ordered when the loan becomes impaired if the appraisal or evaluation on file is more than twelve months old. Appraisals and evaluations are reviewed for appropriateness and may be discounted. The appraisal or evaluation value for a collateral-dependent loan for which recovery is expected solely from the sale of collateral is reduced by estimated selling costs, which include prior liens, taxes, sales commission, and closing costs.

Estimated losses on collateral-dependent loans, as well as any other impairment loss considered uncollectible, are charged against the allowance for loan losses. For loans that are not collateral dependent, the impairment loss is accrued in the allowance. Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied. Smaller homogeneous impaired loans that are not troubled debt restructurings or part of a larger impaired relationship are collectively evaluated.

Collectively-evaluated loans.

Loans that are not individually evaluated for impairment are evaluated collectively by grouping loans into homogeneous pools based on loan type and risk rating.

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Under our methodology for collectively-evaluating loans, historical net charge off rates for the last three years on a rolling quarter-to-quarter basis, weighted towards the more recent periods, are determined and averaged for: (a) commercial credits (including agriculture, commercial, commercial real estate, land acquisition, development and construction); and (b) consumer credits (including residential real estate, consumer direct, consumer indirect, consumer revolving, and leases). After determining the weighted average loss rates, management adjusts these rates for certain considerations, such as:

• portfolio segments where the timeline from the loss triggering event to loss confirmation is greater than 12 months, such as is the case for commercial and residential exposures

• evaluations of the factors specified in bank regulatory guidance, such as current economic trends and factors, risk rating trends, delinquency, credit concentrations, credit administration, or changes in products and volume

• estimates of probable incurred losses on loans where Susquehanna holds a second or more junior lien and does not also own or service the first lien estimates of unallocated but probable incurred losses to cover uncertainties in the existing loan portfolio

Off-Balance-Sheet Credit-Related Financial Instruments.In the ordinary course of business, Susquehanna enters into commitments to extend credit, including commitments under commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded or otherwise required to be recognized as derivative financial instruments. Susquehanna maintains a reserve for probable losses on off-balance sheet commitments which is classified in Other liabilities.

Derivative Financial Instruments. All derivatives are recorded on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on whether Susquehanna has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Susquehanna may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting is not applied.

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings, together and in the same income statement line item with changes in the fair value of the related hedged item. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income and are reclassified into the line item in the income statement in which the hedged item is recorded and in the same period in which the hedged item affects earnings. Hedge ineffectiveness and gains and losses on the excluded component of a derivative in assessing hedge effectiveness are recorded in earnings.

Foreclosed Assets. Other real estate property acquired through foreclosure or other means is initially recorded at the fair value of the of the related real estate collateral at the transfer date less estimated selling costs, and subsequently at the lower of its carrying value or fair value less estimated cost to sell through a valuation reserve. Costs to maintain other real estate are expensed as incurred.

Premises and Equipment. Land is carried at cost. Buildings, land improvements, leasehold improvements, and furniture and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or ten to twenty years. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings and furniture and equipment are capitalized. Gains or losses on disposition of assets are reflected in earnings.

Long-lived assets are evaluated for impairment by management on an on-going basis. Impairment may occur whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Sale Leaseback. In 2013, 30 bank branches were sold and leased back under lease agreements of fifteen and twenty six years. The branch sale transactions were accounted for as sales of real estate and the lease agreements accounted were categorized as operating leases. The accounting determined were evaluated to ensure that the sale leaseback resulted in the following: (1) a qualified sale existed and not a financing; (2) no continuing involvement existed other than a normal leaseback; and (3) the lease was properly categorized as an operating or capital lease. Cash proceeds of $52.3 million were included with Cash Flows from Investing Activities in the captionDeletions (additions) to premises and equipment, net. The transaction resulted in a deferred gain of $33.3 million, which is being recognized over the term of the leases and is included with Cash Flows from Operating Activities in the captionOther, net.

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Goodwill and Other Intangible Assets. Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis. Susquehanna tests for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit. For the years ended December 31, 2013, 2012, and 2011, there was no impairment.

Core deposit and other intangible assets acquired in acquisitions are identified, recognized, and amortized based upon the estimated economic benefits received.

Segment Reporting. Public companies are required to report financial and descriptive information about their reportable operating segments. Susquehanna has determined that its only reportable segment is Community Banking, and all services offered by Susquehanna relate to Community Banking.

Accumulated Other Comprehensive Income. Susquehanna records unrealized gains and losses on available-for-sale securities, unrealized gains and losses on cash flow hedges, and unrecognized actuarial gains and losses, transition obligation and prior service costs on pensions and other postretirement benefit plans in accumulated other comprehensive income, net of taxes. Unrealized gains and losses on available-for-sale securities are reclassified into earnings as the gains or losses are realized upon sale of the securities. The credit component of unrealized losses on available-for-sale securities that are determined to be other-than-temporarily impaired are reclassified into earnings at the time the determination is made. Unrealized gains or losses on cash flow hedges are reclassified into earnings when the hedged transaction affects earnings.

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 are variable interest entities. Susquehanna performed an analysis to determine whether it has a controlling financial interest in these entities, and thus, as the primary beneficiary, would be required to consolidate the entities. An enterprise is deemed to have a controlling financial interest in a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Susquehanna retained servicing responsibilities and interests in the VIEs. Susquehanna receives servicing fees and rights to cash flows remaining after the investors have received the return for which they contracted. Susquehanna, as servicer, has the ability to manage the entities’ assets that become delinquent to improve the economic performance of the entities. Therefore, Susquehanna meets the “power criterion.” In addition, through its ownership of the entities’ equity certificates, and the right to receive servicing fees, Susquehanna has the right to receive potentially significant benefits. Therefore, Susquehanna meets the “losses/benefits criterion.” Since Susquehanna meets both criteria, it is the primary beneficiary of the VIEs and is required to consolidate them.

Income Taxes. Deferred income taxes reflect the temporary tax consequences on future years of differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse.

Earnings per Common Share. Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares relate to outstanding stock options, restricted stock, and warrants and are determined using the treasury stock method.

Recently Adopted Accounting Guidance

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210) -Disclosures about Offsetting Assets and Liabilities. In January 2013, FASB issued ASU 2013-01, Balance Sheet (Topic 210) –Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. These ASUs require an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments, and derivative instruments accounted for in accordance with Topic 815, Derivatives and Hedging, issued in December 2011. The objective of these ASUs are to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures will give financial statement users information about both gross and net exposures. These ASUs were effective for interim and annual reporting periods after January 1, 2013 and were applied on a retrospective basis. The adoption of this guidance, in the first quarter of 2013, did not have a material impact on the financial condition, or results of operations, however did result in additional disclosures. For more information about these disclosures, refer toNote 21. Balance Sheet Offsetting.

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In July 2012, FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350) –Testing Indefinite – Lived Intangible Assets for Impairment. This ASU clarifies the assessment options and testing processes previously defined in ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment issued in September 2011. ASU 2012-02 is effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance, in the first quarter of 2013, did not have a material impact on results of operations or financial condition.

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220) –Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires entities to disclose information regarding reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of this guidance, in the first quarter of 2013, did not have a material impact on results of operations or financial condition, however did result in additional disclosures. For more information about these disclosures, refer toNote 13. Accumulated Other Comprehensive Loss.

In July 2013, FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815) –Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to U.S. Treasury interest rates and the London Interbank Offered Rate. The amendment also removes the restriction on using different benchmark rates for similar hedges. The adoption of this guidance, in the third quarter of 2013, did not have a material impact on results of operations, financial condition, or disclosures. For more information, refer toNote 22. Fair Value Disclosures.

Recently Issued Accounting Guidance

In July 2013, FASB issued ASU 2013-11, Income Taxes (Topic 740) –Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU provides clarifying guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this amendment is not expected to have a material impact on the financial condition or results of operations.

In January 2014, FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) –Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This ASU clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. ASU 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this amendment is not expected to have a material impact on the financial condition or results of operations.

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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.

The Abington 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 approximately $1,165,974, including $630,335 of loans and leases (including approximately $98,859 of commercial real estate loans, $11,400 of commercial loans and leases, and $448,825 of residential real estate loans). Liabilities assumed aggregated $976,014, including $857,331 of deposits. The transaction added $150,813 to the Susquehanna shareholders’ equity. There was no goodwill recorded as a result of the transaction, however, a non-taxable gain of $39,143 was recognized, which resulted from the drop in Susquehanna’s stock price from when the merger transaction was announced to when the merger was consummated on October 1, 2011. The drop in the stock price resulted in less common equity recorded than anticipated, but was offset dollar for dollar by a greater amount of retained earnings resulting from the bargain purchase gain.

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.

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 $2,388,122, 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 $2,255,413, including $2,074,372 of deposits. The transaction added $302,112 to the Susquehanna shareholders’ equity. Goodwill of $257,408 was recorded as a result of the transaction, including an adjustment of $10,547, to the previously estimated purchase price allocation.

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The consideration transferred for Abington’s and Tower’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:

	Abington		Tower
Purchase price:
Value of:
Common shares issued and options assumed	$	150,813	$	302,112
Cash		4		88,005
Total purchase price		150,817		390,117
Identifiable assets:
Cash and due from banks		99,254		85,518
Unrestricted short-term investments		11,898		9,171
Securities available for sale		329,536		137,254
Loans and leases		630,335		1,975,488
Intangible assets		2,860		27,334
Other assets		92,091		153,357
Total identifiable assets		1,165,974		2,388,122
Liabilities:
Deposits		857,331		2,074,372
Short-term borrowings		22,204		10,228
Long-term borrowings		76,018		103,923
Other liabilities		20,461		66,890
Total liabilities		976,014		2,255,413
Net gain (goodwill) resulting from acquisition	$	39,143	$	(257,408	)

In many cases, determining the fair value of the purchased 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 purchased loans.

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The following is a summary of the loans purchased in the Abington and Tower transactions:

Abington	Purchased Credit Impaired Loans			Purchased Non- Impaired Loans			Total Purchased Loans
Contractually required principal and interest at acquisition	$	71,711		$	666,164		$	737,875
Contractual cash flows not expected to be collected		(23,254	)		(6,014	)		(29,268	)
Expected cash flows at acquisition		48,457			660,150			708,607
Interest component of expected cash flows		(5,800	)		(72,472	)		(78,272	)
Basis in acquired loans at acquisition - estimated fair value	$	42,657		$	587,678		$	630,335
Tower	Purchased Credit Impaired Loans			Purchased Non- Impaired Loans			Total Purchased 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 Abington and Tower core deposit intangibles of $2,133 and $24,005, respectively, are being amortized using an accelerated method over a period of 10 years based upon the estimated economic benefits received.

The fair value of checking, savings and money market deposit accounts acquired from Abington and Tower were 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 Abington and Tower acquisitions, 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. There were no merger-related expenses incurred in 2013. A summary of merger-related expenses for 2012 and 2011 are included in the consolidated statement of income follows:

	2012						2011
	Abington		Tower		Total		Abington		Tower		Total
Salaries and employee benefits	$	2	$	4,035	$	4,037	$	525	$	4,076	$	4,601
Consulting		68		4,811		4,879		2,955		430		3,385
Legal		299		1,604		1,903		1,645		1,290		2,935
Branch writeoffs		0		1,371		1,371		1,561		0		1,561
Net occupancy and equipment		0		2,840		2,840		1,198		0		1,198
All other		829		1,492		2,321		1,264		47		1,311
	$	1,198	$	16,153	$	17,351	$	9,148	$	5,843	$	14,991

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Pro Forma Condensed Combined Financial Information

If the Abington acquisition had been completed on January 1, 2011, total revenue, net of interest expense, would have been approximately $642.1 million for 2011, and net income from continuing operations would have been approximately $60.6 million for the same period.

If the Tower acquisition had been completed on January 1, 2011, total revenue, net of interest expense, would have been approximately $733.2 million and $772.9 million, respectively, for 2011 and 2012, respectively. Net income from continuing operations would have been approximately $69.7 million and $141.3 million, respectively, for 2011 and 2012.

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.

3. Unrestricted Short-term Investments

The amortized cost and current yields of unrestricted short-term investments at December 31, 2013 and 2012 are as follows:

	2013					2012
	Amortized Cost		Rates			Amortized Cost		Rates
Interest-bearing deposits in other banks	$	11,905		0.33	%	$	13,881		0.33	%
Money market funds		18,680		0.03	%		19,714		0.02	%
Mutual funds		7,382		0.01	%		5,955		0.03	%
Total	$	37,967				$	39,550

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4. Investment Securities

The amortized cost and fair values of investment securities at December 31, 2013 and 2012 were as follows:

At December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	110,227	$	343	$	422	$	110,148
Obligations of states and political subdivisions		389,199		13,386		4,075		398,510
Agency residential mortgage-backed securities		1,786,133		12,163		20,104		1,778,192
Non-agency residential mortgage-backed securities		572		1		8		565
Commercial mortgage-backed securities		8,568		166		0		8,734
Other structured financial products		25,038		0		13,741		11,297
Other debt securities		43,156		1,487		557		44,086
		2,362,893		27,546		38,907		2,351,532
Other equity securities		24,318		557		1,183		23,692
Total available-for-sale securities	$	2,387,211	$	28,103	$	40,090	$	2,375,224

At December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-Sale:
U.S. Government agencies	$	113,367	$	1,041	$	0	$	114,408
Obligations of states and political subdivisions		403,487		32,585		295		435,777
Agency residential mortgage-backed securities		1,843,511		37,104		53		1,880,562
Non-agency residential mortgage-backed securities		29,428		2		1,980		27,450
Commercial mortgage-backed securities		38,847		1,533		0		40,380
Other structured financial products		25,011		0		15,461		9,550
Other debt securities		43,076		2,643		464		45,255
		2,496,727		74,908		18,253		2,553,382
Other equity securities		24,097		1,179		757		24,519
Total available-for-sale securities	$	2,520,824	$	76,087	$	19,010	$	2,577,901

At December 31, 2013 and 2012, investment securities with carrying values of $1,512,824 and $1,775,345, 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, agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, other structured financial products, other debt securities, and residential and commercial mortgage-backed securities, at December 31, 2013 and 2012, 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.

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	December 31, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Within one year	$	8,870	$	9,005	$	8,690	$	8,781
After one year but within five years		129,176		130,091		141,362		143,714
After five years but within ten years		945,637		946,754		935,796		952,680
After ten years		1,279,210		1,265,682		1,410,879		1,448,207
Total	$	2,362,893	$	2,351,532	$	2,496,727	$	2,553,382

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
	For the Year Ended December 31,
	2013			2012			2011
Gross gains	$	462		$	5,090		$	9,089
Gross losses		(1,371	)		(3,416	)		(5,211	)
Other-than-temporary impairment		(485	)		(241	)		(3,364	)
Net (losses) gains	$	(1,394	)	$	1,433		$	514

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 December 31, 2013 and 2012.

December 31, 2013	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	68,111	$	422	$	0	$	0	$	68,111	$	422
Obligations of states and political subdivisions		73,895		3,910		7,025		165		80,920		4,075
Agency residential mortgage-backed securities		1,030,987		20,104		0		0		1,030,987		20,104
Non-agency residential mortgage-backed securities		530		8		0		0		530		8
Other structured financial products		0		0		11,297		13,741		11,297		13,741
Other debt securities		0		0		6,476		557		6,476		557
Other equity securities		19,111		286		1,619		897		20,730		1,183
	$	1,192,634	$	24,730	$	26,417	$	15,360	$	1,219,051	$	40,090

December 31, 2012	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of states and political subdivisions	$	31,791	$	295	$	0	$	0	$	31,791	$	295
Agency residential mortgage-backed securities		11,291		53		0		0		11,291		53
Non-agency residential mortgage-backed securities		12,117		450		14,683		1,530		26,800		1,980
Other structured financial products		0		0		9,551		15,461		9,551		15,461
Other debt securities		0		0		6,518		464		6,518		464
Other equity securities		1,751		585		796		172		2,547		757
	$	56,950	$	1,383	$	31,548	$	17,627	$	88,498	$	19,010

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Non-agency residential mortgage-backed securities.At December 31, 2013, Susquehanna held one security that had unrealized losses, but was not 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 none of these securities are other-than-temporarily impaired.

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

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

	2013		2012
Balance - beginning of period	$	1,280	$	4,602
Additions:
Amount related to credit losses for which an other-than-temporary impairment was not previously recognized		325		0
Additional amount related to credit losses for which an other-than-temporary impairment was previously recognized		160		241
Deletions:
Sale of securities for which other-than-temporary impairment was previously recognized		958		3,180
Realized losses		198		383
Balance - end of period	$	609	$	1,280

The balance at December 31, 2013 and 2012 includes other-than-temporary impairment of $609 and $512, respectively, for Other Equity Securities.

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, assisted with the development of critical assumptions including the expected cash flows of the underlying collateral of the non-agency residential mortgage-backed securities 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 ($0 and $560 at December 31, 2013 and 2012, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

	Weighted-average (%)
	2013(1)		2012
Conditional repayment rate(2)		N/A		10.4	%
Loss severity(3)		N/A		43.8	%
Conditional default rate(4)		N/A		3.6	%

^‘(1)  Not applicable as the related securities were sold during 2013.

^‘(2)  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.

^‘(3)  Loss severity rates are projected by considering collateral characteristics such as current loan-to-value, original creditworthiness of borrowers (FICO score) and geographic concentration.

^‘(4)  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 borrower being past due 60 days, 90 days, or possibly already in the foreclosure process.

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Management provides input and monitors the third party valuation process of the non-agency residential mortgage-backed securities. A detailed review of the critical assumptions and inputs is performed by Susquehanna’s Investment Committee (“CIC”). Key assumptions reviewed by the CIC include prepayment assumptions, default rates, loss severity, bond waterfall payments, and the discount rate. Additionally, available market indications of similar securities are provided by Susquehanna to the third party and are given a significant weighting by the third party.

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 $13,742 and $15,461 at December 31, 2013 and 2012, respectively. All of these securities are below investment grade but are of a more senior tranche of the specific issue. Susquehanna has contracted with a third party financial advisory firm (“third party firm”) to assist in its valuation and other-than-temporary impairment analysis of its structured financial product investments. In addition to the valuation work performed by a third party firm which Susquehanna utilizes to support its valuation and other-than-temporary-impairment analysis, management of Susquehanna considered Section 619 of the Dodd-Frank Act (commonly referred to as the “Volcker Rule”). Specifically, Susquehanna considered the interim final rule published by federal regulatory agencies on January 14, 2014, which indicated Susquehanna’s trust preferred securities will remain permissible holdings under the Volcker Rule.

Management has assisted with the development of, and performed a detailed review of the critical assumptions. The review of the inputs for the valuation of the pooled trust preferred securities is performed by the CIC. Key aspects reviewed by CIC include the detail on non-performing financial institutions within the pools of trust preferred securities, the probability of default of the underlying institutions within the pools, the discount rate, trades of similar securities and indexes, and the weighting given to market indications. Susquehanna management 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.

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 any other-than-temporary impairment.

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 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. The third party firm determines short-term default risk using ratios, including the Texas ratio, 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 are reasonably developed and supported.

If a collateral security is in default at the assessment date, a recovery rate specific to the issuer of the collateral security 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 FDIC insured bank institutions. The active issuers of the collateral securities 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 of collateral securities 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.

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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 present value.

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 December 31, 2013	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Recorded investment	$	3,000		$	7,177		$	8,111		$	6,750
Fair value		1,001			3,588			4,017			2,690
Unrealized loss		(1,999	)		(3,589	)		(4,094	)		(4,060	)
Class		B			B			B			A2L
Class face value	$	35,000		$	59,567		$	89,461		$	45,500
Present value of expected cash flows for class noted above and all subordinated classes(1)	$	176,955		$	194,180		$	315,518		$	162,528
Lowest credit rating assigned		D			Ca			Caa			Ca
Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		393,342			301,814			472,261			273,488
Actual defaults		43,900			51,580			44,000			74,885
Actual deferrals		32,000			96,430			93,650			93,080
Projected future defaults		29,541			45,690			47,668			33,856
Actual defaults as a % of original collateral		7.0	%		10.3	%		6.3	%		15.4	%
Actual deferrals as a % of original collateral(2)		5.1	%		19.2	%		13.4	%		19.1	%
Actual defaults and deferrals as a % of original collateral		12.1	%		29.5	%		19.7	%		34.5	%
Projected future defaults as a % of original collateral (3)		4.7	%		9.1	%		6.8	%		6.9	%
Actual institutions deferring and defaulted as a % of total institutions		16.9	%		32.7	%		24.6	%		42.2	%
Projected future defaults as a % of performing collateral plus deferrals		6.9	%		11.5	%		8.4	%		9.2	%

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As of December 31, 2012	Pooled Trust #1			Pooled Trust #2			Pooled Trust #3			Pooled Trust #4
Recorded investment	$	3,000		$	7,163		$	8,098		$	6,750
Fair value		1,073			2,987			3,315			2,175
Unrealized loss		(1,927	)		(4,176	)		(4,783	)		(4,575	)
Class		B			B			B			A2L
Class face value	$	35,000		$	58,745		$	88,449		$	45,500
Present value of expected cash flows for class noted above and all subordinated classes(1)	$	141,786		$	172,051		$	290,724		$	141,211
Lowest credit rating assigned		Ca			Ca			Ca			Ca
Original collateral	$	623,984		$	501,470		$	700,535		$	487,680
Performing collateral		352,028			313,200			472,731			296,600
Actual defaults		30,000			51,580			44,000			75,447
Actual deferrals		87,400			107,690			123,150			83,080
Projected future defaults		65,480			53,913			57,013			46,610
Actual defaults as a % of original collateral		4.8	%		10.3	%		6.3	%		15.5	%
Actual deferrals as a % of original collateral(2)		14.0	%		21.5	%		17.6	%		17.0	%
Actual defaults and deferrals as a % of original collateral		18.8	%		31.8	%		23.9	%		32.5	%
Projected future defaults as a % of original collateral(3)		10.5	%		10.8	%		8.1	%		9.6	%
Actual institutions deferring and defaulted as a % of total institutions		19.7	%		37.5	%		29.9	%		38.8	%
Projected future defaults as a % of performing collateral plus deferrals		14.9	%		12.8	%		9.6	%		12.3	%

⁽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. As of December 31, 2013 and 2012, the present value of the current estimated cash flows is equal to or greater than the book value of the trust preferred securities held. Consequently, there is no credit-related other-than-temporary impairment required to be recognized.

⁽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.

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5. Loans and Leases

Originated loans and leases is defined to exclude loans purchased in business combinations since September 30, 2011, and purchased loans and leases is defined to include those loans and leases excluded from the definition of originated loans.

Loans and Leases, Net of Deferred Costs and Fees

At December 31,	2013		2012
Commercial, financial, and agricultural	$	2,394,847	$	2,273,611
Real estate - construction		735,877		847,781
Real estate secured - residential		4,204,430		4,065,818
Real estate secured - commercial		4,068,816		3,964,608
Consumer		953,000		842,552
Leases		1,219,116		900,371
Total loans and leases	$	13,576,086	$	12,894,741
Originated loans and leases	$	11,930,946	$	10,765,458
Purchased loans and leases		1,645,140		2,129,283
Total loans and leases	$	13,576,086	$	12,894,741
Nonaccrual loans and leases	$	100,815	$	97,767
Loans and leases contractually past due 90 days and still accruing		9,757		8,209
Troubled debt restructurings		72,133		67,775
Deferred origination costs, net of fees		21,216		17,763
All overdrawn deposit accounts, reclassified as loans and evaluated for collectability		2,918		15,422

A summary of our net investment in direct lease financing is presented below.

Net Investment in Direct Financing Leases

At December 31,	2013			2012
Minimum lease payments receivable	$	667,365		$	568,110
Estimated residual value of leases		634,875			409,753
Unearned income under lease contracts		(83,124	)		(77,492	)
Total leases	$	1,219,116		$	900,371

Susquehanna monitors the credit quality of its commercial loan portfolio using internal risk ratings. These risk ratings are consistent with established regulatory guidance. Loans with a Pass rating represent those not considered a problem credit. Special mention loans are those that have a potential weakness deserving management’s careful attention. Substandard loans are those where a well-defined weakness has been identified that may put the complete receipt of contractual cash flows at risk. Substandard loans are placed in nonaccrual status when Susquehanna believes it is no longer probable it will collect all contractual cash flows.

Susquehanna reviews the loan gradings on an annual basis or at any time management becomes aware of the potential for not collecting all contractual cash flows. Significant credits with ratings of special mention or substandard, and associated with a relationship greater than $5.0 million, are reviewed quarterly by the Senior Credit Staff of Susquehanna Bank.

Susquehanna monitors the credit quality of its retail loan portfolio based primarily on delinquency status, which is the primary factor considered in determining whether a retail loan should be classified as nonaccrual.

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The following tables present Susquehanna’s credit quality indicators by internally assigned grading and by payment activity at December 31, 2013 and 2012:

Credit Quality Indicators, at December 31, 2013

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade

					Real Estate -		Total
			Real Estate -		Secured -		Commercial
	Commercial		Construction (1)		Commercial (2)		Credit Exposure
Originated loans and leases
Grade:
Pass(3)	$	2,133,884	$	478,097	$	3,658,875	$	6,270,856
Special mention(4)		75,162		33,907		168,464		277,533
Substandard(5)		60,168		30,583		194,799		285,550
Total	$	2,269,214	$	542,587	$	4,022,138	$	6,833,939
Purchased loans and leases
Grade:
Pass(3)	$	108,898	$	25,070	$	750,241	$	884,209
Special mention(4)		4,220		19,811		62,208		86,239
Substandard(5)		12,515		22,247		130,408		165,170
Total	$	125,633	$	67,128	$	942,857	$	1,135,618
Total loans and leases
Grade:
Pass(3)	$	2,242,782	$	503,167	$	4,409,116	$	7,155,065
Special mention(4)		79,382		53,718		230,672		363,772
Substandard(5)		72,683		52,830		325,207		450,720
Total	$	2,394,847	$	609,715	$	4,964,995	$	7,969,557

Other Credit Exposure

Credit-risk Profile based on Payment Activity

	Real Estate -
	Secured -						Total Other
	Residential		Consumer		Leases		Credit Exposure
Originated loans and leases
Performing	$	2,914,547	$	945,379	$	1,217,629	$	5,077,555
Nonperforming(6)		16,937		1,028		1,487		19,452
Total	$	2,931,484	$	946,407	$	1,219,116	$	5,097,007
Purchased loans and leases
Performing	$	491,922	$	6,591	$	0	$	498,513
Nonperforming(6)		11,007		2		0		11,009
Total	$	502,929	$	6,593	$	0	$	509,522
Total loans and leases
Performing	$	3,406,469	$	951,970	$	1,217,629	$	5,576,068
Nonperforming(6)		27,944		1,030		1,487		30,461
Total	$	3,434,413	$	953,000	$	1,219,116	$	5,606,529

86

Credit Quality Indicators, at December 31, 2012

Commercial Credit Exposure

Credit-risk Profile by Internally Assigned Grade

					Real Estate -		Total
			Real Estate -		Secured -		Commercial
	Commercial		Construction (1)		Commercial (2)		Credit Exposure
Originated loans and leases
Grade:
Pass(3)	$	2,008,548	$	439,296	$	3,388,337	$	5,836,181
Special mention(4)		45,733		76,852		141,817		264,402
Substandard(5)		60,123		45,102		213,776		319,001
Total	$	2,114,404	$	561,250	$	3,743,930	$	6,419,584
Purchased loans and leases
Grade:
Pass(3)	$	135,308	$	95,289	$	918,119	$	1,148,716
Special mention(4)		7,685		34,519		82,021		124,225
Substandard(5)		16,214		54,162		143,629		214,005
Total	$	159,207	$	183,970	$	1,143,769	$	1,486,946
Total loans and leases
Grade:
Pass(3)	$	2,143,856	$	534,585	$	4,306,456	$	6,984,897
Special mention(4)		53,418		111,371		223,838		388,627
Substandard(5)		76,337		99,264		357,405		533,006
Total	$	2,273,611	$	745,220	$	4,887,699	$	7,906,530

Other Credit Exposure

Credit-risk Profile based on Payment Activity

	Real Estate -
	Secured -						Total Other
	Residential		Consumer		Leases		Credit Exposure
Originated loans and leases
Performing	$	2,591,349	$	830,495	$	898,781	$	4,320,625
Nonperforming(6)		23,082		577		1,590		25,249
Total	$	2,614,431	$	831,072	$	900,371	$	4,345,874
Purchased loans and leases
Performing	$	618,796	$	11,469	$	0	$	630,265
Nonperforming(6)		12,061		11		0		12,072
Total	$	630,857	$	11,480	$	0	$	642,337
Total loans and leases
Performing	$	3,210,145	$	841,964	$	898,781	$	4,950,890
Nonperforming(6)		35,143		588		1,590		37,321
Total	$	3,245,288	$	842,552	$	900,371	$	4,988,211

⁽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.

87

The following tables detail the age analysis of Susquehanna’s past due financing receivables as of December 31, 2013 and 2012.

Age Analysis of Past Due Financing Receivables, as of December 31, 2013

Financing Receivables that are Accruing

											Total
	30-59 Days		60-89 Days		90 Days		Total				Financing
	Past Due		Past Due		and Greater		Past Due		Current		Receivables
Commercial	$	3,640	$	518	$	127	$	4,285	$	2,373,735	$	2,378,020
Real estate - construction		1,631		903		418		2,952		719,695		722,647
Real estate secured - residential		27,441		6,223		7,274		40,938		4,140,127		4,181,065
Real estate secured - commercial		11,583		1,840		667		14,090		4,008,579		4,022,669
Consumer		8,664		1,537		983		11,184		941,769		952,953
Leases		4,275		368		288		4,931		1,212,986		1,217,917
Total	$	57,234	$	11,389	$	9,757	$	78,380	$	13,396,891	$	13,475,271
Originated loans and leases	$	46,031	$	9,381	$	7,302	$	62,714	$	11,787,333	$	11,850,047
Purchased loans and leases		11,203		2,008		2,455		15,666		1,609,558		1,625,224
Total	$	57,234	$	11,389	$	9,757	$	78,380	$	13,396,891	$	13,475,271

Financing Receivables that are Nonaccruing

											Total
	30-59 Days		60-89 Days		90 Days		Total				Financing
	Past Due		Past Due		and Greater		Past Due		Current		Receivables
Commercial	$	4,832	$	855	$	4,850	$	10,537	$	6,290	$	16,827
Real estate - construction		2,176		788		5,320		8,284		4,946		13,230
Real estate secured - residential		609		497		16,518		17,624		5,741		23,365
Real estate secured - commercial		1,320		3,551		19,952		24,823		21,324		46,147
Consumer		0		0		0		0		47		47
Leases		0		199		148		347		852		1,199
Total	$	8,937	$	5,890	$	46,788	$	61,615	$	39,200	$	100,815
Originated loans and leases	$	8,205	$	3,806	$	39,553	$	51,564	$	29,335	$	80,899
Purchased loans and leases		732		2,084		7,235		10,051		9,865		19,916
Total	$	8,937	$	5,890	$	46,788	$	61,615	$	39,200	$	100,815

88

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

Financing Receivables that are Accruing

											Total
	30-59 Days		60-89 Days		90 Days		Total				Financing
	Past Due		Past Due		and Greater		Past Due		Current		Receivables
Commercial	$	5,163	$	762	$	359	$	6,284	$	2,256,863	$	2,263,147
Real estate - construction		8,568		1,614		157		10,339		822,625		832,964
Real estate secured - residential		19,544		4,467		5,547		29,558		4,007,820		4,037,378
Real estate secured - commercial		9,623		13,746		1,394		24,763		3,897,224		3,921,987
Consumer		8,898		1,678		545		11,121		831,388		842,509
Leases		5,445		487		207		6,139		892,850		898,989
Total	$	57,241	$	22,754	$	8,209	$	88,204	$	12,708,770	$	12,796,974
Originated loans and leases	$	51,679	$	21,471	$	5,720	$	78,870	$	10,596,166	$	10,675,036
Purchased loans and leases		5,562		1,283		2,489		9,334		2,112,604		2,121,938
Total	$	57,241	$	22,754	$	8,209	$	88,204	$	12,708,770	$	12,796,974

Financing Receivables that are Nonaccruing

											Total
	30-59 Days		60-89 Days		90 Days		Total				Financing
	Past Due		Past Due		and Greater		Past Due		Current		Receivables
Commercial	$	631	$	649	$	6,068	$	7,348	$	3,116	$	10,464
Real estate - construction		0		405		14,047		14,452		365		14,817
Real estate secured - residential		953		452		19,551		20,956		7,484		28,440
Real estate secured - commercial		2,483		622		30,433		33,538		9,083		42,621
Consumer		0		0		0		0		43		43
Leases		0		656		408		1,064		318		1,382
Total	$	4,067	$	2,784	$	70,507	$	77,358	$	20,409	$	97,767
Originated loans and leases	$	4,067	$	2,379	$	65,830	$	72,276	$	18,146	$	90,422
Purchased loans and leases		0		405		4,677		5,082		2,263		7,345
Total	$	4,067	$	2,784	$	70,507	$	77,358	$	20,409	$	97,767

89

The following tables present Susquehanna’s impaired loans and reserve positions at December 31, 2013 and 2012:

Impaired Loans at December 31, 2013

										Average
			Recorded							Recorded
	Unpaid		Investment							Investment		Interest
	Principal		in Impaired			Related		Related		in Impaired		Income
	Balance		Loans			Charge-offs		Allowance		Loans(2)		Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	31,196	$	28,034		$	3,162			$	29,316	$	390
Real estate - construction		17,851		14,215			3,636				14,715		140
Real estate secured - residential		28,308		27,645			663				27,800		297
Real estate secured - commercial		143,664		125,139			18,525				125,003		2,076
Consumer		0		0			0				14		0
Total impaired loans without a related reserve		221,019		195,033	(1)		25,986				196,848		2,903
Impaired loans with a related reserve:
Commercial, financial, and agricultural		6,864		5,879			985	$	3,008		5,893		154
Real estate - construction		15,202		7,288			7,914		1,819		5,831		228
Real estate secured - residential		37,499		35,153			2,346		4,753		35,273		554
Real estate secured - commercial		27,238		17,529			9,709		3,827		16,546		325
Consumer		1,992		1,992			0		218		2,042		56
Total impaired loans with a related reserve		88,795		67,841			20,954		13,625		65,585		1,317
Total impaired loans:
Commercial, financial, and agricultural		38,060		33,913			4,147		3,008		35,209		544
Real estate - construction		33,053		21,503			11,550		1,819		20,546		368
Real estate secured - residential		65,807		62,798			3,009		4,753		63,073		851
Real estate secured - commercial		170,902		142,668			28,234		3,827		141,549		2,401
Consumer		1,992		1,992			0		218		2,056		56
Total impaired loans	$	309,814	$	262,874		$	46,940	$	13,625	$	262,433	$	4,220
Impaired loans without a related reserve:
Originated loans and leases	$	88,900	$	66,086		$	22,814			$	65,341	$	749
Purchased loans and leases		132,119		128,947			3,172				131,507		2,154
Total impaired loans without a related reserve		221,019		195,033			25,986				196,848		2,903
Impaired loans with a related reserve:
Originated loans and leases		78,015		58,343			19,672	$	11,612		55,881		1,172
Purchased loans and leases		10,780		9,498			1,282		2,013		9,704		145
Total impaired loans with a related reserve		88,795		67,841			20,954		13,625		65,585		1,317
Total impaired loans:
Originated loans and leases		166,915		124,429			42,486		11,612		121,222		1,921
Purchased loans and leases(3)		142,899		138,445			4,454		2,013		141,211		2,299
Total impaired loans	$	309,814	$	262,874		$	46,940	$	13,625	$	262,433	$	4,220

⁽¹⁾  $43,363 of the $195,033 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 $25,986.

⁽²⁾  Average recorded investment in impaired loans is calculated on a quarterly basis using daily balances.

⁽³⁾  $9,498 of the $138,445 purchased impaired loans were subsequently impaired after being acquired.

90

Impaired Loans at December 31, 2012

										Average
			Recorded							Recorded
	Unpaid		Investment							Investment		Interest
	Principal		in Impaired			Related		Related		in Impaired		Income
	Balance		Loans			Charge-offs		Allowance		Loans(2)		Recognized
Impaired loans without a related reserve:
Commercial, financial, and agricultural	$	23,959	$	23,877		$	82			$	24,603	$	233
Real estate - construction		48,394		32,717			15,677				34,223		882
Real estate secured - residential		26,298		25,261			1,037				25,417		398
Real estate secured - commercial		133,903		119,217			14,686				118,424		1,727
Consumer		114		114			0				114		3
Total impaired loans without a related reserve		232,668		201,186	(1)		31,482				202,781		3,243
Impaired loans with a related reserve:
Commercial, financial, and agricultural		4,240		4,184			56	$	3,267		4,278		47
Real estate - construction		12,894		5,577			7,317		952		5,883		237
Real estate secured - residential		32,640		32,375			265		6,633		32,498		333
Real estate secured - commercial		49,322		39,331			9,991		4,884		40,778		486
Consumer		0		0			0		0		0		0
Total impaired loans with a related reserve		99,096		81,467			17,629		15,736		83,437		1,103
Total impaired loans:
Commercial, financial, and agricultural		28,199		28,061			138		3,267		28,881		280
Real estate - construction		61,288		38,294			22,994		952		40,106		1,119
Real estate secured - residential		58,938		57,636			1,302		6,633		57,915		731
Real estate secured - commercial		183,225		158,548			24,677		4,884		159,202		2,213
Consumer		114		114			0		0		114		3
Total impaired loans	$	331,764	$	282,653		$	49,111	$	15,736	$	286,218	$	4,346
Impaired loans without a related reserve:
Originated loans and leases	$	76,120	$	45,560		$	30,560			$	49,975	$	764
Purchased loans and leases		156,548		155,626			922				152,806		2,479
Total impaired loans without a related reserve		232,668		201,186			31,482				202,781		3,243
Impaired loans with a related reserve:
Originated loans and leases		92,471		74,842			17,629	$	14,649		76,823		1,033
Purchased loans and leases		6,625		6,625			0		1,087		6,614		70
Total impaired loans with a related reserve		99,096		81,467			17,629		15,736		83,437		1,103
Total impaired loans:
Originated loans and leases		168,591		120,402			48,189		14,649		126,798		1,797
Purchased loans and leases(3)		163,173		162,251			922		1,087		159,420		2,549
Total impaired loans	$	331,764	$	282,653		$	49,111	$	15,736	$	286,218	$	4,346

⁽¹⁾  $28,658 of the $201,186 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 $31,482.

⁽²⁾  Average recorded investment in impaired loans is calculated on a quarterly basis using daily balances.

⁽³⁾  $6,625 of the $162,251 purchased impaired loans were subsequently impaired after being acquired.

91

The following table presents Troubled Debt Restructurings (TDR’s), by class segment:

At December 31,	2013			2012
Commercial, financial, and agricultural	$	6,885		$	8,744
Real estate - construction		615			940
Real estate secured - residential		31,623			23,224
Real estate secured - commercial		31,295			33,589
Consumer		1,715			1,278
Total performing TDRs		72,133			67,775
Non-performing TDRs(1)		22,676			24,603
Total TDRs	$	94,809		$	92,378
Performing TDRs		76	%		73	%
Non-performing TDRs		24	%		27	%

⁽¹⁾  These loans are included in the 90 day past due and non-accrual categories.

The following table provides detail of TDR balance and activity for the twelve months ended December 31, 2013 and 2012:

	Twelve months ended December 31,
	2013			2012			2011
Performing TDRs, January 1,	$	67,775		$	72,852		$	114,566
New restructurings as TDRs		49,888			28,374			26,805
Repayments and payoffs		(8,802	)		(10,518	)		(25,882	)
Charge-offs after restructuring		(7,604	)		(1,121	)		(15,671	)
Transfer to nonaccrual, past due 90 days or greater, non-performing TDRs		(14,657	)		(5,887	)		(5,612	)
Transfer out of TDR status(1)		(14,076	)		(15,840	)		(21,354	)
Other, net(2)		(391	)		(85	)		0
Performing TDRs, December 31,	$	72,133		$	67,775		$	72,852
Non-performing TDRs(3), December 31,	$	22,676		$	24,603		$	14,346
Performing TDRs		76	%		73	%		84	%
Non-performing TDRs		24	%		27	%		16	%

⁽¹⁾  Loans that have performed in accordance with the renegotiated terms for a minimum of six consecutive months with payments and at the time of renegotiation the loan’s interest rate represented a then current market interest rate for a loan of similar risk.

⁽²⁾  Includes $203 transferred to OREO in 2013.

⁽³⁾  Included in Age Analysis of Past Due Financing Receivables.

92

The following tables present Susquehanna’s loan modification activities that were considered troubled debt restructurings for the twelve month periods ended December 31, 2013 and 2012:

	Recorded Investment
			Pre-Modification		Post- Modification		Financial Effect of Modification
Twelve months ended December 31, 2013	Number of Loans		Recorded Investment		Recorded Investment		Recorded Investment(1)		Interest (2)
Troubled Debt Restructurings
Commercial, financial, and agricultural
Bankruptcies and maturity date extensions		38	$	10,397	$	10,397	$	0	$	(6	)
Combination of modification types		2		292		292		0		0
Real estate - construction
Bankruptcies and maturity date extensions		3		426		426		0		0
Combination of modification types		0		0		0		0		0
Real estate secured - residential
Bankruptcies and maturity date extensions		183		15,643		15,643		0		0
Combination of modification types		37		6,247		6,247		0		43
Real estate secured - commercial
Bankruptcies and maturity date extensions		27		12,977		12,977		0		0
Combination of modification types		1		1,436		1,436		0		(196	)
Consumer
Bankruptcies and maturity date extensions		260		2,444		2,444		0		0
Combination of modification types		1		26		26		0		0
Total		552	$	49,888	$	49,888	$	0	$	(159	)
Originated loans and leases		516	$	42,937	$	42,937	$	0	$	(123	)
Purchased loans and leases		36		6,951		6,951		0		(36	)
Total		552	$	49,888	$	49,888	$	0	$	(159	)

⁽¹⁾  Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

⁽²⁾  Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

	Number of Loans		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted during the current period
Commercial, financial, and agricultural		19	$	7,967
Real estate - construction		3		254
Real estate secured - residential		44		4,049
Real estate secured - commercial		9		5,287
Consumer		88		589
Total		163	$	18,146
Originated loans and leases		149	$	16,680
Purchased loans and leases		14		1,466
Total		163	$	18,146

93

	Recorded Investment
			Pre- Modification		Post- Modification		Financial Effect of Modification
Twelve months ended December 31, 2012	Number of Loans		Recorded Investment		Recorded Investment		Recorded Investment(1)		Interest(2)
Troubled Debt Restructurings
Commercial, financial, and agricultural
Bankruptcies and maturity date extensions		19	$	1,433	$	1,433	$	0	$	0
Combination of modification types		0		0		0		0		0
Real estate - construction
Bankruptcies and maturity date extensions		2		343		343		0		0
Combination of modification types		0		0		0		0		0
Real estate secured - residential
Bankruptcies and maturity date extensions		70		6,722		6,722		0		0
Combination of modification types		26		6,111		6,111		0		139
Real estate secured - commercial
Bankruptcies and maturity date extensions		10		10,630		10,630		0		0
Combination of modification types		1		2,113		2,113		0		233
Consumer
Bankruptcies and maturity date extensions		121		1,022		1,022		0		0
Combination of modification types		0		0		0		0		0
Total		249	$	28,374	$	28,374	$	0	$	372
Originated loans and leases		218	$	23,050	$	23,050	$	0	$	94
Purchased loans and leases		31		5,324		5,324		0		278
Total		249	$	28,374	$	28,374	$	0	$	372

⁽¹⁾  Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

⁽²⁾  Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

	Number of Loans		Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted during the current period
Commercial, financial, and agricultural		2	$	938
Real estate - construction		0		0
Real estate secured - residential		11		2,153
Real estate secured - commercial		3		929
Consumer		0		0
Total		16	$	4,020
Originated loans and leases		14	$	3,578
Purchased loans and leases		2		442
Total		16	$	4,020

94

The unpaid principal balance and the related carrying amount of acquired loans are as follows:

	December 31,
	2013		2012
Credit impaired purchased loans evaluated individually for incurred credit losses
Unpaid principal balance	$	176,351	$	238,538
Carrying amount		138,445		162,251
Other purchased loans evaluated collectively for incurred credit losses
Unpaid principal balance		1,509,870		1,976,132
Carrying amount		1,506,695		1,967,032
Total purchased loans
Unpaid principal balance		1,686,221		2,214,670
Carrying amount		1,645,140		2,129,283

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

	Twelve Months Ended, December 31,
	2013			2012
Balance - beginning of period	$	62,868		$	4,881
Tower acquisition		0			54,418
Accretion recognized during the period		(19,776	)		(19,255	)
Net reclassification from non-accretable to accretable		3,127			22,824
Balance - end of period	$	46,219		$	62,868

6. Allowance for Loan and Lease Losses

In establishing the allowance for credit losses, Susquehanna estimates losses attributable to specific impaired credits identified through the credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, Susquehanna evaluates its loan and lease portfolio by loan type. The losses provisioned for in Susquehanna’s allowance for loan loss is determined through a loan by loan analysis of larger balance commercial and commercial real estate loans that show signs of credit deterioration and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Susquehanna’s loan grading system, adjusted for qualitative considerations. In determining the allowance for credit losses, Susquehanna utilizes an internal loan grading system for its commercial portfolio. The internal loan grading’s are monitored by Susquehanna’s loan review department. Additionally, loans that are part of a relationship of over $1.0 million and have a rating of substandard, special mention, and pass that are on the company’s watch list, are reviewed on a quarterly basis at Susquehanna’s Loan Quality Review Committee. Factors considered at the Loan Quality Review meetings include the financial statements of the borrower, the borrower’s global cash flow, guarantees, and underlying collateral valuations.

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An analysis of the allowance for loan and lease losses for the years ended December 31, 2013 and 2012 are presented in the following tables:

	Twelve Months Ended December 31, 2013
	Commercial			Real Estate - Construction			Real Estate Secured - Residential			Real Estate Secured - Commercial			Consumer			Leases			Unallocated		Total
Allowance for credit losses:
Balance at January 1, 2013	$	30,207		$	25,171		$	41,276		$	70,053		$	3,722		$	13,341		$	250	$	184,020
Charge-offs		(28,717	)		(14,831	)		(13,606	)		(23,210	)		(3,082	)		(4,164	)		0		(87,610	)
Recoveries		8,636			7,893			2,990			7,503			1,241			1,935			0		30,198
Provision		30,464			7,956			(6,584	)		(6,085	)		385			4,147			717		31,000
Balance at December 31, 2013	$	40,590		$	26,189		$	24,076		$	48,261		$	2,266		$	15,259		$	967	$	157,608
Balance at December 31, 2013
Individually evaluated for impairment:
Originated loans and leases	$	2,708		$	1,813		$	3,979		$	2,896		$	216		$	0				$	11,612
Purchased loans and leases		300			6			774			931			2			0					2,013
Total	$	3,008		$	1,819		$	4,753		$	3,827		$	218		$	0				$	13,625
Collectively evaluated for impairment:
Originated loans and leases	$	37,582		$	24,370		$	19,323		$	44,434		$	2,048		$	15,259		$	967	$	143,983
Purchased loans and leases		0			0			0			0			0			0			0		0
Total	$	37,582		$	24,370		$	19,323		$	44,434		$	2,048		$	15,259		$	967	$	143,983
Financing receivables:
Balance at December 31, 2013	$	2,394,847		$	735,877		$	4,204,430		$	4,068,816		$	953,000		$	1,219,116				$	13,576,086
Balance at December 31, 2013
Individually evaluated for impairment:
Originated loans and leases	$	17,281		$	7,702		$	36,535		$	60,934		$	1,977		$	0				$	124,429
Purchased loans and leases		14,189			12,955			28,567			82,719			15			0					138,445
Total	$	31,470		$	20,657		$	65,102		$	143,653		$	1,992		$	0				$	262,874
Collectively evaluated for impairment:
Originated loans and leases	$	2,248,376		$	660,544		$	3,415,085		$	3,318,965		$	944,431		$	1,219,116				$	11,806,517
Purchased loans and leases		115,001			54,676			724,243			606,198			6,577			0					1,506,695
Total	$	2,363,377		$	715,220		$	4,139,328		$	3,925,163		$	951,008		$	1,219,116				$	13,313,212

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	Twelve Months Ended December 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	$	30,086		$	36,868		$	28,839		$	78,414		$	3,297		$	10,561		$	35	$	188,100
Charge-offs		(22,758	)		(17,598	)		(14,343	)		(27,509	)		(3,364	)		(4,463	)		0		(90,035	)
Recoveries		9,515			3,561			1,930			4,610			1,228			1,111			0		21,955
Provision		13,364			2,340			24,850			14,538			2,561			6,132			215		64,000
Balance at December 31, 2012	$	30,207		$	25,171		$	41,276		$	70,053		$	3,722		$	13,341		$	250	$	184,020
Balance at December 31, 2012
Individually evaluated for impairment:
Originated loans and leases	$	3,264		$	952		$	5,649		$	4,783		$	0		$	0				$	14,648
Purchased loans and leases		3			0			983			100			0			0					1,086
Total	$	3,267		$	952		$	6,632		$	4,883		$	0		$	0				$	15,734
Collectively evaluated for impairment:
Originated loans and leases	$	26,940		$	24,219		$	34,644		$	65,170		$	3,722		$	13,341		$	250	$	168,286
Purchased loans and leases		0			0			0			0			0			0			0		0
										��
Total	$	26,940		$	24,219		$	34,644		$	65,170		$	3,722		$	13,341		$	250	$	168,286
Financing receivables:
Balance at December 31, 2012	$	2,273,611		$	847,781		$	4,065,818		$	3,964,608		$	842,552		$	900,371				$	12,894,741
Balance at December 31, 2012
Individually evaluated for impairment:
Originated loans and leases	$	12,050		$	16,277		$	30,994		$	61,081		$	0		$	0				$	120,402
Purchased loans and leases		16,011			22,017			26,643			97,466			114			0					162,251
Total	$	28,061		$	38,294		$	57,637		$	158,547		$	114		$	0				$	282,653
Collectively evaluated for impairment:
Originated loans and leases	$	2,071,532		$	672,176		$	3,217,375		$	2,952,531		$	831,072		$	900,371				$	10,645,057
Purchased loans and leases		174,018			137,311			790,806			853,530			11,366			0					1,967,031
Total	$	2,245,550		$	809,487		$	4,008,181		$	3,806,061		$	842,438		$	900,371				$	12,612,088

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7. Premises and Equipment

The following is a summary of premises and equipment as of December 31, 2013 and 2012:

At December 31,	2013		2012		Useful Life (in years)
Land	$	25,775	$	29,838
Buildings		125,601		141,223	10 - 40
Furniture and equipment		103,477		100,680	3 - 5
Leasehold improvements		46,370		46,979	10 - 25
Land improvements		3,205		3,594	3 - 10
		304,428		322,314
Less: accumulated depreciation and amortization		130,886		133,331
	$	173,542	$	188,983

	2013		2012		2011
Depreciation and amortization expense	$	16,681	$	16,713	$	13,881

All subsidiaries lease certain banking branches and equipment under operating leases that expire on various dates through 2039. Renewal options generally are available for periods up to ten years. Minimum future rental commitments under non-cancelable leases, as of December 31, 2013, were as follows:

	Operating Leases
2014	$	25,688
2015		24,399
2016		23,753
2017		22,919
2018		18,543
Subsequent years		139,516
	$	254,818

	2013		2012		2011
Rent expense	$	19,789	$	20,141	$	15,639

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8. Goodwill and Other Intangibles

Amortizing Intangible Assets

The following is a summary of amortizing intangible assets as of December 31, 2013 and 2012:

At December 31, 2013	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Average Remaining Life(1)
Core deposit intangibles	$	85,337		$	(59,499	)	$	25,838			6.4
Customer lists		20,806			(14,658	)		6,148			6.3
Unfavorable lease adjustments		(2,109	)		758			(1,351	)		15.4
Originated mortgage service rights		1,691			(64	)		1,627			3.5
Total amortizing intangible assets	$	105,725		$	(73,463	)	$	32,262			5.9

At December 31, 2012	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Average Remaining Life(1)
Core deposit intangibles	$	85,337		$	(50,202	)	$	35,135			6.9
Customer lists		20,806			(12,331	)		8,475			7.3
Unfavorable lease adjustments		(2,109	)		(169	)		(2,278	)		16.5
Total amortizing intangible assets	$	104,034		$	(62,702	)	$	41,332			7.4

⁽¹⁾  Weighted average remaining life in years.

Aggregate Amortization Expense for the Year Ended December 31:
2013	$	11,626
Estimated Amortization Expense for the Year Ending December 31:
2014	$	9,389
2015		7,591
2016		5,490
2017		3,717
2018		2,602

Goodwill

Activity in Susquehanna’s goodwill accounts for the twelve month periods ended December 31, 2013 and 2012 are as follows:

Goodwill at January 1, 2012	$	1,018,031
Goodwill acquired through the Tower acquisition		252,328
Goodwill at December 31, 2012		1,270,359
Adjustment to Tower previously estimated purchase price allocation		5,080
Goodwill at December 31, 2013	$	1,275,439

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

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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.

Susquehanna performed its annual goodwill impairment assessments in the second quarter of 2013 and determined that the fair value of each of its reporting units exceeded its book value, and that there was no goodwill impairment.

Bank Reporting Unit

Goodwill assigned to the bank reporting unit at the annual assessment dates of May 31, 2013 and 2012, was $1,165,200 and $1,158,248, respectively. 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 the United States, with particular consideration given to transactions within Susquehanna’s market, to value the bank reporting unit. In 2013, Susquehanna increased the number of key ratios in measuring the fair value of the bank reporting unit from two to three, adding a price to earnings ratio. The addition of the price to earnings ratio, and its corresponding use in valuations, is appropriate given the return to more normalized profitability of the banking industry, as a whole, from the economic downturn experienced during the past several years. The following table shows the ratios used at May 31, 2013, and 2012.

	Annual	Annual
Ratio	May 31, 2013	May 31, 2012
Price to book	1.57x	1.29x
Price to tangible book	1.80x	1.47x
Price to earnings(1)	22.1x	NA

⁽¹⁾  Last twelve months earnings.

Fair value of the bank reporting unit exceeded carrying value by 44.6% at May 31, 2013, and by 5.9% at May 31, 2012. 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 the annual assessment dates of May 31, 2013 and 2012, was $82,746 for both periods. 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 a 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, 2013, and 2012.

	Annual			Annual
Factors	May 31, 2013			May 31, 2012
Discount rate		18.4	%		17.5	%
Weighted-average increase in revenues		5.0	%		6.0	%
Weighted-average increase in expenses		3.0	%		5.0	%

Fair value of the wealth management reporting unit exceeded carrying value by 45.9% at May 31, 2013 and by 63.4% at May 31, 2012. 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.

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Property and Casualty Insurance Reporting Unit

Goodwill assigned to the property and casualty insurance reporting unit at the annual assessment dates of May 31, 2013 and 2012, was $17,177 for both periods. 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 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, 2013, and 2012.

	Annual		Annual
Ratio	May 31, 2013		May 31, 2012
Average price to book		1.15X		1.17X
Median price to earnings		18.1X		12.1X

Fair value of the property and casualty insurance reporting unit exceeded carrying value by 21.7% at May 31, 2013 and by 7.3% at May 31, 2012. 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.

9. Deposits

Deposits consisted of the following at December 31, 2013 and 2012:

At December 31,	2013		2012
Noninterest-bearing:
Demand	$	1,913,526	$	1,973,664
Interest-bearing:
Interest-bearing demand		6,053,482		5,829,147
Savings		1,077,923		1,032,293
Time		2,113,209		2,262,262
Time of $100 or more		1,711,232		1,482,680
Total deposits	$	12,869,372	$	12,580,046

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10. Borrowings

Short-term Borrowings

Short-term borrowings and weighted average interest rates at December 31 were as follows:

	2013					2012
	Amount		Rate			Amount		Rate
Securities sold under repurchase agreements(1)	$	295,800		0.31	%	$	302,577		0.30	%
Federal funds purchased		256,000		0.15			515,000		0.21
Swap collateral		3,940		0.07			0		0.00
Total short-term borrowings	$	555,740				$	817,577

⁽¹⁾  Securities sold under agreements 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.

At December 31, 2013, Susquehanna Bank had aggregate availability under federal funds lines totaling $1,242,000 and collateralized availability at the Federal Reserve’s Discount Window of $1,506,102.

Federal Home Loan Bank Borrowings

At December 31,	2013		2012
Due 2013, 0.18% to 0.32%	$	0	$	1,098,000
Due 2013, 2.05% to 4.13%		0		60,664
Due 2014, 0.24% to 0.34%		1,450,000		0
Due 2014, 2.75% to 4.70%		58,096		10,592
Due 2015, 3.65% to 4.56%		17,783		22,946
Due 2017, 2.35%		5,403		6,860
	$	1,531,282	$	1,199,062

Susquehanna Bank is a member of the Federal Home Loan Bank of Pittsburgh and, as such, can take advantage of FHLB programs for overnight and term advances at published daily rates. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying first mortgages. In addition, all of the bank’s stock in the FHLB is pledged as collateral for such debt. Advances available under this agreement are limited by available and qualifying collateral and the amount of FHLB stock held by the bank.

Under this program, Susquehanna’s banking subsidiary had line-of-credit availability of $4,072,600 and $2,683,472 at December 31, 2013 and 2012, respectively. Excluding purchase-accounting adjustments, $1,526,499 and $1,192,237 was outstanding at December 31, 2013 and 2012, respectively. At December 31, 2013, Susquehanna Bank could have borrowed an additional $2,546,101 based on qualifying collateral. Such additional borrowings would have required the bank to increase its investment in FHLB stock by $101,844.

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Long-term Debt and Junior Subordinated Debentures⁽¹⁾

	2013					2012
	Amount		Rate			Amount		Rate
Senior note due 2022(5)	$	150,000		5.48	%	$	150,000		5.48	%
Subordinated notes due 2014		75,000		2.22	(2)		75,000		2.34	(2)
Subordinated note due 2018(4) (9)		25,000		4.75	(2)		25,000		5.60	(2)
Other(9)		227		n/m	(10)		1,021		n/m	(10)
Junior subordinated notes due 2032		5,743		3.31	(3)		5,764		3.56	(3)
Junior subordinated notes due 2033(6)		15,464		3.59			15,464		3.81
Junior subordinated notes due 2033(6)		15,464		3.09			15,464		3.41
Junior subordinated notes due 2033(6)		3,093		3.49			3,093		3.71
Junior subordinated notes due 2033(7)		9,813		3.65	(3)		9,788		3.81	(3)
Junior subordinated notes due 2036(8)		51,547		1.57			51,547		1.74
Junior subordinated notes due 2036(6)		10,310		1.62	(3)		10,310		1.81	(3)
Junior subordinated notes due 2036(6)		9,909		8.43	(3)		9,740		8.53	(3)
Junior subordinated notes due 2037(6)		20,619		1.84	(3)		20,619		2.02	(3)
Junior subordinated notes due 2037(7)		3,925		3.50	(3)		3,874		3.70	(3)
Junior subordinated notes due 2039(7)		9,115		5.68	(3)		9,264		7.33	(3)
	$	405,229				$	405,948

⁽¹⁾  The notes, except “Other,” require interest-only payments throughout their term with the entire principal balance paid at maturity.

⁽²⁾  Reflects the effect of amortization of acquisition costs.

⁽³⁾  Reflects the effect of purchase accounting adjustments.

⁽⁴⁾  On December 31, 2008, Susquehanna issued a $25,000 subordinated note to another financial institution. The note bears interest at the ninety-day LIBOR plus 4.5% and matures on December 31, 2018.

⁽⁵⁾  On August 15, 2012, Susquehanna issued $150,000 of senior notes bearing an interest rate of 5.375%, and used the proceeds to redeem various junior subordinated notes bearing interest rates ranging from 9.00% to 11.00%.

⁽⁶⁾  As a result of the Community Banks, Inc. acquisition, Susquehanna assumed subordinated debentures with a fair value of $69,726 issued by Community to six statutory trusts. The trust preferred securities issued by the trusts are callable on dates specified in the individual indentures. The notes, as presented in this table, include purchase accounting adjustments.

⁽⁷⁾  As a result of the Tower acquisition, Susquehanna assumed subordinated debentures with a fair value of $22,986 issued by Tower to three statutory trusts. The trust preferred securities issued by the trusts are callable on dates specified in the individual indentures. The notes, as presented in this table, include purchase accounting adjustments.

⁽⁸⁾  On April 19, 2006, Susquehanna completed a private placement to an institutional investor of $50,000 of fixed/floating rate trust preferred securities through a newly formed Delaware trust affiliate, Susquehanna TP Trust 2006-1. The trust preferred securities mature in June 2036, are redeemable at Susquehanna’s option and bear interest at a rate per annum equal to the three-month LIBOR plus 1.33%. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase Susquehanna’s fixed/floating rate junior subordinated notes.

⁽⁹⁾  Issued by Susquehanna Bank.

⁽¹⁰⁾  Not meaningful.

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11. Shareholders’ Equity

Repurchase of Warrant from the U.S. Treasury

On January 19, 2011, Susquehanna purchased for cash of $5.3 million a warrant that had been issued to the U.S. Treasury on December 12, 2008 in conjunction with our participation in the TARP Capital Purchase Program.

The warrant entitled the holder to purchase up to approximately 3,028 shares of Susquehanna’s common stock at a price of $14.86 per share. The repurchase of the warrant concluded Susquehanna’s participation in the U.S. Treasury’s Capital Purchase Program.

Treasury Stock

Susquehanna’s stock option plan permits option grantees to meet certain of their tax obligations through sales of the shares of Susquehanna. During 2013, grantees elected to satisfy their income tax obligations with respect to the stock options by having Susquehanna repurchase shares up to an amount that does not exceed the minimum applicable rate for federal (including FICA), state and local tax liabilities. Shares are repurchased at market price by Susquehanna and recorded as treasury stock.

12. Income Taxes

The components of the provision for income taxes were as follows:

	2013		2012		2011
Current:
Federal	$	7,541	$	8,788	$	(13,723	)
State		4,495		2,623		481
Total current		12,036		11,411		(13,242	)
Deferred:
Federal		61,439		48,311		4,408
State		675		3,086		(433	)
Total deferred		62,114		51,397		3,975
Total income tax expense (benefit)	$	74,150	$	62,808	$	(9,267	)

The provision for income taxes differs from the amount derived from applying the statutory income tax rate to income before income taxes as follows:

	2013(1)						2012(1)						2011(1)
	Amount			Rate			Amount			Rate			Amount			Rate
Provision at statutory rates	$	86,737			35.00	%	$	71,393			35.00	%	$	15,973			35.00	%
Tax-advantaged income		(12,766	)		(5.15	)		(11,890	)		(5.83	)		(10,524	)		(23.06	)
Bargain purchase accounting		0			0.00			0			0.00			(13,700	)		(30.02	)
Other, net		179			0.07			3,305			1.62			(1,016	)		(2.23	)
Total	$	74,150			29.92	%	$	62,808			30.79	%	$	(9,267	)		(20.31	)%

⁽¹⁾  The differences from the statutory rates expressed as percentages vary significantly from year to year due to the fluctuation of pre-tax book income in 2013, 2012, and 2011, respectively. The main differences between the statutory rate and the effective rate are due to the benefits of federally exempt income, and the effects of the Abington bargain purchase accounting.

Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates.

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The components of the net deferred tax asset (liability) as of December 31 were as follows:

	2013			2012
Deferred tax assets:
Reserve for loan losses	$	91,794		$	128,124
Deferred compensation		9,760			8,618
Nonaccrual loan interest		2,463			3,538
Federal net operating losses		36,864			28,589
State net operating losses		13,221			10,219
Post-retirement benefits		6,992			6,147
Unrealized losses		16,980			0
Underfunded status of defined benefit pension or other postretirement benefit plans		12,066			21,164
Tax credit carryforwards		10,233			4,908
Other assets		15,576			22,836
Total deferred tax assets		215,949			234,143
Deferred tax liabilities:
Prepaid pension expense		(7,751	)		(9,843	)
Amortization of market value purchase adjustments		(30,480	)		(33,980	)
Deferred loan costs		(7,311	)		(7,043	)
Premises and equipment		(4,054	)		(17,005	)
Lease transaction adjustments, net		(226,012	)		(167,025	)
Unrealized gains		0			(493	)
Other liabilities		(3,150	)		(3,789	)
Total deferred tax liabilities		(278,758	)		(239,178	)
Net deferred liability before valuation allowance		(62,809	)		(5,035	)
Valuation allowance		(1,027	)		(4,755	)
Net deferred tax liabilities	$	(63,836	)	$	(9,790	)

The deferred tax asset and deferred tax liability balances as of December 31 were included in the following Consolidated Balance Sheet line items:

	2013			2012
Deferred income tax assets	$	6,472		$	4,685
Deferred income tax liabilities		(70,308	)		(14,475	)
	$	(63,836	)	$	(9,790	)

As of December 31, 2013, Susquehanna has federal net operating losses remaining of $105,327 which begin to expire in 2030. As a result of the Abington ownership changes in 2011, Section 382 of the Internal Revenue Code places an annual limitation on the amount of federal net operating loss (“NOL”) carry-forwards which Susquehanna may utilize. Additionally, Section 382 of the Internal Revenue Code limits Susquehanna’s ability to utilize certain tax deductions due to the existence of a Net Unrealized Built-In Loss (“NUBIL”) at the time of the change in control. Consequently,$60,426 of Susquehanna’s NOL carry-forwards and the NUBIL acquired from the Abington acquisition are subject to annual limitations of $5,574.

There was no income tax benefit or expense recognized in the 2013 statement of operations for share-based award compensation due to the net operating loss position for the year. When Susquehanna is in a cash taxpaying position and the share-based compensation is realized, a benefit of $995 will be recorded to additional paid-in capital.

As of December 31, 2013, Susquehanna has state net operating losses remaining of $528,796 which begin to expire in 2014. The valuation allowance relates to state net operating loss carry-forwards and state tax credits for which future realization is uncertain. In assessing the future realization of the state net operating losses, management considers the scheduled reversal of deferred tax liabilities, projected future income and tax planning strategies.

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As of December 31, 2013, Susquehanna has federal general business credits of $3,065 which begin to expire in 2031, and charitable contribution carry-forwards of $5,654 which begin to expire in 2015. Susquehanna also has alternative minimum tax credits of $7,168 with no expiration.

Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2013		2012			2011
Balance at January 1,	$	831	$	2,043		$	3,598
Increase based on tax positions related to the current year		30		12			15
Increase for tax positions of prior years		0		804			0
Decrease for tax positions of prior years		0		0			(259	)
Decrease related to settlements with taxing authorities		0		(1,270	)		0
Decrease related to expiration of statute of limitations		0		(758	)		(1,311	)
Balance at December 31,	$	861	$	831		$	2,043

Susquehanna has $861 of unrecognized tax benefits of which $560, if recognized, would affect the effective tax rate. Susquehanna does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

Susquehanna recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax expense. During the twelve months ended December 31, 2013, 2012 and 2011, respectively, Susquehanna recognized $90, ($39) and ($240), respectively, in interest and penalties and had accrued $187, $97 and $136, respectively, for the payment of interest and penalties.

Susquehanna and its subsidiaries file income tax returns in the U.S. federal jurisdictions and various state jurisdictions. With few exceptions, Susquehanna is no longer subject to U.S. federal examinations by tax authorities before 2010, or state and local examinations by tax authorities before 2009. As of December, 31, 2013, there are no federal or state examinations of Susquehanna’s tax returns in progress.

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13. Accumulated Other Comprehensive Loss

The balances and changes in balances by component of accumulated other comprehensive income (loss) are shown in the following tables:

							Unrealized						Accumulated
	Unrealized Gains (Losses) on						Gains (Losses)			Post-			Other
	Investment securities						on Cash Flow			retirement			Comprehensive
	With OTTI			All other			Hedges			Benefits			Loss
Balance, January 1, 2011	$	(603	)	$	(12,516	)	$	(19,135	)	$	(25,881	)	$	(58,135	)
AOCI before reclassifications, net of tax		(4,379	)		38,361			(25,240	)		(7,594	)		1,148
Sale of securities for which other-than-temporary impairment was previously taken, net of tax		287			0			0			0			287
Amounts reclassified from AOCI:
Interest expense		0			0			16,880			0			16,880
Net realized gain on sales of securities		0			(3,878	)		0			0			(3,878	)
Net impairment losses recognized in earnings		3,364			0			0			0			3,364
Total before income taxes		3,364			(3,878	)		16,880			0			16,366
Less: Income taxes		(1,233	)		1,421			(5,908	)		0			(5,720	)
Net of income taxes		2,131			(2,457	)		10,972			0			10,646
Net change in AOCI		(1,961	)		35,904			(14,268	)		(7,594	)		12,081
Balance, December 31, 2011		(2,564	)		23,388			(33,403	)		(33,475	)		(46,054	)
AOCI before reclassifications, net of tax		(443	)		15,193			(12,689	)		(5,829	)		(3,768	)
Sale of securities for which other-than-temporary impairment was previously taken, net of tax		2,015			0			0			0			2,015
Amounts reclassified from AOCI:
Interest expense		0			0			17,624			0			17,624
Net realized gain on sales of securities		0			(1,674	)		0			0			(1,674	)
Net impairment losses recognized in earnings		241			0			0			0			241
Total before income taxes		241			(1,674	)		17,624			0			16,191
Less: Income taxes		(88	)		614			(6,168	)		0			(5,642	)
Net of income taxes		153			(1,060	)		11,456			0			10,549
Net change in AOCI		1,725			14,133			(1,233	)		(5,829	)		8,796
Balance, December 31, 2012		(839	)		37,521			(34,636	)		(39,304	)		(37,258	)
AOCI before reclassifications, net of tax		(1,209	)		(44,439	)		219			16,895			(28,534	)
Sale of securities for which other-than-temporary impairment was previously taken, net of tax		608			0			0			0			608
Amounts reclassified from AOCI:
Interest expense		0			0			19,591			0			19,591
Net realized loss (gain) on sales of securities		1,347			(438	)		0			0			909
Net impairment losses recognized in earnings		485			0			0			0			485
Total before income taxes		1,832			(438	)		19,591			0			20,985
Less: Income taxes		(671	)		161			(6,857	)		0			(7,367	)
Net of income taxes		1,161			(277	)		12,734			0			13,618
Net change in AOCI		560			(44,716	)		12,953			16,895			(14,308	)
Balance, December 31, 2013	$	(279	)	$	(7,195	)	$	(21,683	)	$	(22,409	)	$	(51,566	)

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14. Financial Instruments with Off-balance-sheet Credit Risk

Susquehanna is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the needs of its customers. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated financial statements. The contract or notional amount of those instruments reflects the extent of involvement Susquehanna has in particular classes of financial instruments. Susquehanna’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for loan commitments and standby letters of credit is represented by the contractual amount of these instruments. Susquehanna uses the same credit policies for these instruments as it does for on-balance-sheet instruments.

Standby letters of credit are conditional commitments issued by Susquehanna to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Susquehanna evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Susquehanna upon extension of credit, is based upon management’s credit evaluation of the borrower.

Financial instruments whose contractual amounts represent off-balance-sheet credit risk at December 31, 2013 and 2012 were as follows:

	2013		2012
Standby letters of credit	$	331,235	$	386,763
Real estate commitments - commercial		411,631		327,304
Real estate commitments - residential		240,729		181,850
Unused portion of home equity lines held by VIEs		24,729		85,524
Unused portion of home equity lines		1,239,048		1,058,661
Other commitments		45,292		43,835
All other commercial, financial, and agricultural commitments		1,121,917		1,005,229

15. Contingent Liabilities

In September 2010, Lehman Brothers Special Financing Inc. (“LBSF”) filed suit in the United States Bankruptcy Court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate holders who received distributions from the trustees, including Susquehanna, to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate collateralized debt obligation transactions (“CDO”). In June 2007, two of our affiliates each purchased $5.0 million in AAA rated Class A Notes of a CDO offered by Lehman Brothers Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with LBSF. Lehman Brothers Holdings Inc. (“LBHI”) guaranteed LBSF’s obligations to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an Event of Default under the indenture occurred, and the trustee declared the notes to be immediately due and payable. Susquehanna was repaid its principal on the notes in September 2008.

This legal proceeding is in the early stages of discovery; thus 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.

16. Share-based Compensation

Susquehanna implemented an Equity Compensation Plan (“Compensation Plan”) in 1996 under which Susquehanna may grant options to its employees and directors for up to 2,463 shares of common stock. Under the Compensation Plan, the exercise price of each nonqualified option equaled the market price of Susquehanna’s stock on the date of grant, and an option’s maximum term was ten years. Options were granted upon approval of the Board of Directors and typically vested one-third at the end of years three, four, and five. The exercise prices associated with the options ranged from $13.00 per share to $25.47 per share. This Compensation Plan expired in 2006.

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In May 2005, Susquehanna’s shareholders approved the 2005 Equity Compensation Plan, as amended, (“the 2005 Plan”) and approved an amendment and restatement of the plan in May 2009. Subject to adjustments in certain circumstances, the 2005 Plan authorized up to 3,500 shares of common stock for issuance. Incentives under the 2005 Plan consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock options, restricted stock grants, restricted stock unit grants, and dividend equivalents on restricted stock units. Options were granted upon approval of the Board of Directors and typically vested one-third at the end of years three, four, and five. The exercise prices associated with the options ranged from $8.28 per share to $24.34 per share. The 2005 Plan was terminated in 2013, and superseded by the 2013 Omnibus Equity Compensation Plan.

In 2013, Susquehanna’s Board of Directors approved the 2013 Omnibus Equity Compensation Plan (“the Plan”). The Plan authorizes up to 4,447 shares of common stock issuance. Incentives under the 2013 plan consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock options, restricted stock grants, restricted stock unit grants, performance stock units (“PSU”) and dividend equivalents on restricted stock units and performance stock units. The PSU grants provide key executives with long-term incentives based on Susquehanna’s performance relative to peers, service, and market conditions, as a motivation for future performance and as a retention tool for continued employment. The PSU’s are based on a plan which is a multi-year performance plan, with stock-based incentive award opportunities if certain performance targets are met. At December 31, 2013, approximately 374 shares have been allocated for PSU’s. At December 31, 2013, approximately 555 total shares were outstanding under the Plan.

The exercise period for stock options may not exceed ten years, and the options typically vest one-third at the end of years three, four, and five. Restricted stock vests one-third at the end of years one, two, and three; while restricted stock units vest at the end of three years. The fair value of restricted stock and restricted stock units is the fair market value of Susquehanna’s stock on the date that the incentives are granted. The fair value of option award is estimated on the date of grant using the Black-Scholes-Merton model.

For the twelve months ended December 31, 2013, 2012, and 2011, share-based compensation expense totaling $3,021, $1,921, and, $3,139, respectively, was included in salaries and employee benefits expense in the Consolidated Statements of Income. In addition, as of December 31, 2013, there was $7,228 of aggregate unrecognized compensation expense related to non-vested share-based compensation arrangements. That expense is expected to be recognized through 2018.

Stock Options

The following table presents the assumptions used to estimate the fair value of options granted in 2013, 2012, and 2011, and the resultant fair values. Expected volatilities are based upon the historical volatility of Susquehanna stock, using the monthly high stock price over the past ten years. The expected term is based upon historical exercise behavior of all employees and directors. The risk-free rate is based upon zero coupon treasury rates in effect on the grant date of the options.

	2013			2012			2011
Volatility		37.84	%		37.61	%		37.09	%
Expected dividend yield		4.00	%		4.00	%		4.00	%
Expected term (in years)		7.0			7.0			7.0
Risk-free rate		1.51	%		1.09	%		2.96	%
Fair value	$	2.92		$	2.40		$	2.60

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Option Activity for the Year Ended December 31, 2013

						Weighted-
				Weighted-		average
				average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Options			Price		Term		Value
Outstanding at January 1, 2013		4,927		$	12.53
Granted		6			11.69
Forfeited		(52	)		10.46
Expired		(284	)		22.39
Exercised		(596	)		6.47
Outstanding at December 31, 2013		4,001		$	12.75		4.1	$	14,238
Exercisable at December 31, 2013		3,467		$	13.22		3.5	$	12,575

						Weighted-
				Weighted-		average
				average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Options			Price		Term		Value
Outstanding at January 1, 2012		5,010		$	13.03
Replacement awards		566			8.02
Granted		327			9.92
Forfeited		(206	)		18.03
Expired		(168	)		23.09
Exercised		(602	)		6.24
Outstanding at December 31, 2012		4,927		$	12.53		4.8	$	10,365
Exercisable at December 31, 2012		4,142		$	12.68		4.2	$	9,796

	2013		2012		2011
Intrinsic value of options exercised	$	3,537	$	2,397	$	398

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A summary of the status of Susquehanna’s non-vested options at December 31, 2013 and 2012, and changes during the years ended December 31, 2013 and 2012 are as follows:

	2013					2012
	Shares			Weighted- average Grant-date Fair Value		Shares			Weighted- average Grant-date Fair Value
Nonvested at January 1,		785		$	2.30		934		$	2.50
Granted		6			2.92		327			2.40
Vested		(171	)		2.14		(376	)		2.87
Forfeited		(86	)		2.45		(100	)		2.27
Nonvested at December 31,		534			2.33		785			2.30

Restricted Stock and Restricted Stock Units

A summary of activity related to restricted stock and restricted stock units for the year ended December 31, 2013 is as follows:

	2013					2012
	Restricted Stock and Stock Units			Weighted- average Fair Value		Restricted Stock and Stock Units			Weighted- average Fair Value
Outstanding at January 1,		347		$	9.79		303		$	9.53
Granted		240			12.16		290			9.83
Vested		(162	)		9.80		(223	)		9.53
Forfeited		(13	)		9.89		(23	)		9.41
Outstanding at December 31,		412		$	11.16		347		$	9.79

17. Benefit Plans

Pension Plan and Other Postretirement Benefits

Susquehanna maintains a single non-contributory defined benefit pension plan. The plan provides defined benefits based on years of service and final average salary. Effective June 30, 2009, certain benefits under the plan were frozen, as follows:

• Employees who were hired before January 1, 2009 and who were age fifty or over or who had at least fifteen years of vesting service as of December 31, 2009, continued to participate in the plan after June 30, 2009 with no changes to the features of the plan.

• Employees who were hired before January 1, 2009 and who were not age fifty and who did not have fifteen years of vesting service were frozen from accruing future pay-based credits to their accounts within the plan after June 30, 2009. These employees continue to receive interest each year at a guaranteed minimum of 5.0%. Employees in this group also receive an automatic non-discretionary contribution to the Susquehanna 401(k) plan equal to 2.0% of eligible compensation.

• Employees who were hired on or after January 1, 2009 are not eligible to participate in the plan. However, eligible employees receive an automatic non-discretionary contribution to the Susquehanna 401(k) plan equal to 2.0% of eligible compensation. The automatic contribution to the 401(k) plan begins once these employees individually meet the eligibility requirements of the plan.

Additional benefits were frozen effective December 31, 2013. Susquehanna will cease providing future pay-based increases to accounts for eligible employees. Eligible employees will continue to receive interest each year at a guaranteed minimum of 5.0%. Employees in this group will also receive an automatic contribution to the Susquehanna 401(k) plan equal to 2.0% of their eligible compensation. In conjunction with the plan freeze, Susquehanna revised the asset allocation strategy for the defined benefit pension plan. The strategy changes involved decreasing the duration of fixed income assets, adding multi-sector bond managers to diversify fixed income holdings, and a reduction of direct equity exposure.

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Susquehanna also maintains a supplemental executive retirement plan (“SERP”) for selected participants. This plan provides for benefits lost under the defined benefit pension plan due to provisions in the Internal Revenue Code that limit the compensation and benefits under a qualified retirement plan. In addition, Susquehanna offers life insurance and certain medical benefits to its retirees.

Obligations and Funded Status

	Pension Benefits						SERP						Other Postretirement Benefits
At December 31	2013			2012			2013			2012			2013			2012
Change in Benefit Obligation
Benefit obligation at beginning of year	$	171,270		$	151,676		$	9,763		$	6,423		$	22,008		$	18,159
Service cost		4,776			4,698			678			1,129			1,450			1,182
Interest cost		7,257			7,065			432			366			855			831
Plan participants’ contributions		0			0			0			0			329			380
Actuarial (gain) loss		(15,817	)		12,326			(434	)		931			(3,628	)		2,101
Change in plan provisions		0			0			0			1,128			0			0
Benefits paid		(4,949	)		(4,495	)		(245	)		(214	)		(636	)		(645	)
Liability (gain) loss due to curtailment		(6,057	)		0			0			0			0			0
Special termination benefits		0			0			574			0			0			0
Benefit obligation at end of year		156,480			171,270			10,768			9,763			20,378			22,008
Change in Plan Assets
Fair value of plan assets at beginning of year		146,398			137,361			0			0			0			0
Actual return on plan assets		4,978			13,533			0			0			0			0
Employer contributions(1)		0			0			245			214			307			265
Expenses		0			(1	)		0			0			0			0
Plan participants’ contributions		0			0			0			0			329			380
Benefits paid		(4,949	)		(4,495	)		(245	)		(214	)		(636	)		(645	)
Fair value of plan assets at end of year		146,427			146,398			0			0			0			0
Funded Status at End of Year	$	(10,053	)	$	(24,872	)	$	(10,768	)	$	(9,763	)	$	(20,378	)	$	(22,008	)

⁽¹⁾  Cash contributions made to providers, insurers, trusts, or participants for payment of claims.

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Amounts recognized on the consolidated balance sheets consist of the following:

	Pension Benefits						SERP						Other Postretirement Benefits
	2013			2012			2013			2012			2013			2012
Assets	$	0		$	0		$	0		$	0		$	0		$	0
Liabilities		(10,053	)		(24,872	)		(10,768	)		(9,763	)		(20,378	)		(22,009	)
Net asset/(liability) recognized	$	(10,053	)	$	(24,872	)	$	(10,768	)	$	(9,763	)	$	(20,378	)	$	(22,009	)

Amounts recognized in accumulated other comprehensive income (net of taxes at 35%) consist of the following:

	Pension Benefits				SERP				Other Postretirement Benefits
	2013		2012		2013		2012		2013		2012
Net actuarial loss	$	19,728	$	33,233	$	1,293	$	1,759	$	548	$	3,000
Transition obligation		0		0		0		0		0		5
Prior service cost		0		62		544		686		295		369
	$	19,728	$	33,295	$	1,837	$	2,445	$	843	$	3,374

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The accumulated benefit obligation for the defined benefit pension plan was $156,480 and $165,376 at December 31, 2013 and 2012, respectively. The accumulated benefit obligation for the SERP was $9,776 and $7,602 at December 31, 2013 and 2012, respectively.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income

Net Periodic Benefit Cost

	Pension Benefits						SERP				Other Postretirement Benefits
	2013			2012			2013		2012		2013		2012
Service cost	$	4,776		$	4,699		$	678	$	1,129	$	1,450	$	1,182
Interest cost		7,257			7,065			432		366		855		830
Expected return on plan assets		(9,358	)		(9,055	)		0		0		0		0
Amortization of prior service cost		25			25			218		256		114		114
Amortization of transition obligation		0			0			0		0		8		113
Amortization of net actuarial loss		3,283			2,684			282		97		144		88
Settlement/curtailment expense		70			0			0		0		0		0
Special termination benefits		0			0			574		0		0		0
Net periodic postretirement benefit cost	$	6,053		$	5,418		$	2,184	$	1,848	$	2,571	$	2,327

Other Changes in Plan Assets and Benefit Obligations

	Pension Benefits						SERP						Other Postretirement Benefits
	2013			2012			2013			2012			2013			2012
Net actuarial (gain) loss for the period	$	(17,494	)	$	7,847		$	(434	)	$	931		$	(3,628	)	$	2,145
Amortization of net loss		(3,283	)		(2,684	)		(282	)		(97	)		(144	)		(88	)
Amortization of prior service cost		(95	)		(25	)		(218	)		(256	)		(114	)		(114	)
Recognition of prior service cost		0			0			0			1,128			0			0
Amortization of transition obligation		0			0			0			0			(8	)		(113	)
Total recognized in other comprehensive income		(20,872	)		5,138			(934	)		1,706			(3,894	)		1,830
Total recognized in net periodic benefit cost and other comprehensive income	$	(14,819	)	$	10,556		$	1,250		$	3,554		$	(1,323	)	$	4,157

Expected Amortizations

The estimated net loss, prior service cost, and transition obligation (asset) for the plans that are expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is as follows:

	Pension Benefits		SERP		Other Postretirement Benefits
Expected amortization of net loss	$	481	$	114	$	0
Expected amortization of prior service cost		0		145		114

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Additional Information

The weighted-average assumptions used in the actuarial computation of the plans’ benefit obligations were as follows:

	Pension Benefits						SERP						Other Postretirement Benefits
	2013			2012			2013			2012			2013			2012
Discount rate		5.00	%		4.25	%		4.67	%		4.25	%		4.93	%		4.00	%
Rate of compensation increase		3.00	%		3.00	%		4.00	%		4.00	%		3.00	%		3.00	%
Assumed health care trend rates:
Health care cost trend rate assumed for next year(1)														8.85% / 7.45	%		9.25% / 7.75	%
Ultimate health care trend rate														5.00	%		5.00	%
Year that ultimate trend rate is attained														2022			2022

⁽¹⁾  Initial trend is 8.85% for pre-65 benefits and 7.45% for post-65 benefits.

The weighted-average assumptions used in the actuarial computation of the plan’s net periodic cost were as follows:

	Pension Benefits						SERP						Other Postretirement Benefits
	2013			2012			2013			2012			2013			2012
Discount rate		4.25	%		4.75	%		4.25	%		4.75	%		4.00	%		4.50	%
Expected return on plan assets		6.50	%		6.70	%		N/A			N/A			N/A			N/A
Rate of compensation increase		3.00	%		3.00	%		4.00	%		4.00	%		3.00	%		3.00	%
Assumed health care trend rates:
Health care cost trend rate assumed for current year(1)														9.25% / 7.75	%		9.00	%
Ultimate health care trend rate														5.00	%		5.00	%
Year that ultimate trend rate is attained														2022			2016

⁽¹⁾  Initial trend is 9.25% for pre-65 benefits and 7.75% for post-65 benefits.

The impact of one-percentage point change in assumed health care cost trend rates is as follows:

	Increase		Decrease
Effect on service cost plus interest cost components of net periodic postretirement benefit cost	$	113	$	(93	)
Effect on accumulated benefit obligation as of December 31, 2013		782		(675	)

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Other accounting items that are required to be disclosed are as follows:

Pension Benefits

SERP

Other Postretirement Benefits

2013

2012

2013

2012

2013

2012

Alternative amortization methods used:

Prior service cost

Straight line

Straight line

Straight line

Straight line

Straight line

Straight line

Unrecognized net actuarial loss

Straight line

Straight line

Straight line

Straight line

Straight line

Straight line

Average future service (in years)

10.88

11.23

8.01

7.63

N/A

N/A

Average future service to assumed retirement age (in years)

N/A

N/A

N/A

N/A

10.70

8.99

Average future service to full benefit eligibility age (in years)

N/A

N/A

N/A

N/A

15.01

14.36

Measurement date used

12/31/2013

12/31/2012

12/31/2013

12/31/2012

12/31/2013

12/31/2012

The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the defined pension benefit plan’s target asset allocation. The expected return on equities was computed using a valuation methodology which projected future returns based on current equity valuations while looking at historical returns, as well. Due to active management of the plan’s assets, the return on the equity investment of the plan historically has exceeded general market returns. Management estimated the rate by which the plan’s assets would perform to the market in the future by looking at historical performance and adjusting for changes in the asset allocations.

For the plan-year ending December 31, 2014, expected employer contributions to the pension plan, SERP, and other benefit plans are $0, $559, and $375, respectively, and expected employee contributions are $0, $0, and $407, respectively. The 2014 plan assumptions used to determine net periodic cost will be a discount rate of 4.25% and an expected long-term return on plan assets of 6.50%. The assumed discount rate was determined by matching Susquehanna’s projected pension payments to high quality AA bonds of similar duration. The payment projections used a seventy-five year payout projection.

The investment objective of the pension plan is to maximize total return while limiting the volatility in funded status by emphasizing growth at a reasonable price and owning fixed-income assets that correlate to the calculation of liabilities under the Pension Protection Act of 2006.

The plan’s equity portfolio consists primarily of large-cap stocks. Equity investments are diversified and sector-weighted. Industry growth prospects and economic sentiment are major considerations in the investment process, but risk reduction is achieved through diversification and active portfolio management. The plan does not hold Susquehanna common stock.

The pension plan’s debt securities portfolio consists of bonds rated A or higher at the time of purchase. The current portfolio consists primarily of investment-grade bonds with a duration exceeding eleven years with additional holdings of U.S. Treasuries and agency securities, high-quality corporate, and money market investments. A credit analysis is conducted to ensure that the appropriate liquidity, industry diversification, safety, maximum yield, and minimum risk are achieved. Duration in excess of eleven years is sought for correlation with the determination of plan liabilities. While there is a concentration of assets in long-duration bonds, risk is mitigated by the high quality of the bonds and their correlation to the valuation of plan liabilities.

The target and actual allocations expressed as a percentage of the defined benefit pension plan’s assets are as follows:

	Target	Actual
For the year ended	2014	2013			2012
Equity securities	20-40%		33	%		30	%
Debt securities	60-80%		65	%		66	%
Temporary cash and other investments	0-10%		2	%		4	%
Total			100	%		100	%

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Estimated aggregate future benefit payments for pension, SERP, and other benefits, which reflect expected future service, as appropriate, are as follows:

	Pension		SERP		Other Benefits
2014	$	5,389	$	559	$	782
2015		5,888		699		855
2016		6,353		706		891
2017		6,865		699		1,021
2018		7,407		701		1,153
Years 2019-2023		44,922		3,878		7,360

Fair Value Measurement of Plan Assets

For information regarding Susquehanna’s fair value methodology and hierarchy, refer to “Note 22. Fair Value Disclosures”.

The following tables summarize the fair values of the plan’s investments at December 31, 2013 and 2012.

			Fair Value Measurements at Reporting Date
Description	12/31/2013		Level 1		Level 2		Level 3
Registered investment companies	$	95,400	$	95,400	$	0	$	0
U.S. Government agencies		6		0		6		0
Municipal bonds		124		0		124		0
Corporate bonds and notes		0		0		0		0
Common stocks		47,565		47,565		0		0
Dividends and interest receivable		371		0		0		371
Temporary cash and other investments		2,961		2,961		0		0
Total	$	146,427	$	145,926	$	130	$	371

			Fair Value Measurements at Reporting Date
Description	12/31/2012		Level 1		Level 2		Level 3
Registered investment companies	$	95,970	$	95,970	$	0	$	0
U.S. Government agencies		10		0		10		0
Municipal bonds		591		0		591		0
Corporate bonds and notes		365		0		365		0
Common stocks		43,483		43,483		0		0
Dividends and interest receivable		99		0		0		99
Temporary cash and other investments		5,880		5,880		0		0
Total	$	146,398	$	145,333	$	966	$	99

401(k) Plan

Susquehanna maintains a 401(k) savings plan which allows employees to invest a percentage of their earnings, matched up to a certain amount specified by Susquehanna. In addition, in conjunction with the changes to Susquehanna’s pension plan, certain employees are to receive non-discretionary contributions to their 401(k) accounts. Susquehanna’s match of employee contributions to the savings plan, which is included in salaries and benefits expense, totaled $6,197 in 2013, $5,903 in 2012, and $4,785 in 2011. Susquehanna’s non-discretionary contribution to the savings plan was $2,475 for 2013, $1,798 in 2012, and $1,567 in 2011.

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18. Earnings per Common Share (“EPS”)

Basic earnings per common share

	For the Year Ended December 31,
	2013		2012		2011
Net income applicable to common shareholders	$	173,679	$	141,172	$	54,905
Average common shares outstanding		186,927		182,896		136,509
Basic earnings per common share	$	0.93	$	0.77	$	0.40

Diluted earnings per common share

	For the Year Ended December 31,
	2013		2012		2011
Net income (loss) available to common shareholders	$	173,679	$	141,172	$	54,905
Average common shares outstanding		186,927		182,896		136,509
Dilutive potential common shares		908		682		367
Total diluted average common shares outstanding		187,835		183,578		136,876
Diluted earnings per common share	$	0.92	$	0.77	$	0.40

For the years ended December 31, 2013, 2012, and 2011, options to purchase 1,325, 1,611, and 5,010 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents were antidilutive. For the year ended December 31, 2011, warrants to purchase 3,028 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the warrants’ common stock equivalents were antidilutive.

19. Related Party Transactions

Certain directors and named executive officers of Susquehanna and its affiliates, including their immediate families and companies in which they are principal owners (more than 10%), were indebted to the bank subsidiary. In the opinion of management, such loans are consistent with sound banking practices and are within applicable regulatory bank lending limitations and in compliance with applicable rules and regulations of the Securities and Exchange Commission. Susquehanna relies on the directors and named executive officers for the identification of their associates.

The activity of loans to such persons whose balances exceeded a reportable threshold of $120 is as follows:

	2013			2012			2011
Balance - January 1	$	69,046		$	33,362		$	45,595
Additions		27,745			32,250			2,566
Deductions:
Amounts collected		(21,167	)		(30,047	)		(13,665	)
Other changes(1)		(6,919	)		33,481			(1,134	)
Balance - December 31	$	68,705		$	69,046		$	33,362

⁽¹⁾  Represents adjustment in beginning balance because of director relationship changes.

20. 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.

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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 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 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 fixed-rate basis for all or a portion of the term of the long-term debt. As of December 31, 2013 and 2012, Susquehanna had 14 interest rate swaps, respectively for each period, with an aggregate notional amount of $1,146,437 and $1,154,363, respectively, 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. 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 in a hedge relationship 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 $21,485 will be reclassified as an expense to net interest income.

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 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. 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 December 31, 2013 and 2012, Susquehanna had 262 and 200 derivative transactions, respectively, related to these risk management activities with an aggregate notional amount of $1,696,865 and $1,071,616, respectively. For the years ended December 31, 2013 and 2012, Susquehanna recognized net gain (losses) of $3,142, and ($3,816), respectively, related to changes in fair value of the derivatives in this program.

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;

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• 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;

At December 31, 2013 and 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 $50,247 and $72,126, respectively. At December 31, 2013 and 2012, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $42,813 and $75,103, respectively. If Susquehanna had breached any of the above provisions at December 31, 2013, 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 December 31, 2013
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	1,419	Other liabilities	$	31,662
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets		22,897	Other liabilities		18,585
Total derivatives		$	24,316		$	50,247

	Fair Values of Derivative Instruments December 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	$	878	Other liabilities	$	51,172
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets		25,037	Other liabilities		20,954
Total derivatives		$	25,915		$	72,126

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The Effect of Derivative Instruments on Comprehensive Income

Year Ended December 31, 2013

							Location of Loss	Amount of Loss
			Location of Loss	Amount of Loss			Recognized in	Recognized in
	Amount of Gain		Reclassified from	Reclassified from			Income	Income
Derivatives in Cash Flow Hedging Relationships	Recognized		Accumulated OCI	Accumulated OCI			(Ineffective	(Ineffective
	in OCI		into Income	into Income			Portion)	Portion)
Interest rate contracts:	$	12,953	Interest expense	$	(19,591	)	Other expense	$	0

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	$	3,143
	Other expense		(1	)

Year Ended December 31, 2012

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:	$	(1,233	)		Interest expense	$	(17,624	)		Other expense	$	0

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	$	(3,768	)
	Other expense		(48	)

NOTE 21. Balance Sheet Offsetting

Assets and liabilities relating to certain financial instruments, including derivatives and securities sold under agreements to repurchase, may be eligible for offset in the consolidated balance sheet as permitted under accounting guidance. Susquehanna is party to transactions involving derivative instruments that are subject to master netting arrangements or similar agreements. Under these agreements, Susquehanna may have the right to net settle multiple contracts with the same counterparty. Certain derivative transactions may require Susquehanna to receive or pledge cash collateral based on the contract provisions.

Susquehanna also enters into agreements in which it sells securities subject to an obligation to repurchase the same or similar securities. Under these agreements, Susquehanna may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates Susquehanna to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in Susquehanna’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liability.

Susquehanna also offers derivative products to qualifying customers and enters into offsetting derivative transactions in due course. Susquehanna manages a matched book with respect to its derivative instruments offered as part of this service to its customers in order to minimize its interest rate risk resulting from such transactions. These instruments are free-standing derivatives and are recorded at fair value on the consolidated balance sheet. Collateral is posted by the counterparty with net liability positions in accordance with the contract provisions.

Susquehanna is subject to the regulations of the Commodity Futures Trading Commission that require financial institutions to clear all eligible contracts beginning June 2013. Susquehanna fulfills this obligation by clearing its eligible contracts through a clearing member that faces a designated clearing house on Susquehanna’s behalf. Susquehanna reports amounts for interest rate contracts in a single clearing member account as of period end on a net basis in the Consolidated Balance Sheet, including the related unrealized contract gains and losses, accrued interest receivable/payable, and cash collateral posted as initial and variation margin. Derivatives originated prior to June 2013 continue to be presented on a gross basis in the Consolidated Balance Sheet.

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The following table provides information about financial instruments that are eligible for offset at December 31, 2013 and 2012:

Balance Sheet Netting Disclosure about Offsetting Assets and Liabilities

						Net Amounts Presented in the		Gross Amounts Not Offset in the
	Gross					Consolidated		Consolidated Balance Sheet
	Amounts Recognized		Gross Amounts Offset			Balance Sheet		Financial Instruments			Cash Collateral			Net Amount
December 31, 2013
Financial assets:
Derivatives	$	24,316	$	0		$	24,316	$	0		$	(3,940	)	$	20,376
Financial liabilities:
Derivatives	$	50,247	$	0		$	50,247	$	0		$	(42,813	)	$	7,434
Repurchase agreements		295,800		0			295,800		(295,800	)		0			0
Total	$	346,047	$	0		$	346,047	$	(295,800	)	$	(42,813	)	$	7,434
December 31, 2012
Financial assets:
Derivatives	$	25,922	$	(7	)	$	25,915	$	0		$	0		$	25,915
Financial liabilities:
Derivatives	$	72,126	$	0		$	72,126	$	0		$	(75,103	)	$	(2,977	)
Repurchase agreements		302,577		0			302,577		(302,577	)		0			0
Total	$	374,703	$	0		$	374,703	$	(302,577	)	$	(75,103	)	$	(2,977	)

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The table below presents the offsetting of derivative assets and derivative liabilities as of December 31, 2013 and 2012.

	Derivative Assets and Collateral									Derivative Liabilities and Collateral
	Held by Counterparty									Pledged by Counterparty
	Net Amounts		Gross Amounts							Net Amounts		Gross Amounts
	Presented in		Not Offset							Presented in		Not Offset
	the		in the Consolidated							the		in the Consolidated
	Consolidated		Balance Sheet							Consolidated		Balance Sheet
	Balance		Financial		Cash			Net		Balance		Financial		Cash			Net
	Sheet		Instruments		Collateral			Amount		Sheet		Instruments		Collateral			Amount
December 31, 2013
Cleared Agreements:
Clearing member A	$	19	$	0	$	0		$	19	$	1,077	$	0	$	(3,993	)	$	(2,916	)
		19		0		0			19		1,077		0		(3,993	)		(2,916	)
Bilateral Agreements:
Counterparty:
Dealer A		2,836		0		0			2,836		3,840		0		(1,290	)		2,550
Dealer B		2,412		0		0			2,412		3,306		0		(1,400	)		1,906
Dealer C		359		0		0			359		684		0		(550	)		134
Dealer D		5,571		0		(3,940	)		1,631		688		0		0			688
Dealer E		0		0		0			0		21,251		0		(24,100	)		(2,849	)
Dealer F		0		0		0			0		5,081		0		(6,100	)		(1,019	)
Dealer G		0		0		0			0		3,966		0		(4,260	)		(294	)
Dealer H		0		0		0			0		770		0		(1,120	)		(350	)
Dealer I		0		0		0			0		121		0		0			121
Dealer J		0		0		0			0		18		0		0			18
End User		13,119		0		0			13,119		9,445		0		0			9,445
		24,297		0		(3,940	)		20,357		49,170		0		(38,820	)		10,350
Total	$	24,316	$	0	$	(3,940	)	$	20,376	$	50,247	$	0	$	(42,813	)	$	7,434
December 31, 2012
Counterparty:
Dealer A	$	0	$	0	$	0		$	0	$	7,789	$	0	$	(7,820	)	$	(31	)
Dealer B		873		0		0			873		6,104		0		(5,050	)		1,054
Dealer C		5		0		0			5		3,460		0		(3,300	)		160
Dealer D		0		0		0			0		3,239		0		(3,350	)		(111	)
Dealer E		0		0		0			0		33,598		0		(35,800	)		(2,202	)
Dealer F		0		0		0			0		9,105		0		(10,300	)		(1,195	)
Dealer G		0		0		0			0		6,623		0		(7,150	)		(527	)
Dealer H		0		0		0			0		1,816		0		(1,820	)		(4	)
End User		25,037		0		0			25,037		392		0		(513	)		(121	)
Total	$	25,915	$	0	$	0		$	25,915	$	72,126	$	0	$	(75,103	)	$	(2,977	)

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22. Fair Value Disclosures

The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.

Susquehanna uses fair value measurements for the initial recording of certain assets and liabilities and periodic subsequent measurement of certain assets and liabilities on a recurring or non-recurring basis.

Fair Value Hierarchy

The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

The accounting guidance requires the measurement of fair value to maximize the use of observable inputs and minimize the use of unobservable inputs. 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 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.

Valuation Processes and Controls over Fair Value Measurement

As part of Susquehanna’s overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable.

Valuation Methodologies and Inputs

The following is a description of Susquehanna’s valuation methodologies and more significant inputs 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.

Susquehanna uses a third-party pricing service and third-party financial advisory firms in determining the fair value of its securities. Certain fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. For certain other fair value measurements, when market observable data is not available due to the lack of an active market for a given security, the valuation of the security involves assistance of a third-party financial advisory firm and substantial judgment by management.

Specific valuation methodologies and inputs used in determining the fair value of each significant class of assets and liabilities follows:

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

U.S. Government agencies: These are debt securities issued by U.S. government-sponsored entities (“GSE”). These securities are valued using market-based pricing matrices that are based on observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. The investor base is broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to interest rates. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

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Obligations of states and political subdivisions: These securities are valued using market-based pricing matrices that are based on observable inputs including the structure of the bond, including call terms, cross-collateralization features, and tax-exempt features, together with MSRB reported trades, issuer spreads, material event notices and benchmark yield curves. The investor base for most issues of municipal securities is fairly broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to trends in the broader municipal securities market, which includes credit risk. As market concerns associated with credit risk increase (decrease), the fair value of the securities will generally decrease (increase).

Agency residential mortgage-backed securities: These securities are valued using market-based pricing matrices that are based on observable inputs, including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE collateralized mortgage obligations (“CMOs”) are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Because agency residential mortgage-backed securities are generally liquid and are valued using observable pricing in the market, they generally are classified as Level 2. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

Non-agency mortgage-backed securities: Refer to the description in “Note 4-Investment Securities”.

Commercial mortgage-backed securities: Commercial mortgage-backed securities are valued primarily based on the median prices from multiple pricing services. Some of the important valuation assumptions used by the pricing services include the collateral type, collateral performance, capital structure, issuer, credit enhancement, coupon, weighted average life, and interest rates, coupled with the observed spread levels on trades of similar securities. Many of these securities have significant prepayment lockout periods or penalty periods that limit the window of potential prepayment to a relatively narrow band. These securities are primarily classified as Level 2.

These valuations are sensitive to market changes, specifically changes in interest rates and credit spreads. As interest rates increase (decrease) and/or credit spreads widens (tightens), fair values will typically decrease (increase).

Other structured financial products: 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. In addition, refer to the description in “Note 4-Investment Securities”.

Other debt securities: These securities consist primarily of government and corporate bonds. These securities are valued using market-based pricing matrices that are based on observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. The investor base is broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to interest rates. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

Other equity securities: These securities include liquid, exchange-traded equity securities as well as thinly-traded bank stocks and trust preferred securities. The exchange-traded equities are classified in Level 1 because they are valued using quoted market prices. The thinly traded and trust preferred securities are classified in Level 2 or 3 based on the significance of market observable inputs to the overall measurement.

Restricted investments in bank stocks

Restricted investments in bank stocks consists of FRB stock, FHLB stock, and Atlantic Central Bankers Bank stock. Federal law requires a member institution of the district 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.

Loans and leases

The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are indicative of orderly transactions in the current market. For commercial loans and leases, internal risk grades are used to adjust discount rates for risk migration and expected losses. For residential mortgage and

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other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using benchmark-based rates. The carrying amounts of accrued interest receivable approximate fair values.

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 approximates 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 approximates 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. The carrying amounts of accrued interest receivable approximate fair values.

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.

In the first quarter of 2013 Susquehanna changed its valuation methodology for over-the-counter (“OTC”) derivatives to discount cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially-collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs, such as a spread between LIBOR and OIS to approximate an uncollateralized cost of funds, and credit risk. Susquehanna made the changes to reflect inputs, assumptions, and pricing methodologies that are used in its principal market by market participants.

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 use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2013 and 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.

The fair values of commitments to originate mortgage loans to be held for sale and their corresponding forward-sales agreements are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The valuation of fixed-rate loan commitments also considers the difference between current levels of interest rates and the committed rates. These respective fair value measurements would be categorized within Level 3 of the fair value hierarchy.

For additional information regarding derivatives, refer to “Note 20 – 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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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at December 31, 2013 and 2012, on the consolidated balance sheets and by levels within the valuation hierarchy.

			Fair Value Measurements at Reporting Date Using
Description	December 31, 2013		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	$	110,148	$	0	$	110,148	$	0
Obligations of states and political subdivisions		398,510		0		398,510		0
Agency residential mortgage-backed securities		1,778,192		0		1,778,192		0
Non-agency residential mortgage-backed securities		565		0		565		0
Commercial mortgage-backed securities		8,734		0		8,734		0
Other structured financial products		11,297		0		0		11,297
Other debt securities		44,086		0		44,086		0
Other equity securities		23,692		20,895		0		2,797
Derivatives:(1)
Designated as hedging instruments		1,419		0		1,419		0
Not designated as hedging instruments		22,897		0		22,897		0
Total	$	2,399,540	$	20,895	$	2,364,551	$	14,094
Liabilities
Derivatives:(2)
Designated as hedging instruments	$	31,662	$	0	$	31,662	$	0
Not designated as hedging instruments		18,585		0		18,585		0
Total	$	50,247	$	0	$	50,247	$	0

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			Fair Value Measurements at Reporting Date Using
Description	December 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	$	114,408	$	0	$	114,408	$	0
Obligations of states and political subdivisions		435,777		0		435,777		0
Agency residential mortgage-backed securities		1,880,562		0		1,880,562		0
Non-agency residential mortgage-backed securities		27,450		0		650		26,800
Commercial mortgage-backed securities		40,380		0		40,380		0
Other structured financial products		9,550		0		0		9,550
Other debt securities		45,255		0		45,255		0
Other equity securities		24,519		21,266		97		3,156
Derivatives:(1)
Designated as hedging instruments		878		0		878		0
Not designated as hedging instruments		25,037		0		25,037		0
Total	$	2,603,816	$	21,266	$	2,543,044	$	39,506
Liabilities
Derivatives:(2)
Designated as hedging instruments	$	51,172	$	0	$	51,172	$	0
Not designated as hedging instruments		20,954		0		20,954		0
Total	$	72,126	$	0	$	72,126	$	0

⁽¹⁾  Included in Other assets

⁽²⁾  Included in Other liabilities

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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 years ended December 31, 2013 and 2012, 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):
Included in earnings:
Other-than-temporary impairment(1)		(144	)		0			2,995			2,851
Included in other comprehensive income (before taxes)		(352	)		(3,743	)		172			(3,923	)
Sales		0			0			(18,782	)		(18,782	)
Transfers into Level III		222			0			42,415			42,637
Balance at December 31, 2012	$	3,156		$	9,550		$	26,800		$	39,506
Total gains or losses (realized/unrealized):
Included in earnings:
Other-than-temporary impairment(1)		(97	)		0			(388	)		(485	)
Included in other comprehensive income (before taxes)		(262	)		1,747			(4,952	)		(3,467	)
Sales		0			0			(21,460	)		(21,460	)
Balance at December 31, 2013	$	2,797		$	11,297		$	0		$	14,094

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

Susquehanna’s policy is to recognize transfers in and transfers out of Levels 1, 2, and 3 as of the end of a reporting period.

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 minus selling costs, 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 selling costs, 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.

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The following tables present assets measured at fair value on a nonrecurring basis at December 31, 2013 and 2012, on the consolidated balance sheets and by the valuation hierarchy.

Description	December 31, 2013		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	54,216	$	0	$	0	$	54,216
Foreclosed assets		16,555		0		0		16,555
	$	70,771	$	0	$	0	$	70,771

Description	December 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	$	65,731	$	0	$	0	$	65,731
Foreclosed assets		26,245		0		0		26,245
	$	91,976	$	0	$	0	$	91,976

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

Asset	Fair Value at December 31, 2013 (in thousands)		Valuation Technique(s)		Unobservable Input	Range (Weighted Average)
Other structured financial products(1)	$	11,297		Discounted Cash Flow	Credit default rates, call options and deferrals, waterfall structure, and covenants.	Varies by individual security, refer to Note 4
Other equity securities		2,797		Discounted Cash Flow	Cash flows from dividends and terminal value	0.2x - 1.5x
						(.8x)
Impaired loans		54,216		Discounted Cash Flow	Cash flows based upon current discount rates and terminal value	0.8% - 8.0%
						(3.9%)
Foreclosed assets		16,555		Discounted Cash Flow	Third party appraisals less estimated selling costs	0.0% - 100.0%
						(29.6%)

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Asset	Fair Value at December 31, 2012 (in thousands)		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Non-agency residential mortgage-backed securities	$	26,800	Discounted Cash Flow	Conditional repayment rate Loss severity Conditional default rate	10.4%
					43.8%
					3.6%
Other structured financial products(1)		9,550	Discounted Cash Flow	Credit default rates, call options and deferrals, waterfall structure, and covenants.	Varies by individual security, refer to Note 4
Other equity securities		3,156	Discounted Cash Flow	Cash flows from dividends and terminal value	0.2x - 1.5x
					(.9x)
Impaired loans		65,731	Discounted Cash Flow	Cash flows based upon current discount rates and terminal value	2.9% - 5.6%
					(4.2%)
Foreclosed assets		26,245	Discounted Cash Flow	Third party appraisals less estimated selling costs	0.0% - 100.0%
					(24.0%)

⁽¹⁾  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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Additional Disclosures about Fair Value of Financial Instruments

The following table represents the carrying amounts and estimated fair values of Susquehanna’s financial instruments. The methods and assumptions used to estimate the fair value of each class of financial instruments are described above.

	December 31, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	305,357	$	305,357	$	305,357	$	0	$	0
Short-term investments		83,227		83,227		0		83,227		0
Investment securities		2,375,224		2,375,224		20,895		2,340,235		14,094
Restricted investment in bank stocks		158,232		158,232		0		158,232		0
Loans and leases		13,576,086		13,463,676		0		0		13,463,676
Derivatives		24,316		24,316		0		24,316		0
Financial liabilities:
Deposits		12,869,372		11,901,099		0		11,901,099		0
Short-term borrowings		555,740		555,740		0		555,740		0
FHLB borrowings		1,531,282		1,531,606		0		1,531,606		0
Long-term debt		453,260		461,247		0		461,247		0
Derivatives		50,247		50,247		0		50,247		0
	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	277,042	$	277,042	$	277,042	$	0	$	0
Short-term investments		119,176		119,176		0		119,176		0
Investment securities		2,577,901		2,577,901		21,266		2,517,129		39,506
Restricted investment in bank stocks		152,434		152,434		0		152,434		0
Loans and leases		12,894,741		12,954,918		0		0		12,954,918
Derivatives		25,915		25,915		0		25,915		0
Financial liabilities:
Deposits		12,580,046		12,544,069		0		12,544,069		0
Short-term borrowings		817,577		817,577		0		817,577		0
FHLB borrowings		1,199,062		1,200,358		0		1,200,358		0
Long-term debt		513,401		512,632		0		512,632		0
Derivatives		72,126		72,126		0		72,126		0

23. Regulatory Requirements and Other Restrictions

Susquehanna is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Susquehanna’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Susquehanna must meet specific capital guidelines that involve quantitative measures of Susquehanna’s assets, liabilities, and certain off-balance-sheet items calculated pursuant to regulatory directives. Susquehanna’s capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings and other factors. Susquehanna is in full compliance with these requirements. At December 31, 2013 and 2012, Susquehanna and its wholly-owned subsidiary bank were classified as “well-capitalized”.

Quantitative measures established by regulation to ensure capital adequacy require Susquehanna to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average tangible assets (leverage ratio).

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The following table presents summary information regarding Susquehanna and its wholly-owned subsidiary bank as of December 31, 2013 and 2012.

	December 31, 2013									December 31, 2012
	Actual Capital					Capital Requirements				Actual Capital					Capital Requirements
								Well									Well
	Ratio			Amount		Minimum		Capitalized		Ratio			Amount		Minimum		Capitalized
Tier I Capital
Consolidated		11.7	%	$	1,641,392	$	560,680	$	841,021		11.1	%	$	1,502,722	$	542,575	$	813,863
Bank		11.0			1,548,995		563,783		845,675		11.3			1,534,456		545,015		817,522
Total Capital
Consolidated		13.0			1,828,082		1,121,523		1,401,903		12.6			1,712,691		1,085,150		1,356,438
Bank		12.3			1,735,685		1,127,068		1,408,835		12.7			1,727,371		1,090,029		1,362,536
Leverage Capital
Consolidated		9.6			1,641,392		687,494		859,368		9.0			1,502,722		669,252		836,565
Bank		9.0			1,548,995		686,916		858,645		9.2			1,534,456		501,577		835,691

Susquehanna is limited by regulatory provisions in the amount it can receive in dividends from its banking subsidiary. Accordingly, at December 31, 2013, $7,915 was available for dividend distribution to Susquehanna in 2014 from its banking subsidiary.

Susquehanna Bank is required to maintain reserves against certain deposit liabilities which may be satisfied with vault cash and balances on deposit with the Federal Reserve Bank of Philadelphia. During the reserve maintenance periods that included December 31, 2013 and 2012, cash and due from banks included a daily average balance of $112,296 and $128,540, respectively, for such periods.

Under current Federal Reserve regulations, Susquehanna Bank is limited in the amount it may lend to the parent company and its nonbank subsidiaries. Loans to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20% of the bank’s capital stock, surplus, and undivided profits, plus the allowance for loan and lease losses. Loans from Susquehanna Bank to nonbank affiliates, including the parent company, are also required to be collateralized according to regulatory guidelines. At December 31, 2013, there were no loans from the bank to any nonbank affiliate, including the parent company.

Valley Forge Asset Management Corp. is required to maintain minimum net worth capital and is governed by the FINRA and the SEC. As of December 31, 2013, this subsidiary met its minimum regulatory capital requirement.

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24. Condensed Financial Statements of Parent Company

Balance Sheets

	December 31,
	2013		2012
Assets
Cash in subsidiary banks	$	22,361	$	285
Investments in and receivables from consolidated subsidiaries		3,061,184		2,996,307
Other investment securities		31,201		6,181
Premises and equipment, net		6,965		3,837
Other assets		58,619		90,333
Total assets	$	3,180,330	$	3,096,943
Liabilities and Shareholders’ Equity
Long-term debt	$	225,000	$	225,000
Junior subordinated debentures		155,002		154,927
Other liabilities		82,741		121,107
Total liabilities		462,743		501,034
Shareholders’ equity		2,717,587		2,595,909
Total liabilities and shareholders’ equity	$	3,180,330	$	3,096,943

Statements of Income

	Years Ended December 31,
	2013			2012			2011
Income:
Dividends from bank subsidiary	$	180,500		$	185,500		$	0
Dividends from nonbank subsidiaries		7,300			3,025			4,700
(Losses) gains on sales of investment securities		(23	)		0			(39	)
Interest and management fees from bank subsidiary		87,262			83,009			69,568
Interest and management fees from nonbank subsidiaries		5,109			5,742			2,162
Other		2,141			2,730			1,080
Total income		282,289			280,006			77,471
Expenses:
Interest		14,551			25,358			31,881
Other		107,993			121,073			95,906
Total expenses		122,544			146,431			127,787
Income before taxes and equity in undistributed income of subsidiaries		159,745			133,575			(50,316	)
Benefit from income taxes		(943	)		(2,154	)		(5,320	)
Equity in undistributed net income of subsidiaries		12,991			5,443			99,901
Net Income	$	173,679		$	141,172		$	54,905

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Statements of Comprehensive Income

	Years ended December 31,
	2013			2012			2011
Net Income	$	173,679		$	141,172		$	54,905
Other comprehensive income (loss):
Change in unrealized (loss) gain on securities available for sale		(41	)		2			60
Tax effect and reclassification adjustment		14			(1	)		(21	)
		(27	)		1			39
Changes in postretirement benefit obligations		25,992			(8,967	)		(11,684	)
Tax effect		(9,097	)		3,138			4,090
		16,895			(5,829	)		(7,594	)
Total other comprehensive income (loss)		16,868			(5,828	)		(7,555	)
Total comprehensive income	$	190,547		$	135,344		$	47,350

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Statements of Cash Flow

	Years Ended December 31,
	2013			2012			2011
Cash Flows from Operating Activities:
Net income	$	173,679		$	141,172		$	54,905
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		4,507			2,168			3,758
Realized loss on sale of available-for-sale securities		0			0			39
Equity in undistributed net income of subsidiaries		(12,991	)		(5,443	)		(99,901	)
Other, net		3,755			14,956			6,738
Net cash provided by (used in) operating activities		168,950			152,853			(34,461	)
Cash Flows from Investing Activities:
Purchase of investment securities		(25,125	)		0			(1,500	)
Proceeds from the sale/maturities of investment securities		0			0			1,461
Capital expenditures		(4,556	)		(5,162	)		(1,400	)
Net investment in subsidiaries		(79,500	)		60,364			48,873
Acquisitions		0			(45,005	)		(4	)
Net cash (used in) provided by investing activities		(109,181	)		10,197			47,430
Cash Flows from Financing Activities:
Proceeds from issuance of common stock		7,888			6,181			4,368
Redemption of warrant		0			0			(5,269	)
Proceeds from issuance of long-term debt		0			149,025			0
Repayment of long-term debt		0			(266,088	)		0
Purchase of treasury stock		(681	)		(587	)		(860	)
Dividends paid		(44,900	)		(51,393	)		(11,212	)
Net cash used in financing activities		(37,693	)		(162,862	)		(12,973	)
Net change in cash and cash equivalents		22,076			188			(4	)
Cash and cash equivalents at January 1,		285			97			101
Cash and cash equivalents at December 31,	$	22,361		$	285		$	97

136

25. Summary of Quarterly Financial Data (Unaudited)

	2013
Quarter Ended	March 31		June 30		September 30		December 31
Interest income	$	175,400	$	174,411	$	171,077	$	167,494
Interest expense		26,194		26,314		25,128		24,806
Net interest income		149,206		148,097		145,949		142,688
Provision for loan and lease losses		12,000		12,000		5,000		2,000
Net interest income after provision for loan and lease losses		137,206		136,097		140,949		140,688
Noninterest income		42,644		49,076		41,343		50,666
Noninterest expense		117,729		119,738		117,701		135,672
Income before income taxes		62,121		65,435		64,591		55,682
Provision for income taxes		19,722		19,787		20,300		14,341
Net income	$	42,399	$	45,648	$	44,291	$	41,341
Earnings per common share:
Basic	$	0.23	$	0.24	$	0.24	$	0.22
Diluted	$	0.23	$	0.24	$	0.24	$	0.22
	2012
Quarter Ended	March 31		June 30		September 30		December 31
Interest income	$	165,936	$	183,859	$	181,069	$	179,766
Interest expense		31,814		31,189		31,927		24,462
Net interest income		134,122		152,670		149,142		155,304
Provision for loan and lease losses		19,000		16,000		16,000		13,000
Net interest income after provision for loan and lease losses		115,122		136,670		133,142		142,304
Noninterest income		39,515		39,811		43,661		43,772
Noninterest expense		120,355		121,475		122,910		125,277
Income before income taxes		34,282		55,006		53,893		60,799
Provision for income taxes		10,809		17,213		17,161		17,625
Net income	$	23,473	$	37,793	$	36,732	$	43,174
Earnings per common share:
Basic	$	0.14	$	0.20	$	0.20	$	0.23
Diluted	$	0.14	$	0.20	$	0.20	$	0.23

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS and REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Susquehanna Bancshares, Inc. (the “Company”) is responsible for the preparation of the Company’s consolidated financial statements and related information as they appear in this report. Management believes that the consolidated financial statements of Susquehanna Bancshares, Inc. fairly reflect the form and substance of transactions and that the financial statements present the Company’s financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the Company’s financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.

The independent registered public accounting firm of PricewaterhouseCoopers LLP audits the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Board of Directors of the Company has an Audit Committee composed of four non-management Directors. The Committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing, corporate governance and financial reporting matters.

Management of Susquehanna Bancshares, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework(1992), management concluded that our internal control over financial reporting was effective as of December 31, 2013. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

138

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Susquehanna

Bancshares, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Susquehanna Bancshares, Inc. and its subsidiaries (the “Company”) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

February 28, 2014

139

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There has been no change in our principal accountants in over two years. There have been no disagreements with such principal accountants on any matters of accounting principles, practices, financial statement disclosure, auditing scope, or procedures.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the design and operating effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2013, our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Management’s Responsibility for Financial Statements and Report on Internal Control over Financial Reporting are included in Part II, Item 8, “Financial Statements and Supplementary Data,” and are incorporated by reference herein.

Changes in Internal Controls. There was no change in Susquehanna’s internal control over financial reporting that 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. Additionally, there were no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any significant deficiencies or material weaknesses in internal controls that would require corrective action.

Item 9B. Other Information

Not applicable.

140

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Certain portions of the information required by this Item will be included in the Proxy Statement for the 2014 annual meeting in the Election of Directors section, the Corporate Governance section, the Director Compensation section, the Executive Officer Compensation section, and the Compliance with Section 16(a) of the Exchange Act section, each of which sections is incorporated herein by reference. The information concerning our executive officers required by this Item is provided under the caption “Executive Officers” in Item 1, Part I of this Annual Report on Form 10-K.

Item 11. Executive Compensation

The information required by this Item will be included in the Proxy Statement for the 2014 annual meeting in the Director Compensation section and the Executive Officer Compensation section, and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this Item will be included in the Proxy Statement for the 2014 annual meeting in the Security Ownership of Certain Beneficial Owners and Holdings of Susquehanna’s Management section and the Executive Officer Compensation — Equity Compensation Plan Information section, and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be included in the Proxy Statement for the 2014 annual meeting in the Certain Relationships and Related Person Transactions section and the Corporate Governance — Board Independence section, each of which sections is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item will be included in the Proxy Statement for the 2014 annual meeting in the Annual Audit Information — Fees Billed by Independent Registered Public Accounting Firm to Susquehanna section, and is incorporated herein by reference.

141

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)	The following documents are filed as part of this report:
	(1)	Financial Statements. See Item 7 of this report for the consolidated financial statements of Susquehanna and its subsidiaries (including the index to financial statements).
		Financial Statement Schedules. Not Applicable.
		Exhibits 2.1-99.2. A list of the Exhibits to this Form 10-K is set forth in (b) below.
(b)	Exhibits.
	(3)	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.
		3.1.a	Statement with Respect to Shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Susquehanna, incorporated by reference to Exhibit 3.1 to Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.
		3.2	Amended and Restated Bylaws, dated December 10, 2013, incorporated by reference to Exhibit 3.1 to Susquehanna’s Current Report on Form 8-K, filed December 13, 2013.
	(4)	Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna’s Common Stock and the rights of Susquehanna’s note holders are contained in the following documents or instruments, which are incorporated herein by reference.
		4.1	Indenture, dated as of November 4, 2002, by and between Susquehanna and JP Morgan Trust Company, National Association, relating to the 6.05% subordinated notes due 2012, incorporated by reference to Exhibit 4.1 to Susquehanna’s Registration Statement on Form S-4, Registration No. 333-102265.
		4.2	Indenture, dated as of August 13, 2012, between Susquehanna Bancshares, Inc. and The New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 in Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
		4.3	First Supplemental Indenture, dated as of August 13, 2012, between Susquehanna Bancshares, Inc. and The New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.2 to Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
		4.4	Form of Note (included in Exhibit 4.3 above), incorporated by reference to Exhibit 4.2 to Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
	(10)	Material Contracts.
		10.1	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and William J. Reuter, incorporated by reference to Exhibit 10.1 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
		10.2	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and Drew K. Hostetter, incorporated by reference to Exhibit 10.2 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
		10.3	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and Gregory A. Duncan, incorporated by reference to Exhibit 10.3 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**

142

10.4	Employment Agreement, as amended and restated effective December 21, 2012, between Susquehanna and Michael M. Quick, incorporated by reference to Exhibit 10.4 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
10.5	Employment Agreement, dated June 20, 2011, between Susquehanna and Andrew Samuel, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed February 21, 2012.*
10.6	Recoupment Policy with Respect to Incentive Awards, incorporated by reference to Exhibit 10.22 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.*
10.7	Susquehanna’s Executive Deferred Income Plan, effective January 1, 2009, incorporated by reference to Exhibit 10.21 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.8	Susquehanna’s Supplemental Executive Retirement Plan as amended and restated effective January 1, 2012, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed August 27, 2012.*
10.9	Forms of The Insurance Trust for Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement and Split Dollar Policy Endorsement, incorporated by reference to Exhibit 10(v) to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.*
10.10	Community Banks, Inc. Survivor Income Agreement, including Split Dollar Addendum to Community Banks, Inc. Survivor Income Agreement, incorporated by reference to Exhibit 10.18 to Susquehanna’s Annual Report onForm 10-K for the fiscal year ended December 31, 2007.*
10.11	Susquehanna’s Key Employee Severance Pay Plan, amended and restated as of January 14, 2014, attached hereto as Exhibit 10.11. Filed herewith.
10.12	Susquehanna’s Amended and Restated 2005 Equity Compensation Plan, as amended, incorporated by reference to Exhibit 10.1 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*
10.13	Form of Restricted Stock Unit Grant Agreement for Susquehanna’s senior executive officers, incorporated by reference to Exhibit 10.29 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.14	Form of Amended and Restated 2005 Equity Compensation Plan Amended and Restated Restricted Stock Agreement for Susquehanna’s executive officers, incorporated by reference to Exhibit 10.30 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.15	Form of Amended and Restated 2005 Equity Compensation Plan Restricted Stock Agreement for Susquehanna’s executives, incorporated by reference to Exhibit 10.31 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.16	Form of Amended and Restated 2005 Equity Compensation Plan Restricted Stock Agreement for Susquehanna’s directors, incorporated by reference to Exhibit 10.32 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.17	Form of Amended and Restated 2005 Equity Compensation Plan Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.33 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.18	Susquehanna’s Equity Compensation Plan, incorporated by reference to Exhibit 10.17 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.*

143

10.19	Susquehanna’s Long Term Incentive Plan, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*
10.20	Form of Susquehanna’s Long Term Incentive Plan Restricted Stock Unit Grant Agreement, incorporated by reference to Exhibit 10.2 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*
10.21	Form of Susquehanna’s Long Term Incentive Plan Nonqualified Stock Option Grant Agreement, incorporated by reference to Exhibit 10.3 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*
10.22	Susquehanna’s Short Term Incentive Plan, incorporated by reference to Exhibit 10.3 to Susquehanna’s Current Report on Form 8-K, filed August 3, 2012.*
10.23	Restricted Stock Unit Agreement for awards granted to Messrs, Reuter, Hostetter, Duncan, and Quick, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed June 22, 2012.*
10.24	Community Banks, Inc. 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 99.1 of Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
10.25	Director Compensation Schedule, effective January 1, 2014. Filed herewith.*
10.26	Community Banks, Inc. Directors Stock Option Plan, incorporated by reference to Exhibit 99.2 to Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
10.27	The Farmers and Merchants National Bank of Hagerstown Executive Supplemental Income Plan, dated March 6, 1984, incorporated by reference to Exhibit 10.28 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
10.28	First Amendment to Employment Agreement, dated as of December 10, 2013, by and between Susquehanna and William J. Reuter, incorporated by reference to Exhibit 99.1 to Susquehanna’s Current Report on Form 8-K, filed December 13, 2013*
10.29	2010 Amended and Restated Servicing Agreement between and among Auto Lenders Liquidation Center, Inc., Boston Service Company, Inc., d/b/a Hann Financial Service Corp., Susquehanna Auto Lease Exchange, LLC and SALE NYC, LLC, dated December 22, 2010, incorporated by reference to Exhibit 10.41 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. First Amendment to the 2010 Amended and Restated Servicing Agreement, dated December 21, 2011, incorporated by reference to Exhibit 10.48 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Second Amendment to the 2010 Amended and Restated Servicing Agreement, effective as of December 31, 2012, incorporated by reference to Exhibit 10.29 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
10.30	Abington Bancorp, Inc. Amended and Restated 2005 Stock Option Plan, incorporated by reference to Exhibit 99.1 to Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, filed October 13, 2011 (File No. 333-172626).*
10.31	Abington Bancorp, Inc. 2007 Stock Option Plan, incorporated by reference to Exhibit 99.2 to Susquehanna’s Post- Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, filed October 13, 2011 (File No. 333-172626).*
10.32	Form of Split Dollar Insurance Agreement between Abington Bank and each of Robert W. White, Thomas J. Wasekanes, Frank Kovalcheck, Jack J. Sandoski and Eric L. Golden, incorporated by reference to Exhibit 10.51 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.*

144

10.33	Tower Bancorp, Inc. Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 99.1 to Tower Bancorp, Inc.’s Registration Statement on Form S-8, filed November 20, 1997 (File No. 333-40661).*
10.34	Graystone Financial Corp. 2007 Stock Incentive Plan, incorporated by reference to Exhibit 10.3 to Tower Bancorp, Inc.’s Current Report on Form 8-K, filed March 31, 2009.*
10.35	American Home Bank, National Association 2001 Stock Option Incentive Plan, incorporated by reference to Exhibit 10.37 to First Chester County Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.36	First Chester County Corporation Amended and Restated 1995 Stock Option Plan, incorporated by reference to Exhibit 10.36 to Tower Bancorp, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.37	Susquehanna Bancshares, Inc. Short-Term Incentive Plan (effective as of January 1, 2013), incorporated by reference to Exhibit 10.1 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.*
10.38	Employment Agreement, effective as of June 6, 2012, between Susquehanna and Michael W. Harrington, incorporated by reference to Exhibit 10.2 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.*
10.39	Susquehanna Bancshares, Inc. 2013 Omnibus Equity Compensation Plan, incorporated by reference to Annex A to Susquehanna’s Proxy Statement on Schedule 14-A, filed March 22, 2013.*
10.40	Form of Restricted Stock Unit Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.2 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.41	Form of Performance Stock Unit Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.3 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.42	Form of Nonqualified Stock Option Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.4 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.43	Form of Restricted Stock Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.5 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.44	Purchase Agreement dated December 23, 2013, by and among Susquehanna Bank and buyers named therein incorporated by reference to Exhibit 99.1 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.**
10.45	Form of 15-Year Lease Agreement, dated as of December 23, 2013 by and between Susquehanna Landlord, LLC, as landlord, and Susquehanna Bank, as tenant, incorporated by reference to Exhibit 99.2 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.***
10.46	Form of 26-Year Lease Agreement, dated as of December 23, 2013, by and between Susquehanna Landlord, LLC, as landlord, and Susquehanna Bank, as tenant, incorporated by reference to Exhibit 99.3 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.***

145

	10.47	Employment Agreement, dated as of December 23, 2013, by and between Susquehanna and Carl D. Lundblad. Filed herewith.*
	10.48	Employment Agreement, dated as of December 20, 2013, effective as of January 6, 2014, by and between Susquehanna and Kevin J. Burns. Filed herewith.*
(14)	Code of Ethics
	14.1	A copy of Susquehanna’s Code of Ethics is available on Susquehanna’s website atwww.susquehanna.net. Click on “Investor Relations,” then “Governance Documents,” then “Code of Ethics of Susquehanna Bancshares, Inc.”
(21)	Subsidiaries of the registrant. Incorporated by reference to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
(23)	Consent of PricewaterhouseCoopers, LLP. Filed herewith.
(31)	Rule 13a-14(a)/15d-14(a) Certifications.
	31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer. Filed herewith.
	31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer. Filed herewith.
(32)	Section 1350 Certifications. Filed herewith.
	Additional Exhibits
	101.INS XBRL Instance Document
	101.SCH XBRL 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 Definition Linkbase Document

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

** In accordance with Regulation S-K Item 6.01(b)(2), Susquehanna agrees to furnish supplementally a copy of all omitted schedules to the SEC upon its request.

*** The lease agreements are identical except for property descriptions and location information. Accordingly, in accordance with Instruction 2 to Regulation S-K Item 6.01(a) Susquehanna has filed forms of the agreements.

v Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. Susquehanna agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.

(c) Financial Statement Schedule. None Required.

146

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/    WILLIAM J. REUTER
	William J. Reuter, Chairman of the Board and Chief Executive Officer

Dated: February 27, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    WILLIAM J. REUTER         (William J. Reuter)	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	February 27, 2014
/s/    MICHAEL W. HARRINGTON         (Michael W. Harrington)	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	February 27, 2014
/s/    ANTHONY J. AGNONE, SR.         (Anthony J. Agnone, Sr.)	Director	February 27, 2014
/s/    WAYNE E. ALTER, JR.         (Wayne E. Alter, Jr.)	Director	February 27, 2014
/s/    HENRY R. GIBBEL         (Henry R. Gibbel)	Director	February 27, 2014
/s/    BRUCE A. HEPBURN         (Bruce A. Hepburn)	Director	February 27, 2014
/s/    DONALD L. HOFFMAN         (Donald L. Hoffman)	Director	February 27, 2014
/s/    SARA G. KIRKLAND         (Sara G. Kirkland)	Director	February 27, 2014
/s/    JEFFREY F. LEHMAN.         (Jeffrey F. Lehman.)	Director	February 27, 2014
/s/    MICHAEL A. MORELLO         (Michael A. Morello)	Director	February 27, 2014

147

SECURITIES AND EXCHANGE COMMISSION

SUSQUEHANNA BANCSHARES, INC.

Form 10-K, December 31, 2013

[SIGNATURES CONTINUED]

/s/    SCOTT J. NEWKAM         (Scott J. Newkam)	Director	February 27, 2014
/s/    ROBERT E. POOLE, JR.         (Robert E. Poole, Jr.)	Director	February 27, 2014
/s/    ANDREW S. SAMUEL         (Andrew S. Samuel)	Director	February 27, 2014
/s/    CHRISTINE SEARS         (Christine Sears)	Director	February 27, 2014
/s/    JAMES A. ULSH         (James A. Ulsh)	Director	February 27, 2014

148

Exhibit Index

Exhibits.
(3)	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.
	3.1.a	Statement with Respect to Shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Susquehanna, incorporated by reference to Exhibit 3.1 to Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.
	3.2	Amended and Restated Bylaws, dated December 10, 2013, incorporated by reference to Exhibit 3.1 to Susquehanna’s Current Report on Form 8-K, filed December 13, 2013.
(4)	Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna’s Common Stock and the rights of Susquehanna’s note holders are contained in the following documents or instruments, which are incorporated herein by reference.
	4.1	Indenture, dated as of November 4, 2002, by and between Susquehanna and JP Morgan Trust Company, National Association, relating to the 6.05% subordinated notes due 2012, incorporated by reference to Exhibit 4.1 to Susquehanna’s Registration Statement on Form S-4, Registration No. 333-102265.
	4.2	Indenture, dated as of August 13, 2012, between Susquehanna Bancshares, Inc. and The New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 in Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
	4.3	First Supplemental Indenture, dated as of August 13, 2012, between Susquehanna Bancshares, Inc. and The New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.2 to Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
	4.4	Form of Note (included in Exhibit 4.3 above), incorporated by reference to Exhibit 4.2 to Susquehanna’s Current Report on Form 8-K, filed August 8, 2012.
(10)	Material Contracts.
	10.1	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and William J. Reuter, incorporated by reference to Exhibit 10.1 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
	10.2	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and Drew K. Hostetter, incorporated by reference to Exhibit 10.2 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
	10.3	Employment Agreement, as amended and restated effective December 28, 2012, between Susquehanna and Gregory A. Duncan, incorporated by reference to Exhibit 10.3 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
	10.4	Employment Agreement, as amended and restated effective December 21, 2012, between Susquehanna and Michael M. Quick, incorporated by reference to Exhibit 10.4 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.**
	10.5	Employment Agreement, dated June 20, 2011, between Susquehanna and Andrew Samuel, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed February 21, 2012.*
	10.6	Recoupment Policy with Respect to Incentive Awards, incorporated by reference to Exhibit 10.22 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.*

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10.7	Susquehanna’s Executive Deferred Income Plan, effective January 1, 2009, incorporated by reference to Exhibit 10.21 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
10.8	Susquehanna’s Supplemental Executive Retirement Plan as amended and restated effective January 1, 2012, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed August 27, 2012.*
10.9	Forms of The Insurance Trust for Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement and Split Dollar Policy Endorsement, incorporated by reference to Exhibit 10(v) to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.*
10.10	Community Banks, Inc. Survivor Income Agreement, including Split Dollar Addendum to Community Banks, Inc. Survivor Income Agreement, incorporated by reference to Exhibit 10.18 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
10.11	Susquehanna’s Key Employee Severance Pay Plan, amended and restated as of January 14, 2014, attached hereto as Exhibit 10.11. Filed herewith.
10.12	Susquehanna’s Amended and Restated 2005 Equity Compensation Plan, as amended, incorporated by reference to Exhibit 10.1 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*
10.13	Form of Restricted Stock Unit Grant Agreement for Susquehanna’s senior executive officers, incorporated by reference to Exhibit 10.29 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.14	Form of Amended and Restated 2005 Equity Compensation Plan Amended and Restated Restricted Stock Agreement for Susquehanna’s executive officers, incorporated by reference to Exhibit 10.30 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.15	Form of Amended and Restated 2005 Equity Compensation Plan Restricted Stock Agreement for Susquehanna’s executives, incorporated by reference to Exhibit 10.31 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.16	Form of Amended and Restated 2005 Equity Compensation Plan Restricted Stock Agreement for Susquehanna’s directors, incorporated by reference to Exhibit 10.32 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.17	Form of Amended and Restated 2005 Equity Compensation Plan Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.33 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
10.18	Susquehanna’s Equity Compensation Plan, incorporated by reference to Exhibit 10.17 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.*
10.19	Susquehanna’s Long Term Incentive Plan, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*
10.20	Form of Susquehanna’s Long Term Incentive Plan Restricted Stock Unit Grant Agreement, incorporated by reference to Exhibit 10.2 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*
10.21	Form of Susquehanna’s Long Term Incentive Plan Nonqualified Stock Option Grant Agreement, incorporated by reference to Exhibit 10.3 to Susquehanna’s Current Report on Form 8-K, filed March 2, 2011.*

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10.22	Susquehanna’s Short Term Incentive Plan, incorporated by reference to Exhibit 10.3 to Susquehanna’s Current Report on Form 8-K, filed August 3, 2012.*
10.23	Restricted Stock Unit Agreement for awards granted to Messrs, Reuter, Hostetter, Duncan, and Quick, incorporated by reference to Exhibit 10.1 to Susquehanna’s Current Report on Form 8-K, filed June 22, 2012.*
10.24	Community Banks, Inc. 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 99.1 of Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
10.25	Director Compensation Schedule, effective January 1, 2014. Filed herewith.*
10.26	Community Banks, Inc. Directors Stock Option Plan, incorporated by reference to Exhibit 99.2 to Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
10.27	The Farmers and Merchants National Bank of Hagerstown Executive Supplemental Income Plan, dated March 6, 1984, incorporated by reference to Exhibit 10.28 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
10.28	First Amendment to Employment Agreement, dated as of December 10, 2013, by and between Susquehanna and William J. Reuter, incorporated by reference to Exhibit 99.1 to Susquehanna’s Current Report on Form 8-K, filed December 13, 2013.*
10.29	2010 Amended and Restated Servicing Agreement between and among Auto Lenders Liquidation Center, Inc., Boston Service Company, Inc., d/b/a Hann Financial Service Corp., Susquehanna Auto Lease Exchange, LLC and SALE NYC, LLC, dated December 22, 2010, incorporated by reference to Exhibit 10.41 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. First Amendment to the 2010 Amended and Restated Servicing Agreement, dated December 21, 2011, incorporated by reference to Exhibit 10.48 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Second Amendment to the 2010 Amended and Restated Servicing Agreement, effective as of December 31, 2012, incorporated by reference to Exhibit 10.29 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
10.30	Abington Bancorp, Inc. Amended and Restated 2005 Stock Option Plan, incorporated by reference to Exhibit 99.1 to Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, filed October 13, 2011 (File No. 333-172626).*
10.31	Abington Bancorp, Inc. 2007 Stock Option Plan, incorporated by reference to Exhibit 99.2 to Susquehanna’s Post- Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, filed October 13, 2011 (File No. 333-172626).*
10.32	Form of Split Dollar Insurance Agreement between Abington Bank and each of Robert W. White, Thomas J. Wasekanes, Frank Kovalcheck, Jack J. Sandoski and Eric L. Golden, incorporated by reference to Exhibit 10.51 to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.*
10.33	Tower Bancorp, Inc. Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 99.1 to Tower Bancorp, Inc.’s Registration Statement on Form S-8, filed November 20, 1997 (File No. 333-40661).*
10.34	Graystone Financial Corp. 2007 Stock Incentive Plan, incorporated by reference to Exhibit 10.3 to Tower Bancorp, Inc.’s Current Report on Form 8-K, filed March 31, 2009.*
10.35	American Home Bank, National Association 2001 Stock Option Incentive Plan, incorporated by reference to Exhibit 10.37 to First Chester County Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

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	10.36	First Chester County Corporation Amended and Restated 1995 Stock Option Plan, incorporated by reference to Exhibit 10.36 to Tower Bancorp, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.*
	10.37	Susquehanna Bancshares, Inc. Short-Term Incentive Plan (effective as of January 1, 2013), incorporated by reference to Exhibit 10.1 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.*
	10.38	Employment Agreement, effective as of June 6, 2012, between Susquehanna and Michael W. Harrington, incorporated by reference to Exhibit 10.2 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.*
	10.39	Susquehanna Bancshares, Inc. 2013 Omnibus Equity Compensation Plan, incorporated by reference to Annex A to Susquehanna’s Proxy Statement on Schedule 14-A, filed March 22, 2013.*
	10.40	Form of Restricted Stock Unit Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.2 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
	10.41	Form of Performance Stock Unit Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.3 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
	10.42	Form of Nonqualified Stock Option Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.4 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
	10.43	Form of Restricted Stock Grant Agreement (Pursuant to the 2013 Omnibus Equity Compensation Plan), incorporated by reference to Exhibit 10.5 to Susquehanna’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
	10.44	Purchase Agreement dated December 23, 2013, by and among Susquehanna Bank and buyers named therein, incorporated by reference to Exhibit 99.1 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.**
	10.45	Form of 15-Year Lease Agreement, dated as of December 23, 2013 by and between Susquehanna Landlord, LLC, as landlord, and Susquehanna Bank, as tenant, incorporated by reference to Exhibit 99.2 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.***
	10.46	Form of 26-Year Lease Agreement, dated as of December 23, 2013, by and between Susquehanna Landlord, LLC, as landlord, and Susquehanna Bank, as tenant, incorporated by reference to Exhibit 99.3 to Susquehanna’s Current Report on Form 8-K, filed December 26, 2013.***
	10.47	Employment Agreement, dated as of December 23, 2013, by and between Susquehanna and Carl D. Lundblad. Filed herewith.*
	10.48	Employment Agreement, dated as of December 20, 2013, effective as of January 6, 2014, by and between Susquehanna and Kevin J. Burns. Filed herewith.*
(14)	Code of Ethics
	14.1	A copy of Susquehanna’s Code of Ethics is available on Susquehanna’s website atwww.susquehanna.net. Click on “Investor Relations,” then “Governance Documents,” then “Code of Ethics of Susquehanna Bancshares, Inc.”

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(21)	Subsidiaries of the registrant. Incorporated by reference to Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
(23)	Consent of PricewaterhouseCoopers, LLP. Filed herewith.
(31)	Rule 13a-14(a)/15d-14(a) Certifications.
	31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer. Filed herewith.
	31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer. Filed herewith.
(32)	Section 1350 Certifications. Filed herewith.
	Additional Exhibits
	101.INS	XBRL Instance Document
	101.SCH	XBRL 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 Definition Linkbase Document

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

** In accordance with Regulation S-K Item 6.01(b)(2), Susquehanna agrees to furnish supplementally a copy of all omitted schedules to the SEC upon its request.

*** The lease agreements are identical except for property descriptions and location information. Accordingly, in accordance with

Instruction 2 to Regulation S-K Item 6.01(a) Susquehanna has filed forms of the agreements.

v Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. Susquehanna agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.

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