UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

or

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

For the transition period from                      to                     

Commission File Number 001-33872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Yes  x    No   ¨

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

Yes  ¨    No   ¨

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

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

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

Yes  ¨    No   x

As of April 30, 2010, there were 129,645,084 shares of the registrant’s common stock outstanding, par value $2.00 per share.

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2010 and 2009, and December 31, 2009	3
	Consolidated Statements of Income for the three months ended March 31, 2010 and 2009	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2010 and 2009	7
	Notes to the Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4	Controls and Procedures	40
PART II.	OTHER INFORMATION
Item 1	Legal Proceedings	40
Item 1A	Risk Factors	40
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3	Defaults Upon Senior Securities	40
Item 4	Reserved	40
Item 5	Other Information	40
Item 6	Exhibits	41
SIGNATURES		42
EXHIBIT INDEX		43

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31, 2010			December 31, 2009			March 31, 2009
	(in thousands, except share data)
Assets
Cash and due from banks	$	318,678		$	203,240		$	237,114
Unrestricted short-term investments		69,718			87,966			123,001
Cash and cash equivalents		388,396			291,206			360,115
Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		7,631			0			0
Restricted short-term investments		100			154			50
Securities available for sale		1,769,939			1,866,346			1,842,063
Securities held to maturity (fair values approximate $8,865; $8,921; and $9,092)		8,865			8,921			9,092
Loans and leases, net of unearned income		9,721,583			9,827,279			9,766,063
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		240,083			0			0
Less: Allowance for loan and lease losses		178,819			172,368			132,164
Net loans and leases		9,782,847			9,654,911			9,633,899
Premises and equipment, net		164,691			165,529			172,186
Foreclosed assets		20,697			24,292			13,216
Accrued income receivable		36,700			36,127			41,307
Bank-owned life insurance		356,480			355,373			355,233
Goodwill		1,018,031			1,018,031			1,017,586
Intangible assets with finite lives		41,130			43,513			51,389
Other assets		184,409			224,859			237,064
Total Assets	$	13,779,916		$	13,689,262		$	13,733,200
Liabilities and Shareholders’ Equity
Deposits:
Demand	$	1,287,303		$	1,261,208		$	1,242,979
Interest-bearing demand		3,472,338			3,262,812			2,780,871
Savings		772,794			743,687			731,166
Time		2,473,863			2,540,805			2,976,434
Time of $100 or more		1,305,994			1,165,851			1,408,350
Total deposits		9,312,292			8,974,363			9,139,800
Short-term borrowings		277,205			1,040,703			898,198
FHLB borrowings		898,244			1,023,817			1,060,626
Long-term debt		176,045			176,050			176,255
Junior subordinated debentures		322,469			272,324			271,927
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna’s general credit		232,382			0			0
Accrued interest, taxes, and expenses payable		46,414			47,688			57,116
Deferred taxes		74,298			87,981			90,851
Other liabilities		142,360			85,255			105,164
Total Liabilities		11,481,709			11,708,181			11,799,937
Shareholders’ equity:
Preferred stock, $1,000 liquidation value, 5,000,000 shares authorized. Issued: 300,000 at March 31, 2010; December 31, 2009; and March 31, 2009		292,797			292,359			291,115
Common stock, $2.00 par value, 200,000,000 shares authorized; Issued: 129,645,084 at March 31, 2010; 86,473,612 at December 31, 2009; and 86,242,003 at March 31, 2009		259,290			172,947			172,484
Additional paid-in capital		1,298,934			1,057,305			1,055,809
Retained earnings		474,811			478,167			493,503
Accumulated other comprehensive loss, net of taxes of $14,875; $10,606; and $42,887, respectively		(27,625	)		(19,697	)		(79,648	)
Total Shareholders’ Equity		2,298,207			1,981,081			1,933,263
Total Liabilities and Shareholders’ Equity	$	13,779,916		$	13,689,262		$	13,733,200

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

3

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended March 31,
	2010			2009
	(In thousands, except per share data)
Interest Income:
Loans and leases, including fees	$	136,229		$	137,019
Securities:
Taxable		14,029			19,620
Tax-exempt		3,690			3,682
Dividends		974			962
Short-term investments		34			287
Total interest income		154,956			161,570
Interest Expense:
Deposits:
Interest-bearing demand		5,425			6,818
Savings		286			720
Time		22,722			39,697
Short-term borrowings		758			1,065
FHLB borrowings		9,635			10,060
Long-term debt		7,839			7,940
Total interest expense		46,665			66,300
Net interest income		108,291			95,270
Provision for loan and lease losses		45,000			35,000
Net interest income, after provision for loan and lease losses		63,291			60,270
Noninterest Income:
Service charges on deposit accounts		8,069			9,549
Vehicle origination, servicing, and securitization fees		1,597			2,086
Asset management fees		7,113			5,969
Income from fiduciary-related activities		1,805			1,725
Commissions on brokerage, life insurance, and annuity sales		1,661			1,673
Commissions on property and casualty insurance sales		3,403			3,817
Income from bank-owned life insurance		1,290			1,637
Net gain on sale of loans and leases		1,967			1,697
Net realized gain on sales of securities		6,593			24
Other-than-temporary impairment of securities related to credit losses		(557	)		0
Other		5,741			14,043
Total noninterest income		38,682			42,220
Noninterest Expenses:
Salaries and employee benefits		48,134			47,564
Occupancy		9,841			9,488
Furniture and equipment		3,678			3,751
Advertising and marketing		2,781			2,195
FDIC insurance		4,209			6,044
Amortization of intangible assets		2,383			2,655
Vehicle lease disposal		3,328			2,979
Other		19,950			20,152
Total noninterest expenses		94,304			94,828
Income before income taxes		7,669			7,662
Provision for income taxes		166			1,637
Net Income		7,503			6,025
Preferred stock dividends and accretion		4,188			4,165
Net Income Applicable to Common Shareholders	$	3,315		$	1,860
Earnings per common share:
Basic	$	0.04		$	0.02
Diluted	$	0.04		$	0.02
Cash dividends per common share	$	0.01		$	0.26
Average common shares outstanding:
Basic		94,591			86,152
Diluted		94,609			86,156

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

4

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Cash Flows from Operating Activities:
Net income	$	7,503		$	6,025
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		6,207			6,510
Provision for loan and lease losses		45,000			35,000
Realized gain on available-for-sale securities, net		(6,036	)		(24	)
Deferred income taxes		(5,514	)		106
Gain on sale of loans and leases		(1,967	)		(1,697	)
Loss on sale of foreclosed assets		893			252
Mortgage loans originated for sale		(62,364	)		(79,290	)
Proceeds from sale of mortgage loans originated for sale		65,939			71,499
Loans and leases originated/acquired for sale, net of payments received		(31,323	)		(44,663	)
Payments received on leases transferred from held for sale to held for investment		21,850			17,040
Increase in cash surrender value of bank-owned life insurance		(1,107	)		(1,462	)
Decrease (increase) in accrued interest receivable		93			(821	)
Increase (decrease) in accrued interest payable		1,473			(1,335	)
(Decrease) increase in accrued expenses and taxes payable		(2,783	)		3,325
Other, net		3,242			23,454
Net cash provided by operating activities		41,106			33,919
Cash Flows from Investing Activities:
Net (increase) decrease in restricted short-term investments		(40	)		164
Activity in available-for-sale securities:
Sales		150,496			218
Maturities, repayments, and calls		201,742			111,973
Purchases		(192,911	)		(70,758	)
Net decrease (increase) in loans and leases		79,510			(97,021	)
Cash flows received from retained interests		0			4,046
Proceeds from sale of foreclosed assets		7,128			2,202
Additions to premises and equipment, net		(2,770	)		(2,862	)
Net cash provided by (used in) investing activities		243,155			(52,038	)
Cash Flows from Financing Activities:
Net increase in deposits		337,929			73,307
Net decrease in short-term borrowings		(763,498	)		(12,021	)
Net decrease in short-term FHLB borrowings		(100,000	)		0
Proceeds from long-term FHLB borrowings		0			0
Repayment of long-term FHLB borrowings		(25,048	)		(15,528	)
Proceeds from issuance of long-term debt		47,749			0
Repayment of long-term debt		(7,559	)		(29	)
Proceeds from issuance of common stock		327,972			689
Cash dividends paid		(4,616	)		(25,031	)
Net cash (used in) provided by financing activities		(187,071	)		21,387

5

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

Net change in cash and cash equivalents		97,190			3,268
Cash and cash equivalents at January 1		291,206			356,847
Cash and cash equivalents at March 31	$	388,396		$	360,115
Supplemental Disclosure of Cash Flow Information
Cash paid for interest on deposits and borrowings	$	45,191		$	67,635
Income tax (refunds) payments		(140	)		961
Supplemental Schedule of Noncash Activities
Interest-bearning deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities	$	7,537		$	0
Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities		248,333			0
Real estate acquired in settlement of loans		4,919			5,493
Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna’s general credit		239,936			0
Securities purchased not settled		50,000			0
Accretion of preferred stock discount		438			415
Home equity line of credit loans transferred from held for sale to held for investment		434,897			0
Cumulative-effect adjustment to retained earnings relating to the consolidation of variable interest entities		(5,805	)		0
Adjustment to accumulated other comprehensive income relating to the consolidation of variable interest entities		(6,922	)		0

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

6

Susquehanna Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share data)

	Preferred Stock		Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at January 1, 2009	$	290,700	86,174,285	$	172,349	$	1,055,255	$	512,924		$	(85,310	)	$	1,945,918
Comprehensive income:
Net income									6,025						6,025
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $16												7,693			7,693
Change in unrealized gain on recorded interests in securitized assets, net of taxes												2,112			2,112
Change in unrealized loss on cash flow hedges, net of taxes												(4,143	)		(4,143	)
Total comprehensive income															11,687
Common stock and options issued under employee benefit plans			67,748		135		554								689
Accretion of discount on preferred stock		415							(415	)					—
Cash dividends paid on preferred stock									(2,625	)					(2,625	)
Cash dividends paid on common stock ($0.26 per share)									(22,406	)					(22,406	)
Balance at March 31, 2009	$	291,115	86,242,033	$	172,484	$	1,055,809	$	493,503		$	(79,648	)	$	1,933,263
Balance at January 1, 2010	$	292,359	86,473,612	$	172,947	$	1,057,305	$	478,167		$	(19,697	)	$	1,981,081
Cumulative-effect adjustment resulting from the consolidation of variable interest entities									(5,805	)		(6,922	)		(12,727	)
Comprehensive income:
Net income									7,503						7,503
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment of $3,923												6,058			6,058
Change in unrealized loss on cash flow hedges, net of taxes												(7,064	)		(7,064	)
Total comprehensive income															6,497
Issuance of common stock			43,125,000		86,250		241,091								327,341
Common stock and options issued under employee benefit plans			46,472		93		538								631
Accretion of discount on preferred stock		438							(438	)					—
Cash dividends paid on preferred stock									(3,750	)					(3,750	)
Cash dividends paid on common stock ($0.01 per share)									(866	)					(866	)
Balance at March 31, 2010	$	292,797	129,645,084	$	259,290	$	1,298,934	$	474,811		$	(27,625	)	$	2,298,207

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

7

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. Accounting Policies

The information contained in this report is unaudited. Certain prior year amounts have been reclassified to conform with current period classifications. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended March 31, 2010 and 2009. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries (“Susquehanna”), as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 76 through 83 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Recently Adopted Accounting Guidance.

Effective July 1, 2009, changes to the source of authoritative U.S. GAAP, the FASB Accounting Standards Codification™ (“FASC”), will be communicated through an Accounting Standards Update (“ASU”). ASUs will be published for all authoritative U.S. GAAP promulgated by the Financial Accounting Standards Board (“FASB”), regardless of the form in which such guidance may have been issued prior to the release of the FASB Codification.

In February 2010, FASB issued ASU 2010-10, Consolidation (Topic 810) - Amendments for Certain Investment Funds. These amendments defer the consolidation requirements for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. This ASU was effective January 1, 2010. Adoption of this guidance has not had a material impact on result of operations or financial condition.

In February 2010, FASB issued ASU 2010-09, Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09, among other things, removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In January 2010, FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements. This ASU provides amendments to Subtopic 820-10 that require new disclosures as follows: (1) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. This ASU also provides amendments that clarify existing disclosures relating to the level of disaggregation and inputs and valuation techniques. This ASU was effective for interim and annual reporting periods that began after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this ASU has not had and will not have a material impact on results of operations or financial condition.

In June 2009, FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities and ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets. ASU 2009-16 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASU 2009-17 changes how a company determines when an entity that is insufficiently capitalized or is not controlled

8

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. Both ASUs were effective January 1, 2010. As a result of adopting this guidance, Susquehanna, as primary beneficiary, consolidated two securitization trusts. For additional information, refer to “Note 10. Securitization and Variable Interest Entities.”

Recently Issued Accounting Guidance.

In March 2010, FASB issued ASU 2010-11, Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit Derivatives. This ASU provides amendments that clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. This ASU will be effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Adoption of this guidance is not expected to have a material impact on results of operations or financial condition.

In February 2010, FASB issued ASU 2010-08, Technical Corrections to Various Topics. While none of the provisions in the amendments in this ASU fundamentally change U.S. GAAP, certain clarifications to the guidance on embedded derivatives and hedging (FASC Subtopic 815-15) may cause a change in the application of that Subtopic. This ASU will be effective for Susquehanna on April 1, 2010. Adoption of this guidance is not expected to have a material impact on results of operations or financial condition.

9

2. Investment Securities

The amortized cost and fair values of investment securities at March 31, 2010 and December 31, 2009, were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
At March 31, 2010
Available-for-Sale:
U.S. Government agencies	$	359,865	$	4,176	$	383	$	363,658
Obligations of states and political subdivisions		329,348		12,922		800		341,470
Agency residential mortgage-backed securities		651,779		19,413		87		671,105
Non-agency residential mortgage-backed securities		157,150		73		27,674		129,549
Commercial mortgage-backed securities		99,146		4,284		0		103,430
Synthetic collateralized debt obligations		744		0		10		734
Other structured financial products		26,332		0		11,650		14,682
Equity securities of the Federal Home Loan Bank		74,342		0		0		74,342
Equity securities of the Federal Reserve Bank		45,725		0		0		45,725
Other equity securities		26,699		466		1,921		25,244
		1,771,130		41,334		42,525		1,769,939
Held-to-Maturity:
Other		4,560		0		0		4,560
State and municipal		4,305		0		0		4,305
		8,865		0		0		8,865
Total investment securities	$	1,779,995	$	41,334	$	42,525	$	1,778,804
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
At December 31, 2009
Available-for-Sale:
U.S. Government agencies	$	366,065	$	5,142	$	188	$	371,019
Obligations of states and political subdivisions		343,254		12,043		1,878		353,419
Agency residential mortgage-backed securities		661,755		19,813		1,386		680,182
Non-agency residential mortgage-backed securities		168,476		18		33,029		135,465
Commercial mortgage-backed securities		162,835		2,625		435		165,025
Synthetic collateralized debt obligations		1,301		30		0		1,331
Other structured financial products		26,294		0		10,975		15,319
Equity securities of the Federal Home Loan Bank		74,342		0		0		74,342
Equity securities of the Federal Reserve Bank		45,725		0		0		45,725
Other equity securities		26,597		302		2,380		24,519
		1,876,644		39,973		50,271		1,866,346
Held-to-Maturity:
Other		4,550		0		0		4,550
State and municipal		4,371		0		0		4,371
		8,921		0		0		8,921
Total investment securities	$	1,885,565	$	39,973	$	50,271	$	1,875,267

At March 31, 2010 and December 31, 2009, investment securities with carrying values of $1,190,961 and $1,344,858, respectively, were pledged to secure public funds and for other purposes as required by law.

10

The amortized cost and fair value of U.S. Government agencies, obligations of states and political subdivisions, synthetic collateralized debt obligations, other structured financial products, and residential and commercial mortgage-backed securities, at March 31, 2010, 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.

	Amortized Cost		Fair Value
Securities available for sale:
Within one year	$	60,102	$	61,415
After one year but within five years		217,760		222,550
After five years but within ten years		223,954		228,009
After ten years		1,122,548		1,112,654
		1,624,364		1,624,628
Securities held to maturity:
Within one year	$	0	$	0
After one year but within five years		0		0
After five years but within ten years		0		0
After ten years		8,865		8,865
		8,865		8,865
Total debt securities	$	1,633,229	$	1,633,493

11

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.

	For the Three Months Ended March 31,
	2010					2009
	Available- for- Sale			Held-to- Maturity		Available- for-Sale		Held-to- Maturity
Gross gains	$	6,627		$	0	$	24	$	0
Gross losses		(34	)		0		0		0
Other-than-temporary impairment		(557	)		0		0		0
Net gains	$	6,036		$	0	$	24	$	0

The following table presents Susquehanna’s investments’ gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at March 31, 2010 and December 31, 2009.

March 31, 2010	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	$	93,726	$	383	$	0	$	0	$	93,726	$	383
Obligations of states and political subdivisions		1,416		7		36,037		793		37,453		800
Agency residential mortgage-backed securities		41,027		87		0		0		41,027		87
Non-agency residential mortgage-backed securities		0		0		126,844		27,674		126,844		27,674
Synthetic collateralized debt obligations		190		10		0		0		190		10
Other structured financial products		0		0		14,682		11,650		14,682		11,650
Other equity securities		0		0		3,192		1,921		3,192		1,921
	$	136,359	$	487	$	180,755	$	42,038	$	317,114	$	42,525
December 31, 2009	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	$	14,813	$	188	$	0	$	0	$	14,813	$	188
Obligations of states and political subdivisions		45,348		554		31,637		1,324		76,985		1,878
Agency residential mortgage-backed securities		157,762		1,386		0		0		157,762		1,386
Non-agency residential mortgage-backed securities		89		7		130,579		33,022		130,668		33,029
Commercial mortgage-backed securities		0		0		43,498		435		43,498		435
Other structured financial products		0		0		15,319		10,975		15,319		10,975
Other equity securities		24		29		2,727		2,351		2,751		2,380
	$	218,036	$	2,164	$	223,760	$	48,107	$	441,796	$	50,271

Non-agency residential mortgage-backed securities (16 of the 18 securities are in a loss position). None of Susquehanna’s non-agency residential mortgage-backed securities include subprime or Alt-A components. Management has analyzed the assets underlying these issues with respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

Other structured financial products. Other structured financial products are comprised of pooled trust preferred securities. All four of these securities are in unrealized loss positions. Management has analyzed the assets underlying these securities with respect to interest deferrals and defaults, collateral coverage, and current levels of subordination and concluded that the unrealized losses were caused principally by decreased liquidity and larger risk premiums in the marketplace and not credit quality.

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.

12

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 3. Loans and Leases

Loans and Leases, net of unearned income

	March 31, 2010			December  31, 2009
Commercial, financial, and agricultural	$	1,972,147		$	2,050,110
Real estate - construction		1,083,596			1,114,709
Real estate secured - residential		2,618,257			2,369,380
Real estate secured - commercial		3,035,248			3,060,331
Consumer		507,413			482,266
Leases		745,005			750,483
Total loans and leases	$	9,961,666		$	9,827,279
Nonaccrual loans and leases	$	247,663		$	219,554
Loans and leases contractually past due 90 days and still accruing		20,412			14,820
Troubled debt restructurings		55,038			58,244
Home equity line of credit loans held for sale (included in “Real estate secured - residential,” above)		0	(1)		403,574

(1) During the first quarter of 2010, Susquehanna concluded that, due to recent changes in U.S. GAAP and market conditions, it was highly unlikely that the home equity line of credit loans held for sale would be sold and securitized. Therefore, on March 31, 2010, Susquehanna transferred $434,897 of home equity line of credit loans held for sale to held for investment.

Net investment in direct financing leases was as follows:

	March 31, 2010			December 31, 2009
Minimum lease payments receivable	$	484,966		$	492,664
Estimated residual value of leases		334,800			335,003
Unearned income under lease contracts		(74,761	)		(77,184	)
Total leases	$	745,005		$	750,483

Allowance for Loan and Lease Losses

	Three Months Ended March 31,
	2010			2009
Balance - Beginning of period	$	172,368		$	113,749
Additions		45,000			35,000
		217,368			148,749
Charge-offs		(42,344	)		(19,019	)
Recoveries		3,795			2,434
Net charge-offs		(38,549	)		(16,585	)
Balance - Period end	$	178,819		$	132,164

Impaired Loans

An analysis of impaired loans, as of March 31, 2010 and December 31, 2009, is as follows:

	March 31, 2010		December  31, 2009
Impaired loans without a related reserve	$	187,855	$	118,887
Impaired loans with a reserve		65,659		130,460
Total impaired loans	$	253,514	$	249,347
Reserve for impaired loans	$	29,249	$	35,030

An analysis of impaired loans for the three months ended March 31, 2010 and 2009, is as follows:

	Three Months Ended March 31,
	2010		2009
Average balance of impaired loans	$	271,878	$	126,422
Interest income on impaired loans (cash-basis)		1,462		1,149

13

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 4. Goodwill

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

Susquehanna performed its annual goodwill impairment test in the second quarter of 2009 and determined that the fair value of each of its reporting units exceeded its book value, and there was no goodwill impairment. However, given continuing difficulties in the economy and overall market conditions since that time and the fact that Susquehanna’s market capitalization has been below the book value of its equity, Susquehanna has performed interim goodwill impairment tests.

Goodwill assigned to the bank reporting unit at both March 31, 2010 and December 31, 2009 was $915,421. Fair value of the bank reporting unit was determined utilizing the market multiples approach, which measures the value of the reporting unit using recent non-distressed sales of financial institutions in Susquehanna’s market. Susquehanna uses three key ratios to measure goodwill of the bank reporting unit for impairment: price to earnings, price to book, and price to tangible book. In keeping with the investment community’s current valuations of financial institutions, Susquehanna predominantly uses the price to tangible book ratio, with little consideration given to the price to earnings ratio due to the stress in the current economic environment. The following table shows the ratios used at March 31, 2010 and December 31, 2009.

Ratio	March 31, 2010	December 31, 2009
Price to book	1.42X	1.42X
Price to tangible book	1.62X	1.62X
Price to earnings	25X	25X

Fair value of the bank reporting unit exceeded carrying value by 5.7% and 3.1% at March 31, 2010 and December 31, 2009, respectively.

Goodwill assigned to the wealth management reporting unit at both March 31, 2010 and December 31 2009 was $82,746. Fair value of the wealth management reporting unit was determined utilizing the market multiples approach and the income approach. The income approach measures the value of the reporting unit based on a discount rate to determine the present value of the reporting unit’s future economic benefit over ten years, assuming a weighted increase in the reporting unit’s revenues and a weighted increase in the reporting unit’s expenses. In keeping with the investment community’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 March 31, 2010 and December 31, 2009.

Factors	March 31, 2010		December 31, 2009
Discount rate	17.5	%	17.5	%
Weighted increase in revenues	6	%	6	%
Weighted increase in expenses	5	%	5	%

Fair value of the wealth management reporting unit exceeded carrying value by 56.8% and 41.8% at March 31, 2010 and December 31, 2009, respectively.

NOTE 5. Borrowings

Short-term borrowings	March 31, 2010		December  31, 2009
Securities sold under repurchase agreements	$	269,905	$	333,803
Federal funds purchased		0		200,000
Treasury tax and loan notes		7,300		6,900
Federal Reserve term auction facility		0		500,000
Total short-term borrowings	$	277,205	$	1,040,703

11% Junior Subordinated Deferrable Interest Debentures, Series II

On March 16, 2010, Susquehanna Capital II, a Delaware statutory trust, sold to the public $50,000 aggregate principal amount of 11% Cumulative Trust Preferred Securities, Series II and used the proceeds from those sales to fund its purchase of $50,010 of 11% Junior Subordinated Deferrable Interest Debentures, Series II issued by Susquehanna. The subordinated debentures are unsecured and rank equally in right of payment with Susquehanna’s existing series of junior subordinated debt securities. Interest on the subordinated debentures is payable semi-annually in arrears on each March 23 and September 23, beginning September 23, 2010, unless Susquehanna defers payment. Susquehanna may elect to redeem any or all of the subordinated debentures at any time on or after March 23, 2015. The maturity date of the subordinated debentures is March 23, 2040.

NOTE 6. Common Stock

        On March 15, 2010, Susquehanna completed an offering of 43,125 shares of its common stock, par value $2.00 per share, at a public offering price of $8.00 per share. Proceeds from the offering, net of underwriting discounts and commissions of $17,250 and expenses of $409, totaled $327,341.

14

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 7. Earnings per Share (EPS)

The following tables set forth the calculation of basic and diluted EPS for the three-month periods ended March 31, 2010 and 2009.

	For the Three Months Ended March 31,
	2010					2009
	Income		Average Common Shares	Per Share Amount		Income		Average Common Shares	Per  Share Amount
Basic Earnings per Share:
Income applicable to common shareholders	$	3,315	94,591	$	0.04	$	1,860	86,152	$	0.02
Effect of Diluted Securities:
Stock options and restricted shares outstanding			18					4
Diluted Earnings per Share:
Income applicable to common shareholders and assuming conversion	$	3,315	94,609	$	0.04	$	1,860	86,156	$	0.02

For the three months ended March 31, 2010 and 2009, average options to purchase 2,447 and 2,358 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents were antidilutive. For the three months ended March 31, 2010 and 2009, warrants to purchase 3,028 shares of common stock were outstanding but were not included in the computation of diluted EPS because the warrants’ common stock equivalents were antidilutive.

NOTE 8. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit Cost

	Three Months Ended March 31,
	Pension Benefits						Supplemental Executive Retirement Plan				Other Postretirement Benefits
	2010			2009			2010		2009		2010		2009
Service cost	$	1,401		$	1,716		$	33	$	30	$	191	$	128
Interest cost		1,589			1,418			73		63		193		162
Expected return on plan assets		(2,437	)		(1,892	)		0		0		0		0
Amortization of prior service cost		6			4			29		29		16		23
Amortization of transition obligation (asset)		0			0			0		0		28		28
Amortization of net actuarial loss		595			626			25		16		0		0
Curtailments/settlements		0			204			0		0		0		0
Net periodic benefit cost	$	1,154		$	2,076		$	160	$	138	$	428	$	341

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2009, that it expected to contribute $124 to its pension plans and $290 to its other postretirement benefit plan in 2010. As of March 31, 2010, $31 of contributions have been made to its pension plans, and $73 of contributions have been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $93 to fund its pension plan in 2010, for a total of $124, and $217 to its other postretirement benefit plan, for a total of $290.

Changes to Susquehanna’s Retirement Program

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

15

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 9. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Susquehanna is exposed to certain risks arising from both its business operations and economic conditions, and principally manages its exposures through management of its core business activities. Susquehanna manages economic risks, 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. Specifically, 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 determined by 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 related to certain variable-rate liabilities. Susquehanna also has derivatives that are a result of a service it provides to certain qualifying customers, and therefore, are not used to manage interest-rate risk in its assets or liabilities. Susquehanna manages a matched book with respect to its derivative instruments offered as a part of this service to it customers in order to minimize its net exposure resulting from such transactions.

Cash Flow Hedges of Interest Rate Risk

Susquehanna’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of its variable-rate borrowings, Susquehanna uses interest rate swaps designated as cash flow hedges that involve the receipt of variable amounts from a counterparty in exchange for fixed-rate payments from Susquehanna. As of March 31, 2010, Susquehanna had eight interest rate swaps with an aggregate notional amount of $640,992 that were designated as cash flow hedges of interest-rate risk. Two of these interest rate swaps, with notional amounts of $51,304 and $39,688 and fair values of $313 and ($2,237) , respectively, relate to the consolidated variable interest entities.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During the first quarter of 2010, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings, federal funds borrowings, and long-term debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the quarter ended March 31, 2010, Susquehanna recognized $392 in other expenses relating to the ineffectiveness of two cash flow hedges of consolidated variable interest entities.

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 2010, Susquehanna estimates that $7,580 will be reclassified as an increase to interest expense.

Non-designated Hedges

Susquehanna does not use derivatives for trading or speculative purposes. 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. Additionally, Susquehanna has interest rate derivatives, including interest rate swaps and option products, resulting from a service it provides to certain customers. Susquehanna executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those derivatives are simultaneously hedged by offsetting derivatives that Susquehanna executes with a third party to minimize Susquehanna’s net risk exposure resulting from those transactions. At March 31, 2010, Susquehanna had eighty-six derivative transactions related to this program with an aggregate notional amount of $607,595. For the quarter ended March 31, 2010, Susquehanna recognized a net loss of $554 related to changes in fair value of the derivatives in this program. For the quarter ended March 31, 2009, Susquehanna recognized a net gain of $295 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;

16

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

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

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

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

At March 31, 2010, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments, related to these agreements was $19,341. At March 31, 2010, Susquehanna has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $12,370. If Susquehanna had breached any of the above provisions at March 31, 2010, 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 Values of Derivative Instruments March 31, 2010
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	313	Other liabilities	$	6,609
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets		14,290	Other liabilities		14,346
Total derivatives		$	14,603		$	20,955
	December 31, 2009
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	6,956	Other liabilities	$	408
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets		13,781	Other liabilities		13,282
Total derivatives		$	20,737		$	13,690

17

The Effect of Derivative Instruments on the Statement of Income

Amount of Loss Recognized in OCI

Location of Gain or (Loss) Reclassified from Accumulated  OCI into Income

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income

Location of Gain or (Loss) Recognized in Income (Ineffective Portion)

Amount of Gain or (Loss) Recognized in Income (Ineffective Portion)

Derivatives in cash flow hedging relationships

Three months  ended March 31, 2010

March 31, 2010

March 31, 2010

Interest rate contracts:

$

(7,064

)

Interest expense

$

(367

)

Other expense

$

392

Amount of Loss Recognized in Income on Derivatives

Location of Loss Recognized in Income on Derivatives

Derivatives not designated as hedging instruments

Three months ended March 31, 2010

Interest rate contracts:

Other income

$

(554

)

Amount of Loss Recognized in OCI

Location of Gain or (Loss) Reclassified from Accumulated OCI into Income

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income

Three months ended March 31, 2009

Derivatives in cash flow hedging relationships

March 31, 2009

Interest rate contracts:

$

(4,143

)

Interest expense

$

(135

)

Amount of Loss Recognized in Income on Derivatives

Location of Loss Recognized in Income on Derivatives

Three months ended March 31, 2009

Derivatives not designated as hedging instruments

Interest rate contracts:

Other income

$

295

18

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

2006 Transaction

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

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

2005 Transaction

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

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

									For the Three  Months Ended March 31,
	Principal Balance				Risk Assets(1)				Net Credit Losses (Recoveries)
	March 31, 2010		December 31, 2009		March 31, 2010		December 31, 2009		2010			2009
Loans and leases held in portfolio	$	9,721,583	$	9,827,279	$	284,521	$	258,667	$	38,549		$	129,381
Leases held by VIEs		0		0		0		0		0			107
Home equity loans held by VIEs		240,083		248,554		4,250		4,797		171			133
Leases serviced for others		10,633		13,551		8		7		(3	)		(22	)
Total loans and leases serviced	$	9,972,299	$	10,089,384	$	288,779	$	263,471	$	38,717		$	129,599

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

19

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

Automobile Leases	Three Months Ended March 31,
	2010		2009
Servicing fees received	$	0	$	280
Other cash flows received		0		1,469

Home Equity Loans	Three Months Ended March 31,
	2010		2009
Additional draws conveyed	$	8,372	$	11,140
Servicing fees received		260		290
Other cash flows received		1,204		2,577

There were no proceeds from securitizations nor amounts derecognized for the three-month periods ended March 31, 2010 and 2009 relating to home equity loans and automobile leases.

20

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Note 11. Fair Value Disclosures

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

At March 31, 2010, Susquehanna had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. In addition, non-financial assets and non-financial liabilities have not been measured at fair value because Susquehanna has made the determination that the impact on its financial statements would be immaterial.

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

Securities

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

Derivatives

Currently, Susquehanna uses interest rate swaps to manage its interest rate risk and to assist its borrowers in managing their interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. To comply with the provisions of U.S. GAAP, Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2010, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Certain Retained Interests in Securitizations - Prior to January 1, 2010

        For interest-only strips, there was a lack of similar observable transactions for similar assets in the marketplace. Therefore, Susquehanna used the present-value approach to determine the initial and ongoing fair values of the cash flows associated with securitizations. Assumptions used, which incorporate certain market information obtained from third parties, included an estimation of an appropriate discount rate, net credit losses, and prepayment rates. Changes in the assumptions used may have had a significant impact on Susquehanna’s valuation of retained interests, and accordingly, such interests were classified within Level 3 of the valuation hierarchy.

21

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Assets Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value at March 31, 2010 and December 31, 2009, on the consolidated balance sheets and by levels within the valuation hierarchy.

			Fair Value Measurements at Reporting Date Using
Description	March 31, 2010		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	$	363,658	$	0	$	363,658	$	0
Obligations of states and political subdivisions		341,470				341,470
Agency residential mortgage-backed securities		671,105				671,105
Non-agency residential mortgage-backed securities		129,549				129,549
Commercial mortgage-backed securities		103,430				103,430
Synthetic collateralized debt obligations		734				0		734
Other structured financial products		14,682				1,275		13,407
Equity securities of the FHLB		74,342				74,342
Equity securities of the FRB		45,725				45,725
Other equity securities		25,244		3,293		17,870		4,081
Derivatives: (1)
Designated as hedging instruments		313				313
Not designated as hedging instruments		14,290				14,290
Total	$	1,784,542	$	3,293	$	1,763,027	$	18,222
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	6,609	$	0	$	6,609	$	0
Not designated as hedging instruments		14,346				14,346
Total	$	20,955	$	0	$	20,955	$	0
(1)    Included in Other assets
(2)    Included in Other liabilities
			Fair Value Measurements at Reporting Date Using
Description	December 31, 2009		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	$	371,019	$	0	$	371,019	$	0
Obligations of states and political subdivisions		353,419				353,419
Agency residential mortgage-backed securities		680,182				680,182
Non-agency residential mortgage-backed securities		135,465				133,354		2,111
Commercial mortgage-backed securities		165,025				165,025
Synthetic collateralized debt obligations		1,331						1,331
Other structured financial products		15,319				1,206		14,113
Equity securities of the FHLB		74,342				74,342
Equity securities of the FRB		45,725				45,725
Other equity securities		24,519		2,907		17,531		4,081
Derivatives: (1)
Designated as hedging instruments		6,956				6,956
Not designated as hedging instruments		13,781				13,781
Interest-only strips (1)(3)		17,840						17,840
Total	$	1,904,923	$	2,907	$	1,862,540	$	39,476
Liabilities
Derivatives: (2)
Designated as hedging instruments	$	408	$	0	$	408	$	0
Not designated as hedging instruments		13,282				13,282
Total	$	13,690	$	0	$	13,690	$	0

(1) Included in Other assets

(2) Included in Other liabilities

(3) On January 1, 2010, interest-only strips were eliminated as a result of the consolidation of the variable interest entities.

22

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

The following tables present rollforwards of the balance sheet amounts for the three months ended March 31, 2010 and 2009, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for-sale Securities
	Equity Securities		Synthetic Collateralized Debt Obligations			Other Structured Financial Products			Non-agency Residential Mortgage- backed Securities			Interest-only Strips			Total
Balance at January 1, 2010	$	4,081	$	1,331		$	14,113		$	2,111		$	17,840		$	39,476
Adjustments relating to the consolidation of variable interest entities										(2,111	)		(17,840	)		(19,951	)
Total gains or losses (realized/unrealized)
Other-than-temporary impairment				(557	)											(557	)
Included in other comprehensive income
(Presented here gross of taxes)				(40	)		(706	)								(746	)
Balance at March 31, 2010	$	4,081	$	734		$	13,407		$	—		$	—		$	18,222
									Available- for-sale Securities			Interest- only Strips			Total
Balance at January 1, 2009									$	45,315		$	17,565		$	62,880
Total gains or losses (realized/unrealized)
Included in other comprehensive income (Presented here gross of taxes)										9,686			3,250			12,936
Purchases, issuances, and settlements										(165	)		(1,582	)		(1,747	)
Transfers in and/or out of Level 3										(32,191	)(1)					(32,191	)
Balance at March 31, 2009									$	22,645		$	19,233		$	41,878

(1) Represents four securities transferred from Level 3 to Level 2 as a result of enhanced valuation methodologies.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Certain loans are evaluated for impairment in accordance with U.S. GAAP. To estimate the impairment of a loan, Susquehanna uses the practical expedient method, which is based upon the fair value of the underlying collateral for collateral-dependent loans. Currently, all of Susquehanna’s impaired loans are secured by real estate. The value of the real estate collateral is determined through appraisals performed by independent licensed appraisers. As part of Susquehanna’s overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna’s principal markets. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs. Impaired loans are reviewed at least quarterly for additional impairment, and reserves are adjusted accordingly.

The following tables present the financial instruments carried at fair value at March 31, 2010 and December 31, 2009, on the consolidated balance sheets and by the valuation hierarchy.

Description	March 31, 2010		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	36,410	$	—	$	—	$	36,410
	$	36,410	$	—	$	—	$	36,410

Specific reserves during the first three months of 2010 were reduced by $5,781. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at March 31, 2010.

Description	December 31, 2009		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	95,430	$	—	$	—	$	95,430
	$	95,430	$	—	$	—	$	95,430

Specific reserves identified during 2009 totaled $35,030. These specific reserves were taken into consideration when the required level of the allowance for loan and lease losses was determined at December 31, 2009.

23

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Additional Disclosures about Fair Value of Financial Instruments

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

Cash and due from banks and short-term investments

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

Investment securities

Refer to the above discussion on securities.

Loans and leases

Variable-rate loans, which do not expose Susquehanna to interest-rate risk, have a fair value that equals their carrying value, discounted for estimated future credit losses. The fair value of fixed-rate loans and leases was based upon the present value of projected cash flows. The discount rate was based upon the U.S. Treasury yield curve.

Deposits

The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date. The carrying value of variable-rate time deposits represents a reasonable estimate of fair value. The fair value of fixed-rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity. Discount rates were based upon the U.S. Treasury yield curve.

Short-term borrowings

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

FHLB borrowings and long-term debt

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

Derivatives

Refer to the above discussion on derivatives.

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. The fair values of commitments to originate mortgage loans to be held for sale and their corresponding forward-sales agreements are calculated as the reasonable amounts that Susquehanna would agree to pay or receive, after considering the likelihood of the commitments expiring.

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

	March 31, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	318,678	$	318,678	$	203,240	$	203,240
Short-term investments		69,818		69,818		88,120		88,120
Investment securities		1,778,804		1,778,804		1,875,267		1,875,267
Loans and leases		9,782,847		9,914,172		9,654,911		9,808,728
Financial liabilities:
Deposits		9,312,292		9,155,679		8,974,363		8,838,190
Short-term borrowings		277,205		277,205		1,040,703		1,040,703
FHLB borrowings		898,244		965,629		1,023,817		1,091,796
Long-term debt		498,514		452,816		448,374		381,618

Note 12. Income Taxes

Susquehanna’s provision for income taxes during interim reporting periods historically has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items) for the reporting period. For the reporting period ended March 31, 2010, Susquehanna has computed its provision for income taxes based on the actual effective tax rate for the quarter by applying the discrete method. Susquehanna determined that, as small changes in estimated “ordinary” income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended March 31, 2010. The actual effective rate for the reporting period ended March 31, 2010 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate below statutory rates for the interim reporting periods.

Note 13. Subsequent Events

On April 21, 2010, Susquehanna redeemed $200,000 of the outstanding $300,000 of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program in December 2008. The redemption price included $200,000 of the original investment amount plus approximately $1,800 of accrued and unpaid dividends. The preferred stock that Susquehanna redeemed in the second quarter of 2010 for $200,000 had a carrying value of $195,198 (net of a $4,802 unaccreted discount.) As a result of the redemption, Susquehanna will accelerate the accretion of the discount , which will reduce net income applicable to common shareholders by $4,802 in the second quarter of 2010.

Following the redemption, the U.S. Treasury will continue to own $100,000 of Susquehanna’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as a warrant giving the U. S. Treasury the right to purchase up to 3,028 shares of Susquehanna’s common stock at a price of $14.86 per share. Susquehanna does not expect to redeem the remaining $100,000 of preferred stock until there is sustained economic recovery and related improvement in its credit metrics.

24

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

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

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, expectations regarding Susquehanna’s future operating results or financial condition; expectations regarding a redemption of the remaining securities issued to the U.S. Treasury; Susquehanna’s potential exposures to various types of market risks, such as interest rate risk and credit risk; whether Susquehanna’s allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to maintain loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; our ability to monitor the impact of the recession moving into the commercial and industrial, commercial real estate, and consumer segments; the impact of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) on residual loss exposure; our ability to collect all amounts due under our outstanding synthetic collateralized debt obligations; and our ability to achieve our 2010 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in the automobile industry;

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

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

• the adequacy of loss reserves;

• impairment of goodwill or other assets;

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

• continued relationships with major customers;

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

• adverse national and regional economic and business conditions;

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

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

• the ability to hedge certain risks economically;

25

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

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

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

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

• the impact of the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”) and related rules and regulations on our business operations and competitiveness, including the impact of executive compensation restrictions, which may affect our ability to retain and recruit executives in competition with other firms that do not operate under those restrictions;

• future legislative or administrative changes to the TARP Capital Purchase Program enacted under the EESA;

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

• the effects of and changes in the rate of Federal Deposit Insurance Corporation 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 or to reflect the occurrence of unanticipated events except as required by law.

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

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

Availability of Information

Our web-site address is www.susquehanna.net. We make available free of charge, through the Investor Relations section of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web-site address in this Quarterly Report on Form 10-Q as an inactive textual reference only.

26

Executive Overview

The prolonged economic downturn continues to impact customers in our markets, as well as our own financial performance. Our results for the first three months of 2010 have been impacted by a number of issues related to the recession, including an increase in our provision for loan and lease losses and related credit costs, as a result of deterioration in credit quality. We have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered “well-capitalized.” With these factors in mind, we have updated our 2010 financial goals as follows:

Updated Financial Goals for 2010

Our updated financial goals for 2010 are as follows:

	Original Targets			Updated Targets
Net interest margin		3.75	%		3.70	%
Loan growth		6.0	%		4.0	%
Deposit growth		4.0	%		4.0	%
Noninterest income growth		(14.0	%)		(14.0	%)
Noninterest expense growth		(1.0	%)		(1.0	%)
Tax rate		25.0	%		Not meaningful
Preferred dividend and discount accretion	$	16.8 million		$	14.1 million

Subsequent Events

On April 21, 2010, we redeemed $200.0 million of the outstanding $300.0 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program in December 2008. The redemption price included $200.0 million of the original investment amount plus approximately $1.8 million of accrued and unpaid dividends. The preferred stock that we redeemed in the second quarter of 2010 for $200.0 million had a carrying value of $195.2 million (net of a $4.8 million unaccreted discount). As a result of the redemption, we will accelerate the accretion of the discount , which will reduce net income applicable to common shareholders by $4.8 million in the second quarter of 2010.

Following the redemption, the U.S. Treasury will continue to own $100.0 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as a warrant giving the U.S. Treasury the right to purchase up to 3.0 million shares of our common stock at a price of $14.86 per share. We do not expect to redeem the remaining $100.0 million of preferred stock until there is sustained economic recovery and related improvement in our credit metrics.

Results of Operations

Summary of First Quarter 2010 Compared to First Quarter 2009

Net income applicable to common shareholders for the first quarter of 2010 was $3.3 million, an increase of $1.5 million from net income applicable to common shareholders of $1.9 million for the first quarter of 2009. Net interest income increased 13.7%, to $108.3 million for the first quarter of 2010, from $95.3 million for the first quarter of 2009. The provision for loan and lease losses increased 28.6% to $45.0 million for the first quarter of 2010, from $35.0 million for the first quarter of 2009. Noninterest income decreased 8.4%, to $38.7 million for the first quarter of 2010, from $42.2 million for the first quarter of 2009. Noninterest expenses decreased 0.6%, to $94.3 million for the first quarter of 2010, from $94.8 million for the first quarter of 2009.

27

Additional information is as follows:

	Three Months Ended March  31,
	2010			2009
Diluted Earnings per Common Share	$	0.04		$	0.02
Return on Average Assets		0.22	%		0.18	%
Return on Average Equity		1.50	%		1.26	%
Return on Average Tangible Equity (1)		3.80	%		3.60	%
Efficiency Ratio		62.72	%		67.38	%
Net Interest Margin		3.80	%		3.40	%

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

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

	Three Months Ended March  31,
	2010		2009
Return on average equity (GAAP basis)	1.50	%	1.26	%
Effect of excluding average intangible assets and related amortization	2.30	%	2.34	%
Return on average tangible equity	3.80	%	3.60	%

28

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential—taxable equivalent basis

	For the Three-Month Period Ended March 31, 2010						For the Three-Month Period Ended March 31, 2009
	Average Balance			Interest		Rate (%)	Average Balance			Interest		Rate (%)
Assets
Short-term investments	$	80,938		$	34	0.17	$	122,623		$	287	0.95
Investment securities:
Taxable		1,498,905			15,003	4.06		1,606,900			20,582	5.19
Tax-advantaged		343,471			5,677	6.70		342,659			5,665	6.70
Total investment securities		1,842,376			20,680	4.55		1,949,559			26,247	5.46
Loans and leases, (net):
Taxable		9,735,566			133,628	5.57		9,454,551			134,657	5.78
Tax-advantaged		258,269			4,002	6.28		220,691			3,634	6.68
Total loans and leases		9,993,835			137,630	5.59		9,675,242			138,291	5.80
Total interest-earning assets		11,917,149			158,344	5.39		11,747,424			164,825	5.69
Allowance for loan and lease losses		(174,890	)					(118,005	)
Other non-earning assets		2,061,713						2,039,130
Total assets	$	13,803,972					$	13,668,549
Liabilities
Deposits:
Interest-bearing demand	$	3,353,579			5,425	0.66	$	2,674,774			6,818	1.03
Savings		750,932			286	0.15		708,570			720	0.41
Time		3,740,414			22,722	2.46		4,568,870			39,697	3.52
Short-term borrowings		817,394			758	0.38		834,395			1,065	0.52
FHLB borrowings		975,745			9,635	4.00		1,054,131			10,060	3.87
Long-term debt		694,204			7,839	4.58		447,817			7,940	7.19
Total interest-bearing liabilities		10,332,268			46,665	1.83		10,288,557			66,300	2.61
Demand deposits		1,223,789						1,190,576
Other liabilities		221,164						246,136
Total liabilities		11,777,221						11,725,269
Equity		2,026,751						1,943,280
Total liabilities and shareholders’ equity	$	13,803,972					$	13,668,549
Net interest income / yield on average earning assets				$	111,679	3.80				$	98,525	3.40

Additional Information

Average loan balances include non-accrual loans.

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

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

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Net Interest Income-Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased to $108.3 million for the first quarter of 2010, as compared to $95.3 million for the same period in 2009. Net interest income as a percentage of net interest income plus noninterest income was 73.7% for the quarter ended March 31, 2010 and 69.3% for the quarter ended March 31, 2009.

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

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

The $13.0 million increase in our net interest income for the first quarter of 2010, as compared to the first quarter of 2009, was primarily the result of a 16.5% increase in average core deposits, which lowered our cost of funds by 78 basis points, while our yield on average earning assets declined only 30 basis points.

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

Provision and Allowance for Loan and Lease Losses

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

As was the case throughout 2009, we continued to experience a challenging operating environment in the first quarter of 2010. Given the economic pressures that continue to impact some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $94.1 million increase in nonaccrual loans and leases since March 31, 2009 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $45.0 million for the first quarter of 2010, and $35.0 million for the first quarter of 2009.

We have seen some signs of stabilization, however, when comparing results on a linked-quarter basis. Net charge-offs for the first quarter of 2010 were $38.5 million, down from $51.2 million for the fourth quarter of 2009. Furthermore, our $45.0 million provision for loan and lease losses for the first quarter of 2010 was less than the $55.0 million provision for the fourth quarter of 2009.

Of the $247.7 million of nonaccrual loans and leases at March 31, 2010 (refer to “Table 3 – Risk Assets”), $198.5 million, or 80.1%, represented non-accrual, non-consumer loan relationships greater than $0.5 million that had been evaluated and considered impaired. Of the $253.5 million of total impaired loans (non-accrual, non-consumer loan relationships greater than $0.5 million plus accruing restructured loans), $187.9 million, or 74.1%, had no related reserve (refer to “Note 3. Loans and Leases – Impaired Loans” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.) The determination that no related reserve for these collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

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Net charge-offs for the first quarter of 2010 increased to $38.5 million, or 1.56% of average loans and leases, when compared to net charge-offs for the first quarter of 2009 of $16.6 million, or 0.70% of average loans and leases. Furthermore, 67.0% of net charge-offs came from the real estate – construction and real estate – commercial portfolios as real estate demand and values in some of our market areas are under considerable downward pressure. For additional information about our real estate – construction loan portfolio, refer to Tables 3, 4, 5, and 6 appearing in “Financial Condition, Risk Assets” in this Quarterly Report on Form 10-Q.

The allowance for loan and lease losses was 1.80% of period-end loans and leases, or $178.8 million, at March 31, 2010; 1.75% of period-end loans and leases, or $172.4 million, at December 31, 2009; and 1.35% of period-end loans and leases, or $132.2 million, at March 31, 2009.

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is adequate to meet probable incurred loan and lease losses at March 31, 2010. There can be no assurance, however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at March 31, 2010.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses

	Three Months Ended March 31,
	2010			2009
	(dollars in thousands)
Balance - Beginning of period	$	172,368		$	113,749
Additions		45,000			35,000
Charge-offs:
Commercial, financial, and agricultural		(5,036	)		(4,997	)
Real estate - construction		(12,683	)		(7,075	)
Real estate secured - residential		(6,137	)		(2,088	)
Real estate secured - commercial		(14,728	)		(766	)
Consumer		(1,097	)		(1,315	)
Leases		(2,663	)		(2,778	)
Total charge-offs		(42,344	)		(19,019	)
Recoveries:
Commercial, financial, and agricultural		1,244			670
Real estate - construction		1,370			0
Real estate secured - residential		154			42
Real estate secured - commercial		198			1,253
Consumer		475			301
Leases		354			168
Total recoveries		3,795			2,434
Net charge-offs		(38,549	)		(16,585	)
Balance - Period end	$	178,819		$	132,164
Net charge-offs as a percentage of average loans and leases (annualized)		1.56	%		0.70	%
Allowance as a percentage of period-end loans and leases		1.80	%		1.35	%
Average loans and leases	$	9,993,835		$	9,675,242
Period-end loans and leases		9,961,666			9,766,063

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Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income, was 26.3% for the first quarter of 2010, and 30.7% for the first quarter of 2009.

Noninterest income decreased $3.5 million, or 8.4%, for the first quarter of 2010, over the first quarter of 2009. This net decrease was primarily a result of the following:

• Decreased service charges on deposit accounts of $1.5 million;

• Increased asset management fees of $1.1 million;

• Increased net realized gains on the sale of securities of $6.6 million; and

• Decreased other of $8.3 million.

Service charges on deposit accounts. The 15.5% decrease primarily was the result of changes in customers’ behavior regarding overdrafts.

Asset management fees. The 19.2% increase was the result of an increase of $746.9 million in assets under management and administration at VFAM and Stratton due primarily to the recovery in the stock market.

Net realized gains on the sale of securities. During the first quarter of 2010, we sold securities with an aggregate book value of $143.8 million for a net gain of $6.6 million. During the first quarter of 2009 we sold securities with an aggregate book value of $0.1 million.

Other. In the first quarter of 2009, we recognized a net gain of $6.9 million on the sale of our Central Atlantic Services accounts. In addition, credit valuation adjustments relating to changes in the fair value of our non-designated hedges totaled $0.3 million at March 31, 2009 and ($0.6) million at March 31, 2010.

Noninterest Expenses

Noninterest expenses decreased $0.5 million, or 0.6%, from $94.8 million for the first quarter of 2009, to $94.3 million for the first quarter of 2010. There were no changes that we consider noteworthy.

Income Taxes

Our provision for income taxes during interim reporting periods historically has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding significant unusual or infrequently occurring items) for the reporting period. For the reporting period ended March 31, 2010, we have computed our provision for income taxes based on the actual effective tax rate for the quarter by applying the discrete method. We determined that as small changes in estimated “ordinary” income result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the reporting period ended March 31, 2010. The actual effective rate for the reporting period ended March 31, 2010 was impacted by the level of permanent differences, including tax-advantaged investment and loan income, resulting in an effective rate below statutory rates for the interim reporting periods.

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Financial Condition

Summary of March 31, 2010 Compared to December 31, 2009

Total assets at March 31, 2010 were $13.8 billion, an increase of $90.7 million as compared to total assets at December 31, 2009. Total loans increased $134.4 million, and total deposits increased $337.9 million from December 31, 2009. Equity capital was $2.3 billion at March 31, 2010, or $15.47 per common share, and $2.0 billion, or $19.53 per common share, at December 31, 2009.

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

At March 31, 2010, 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. Furthermore, 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 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Securities Available for Sale

For information about our investment securities portfolio, refer to “Note 2. Investment Securities” and “Note 11. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Loans and Leases

As a result of the adoption of new accounting guidance relating to variable interest entities, we, as the primary beneficiary of two securitization trusts, were required to consolidate the trusts as of January 1, 2010. At March 31, 2010, the aggregate balance of the loans held by the trusts that can be used only to settle obligations of the trusts was $240.1 million. In addition, during the first quarter of 2010, we concluded that, due to recent changes in accounting guidance and market conditions, it was highly unlikely that the home equity line of credit loans held for sale would be sold and securitized. Therefore, on March 31, 2010, Susquehanna transferred $434.9 million of home equity line of credit loans held for sale to held for investment.

Our experience in recent months indicates that many consumers and businesses in our markets are proceeding cautiously in the current economic environment. In some cases, they appear to be delaying or changing plans for taking on additional debt, and, as a result there has been a reduced demand for loans among credit-worthy borrowers. As a result, loans and leases, net of unearned income and the consolidated loans discussed above, decreased 1.1%, from $9.8 billion at December 31, 2009 to $9.7 billion at March 31, 2010. Commercial, financial, and agricultural loans declined by $78.0 million (including charge-offs of $3.8 million), while real estate construction loans, which we consider to be higher-risk loans, declined by $31.1 million (including charge-offs of $11.3 million). The decline in real estate construction loans was primarily due to our continuing plan to decrease that portfolio, thereby reducing our exposure in a segment that has been particularly stressed during this recession.

Risk Assets

Total nonperforming assets increased $24.5 million, from December 31, 2009 to March 31, 2010, as presented in Table 3.

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Susquehanna Bancshares, Inc. and Subsidiaries

Table 3 - Risk Assets

	March 31, 2010			December 31, 2009			March 31, 2009
	(dollars in thousands)
Nonperforming assets:
Nonaccrual loans and leases:
Commercial, financial, and agricultural	$	23,009		$	20,282		$	24,292
Real estate - construction		97,234			97,717			71,876
Real estate secured - residential		52,749			37,254			20,279
Real estate secured - commercial		70,635			59,181			36,836
Consumer		24			27			214
Leases		4,012			5,093			30
Total nonaccrual loans and leases		247,663			219,554			153,527
Other real estate owned		20,697			24,292			13,216
Total nonperforming assets	$	268,360		$	243,846		$	166,743
Nonperforming assets as a percentage of period-end loans and leases plus other real estate owned		2.69	%		2.48	%		1.71	%
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases		72	%		79	%		86	%
Loans and leases contractually past due 90 days and still accruing	$	20,412		$	14,820		$	26,620
Restructured loans		55,038			58,244			2,493

Nonaccrual loans and leases increased from $219.6 million at December 31, 2009, to $247.7 million at March 31, 2010. The net increase was primarily the result of the effects of the continuing economic deterioration on our borrowers. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus other real estate owned increased from 2.48% at December 31, 2009 to 2.69% at March 31, 2010. Furthermore, at March 31, 2010, 39.3% of nonaccrual loans and leases were in our real estate – construction portfolio as real estate demand and values in some of our market areas are under considerable downward pressure. We consider these real-estate construction loans to be higher-risk loans. Additional information about our real estate – construction loan portfolio is presented in Tables 4, 5, and 6. Categories within these tables are defined as follows:

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

• 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.

We have been aggressively reviewing our portfolio, contacting customers to evaluate their financial situation and, where necessary, working with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We continue to believe that 2010 will be a challenging year, with the effects of the recession moving into the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame and to minimize the effect on our earnings.

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

Category	Balance at March 31, 2010		% of Total Construction		Past Due 30-89 Days		Past Due 90 Days and Still Accruing		Nonaccrual		Other Internally Monitored (1)		Net Charge-offs (2)		Reserve (3)
	(dollars is thousands)
1-4 Family:
Construction	$	256,637	23.7	%	0.3	%	0.0	%	16.5	%	19.3	%	5.8	%	6.0	%
Land development		208,491	19.2		0.3		0.1		0.4		18.2		16.0		3.9
Raw land		2,919	0.3		77.3		0.0		0.4		0.0		37.5		8.9
		468,047	43.2		0.8		0.0		9.2		18.7		10.9		5.1
All Other:
Construction:
Investor		245,692	22.7		2.1		0.0		7.4		9.1		0.7		3.9
Owner-occupied		7,412	0.7		0.0		0.0		15.9		0.0		3.0		6.1
Land development:
Investor		296,894	27.4		0.8		0.0		8.5		22.0		0.3		3.7
Owner-occupied		10,793	1.0		0.0		0.0		0.0		12.8		12.3		3.4
Raw land:
Investor		53,888	5.0		2.0		0.0		17.3		22.9		11.7		13.6
Owner-occupied		870	0.1		0.0		0.0		28.1		0.0		0.0		3.6
		615,549	56.8		1.4		0.0		8.8		16.5		1.9		4.7
Total	$	1,083,596	100.0		1.1		0.0		9.0		17.4		6.0		4.9

(1) represents loans with initial signs of some financial weakness and potential problem loans that are on our internally monitored loan list, excluding nonaccrual 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 March 31, 2010 plus the net charge-offs.

(3) represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at March 31, 2010.

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

	Balance at March 31, 2010		Geographical Location by %
Category			Maryland		New Jersey		Pennsylvania		Other
	(dollars in thousands)
1-4 Family:
Construction	$	256,637	53.3	%	10.2	%	33.5	%	3.0	%
Land development		208,491	52.9		6.7		32.6		7.8
Raw land		2,919	77.6		0.0		22.4		0.0
		468,047	53.3		8.6		33.0		5.1
All Other:
Construction:
Investor		245,692	12.6		19.2		63.0		5.2
Owner-occupied		7,412	44.0		24.5		24.2		7.4
Land development:
Investor		296,894	28.7		1.3		53.9		16.1
Owner-occupied		10,793	44.5		0.0		53.5		2.1
Raw land:
Investor		53,888	22.3		12.6		64.9		0.2
Owner-occupied		870	52.9		28.1		18.9		0.0
		615,549	22.2		9.8		58.1		10.0
Total	$	1,083,596	35.6		9.3		47.3		7.9

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

Category	Balance at March 31, 2010		Global Debt Coverage  Ratio Less than 1.1 Times (1)		Average Loan to Value
	(dollars in thousands)
1-4 Family:
Construction	$	256,637	37.1	%	78.1	%
Land development		208,491	18.7		72.3
Raw land		2,919	0.0		79.9
		468,047	28.6		75.8
All Other:
Construction:
Investor		245,692	12.8		76.8
Owner-occupied		7,412	0.0		59.6
Land development:
Investor		296,894	32.0		71.8
Owner-occupied		10,793	5.4		60.9
Raw land:
Investor		53,888	41.7		70.8
Owner-occupied		870	19.1		97.1
		615,549	24.2		72.4
	$	1,083,596	26.1		74.0

(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.

Goodwill

We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be an 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 test in the second quarter of 2009, and determined that the fair value of each of our reporting units exceeded its book value, and there was no goodwill impairment. However, given the continuing difficulties in the economy and overall market conditions since that time and the fact that our market capitalization has been below the book value of our equity, we have performed interim goodwill impairment tests.

Based upon our analyses at March 31, 2010, the fair value of each of our reporting units exceeded its book value, and there was no goodwill impairment. We will continue to monitor and evaluate the carrying value of goodwill for possible future impairment as conditions warrant.

For additional information about goodwill, refer to “Note 4. Goodwill” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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Deposits

Total deposits increased 3.8%, or $337.9 million, from December 31, 2009 to March 31, 2010. Within this category, core deposits such as demand, interest-bearing demand, and savings increased 2.1%, 6.4%, and 3.9%, respectively. We attribute these increases to customers seeking safety and security while maintaining ready access to their funds. Time deposits less than $0.1 million decreased 2.6%, or $66.9 million, from December 31, 2009 to March 31, 2010. This decrease, in part, reflects the results of our continuing plan to improve our mix of deposits by allowing high-cost, single-service certificates of deposit to run off. Time deposits greater than $0.1 million increased 12.0%, or $140.1 million, from December 31, 2009 to March 31, 2010. This increase is primarily the result of the acquisition of brokered certificates of deposit at very favorable rates.

Borrowings

We temporarily used the proceeds from our common stock offering to pay down short-term borrowings.

11% Junior Subordinated Deferrable Interest Debentures, Series II

On March 16, 2010, Susquehanna Capital II, a Delaware statutory trust, sold to the public $50.0 million aggregate principal amount of 11% Cumulative Trust Preferred Securities, Series II and used the proceeds from those sales to fund its purchase of $50.0 million of 11% Junior Subordinated Deferrable Interest Debentures, Series II issued by Susquehanna. The subordinated debentures are unsecured and rank equally in right of payment with our existing series of junior subordinated debt securities. Interest on the subordinated debentures is payable semi-annually in arrears on each March 23 and September 23, beginning September 23, 2010, unless we defer payment. We may elect to redeem any or all of the subordinated debentures at any time on or after March 23, 2015. The maturity date of the subordinated debentures is March 23, 2040.

Shareholders’ Equity

On March 15, 2010, Susquehanna completed an offering of 43.1 million shares of its common stock, par value $2.00 per share, at a public offering price of $8.00 per share. Proceeds from the offering, net of underwriting discounts and commissions of $17.3 million and expenses of $0.4 million, totaled $327.3 million.

Capital Adequacy

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

Our capital ratios are as follows:

	At March 31, 2010		Well-Capitalized Threshold
Tangible Common Ratio (1)	7.78	%	N/A
Tier 1 Common Ratio	9.03	%	N/A
Leverage Ratio	12.45	%	5.0	%
Tier 1 Capital Ratio	14.67	%	6.0	%
Total Risk-based Capital Ratio	16.98	%	10.0	%

(1) Includes deferred tax liability of $43.0 million associated with intangibles.

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Securitizations and Variable Interest Entities

We have used the securitization of financial assets as a source of funding and a means to manage capital. Hann and our bank subsidiary sold beneficial interests in automobile leases and related vehicles and home equity loans to securitization trusts. These transactions were accounted for as sales, and a net gain or loss was recognized at the time of the initial sale. Due to recent market conditions, no securitizations have occurred since 2007, and we do not anticipate that any will occur in the near future.

For additional information concerning the characteristics of securitization transactions, including the gain or loss from sale, and descriptions of prior years’ securitization transactions, see the following sections of our Annual Report on Form 10-K for the year ended December 31, 2009:

• “Securitization Transactions” on pages 57 through 63;

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

• “Note 21. Securitization Activity” on pages 110 through 113.

Also see “Note 10. Securitizations and Variable Interest Entities” to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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. When market values decline, our fee income also declines.

Liquidity Risk

The maintenance of adequate liquidity — the ability to meet the cash requirements of our customers and other financial commitments — is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources — purchased funds, repurchase agreements, and deposit accounts — allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At March 31, 2010, our bank subsidiary had approximately $1.2 billion available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and approximately $610.6 million more would have been available provided that additional collateral had been pledged. Furthermore, at March 31, 2010, we had unused federal funds lines of $1.0 billion.

In addition, we have pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment securities to obtain collateralized borrowing availability at the Federal Reserve’s Discount Window and Term Auction Facility. At March 31, 2010, we had unused collateralized availability of $854.7 million.

38

Liquidity, however, is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $69.7 million at March 31, 2010 and represented additional sources of liquidity.

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

Interest Rate Risk

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

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

Our policy, as approved by our Board of Directors, is designed so that we experience no more than a 15% decline in net interest income and no more than a 30% decline in the economic value of equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, we were within the Board’s approved guidelines at an up 300 basis point shock. At March 31, 2010, our asset/liability position was slightly asset sensitive.

Derivative Financial Instruments and Hedging Activities

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

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

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

Vehicle Leasing Residual Value Risk

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

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

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control Over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Reserved

Item 5. Other Information.

None.

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Item 6. Exhibits.

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

4.1	Indenture, between Susquehanna and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Subordinated Debt (incorporated by reference to Exhibit 4.2 to Susquehanna’s Registration Statement on Form S-3, filed with the SEC on March 8, 2010).
4.2	Amended and Restated Trust Agreement, dated as of March 16, 2010, by and among Susquehanna, as depositor, The Bank of New York Mellon Trust Company, N.A., as property trustee, BNY Mellon Trust of Delaware, as Delaware trustee, the administrative trustees named therein and the Holders as defined therein (incorporated by reference to Exhibit 4.1 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.3	Guarantee Agreement, dated as of March 16, 2010, between Susquehanna, as guarantor, and The Bank of 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 with the SEC on March 16, 2010).
4.4	First Supplemental Indenture, dated as of March 16, 2010, between Susquehanna and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.5	11% Cumulative Trust Preferred Securities, Series II (incorporated by reference to Exhibit 4.4 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.6	11% Junior Subordinated Deferrable Interest Debentures, Series II (incorporated by reference to Exhibit 4.5 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
10.1	Amended and Restated Susquehanna Bancshares, Inc. 2005 Equity Compensation Plan (incorporated by reference to Annex A to Susquehanna’s Proxy Statement filed with the SEC on March 27, 2009). *
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications is filed herewith as Exhibit 32.

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

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SIGNATURES

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

	SUSQUEHANNA BANCSHARES, INC.
May 6, 2010	/s/ William J. Reuter
	William J. Reuter Chairman and Chief Executive Officer
May 6, 2010	/s/ Drew K. Hostetter
	Drew K. Hostetter Executive Vice President, Treasurer, and Chief Financial Officer

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EXHIBIT INDEX

Exhibit Numbers	Description and Method of Filing
4.1	Indenture, between Susquehanna and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Subordinated Debt (incorporated by reference to Exhibit 4.2 to Susquehanna’s Registration Statement on Form S-3, filed with the SEC on March 8, 2010).
4.2	Amended and Restated Trust Agreement, dated as of March 16, 2010, by and among Susquehanna, as depositor, The Bank of New York Mellon Trust Company, N.A., as property trustee, BNY Mellon Trust of Delaware, as Delaware trustee, the administrative trustees named therein and the Holders as defined therein (incorporated by reference to Exhibit 4.1 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.3	Guarantee Agreement, dated as of March 16, 2010, between Susquehanna, as guarantor, and The Bank of 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 with the SEC on March 16, 2010).
4.4	First Supplemental Indenture, dated as of March 16, 2010, between Susquehanna and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.5	11% Cumulative Trust Preferred Securities, Series II (incorporated by reference to Exhibit 4.4 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
4.6	11% Junior Subordinated Deferrable Interest Debentures, Series II (incorporated by reference to Exhibit 4.5 to Susquehanna’s Current Report on Form 8-K, filed with the SEC on March 16, 2010).
10.1	Amended and Restated Susquehanna Bancshares, Inc. 2005 Equity Compensation Plan (incorporated by reference to Annex A to Susquehanna’s Proxy Statement filed with the SEC on March 27, 2009). *
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
32	Section 1350 Certifications is filed herewith as Exhibit 32.

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

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