UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2012

OR

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

For the transition period from                      to                     

Commission file number 0-133872

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

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  þ    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  þ    No  ¨

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

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

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

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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $1,881,544,416 as of June 29, 2012, based upon the closing price quoted on the Nasdaq Global Select Market for such date. Shares of common stock held by each executive officer and director have been excluded because such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares issued and outstanding of the registrant’s common stock as of February 15, 2013, was 186,665,869.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 3, 2013 are incorporated by reference into Part III of this Annual Report.

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		16
Item 1B.	Unresolved Staff Comments		24
Item 2.	Properties		24
Item 3.	Legal Proceedings		25
Item 4.	Mine Safety Disclosures		26
Part II
Item 5.	Market for Susquehanna’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		27
Item 6.	Selected Financial Data		29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		71
Item 8.	Financial Statements and Supplementary Data		72
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		146
Item 9A.	Controls and Procedures		146
Item 9B.	Other Information		146
Part III
Item 10.	Directors, Executive Officers and Corporate Governance		147
Item 11.	Executive Compensation		147
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		147
Item 13.	Certain Relationships and Related Transactions, and Director Independence		147
Item 14.	Principal Accountant Fees and Services		147
Part IV
Item 15.	Exhibits and Financial Statement Schedules		148

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

PART I

Forward-Looking Statements.

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, general economic conditions; the impact of new regulations on our business; our potential exposures to various types of market risks, such as interest rate risk and credit risk; expectations regarding future acquisitions; whether our allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to evaluate loan guarantors; our ability to offset loan prepayment penalties through decreased interest expense on FHLB borrowings; our ability to achieve loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; and our ability to achieve our 2013 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market-risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in regional real estate values;

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

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

• the adequacy of loss reserves;

• impairment of goodwill or other assets;

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

• continued relationships with major customers;

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

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

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

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

• the ability to hedge certain risks effectively and economically;

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

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

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

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

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

• the effects of and changes in the rate of FDIC premiums; and

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

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

Item 1. Business

General

Susquehanna Bancshares, Inc. (“Susquehanna”) is a one-bank financial holding company organized in 1982 under the laws of the Commonwealth of Pennsylvania. Our executive offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543. Our telephone number is (717) 626-4721 and our web site address is www.susquehanna.net. Our common stock is traded on the Nasdaq Global Select Market under the symbol SUSQ. We make available free of charge, through the Investor Relations section of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web site address in this Annual Report on Form 10-K as a textual reference only and do not intend it to be an active link to our web site.

Susquehanna conducts its business operations primarily through our commercial bank subsidiary, Susquehanna Bank, and other subsidiaries in the mid-Atlantic region to provide a wide range of retail and commercial banking and financial products and services. In addition to Susquehanna Bank, we operate a trust and investment company, an asset management company (which provides investment advisory, asset management, brokerage and retirement planning services), a property and casualty insurance brokerage company and a vehicle leasing company. As of December 31, 2012, we had total assets of approximately $18.0 billion, consolidated net loans and leases of $12.9 billion, deposits of $12.6 billion, and shareholders’ equity of $2.6 billion.

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The following table sets forth information, for the year ended December 31, 2012, regarding our bank subsidiary and each of our non-bank subsidiaries that had annual revenues in excess of $5.0 million:

Table 1

Susquehanna Bancshares, Inc. Subsidiaries

(Dollars in thousands)

Subsidiary	Assets			Percent of Total
Bank Subsidiary:
Susquehanna Bank	$	17,967,742			99.6	%
Non-Bank Subsidiaries:
Valley Forge Asset Management Corp.		39,807			0.2
Stratton Management Company		76,359			0.4
Boston Service Company, Inc. (t/a Hann Financial Service Corp.)		93,552			0.5
The Addis Group, LLC		48,463			0.3
Consolidation adjustments and other non-bank subsidiaries		(188,256	)		-1.0
TOTAL	$	18,037,667			100.0	%

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

As of December 31, 2012, our total loans and leases (net of unearned income) in dollars and by percentage were as follows:

Table 2

Loans and Leases

(Dollars in thousands)

Commercial, financial, and agricultural	$	2,273,611	17.6	%
Real estate - construction		847,781	6.6
Real estate secured - residential		4,065,818	31.5
Real estate secured - commercial		3,964,608	30.8
Consumer		842,552	6.5
Leases		900,371	7.0
Total loans and leases	$	12,894,741	100.0	%

As of December 31, 2012, core deposits funded 68.5% of our lending activities.

Products and Services

Our Bank Subsidiary. Our commercial bank subsidiary, Susquehanna Bank, is a Pennsylvania state-chartered commercial bank that operated 261 banking offices as of December 31, 2012. It provides a wide range of retail banking services, including checking, savings and club accounts, check cards, debit cards, money market accounts, certificates of deposit, individual retirement accounts, home equity lines of credit, residential mortgage loans, home improvement loans, automobile loans, personal loans, internet and mobile banking services. It also

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provides an extensive selection of commercial banking services, including business checking accounts, cash management services, money market accounts, land acquisition and development loans, commercial loans, floor plan, equipment and working capital lines of credit, small business loans, and internet banking services. We provide our bank subsidiary guidance in the areas of credit policy and administration, risk assessment, investment advisory administration, strategic planning, investment portfolio management, asset liability management, liquidity management and other financial, administrative and control services.

Our Non-bank Subsidiaries. Our non-bank subsidiaries offer a variety of financial services to complement our core banking operations, broaden our customer base, and diversify our revenue sources. Our objective is to offer our customers a broad array of products and services to meet all their financial needs. The Addis Group, LLC provides commercial, property and casualty insurance, and risk management programs for medium and large sized companies. Valley Forge Asset Management Corp. offers investment advisory, asset management and brokerage services for institutional and high net worth individual clients, and retirement planning services. Stratton Management Company provides equity management of assets for institutions, pensions, endowments and high net worth individuals. Boston Service Company, Inc. (t/a Hann Financial Service Corp.) provides comprehensive consumer vehicle financing services.

Market Areas

Our Bank Subsidiary. We operate through a regional community banking model with 12 regional leadership teams reporting through three market CEOs responsible for the following markets:

• The PA Division includes 124 banking offices operating primarily in the central Pennsylvania market area, including Adams, Berks, Centre, Cumberland, Dauphin, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Northampton, Northumberland, Schuylkill, Snyder, Union, and York counties.

• The MD Division includes 66 banking offices operating primarily in the market areas of Maryland and southwestern central Pennsylvania, including Allegany, Anne Arundel, Baltimore, Carroll, Garrett, Harford, Howard, Washington, and Worcester counties and the City of Baltimore in Maryland, Berkeley County in West Virginia and Bedford, Franklin, and Fulton counties in Pennsylvania.

• The DV Division includes 71 banking offices operating primarily in the suburban Philadelphia, Pennsylvania and southern New Jersey market areas, including Philadelphia, Bucks, Chester, Delaware, and Montgomery, counties in Pennsylvania and Atlantic, Burlington, Camden, Cumberland, and Gloucester counties in New Jersey.

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

Employees

As of December 31, 2012, we had 3,304 full-time and 160 part-time employees.

Competition

Financial holding companies and their subsidiaries compete with many institutions for deposits, loans, trust services and other banking-related and financial services and products. We are subject to robust competition in our market areas. We compete with larger national and regional banks as well as other types of financial institutions that are less heavily regulated such as brokerage firms, money market funds, credit unions, mortgage

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companies, consumer finance and credit card companies, and other financial services companies. Further, competition among providers of financial services and products continues to increase, especially with consumers having the opportunity to choose from a variety of traditional and non-traditional banking alternatives.

The market areas that we serve continue to experience sluggish economic growth, but have a diverse employment base consisting primarily of manufacturing, agriculture, wholesale and retail trade, technology, health care and governmental sectors. We believe that our community banking approach to providing client service is a competitive advantage that strengthens our ability to provide financial products and services to individuals and businesses in our markets. We believe our market area will support growth in assets and deposits in the future, which we expect to contribute to our ability to maintain or grow profitability. In addition, we will continue to seek relationships that can generate fee income that is not directly tied to lending relationships. We anticipate that this approach will help mitigate profit fluctuations that are caused by movements in interest rates, business and consumer loan cycles, and local economic factors.

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

As a result of the Dodd-Frank Act and other state and federal legislation, as well as the increase in supervisory burden, consolidation in the industry is expected to increase. At present, we compete throughout our market areas with numerous larger institutions that have significantly greater resources and assets.

Our Long-Term Strategy

We manage our business for sustained long-term growth and profitability, with an objective to be a high performing financial services company. Our primary strategy is organic growth through expansion of our customer base in existing markets, supplemented by strategic acquisitions. We focus on leveraging customer relationships through the cross-selling of a comprehensive range of financial services and products by a highly trained and motivated employee sales force. The primary objectives of our current strategic plan are to continue to increase lower-cost core deposits, grow a diverse loan portfolio with an increased focus on commercial and small business lending, increase noninterest income as a component of total revenue, deliver a consistent and differentiating customer experience and build a workplace that employees find engaging and rewarding. These objectives are aligned with and support our mission, “to help customers achieve their financial goals, to deliver a superior return for shareholders, and to build the economic strength of our communities.”

Mergers and Acquisitions

Abington Bancorp, Inc. On October 1, 2011, we completed our acquisition of Abington Bancorp, Inc. (“Abington”) in a merger of Abington with and into Susquehanna. Abington shareholders received 1.32 shares of Susquehanna common stock for each share of Abington common stock they held immediately prior to completion of the merger. The transaction had a total value of $150.8 million compared to a fair value of net assets acquired of $189.9 million. Upon completion of the merger, Robert W. White, Chairman, President and Chief Executive Officer of Abington, was appointed to the Susquehanna board and joined the leadership team of Susquehanna Bank’s DV Division. The locations of Abington’s bank branches provide a natural extension of Susquehanna Bank’s network in the greater Philadelphia area.

Tower Bancorp, Inc. On February 17, 2012, we completed our acquisition of Tower Bancorp, Inc. (“Tower”) in a merger of Tower with and into Susquehanna. Pursuant to the merger agreement, Tower shareholders had the option of receiving either 3.4696 shares of Susquehanna common stock or $28.00 in cash for each share of Tower common stock they held, with $88 million of the aggregate consideration paid in cash, for a total value of approximately $390.1 million. The transaction enhanced Susquehanna’s already strong

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presence in central and southeastern Pennsylvania and significantly increased our market share in the Pennsylvania counties of Chester, Dauphin and Franklin. Additionally, the merger gave Susquehanna Bank a branch presence in the Pennsylvania counties of Lebanon, Fulton and Centre.

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

Supervision and Regulation

General Overview

Susquehanna is a financial holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and is subject to regulation under the Bank Holding Company Act of 1956, as amended. The Bank Holding Company Act requires prior approval of an acquisition of all or substantially all of the assets of a bank or of ownership or control of voting shares of any bank if the share acquisition would give us more than 5% of the voting shares of any bank or bank holding company. It also imposes restrictions, summarized below, on the assets or voting shares of non-banking companies that we may acquire.

Susquehanna Bank is also subject to regulation and supervision. It is a Pennsylvania state-chartered commercial bank and trust company subject to regulation and periodic examination by the Pennsylvania Department of Banking and Securities and the Federal Reserve Board. Due to the bank’s asset size, the bank will also be examined by, and subject to the enforcement authority of, the Bureau of Consumer Financial Protection (the “CFPB”) as to its compliance with consumer financial laws and regulations.

The following discussion describes the extensive regulatory framework applicable to Susquehanna and Susquehanna Bank; however, proposals to change laws and regulations governing the banking industry are often introduced in the U.S. Congress, in state legislatures and before the various bank regulatory agencies. Of note, many of the provisions of the Dodd-Frank Act are still being finalized and may affect the results of our operations. The timing and likelihood of any changes and their potential impact on Susquehanna are impossible to predict with any certainty. Further, a change in applicable laws or regulations, or a change in the interpretation of such laws or regulations, could have a material impact on our business, operations, and earnings. The descriptions herein summarize the significant state and federal laws to which we are currently subject; however, such descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions.

Pennsylvania Regulation and Supervision

On October 24, 2012, Pennsylvania enacted three new laws known as the “Banking Law Modernization Package,” all of which became effective on December 24, 2012. The intended goal of the new law, which applies to our banking subsidiary, is to modernize Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory demands at the federal level as described below.

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

The new law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports provided by officers, employees, attorneys, accountants, or committees of the board, and an officer may not be held liable simply because he or she served as an officer of the institution.

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

Federal Regulation and Supervision

Consistent with the requirements of the Bank Holding Company Act, our only lines of business in 2012 consisted of providing our customers with banking, trust and other financial products and services. These included commercial banking through Susquehanna Bank, trust and related services through Susquehanna Trust & Investment Company, consumer vehicle financing through Boston Service Company, Inc. (t/a Hann Financial Service Corp.), investment advisory, asset management, retirement plan consulting and brokerage services through Valley Forge Asset Management Corp. and Stratton Management Company, and property and casualty insurance brokerage services through The Addis Group, LLC. Of these activities, banking activities accounted for 93% of our gross revenues in 2012 and 94% of our gross revenues in 2011.

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

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

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

Federal Financial Regulatory Reform

Dodd-Frank Act. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became law on July 21, 2010, there is additional regulatory oversight and supervision

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of the holding company and its subsidiaries. The Dodd-Frank Act changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes, and the regulations being developed thereunder will include, provisions affecting large and small financial institutions alike, including several provisions that affect the regulation of community banks and bank holding companies.

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

The Federal Reserve Board in December 2011 issued a notice of proposed rulemaking to implement the enhanced prudential standards and early remediation requirements established under the Dodd-Frank Act. The December 2011 proposal would require all bank holding companies and state member banks with more than $10 billion in total consolidated assets, including us, to comply with the requirements to conduct annual company-run stress tests beginning on the effective date of the final rule. On October 9, 2012, the Federal Reserve Board issued a final rule that generally requires bank holding companies with total consolidated assets of between $10 billion and $50 billion to comply with annual stress testing requirements beginning in September 2013.

In May 2012, the federal banking agencies issued final supervisory guidance for stress testing practices applicable to banking organizations with more than $10 billion in total consolidated assets, such as us and our subsidiary bank, which became effective on July 23, 2012. This guidance outlines general principles for a satisfactory stress testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organization. In addition, there are other stress testing requirements in the Dodd-Frank Act and in the Federal Reserve Board’s capital plan rule that have been or are being implemented through separate rulemaking by the federal banking agencies.

On June 29, 2011, the Federal Reserve Board approved a final debit card interchange rule that caps a debit card issuer’s base fee at 21 cents per transaction and allows an additional 5-basis point charge per transaction to help cover fraud losses. The rule became fully operational on October 1, 2011. The debit card interchange rule reduced Susquehanna Bank’s interchange fee revenue in line with industry-wide expectations, beginning with the quarter ended December 31, 2011. The new pricing restriction negatively impacted fee income by approximately $5.2 million in 2012, when compared to 2011, with the total annual decline of approximately $8.0 million.

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

The Collins Amendment of the Dodd-Frank Act, among other things, eliminates certain trust preferred securities from Tier 1 capital. Preferred securities issued under the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) are exempted from this treatment. In the case of certain trust preferred securities issued prior to May 19, 2010 by bank holding companies with total consolidated assets of $15 billion or more as of December 31, 2009, these “regulatory capital deductions” are to be phased in incrementally over a period of three years beginning on January 1, 2013. This provision also requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Regulations implementing the Collins Amendment became effective on July 28, 2011 and set as a floor for the capital requirements of Susquehanna and Susquehanna Bank a minimum capital requirement computed using the Federal Reserve’s risk-based capital rules.

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On June 12, 2012, the federal banking agencies issued three notices of proposed rulemaking (NPRs) that would revise current capital rules. Two are applicable to us and our subsidiary bank. The first, “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions and Prompt Corrective Action” applies to both us and our subsidiary bank. If adopted, this NPR would increase the quantity and quality of capital required by providing for a new minimum common equity Tier 1 ratio of 4.5% of risk-weighted assets and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. This first NPR would also revise the definition of capital to improve the ability of regulatory capital instruments to absorb losses and establish limitations on capital distributions and certain discretionary bonus payments if additional specified amounts, or “buffers,” of common equity Tier 1 capital are not met, and would introduce a supplementary leverage ratio for internationally active banking organizations. This NPR would also establish a more conservative standard for including an instrument such as trust preferred securities as Tier 1 capital for bank holding companies with total consolidated assets of $15 billion or more as of December 31, 2009, setting out a phase-out schedule for such instruments beginning in January 2013.

The second NPR, “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets: Market Discipline and Disclosure Requirements,” would also apply to both us and our subsidiary bank. This NPR would revise and harmonize the bank regulators’ rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified recently.

On November 9, 2012, the federal banking agencies announced that none of the three NPRs they issued in June 2012 would become effective on January 1, 2013. The federal banking agencies did not specify new effective dates for the NPRs.

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

On January 10, 2013, the CFPB issued a final regulation defining a “qualified mortgage” for purposes of the Dodd-Frank Act, and setting standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. This regulation also affords safe harbor legal protections for lenders making qualified loans that are not “higher priced.” It is unclear how this regulation, or this regulation in tandem with an anticipated rule defining “qualified residential mortgage” and setting standards governing loans that are to be packaged and sold as securities, will affect us and the mortgage lending market by potentially curbing competition, increasing costs or tightening credit availability.

On January 17, 2013, the CFPB issued a final regulation containing new mortgage servicing rules which will take effect in January 2014 and be applicable to our bank subsidiary. The announced goal of the CFPB is to bring greater consumer protection to the mortgage servicing market.

These changes will affect notices to be given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers will be prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

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

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Future Legislation and Regulation. Additional consumer protection laws have recently been enacted, and the Federal Reserve and CFPB have adopted and will adopt in the future numerous new regulations addressing banks’ credit card, overdraft, collection, privacy and mortgage lending practices. Additional consumer protection legislation and regulatory activity is anticipated in the near future.

Internationally, both the Basel Committee on Banking Supervision and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by January 2019. U.S. bank regulators proposed regulations for implementing Basel III on June 12, 2012, as discussed above.

On September 28, 2011, the Basel Committee announced plans to consider adjustments to the first liquidity change to be imposed under Basel III, which change would take effect on January 1, 2015. The liquidity coverage ratio being considered would require banks to maintain an adequate level of unencumbered high-quality liquid assets sufficient to meet liquidity needs for a 30 calendar-day liquidity stress period. On January 6, 2013, the Basel Committee announced that its liquidity requirements would be phased-in annually beginning in 2015, when the minimum liquidity ratio requirement would be set at 60% of required liquidity, then increasing an additional 10% annually until fully implemented on January 1, 2019. The Basel Committee also announced that a broader pool of assets would count as highly liquid assets.

Such proposals and legislation, if finally adopted and implemented, would change banking laws and our operating environment and that of our subsidiaries in ways that could be substantial and unpredictable. We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our financial condition or results of operations.

Additional Activities. Susquehanna is a “financial holding company” (an “FHC”) under the Gramm-Leach-Bliley Act (“GLB Act”). As an FHC, we are permitted to engage, directly or through subsidiaries, in a wide variety of activities which are financial in nature or are incidental or complementary to a financial activity, in addition to all of the activities otherwise allowed to us. The additional activities permitted to us as an FHC (if we so determine to conduct them) include, among others, insurance and securities underwriting, merchant banking activities, issuing and selling annuities and securitized interests in financial assets, and engaging domestically in activities that bank holding companies previously have been permitted to engage in only overseas. All of these listed activities can be conducted, through an acquisition or on a start-up basis, generally without prior Federal Reserve Board approval and with only notice to the Federal Reserve Board afterward. Merchant banking activities have been substantially curtailed by the Volcker Rule provisions in the Dodd-Frank Act which became effective July 21, 2012.

The GLB Act also generally permits well-capitalized national banks and, if state law permits, well-capitalized state chartered banks, to form or acquire financial subsidiaries to engage in most of these same activities, with the exception of certain specified activities (insurance underwriting, for example) which must be conducted only at the level of the holding company or a non-bank subsidiary of the holding company. State chartered banks in Pennsylvania are generally allowed to engage (with proper regulatory authorization) in activities that are permitted to national banks.

As an FHC, Susquehanna is generally subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the Federal Reserve Board. To preserve our FHC status, we must remain well-capitalized and well-managed and ensure that

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Susquehanna Bank remains well-capitalized and well-managed for regulatory purposes and earns “satisfactory” or better ratings on its periodic Community Reinvestment Act (“CRA”) examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances.

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

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

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

At December 31, 2012, our Tier 1 capital and total capital (i.e., Tier 1 plus Tier 2) ratios were 11.1% and 12.6%, respectively. At December 31, 2011, our Tier 1 capital and total capital ratios were 13.7% and 15.4%, respectively. The change from 2011 to 2012 is primarily the result of the deployment of capital in the acquisition of Tower Bancorp, Inc., and the redemption of trust preferred securities.

The Federal Reserve Board has also established minimum leverage ratio guidelines for bank holding companies. These guidelines mandate a minimum leverage ratio of Tier 1 capital to adjusted quarterly average total assets less certain amounts (“leverage amounts”) equal to 3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating). All other banking organizations are generally required to maintain a leverage ratio of at least 3% plus an additional cushion of at least 100 basis points and in some cases more. The Federal Reserve Board’s guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a “tangible Tier 1 leverage ratio” (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. At December 31, 2012 and 2011, our leverage ratios were 9.0% and 10.7%, respectively.

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

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Well-capitalized institutions significantly exceed

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the required minimum level for each relevant capital measure. Adequately capitalized institutions include depository institutions that meet but do not significantly exceed the required minimum level for each relevant capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements for any relevant capital measure. Critically undercapitalized refers to depository institutions with minimal capital and at serious risk for government seizure.

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

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

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

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

• placing limits on asset growth and restrictions on activities;

• placing additional restrictions on transactions with affiliates;

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

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

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

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. As of December 31, 2012 and 2011, Susquehanna Bank exceeded the required capital ratios for classification as “well capitalized.”

Federal Deposit Insurance. The increases in deposit insurance described above under “Supervision and Regulation,” the FDIC’s expanded authority to increase insurance premiums, as well as the recent increase in the number of bank failures, is expected to result in an increase in deposit insurance assessments for all banks, including Susquehanna Bank. The FDIC, absent extraordinary circumstances, is required by the Dodd-Frank Act to return the insurance reserve ratio to a 1.35% ratio no later than September 30, 2020. Following seven quarters of decline, the Deposit Insurance Fund became positive in the second quarter of 2011, with reported balances of $22.7 billion at June 30, 2012. FDIC staff projects that the insurance reserve ratio will reach 1.15% by the end of 2018. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion of increasing the reserve ratio from 1.15% to 1.35%. FDIC staff intends to present a proposed rule to the FDIC Board of Directors to implement this requirement when the deposit insurance reserve ratio is closer to 1.15%.

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

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

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

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

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

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

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Executive Officers of the Registrant

As of December 31, 2012, the executive officers of Susquehanna, their ages and their positions with Susquehanna, are set forth in the following table:

Name	Age		Title
William J. Reuter		63	Chairman of the Board and Chief Executive Officer
Andrew S. Samuel		50	President and Chief Revenue Officer
Drew K. Hostetter		58	Executive Vice President and Chief Financial Officer
Gregory A. Duncan		57	Executive Vice President and Chief Operating Officer
Michael M. Quick		64	Executive Vice President and Chief Corporate Credit Officer

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

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

Drew K. Hostetter, Executive Vice President and Chief Financial Officer, joined Susquehanna in 1994 and has held several positions with the organization. He was named Executive Vice President, Treasurer and Chief Financial Officer in 2001. He has served as Chairman of the Board of our subsidiary, Hann Financial Service Corp., since February 2004. Prior to joining Susquehanna, Mr. Hostetter had been a senior officer at MNC Financial and Equitable Bancorporation. Mr. Hostetter is a Certified Public Accountant and began his career with Price Waterhouse.

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

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

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

Item 1A. Risk Factors

Recent Market, Legislative and Regulatory Events

Difficult conditions in the capital markets and the economy generally may materially adversely affect our business and results of operations, and we do not expect these conditions to significantly improve in the near future.

Our results of operations are materially affected by conditions in the capital markets and the economy generally, which in recent years have produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies’ underlying financial strength.

Concerns over unemployment, energy costs, the availability and cost of credit, the U.S. mortgage market, a depressed U.S. real estate market and geopolitical issues such as sovereign-debt defaults and euro-zone political uncertainty have contributed to increased volatility and diminished expectations for the economy and the capital and credit markets in the near term. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also experienced periods of heightened volatility and turmoil, with issuers (such as our company) that have exposure to the real estate, mortgage, automobile and credit markets particularly affected. These events and other market disturbances may have an adverse effect on us, in part because we have a large investment portfolio and also because we are dependent upon customer behavior. Our revenues are susceptible to decline in such circumstances, and our profit margins could erode. In addition, in the event of extreme and prolonged market events, such as the global credit crisis, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.

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

The soundness of other financial institutions could adversely affect us.

Our ability to engage in funding transactions could be adversely affected by the actions and failure of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even questions or rumors about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or

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client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Losses related to these credit risks could materially and adversely affect our results of operations or earnings.

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

Following the recent financial crisis, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund (“DIF”). In addition, the FDIC now insures deposit accounts up to $250,000 per customer (up from $100,000), and non-interest bearing transactional accounts are fully insured (unlimited coverage) through December 2012. These programs placed additional stress on the DIF.

The Dodd-Frank Act broadened the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance to $250,000 per account and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the DIF, from 1.15% to 1.35% of insured deposits, removes the statutory cap for the reserve ratio, leaving the FDIC with discretion to set this cap going forward, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets. Recent FDIC regulations revise the risk-based assessment system for all large insured depository institutions (generally institutions with at least $10 billion in total assets, such as Susquehanna Bank). Under the regulations, the FDIC uses a scorecard method to calculate assessment rates for all such institutions.

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

Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect our business and require us to raise additional capital.

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

In addition, the new, yet to be written implementing rules and regulations of the Dodd-Frank Act, as well as any proposals for new legislation that are introduced in the U.S. Congress, could further substantially increase regulation of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices, including aspects such as compensation, interest rates, new and inconsistent consumer protection regulations and mortgage regulation, among others. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending, future and certain newly-enacted

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

The provisions of the Dodd-Frank Act restricting bank interchange fees, and any rules promulgated thereunder, may negatively impact our revenues and earnings.

On June 28, 2011, the Federal Reserve Board approved a final debit card interchange rule that would cap an issuer’s base fee at 21 cents per transaction and allow an additional 5 basis-point charge per transaction to help cover fraud losses. The Federal Reserve Board issued an interim final rule that also allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer adopting effective fraud prevention policies and procedures. The Federal Reserve Board also adopted requirements that issuers include two unaffiliated networks for routing debit transactions. Compliance for most types of debit cards was required by April 1, 2012. The effective date for the pricing restrictions was October 1, 2011. The new pricing restriction was expected to impact banks by up to an approximate 45% reduction of revenue related to these transactions. We have noted that the debit card interchange rule has reduced our interchange fee income by approximately $8.0 million, or 58%.

Negative developments in the financial industry and the credit markets may subject us to additional regulation.

As a result of recent global financial instability, the potential exists for new federal or state laws and regulations regarding lending and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and may adversely impact our financial performance.

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

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

Continued economic weakness, especially affecting our geographic market areas, could reduce our customer base, our level of deposits and demand for financial products, such as loans.

Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our geographic markets. If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may suffer. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. A prolonged economic downturn could, therefore, result in losses that could materially and adversely affect our business. A further weakening of the economic environment could also lead to a decline in our operations, and could result in a decline in the implied fair value of goodwill. If the fair value of goodwill is less than the carrying value, we may recognize an other-than-temporary impairment charge.

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Business and Industry Risks

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

Our total assets have grown from approximately $13.7 billion at December 31, 2008, to $18.0 billion at December 31, 2012. Our business strategy calls for continued expansion. Our ability to continue to grow depends, in part, upon our ability to open new branch locations, successfully attract deposits, identify favorable loan and investment opportunities, and acquire other bank and non-bank entities. In the event that we do not continue to grow, our results of operations could be adversely impacted.

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

Geographic concentration in one market may unfavorably impact our operations.

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

• increase loan delinquencies;

• increase problem assets and foreclosures;

• increase claims and lawsuits;

• decrease the demand for our products and services; and

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

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

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

Susquehanna and its subsidiaries face intense competition with various other financial institutions, as well as from non-bank providers of financial services, such as credit unions, brokerage firms, insurance agencies, consumer finance companies and government organizations, for the attraction and retention of key personnel, specifically those who generate and maintain our customer relationships and serve in other key operation positions in the areas of finance, credit oversight and administration, and wealth management. These competitors may offer greater compensation and benefits, which could result in the loss of potential and/or existing substantial customer relationships and may adversely affect our ability to compete effectively.

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Our exposure to credit risk, because we focus on commercial lending, could adversely affect our earnings and financial condition.

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

Commercial loans, including commercial real estate, are generally viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Our consolidated commercial lending operations include commercial, financial and agricultural lending, real estate construction lending, and commercial mortgage lending, which comprised 17.6%, 6.6% and 30.8% of our total loan portfolio, respectively, as of December 31, 2012. Construction financing typically involves a higher degree of credit risk than commercial mortgage lending. Risk of loss on a construction loan depends largely on the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated cost (including interest) of construction. If the estimated property value proves to be inaccurate, the loan may be inadequately collateralized.

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

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

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

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

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

To absorb probable, incurred loan and lease losses that we may realize, we recognize an allowance for loan and lease losses based on, among other things, national and regional economic conditions, historical loss experience, and delinquency trends. However, we cannot estimate loan and lease losses with certainty, and we cannot assure you that charge-offs in future periods will not exceed the allowance for loan and lease losses. If

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charge-offs exceed our allowance, our earnings would decrease. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan and lease losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan and lease losses, such as a prolonged economic downturn or continued weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control, could reduce our earnings.

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

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

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

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

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

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

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

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

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

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

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

The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial service institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.

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

As part of our business we collect, process, and retain sensitive and confidential client and customer information in both paper and electronic form. We have taken reasonable and prudent security measures to prevent the loss of this information, including steps to detect and deter cyber-related crimes intended to electronically infiltrate our network, capture sensitive client and customer information, deny service to customers

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via our website, and harm our electronic processing capability. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses or compromises, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business.

Government regulation significantly affects our business.

The banking industry is heavily regulated, and such regulations are intended primarily for the protection of depositors and the federal deposit insurance funds, not shareholders. As a financial holding company, we are subject to regulation by the Federal Reserve Board. Our bank subsidiary, as of December 31, 2011, is also regulated by the Federal Reserve Board and is subject to regulation by the Pennsylvania Department of Banking and Securities and recently, the Consumer Financial Protection Bureau as to consumer financial services and products. These regulations affect lending practices, capital structure, investment practices, dividend policy, and growth. In addition, we have non-bank operating subsidiaries from which we derive income. Several of these non-bank subsidiaries engage in providing investment management and insurance brokerage services, industries which are also heavily regulated on both a state and federal level. In addition, newly enacted and amended laws, regulations, and regulatory practices affecting the financial service industry may result in higher capital requirements, higher insurance premiums and limit the manner in which we may conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and leases and achieve satisfactory spreads, and may also result in the imposition of additional costs on us. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as any applicable rules or regulations promulgated by the SEC and The NASDAQ Stock Market, LLC. Complying with these existing and any newly enacted standards, rules and regulations may impose administrative costs and burdens on us.

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

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

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

We recently completed our acquisitions of Abington Bancorp, Inc. and Tower Bancorp, Inc. and we regularly evaluate merger and acquisition opportunities related to possible transactions with other financial institutions. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses, litigation, or unexpected future operating expenses such as unanticipated costs to integrate the two businesses, increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on our results of operations and financial condition following a merger or acquisition. In addition, if actual costs are materially different than expected costs, such a merger or acquisition could have a significant dilutive effect on our earnings per share.

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

From time to time, we may be involved in a variety of litigation, claims or legal action arising out of our business operations or acquisitions. In recent years we have been the target of various lawsuits, ranging from ordinary disputes brought by counterparties with whom we have done business to suits brought by class action firms alleging business practices that are unfair to consumers. Similarly, our recent acquisitions of Abington Bancorp, Inc. (“Abington”), and Tower Bancorp, Inc. (“Tower”) resulted in litigation alleging breaches of fiduciary duties by Abington’s and Tower’s directors and aiding and abetting those breaches by Susquehanna. Susquehanna ultimately bore the non-insured portion of the costs and expenses of these suits.

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

We may incur impairments to goodwill.

At December 31, 2012, we had approximately $1.3 billion recorded as goodwill. We evaluate goodwill for impairment, at least annually during the second quarter, of the fiscal year. Significant negative industry or economic trends, including the decline in the market price of our common stock, or reduced estimates of future cash flows or disruptions to our business could result in impairments to goodwill. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If our analysis results in impairment to goodwill, we would be required to record an impairment charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our results of operations and stock price.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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

As of December 31, 2012, our bank subsidiary operated 261 branches and 47 free-standing automated teller machines. It owned 134 of the branches and leased the remaining 127. Thirty-two (32) additional locations were owned or leased by Susquehanna Bank to facilitate operations and expansion. We believe that the properties currently owned and leased by our subsidiaries are adequate for present levels of operation.

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As of December 31, 2012, the offices (including executive offices) of our bank subsidiary were as follows:

Subsidiary	Location of Executive Office	Executive Office Owned/Leased	Location of Offices (including executive office)
Susquehanna Bank	1570 Manheim Pike Lancaster, Pennsylvania	Owned	261 banking offices in Adams, Bedford, Berks, Bucks, Centre, Chester, Cumberland, Dauphin, Delaware, Franklin, Fulton, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Montgomery, Northampton, Northumberland, Philadelphia, Schuylkill, Snyder, Union and York counties, Pennsylvania; Baltimore City, Allegany, Anne Arundel, Baltimore, Carroll, Garrett, Harford, Howard, Washington and Worcester counties, Maryland; Atlantic, Burlington, Camden, Cumberland and Gloucester counties, New Jersey; and Berkeley County, West Virginia

As of December 31, 2012, the offices (including executive offices) of our non-bank subsidiaries were as follows:

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

Item 3. Legal Proceedings.

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

Overdraft Litigation

On July 29, 2011, Susquehanna Bank was named as a defendant in a purported class action lawsuit filed by two New Jersey customers of the bank in the United States District Court of Maryland. The suit challenges the manner in which checking account overdraft fees were charged and the policies related to the posting order of debit card and other checking account transactions. The suit makes claims under New Jersey’s consumer fraud act and under the common law for breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, conversion and unjust enrichment. The case was transferred for pretrial proceedings to pending multi-district litigation in the U.S. District Court for the Southern District of Florida.

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To avoid the costs, risks and uncertainties inherent in litigation and without admitting any of the allegations in the complaint, Susquehanna in good faith participated in mediation with plaintiffs’ counsel and as a result of negotiations following from the mediation, on December 20, 2012, Susquehanna and counsel for plaintiffs entered into a Summary Agreement, subject to preliminary and final approval of the settlement and dismissal of the action with prejudice by the Court.

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

Lehman Litigation

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

This legal proceeding is in its early stages of discovery; thus it is not yet possible for us to estimate potential loss, if any. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of this proceeding will have a material adverse effect on our financial position, or cash flows; although, at the present time, management is not in a position to determine whether such proceeding will have a material adverse effect on our results of operations in any future quarterly reporting period.

Other Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

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

Market Information. Our common stock is listed for quotation on the Nasdaq Global Select Market under the symbol “SUSQ”. Set forth below are the quarterly high and low sales prices of our common stock as reported on the Nasdaq Global Select Market for the years 2012 and 2011, and cash dividends paid.

Table 3

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

Year	Period	Cash Dividends Paid		Price Range Per Share
				Low		High
2012	1st Quarter	$	0.03	$	8.31	$	10.27
	2nd Quarter		0.05		8.87		10.64
	3rd Quarter		0.06		9.95		11.27
	4th Quarter (1)		0.14		9.19		10.85
2011	1st Quarter	$	0.01	$	8.63	$	10.43
	2nd Quarter		0.02		7.50		9.89
	3rd Quarter		0.02		5.25		8.21
	4th Quarter		0.03		5.20		8.51

(1) Includes acceleration of payment of 1st quarter 2013 dividend of $ .07.

As of February 15, 2013, there were 12,588 record holders of Susquehanna common stock.

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

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

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

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

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Stock Performance Graph. The following graph compares the performance of our common stock during the period beginning December 31, 2007 through December 31, 2012, to that of the total return index for the NASDAQ Composite, the SNL Mid-Atlantic Bank Index, and the SNL Mid Cap U.S. Bank Index (which includes Susquehanna) assuming an investment of $100 on December 31, 2007. In calculating total annual shareholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purpose only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. We are including the SNL Mid Cap U.S. Bank Index because it is a broad index that includes all publicly traded (NYSE, NYSE MKT, NASDAQ, OTC BB, Pink Sheets) banks in SNL’s coverage universe with $1B to $5B Total Common Market Capitalization as of most recent pricing data and we believe this is a more accurate comparison than the SNL Mid-Atlantic Bank Index, which we will not use as a comparison in the future.

	Period Ending
Index	12/31/07		12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
Susquehanna Bancshares, Inc.		100.00		91.74		35.34		58.35		51.02		65.55
NASDAQ Composite		100.00		60.02		87.24		103.08		102.26		120.42
SNL Mid-Atlantic Bank		100.00		55.09		57.99		67.65		50.82		68.08
SNL Mid Cap U.S. Bank Index		100.00		52.25		44.30		51.51		45.28		50.74

Source : SNL Financial LC, Charlottesville, VA ^© 2012

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Item 6. Selected Financial Data

Susquehanna Bancshares, Inc. & Subsidiaries

Years ended December 31,	2012 (1)			2011 (2)			2010			2009			2008
	(Amounts in thousands, except per share data)
Interest income	$	710,630		$	594,768		$	613,695		$	643,824		$	697,070
Interest expense		119,392			161,618			187,189			235,008			298,768
Net interest income		591,238			433,150			426,506			408,816			398,302
Provision for loan and lease losses		64,000			110,000			163,000			188,000			63,831
Noninterest income		166,759			182,668			152,148			163,699			142,309
Noninterest expenses		490,017			460,180			382,650			382,472			367,201
Income before taxes		203,980			45,638			33,004			2,043			109,579
Net income		141,172			54,905			31,847			12,675			82,606
Preferred stock dividends and accretion		0			0			15,572			16,659			792
Net income (loss) applicable to common shareholders		141,172			54,905			16,275			(3,984	)		81,814
Cash dividends declared on common stock		51,393			11,212			4,757			31,898			89,462
Per Common Share Amounts
Net income:
Basic	$	0.77		$	0.40		$	0.13		$	(0.05	)	$	0.95
Diluted		0.77			0.40			0.13			(0.05	)		0.95
Cash dividends declared on common stock		0.28			0.08			0.04			0.37			1.04
Dividend payout ratio		36.4	%		20.4	%		29.2	%		n/m	(3)		109.3	%
Financial Ratios
Return on average total assets		0.81	%		0.38	%		0.23	%		0.09	%		0.62	%
Return on average shareholders’ equity		5.62			2.67			1.53			0.65			4.80
Return on average tangible shareholders’ equity (4)		12.03			6.01			3.69			2.19			13.35
Average equity to average assets		14.33			14.31			15.00			14.31			12.92
Net interest margin		4.01			3.60			3.67			3.58			3.62
Efficiency ratio (5)(6)		60.37			66.83			64.62			65.28			66.46
Capital Ratios
Leverage		8.98	%		10.73	%		10.27	%		9.73	%		9.92	%
Tier 1 risk-based capital		11.08			13.65			12.65			11.17			11.17
Total risk-based capital		12.63			15.41			14.72			13.48			13.52
Credit Quality
Net charge-offs/Average loans and leases		0.55	%		1.16	%		1.46	%		1.32	%		0.42	%
Nonperforming assets/Loans and leases plus foreclosed real estate		0.96			1.88			2.23			2.48			1.20
ALLL/Nonaccrual loans and leases		188			120			97			79			108
ALLL/Total loans and leases		1.43			1.80			1.99			1.75			1.18
Year-End Balances
Total assets	$	18,037,667		$	14,974,789		$	13,954,085		$	13,689,262		$	13,682,988
Investment securities		2,730,335			2,431,515			2,417,611			1,875,267			1,879,891
Loans and leases, net of unearned income		12,894,741			10,447,930			9,633,197			9,827,279			9,653,873
Deposits		12,580,046			10,290,472			9,191,207			8,974,363			9,066,493
Total borrowings		2,530,040			2,083,673			2,371,161			2,512,894			2,428,085
Shareholders’ equity		2,595,909			2,189,628			1,984,802			1,981,081			1,945,918
Selected Share Data
Common shares outstanding (period end)		186,554			156,867			129,966			86,474			86,174
Average common shares outstanding:
Basic		182,896			136,509			121,031			86,257			85,987
Diluted		183,578			136,876			121,069			86,257			86,037
Common shareholders of record		12,631			12,747			11,301			11,668			12,035
At December 31:
Book value per common share	$	13.92		$	13.96		$	15.27		$	19.53		$	19.21
Tangible book value per common share		6.88			7.28			7.18			7.25			6.77
Market price per common share		10.48			8.38			9.68			5.89			15.91

(1) On February 17, 2012, we completed our acquisition of Tower Bancorp, Inc. All transactions since the

acquisition date are included in our consolidated financial statements.

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

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(3) Not meaningful.

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

Return on average tangible shareholders’ equity is a non-GAAP-based financial measure calculated using non- GAAP amounts. The most directly comparable measure is return on average shareholders’ equity, which is calculated using GAAP-based amounts. We calculate return on average tangible shareholders’ equity by excluding the balance of intangible assets and their related amortization expense from our calculation of return on average shareholders’ equity. Management uses the return on average tangible shareholders’ equity in order to review our core operating results. 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 shareholders’ equity to return on average tangible shareholders’ equity is set forth below.

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

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

Table 4

Reconciliation of Non-GAAP Measures

Tangible Book Value per Common Share	2012			2011			2010			2009			2008
End of period balance sheet data
Shareholders’ equity	$	2,595,909		$	2,189,628		$	1,984,802		$	1,981,081		$	1,945,918
Preferred shares		0			0			0			(292,359	)		(290,700	)
Goodwill and other intangible assets		(1,311,691	)		(1,047,112	)		(1,052,107	)		(1,061,544	)		(1,071,595	)
Tangible common equity (numerator)	$	1,284,218		$	1,142,516		$	932,695		$	627,178		$	583,623
Common shares outstanding (denominator)		186,554			156,867			129,966			86,474			86,174
Tangible book value per common share	$	6.88		$	7.28		$	7.18		$	7.25		$	6.77

Return on Average Tangible Shareholders’ Equity	2012			2011			2010			2009			2008
Return on average shareholders’ equity (GAAP basis)		5.62	%		2.67	%		1.53	%		0.65	%		4.80	%
Effect of excluding average intangible assets and related amortization		6.41			3.34			2.16			1.54			8.55
Return on average tangible shareholders’ equity		12.03			6.01			3.69			2.19			13.35

Efficiency Ratio	2012			2011			2010			2009			2008
Other expense	$	490,017		$	460,180		$	382,650		$	382,472		$	367,201
Less: Merger related expenses		(17,351	)		(14,991	)		0			0			0
Loss on extinguishment of debt		(5,860	)		(50,020	)		0			0			0
Noninterest operating expense (numerator)	$	466,806		$	395,169		$	382,650		$	382,472		$	367,201
Taxable-equivalent net interest income	$	606,529		$	447,800			440,036			422,207			410,179
Other income		166,759			182,668			152,148			163,699			142,309
Less: Net realized gain on acquisition		0			(39,143	)		0			0			0
Denominator	$	773,288		$	591,325		$	592,184		$	585,906		$	552,488
Efficiency ratio		60.37	%		66.83	%		64.62	%		65.28	%		66.46	%

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

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

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

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

Critical Accounting Estimates

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

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

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

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

Certain debt securities that are in unrealized loss positions are analyzed to determine if they are other-than- temporarily impaired. This analysis consists of calculating expected cash flows, taking into consideration credit default and severity rates, prepayments, deferrals, waterfall structure, covenants relating to the securities, and

31

appropriate discount rates. Furthermore, if a security is found to be other than temporarily impaired, additional analysis is required to determine the portion of the loss attributable to credit quality. For additional information about other-than-temporary impairment of debt securities, refer to “Note 4. Investment Securities” to the consolidated financial statements appearing in Part II, Item 8.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dates. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As defined in U.S. GAAP, Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. For additional information about our financial assets and financial liabilities carried at fair value, refer to “Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

Any material effect on the consolidated financial statements related to these complex accounting areas is also discussed within the body of this document.

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Executive Overview

Net income applicable to common shareholders for the year ended December 31, 2012 was $141.2 million, an increase of $86.3 million when compared to net income applicable to common shareholders for the year ended December 31, 2011.

The following table compares our 2012 financial targets to actual results and sets forth our financial targets for 2013:

Table 5

Key Susquehanna Financial Targets and Results

	2012						2013 Target
	Target			Actual
Net interest margin (FTE)		3.75	%		4.01	%		3.90	%
Loan growth		25.0	%		23.4	%		5.0	%
Deposit growth		27.0	%		22.2	%		6.0	%
Noninterest income growth		-11.0	%		-8.7	%		8.0	%
Noninterest expense growth		3.5	%		6.5	%		-2.0	%
Effective tax rate		29.0	%		30.8	%		32.0	%

During 2012 we continued our efforts to reduce interest expense by increasing our core deposits and reducing our reliance on higher rate time deposits. During 2012, core deposits increased $2.0 billion, or 28.5%. Excluding the Tower transaction, core deposits increased $675.4 million, or 9.8%. Time deposits increased 9.7%, or $332.5 million. Excluding the Tower transaction, time deposits decreased $460.2 million or 13.5%. These changes reduced our cost of deposits by 24 basis points in 2012.

In 2012 we completed a $150.0 million 5.375% Senior Debt offering. The proceeds from this offering plus available cash allowed us to redeem $287.1 million of long-term debt with interest rates ranging from 6.05% to 11.00%. This strategic move along with the restructuring of FHLB borrowings in the fourth quarter of 2011 reduced our overall borrowing expense by $34.4 million in 2012.

Total loans increased $2.4 billion, or 23.4%. Loans acquired in the Tower transaction totaled $2.0 billion. We continued to intentionally reduce our exposure in the Real Estate – Construction portfolio during 2012. If we exclude the intentional reduction, our loan balances increased $662.2 million, or 6.3%, excluding Tower.

We saw improvement in the credit quality of our loan portfolios in 2012. Net charge-offs declined to 0.55% of average loans and leases in 2012, from 1.16% in 2011. Non-performing assets as a percentage of loans and leases plus foreclosed real estate was 0.96% at December 31, 2012 compared to 1.88% at December 31, 2011. As a result, we decreased our provision for loan and lease losses to $64.0 million for 2012 from $110.0 million in 2011.

At December 31, 2012, our capital ratios exceeded regulatory requirements for a well-capitalized institution.

We continue to closely monitor, and act upon, the new regulatory changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act. We have already seen a negative effect of $5.2 million in 2012 on interchange fees that banks earn on debit card transactions. There may be additional regulations that could result in decreased revenues and increased costs.

Acquisition of Tower Bancorp, Inc.

On February 17, 2012, we completed the acquisition of Tower Bancorp, Inc. (“Tower”), a bank holding company based in Harrisburg, Pennsylvania with approximately $2.5 billion of assets, through a merger of Tower with and into Susquehanna. In connection with the Tower merger, Tower’s wholly-owned banking

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subsidiary, Graystone Tower Bank, a Pennsylvania chartered bank, was merged into Susquehanna’s wholly-owned banking subsidiary Susquehanna Bank, with Susquehanna Bank being the surviving institution. The acquisition of Tower enhances Susquehanna’s footprint in Pennsylvania and Maryland. The acquisition was accounted for under the purchase method, and was considered immaterial.

Summary of 2012 Compared to 2011

Results of Operations

Net income applicable to common shareholders for the year ended December 31, 2012 was $141.2 million, an increase of $86.3 million when compared to net income applicable to common shareholders of $54.9 million in 2011. The provision for loan and lease losses decreased 41.8%, to $64.0 million for 2012, from $110.0 million for 2011. Net interest income increased 36.5%, to $591.2 million for 2012, from $433.2 million in 2011. Noninterest income increased 16.2% to $166.8 million for 2012, from $143.5 million for 2011, excluding the one-time gain on acquisition; and noninterest expenses, excluding the loss on extinguishment of debt and merger-related expenses, for 2012 were $466.8 million, an increase of 18.1% over 2011 when noninterest expenses were $395.2 million.

Additional information is as follows:

Table 6

Key Susquehanna Financial Measures

	Twelve Months Ended December 31,
	2012			2011
Diluted Earnings per Common Share	$	0.77		$	0.40
Return on Average Assets		0.81	%		0.38	%
Return on Average Equity		5.62	%		2.67	%
Return on Average Tangible Equity (1)		12.03	%		6.01	%
Efficiency Ratio		60.37	%		66.83	%
Net Interest Margin		4.01	%		3.60	%

The following discussion details the factors that contributed to these results.

(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 metric 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 shareholders’ equity to return on average tangible shareholders’ equity is set forth below.

Table 7

Reconciliation of Return on Average Shareholders’ Equity

to Return on Average Tangible Shareholders’ Equity

	2012			2011
Return on average shareholders’ equity (GAAP basis)		5.62	%		2.67
Effect of excluding average intangible assets and related amortization		6.41			3.34
Return on average tangible shareholders’ equity		12.03			6.01

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Net Interest Income - Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased to $591.2 million in 2012, as compared to $433.2 million in 2011. Net interest income as a percentage of net interest income plus other income was 78% for the twelve months ended December 31, 2012, 75% for the twelve months ended December 31, 2011 (excluding the net realized gain on acquisition), and 74% for the twelve months ended December 31, 2010.

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 8 presents average balances, taxable equivalent interest income and expense, and yields earned or paid on these assets and liabilities. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Table 9 illustrates the changes in net interest income caused by changes in average volume, rates, and yields.

The increase of $158.7 million in our taxable equivalent net interest income in 2012, as compared to 2011, was primarily the result of a $2.7 billion increase in our average interest-earning assets versus the prior year having a greater impact than the $2.2 billion increase in average interest-bearing liabilities, and a 41 basis point increase in the net interest margin, which was the result of the rate paid on interest-bearing liabilities declining 59 basis points, primarily resulting from: changes in deposit structure accounting for 17 basis points, the FHLB borrowings restructure in 2011 accounting for 22 basis points, and the 2012 redemption of debt accounting for 2 basis points. The yield earned on average interest-earning assets declined by 10 basis points from 2011 to 2012.

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

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Table 8

Distribution of Assets, Liabilities and Shareholders’ Equity

	2012							2011							2010
	Average Balance			Taxable Equivalent				Average Balance			Taxable Equivalent				Average Balance			Taxable Equivalent
				Interest		Rate (%)					Interest		Rate (%)					Interest		Rate (%)
	(Dollars in thousands)
Assets
Short-term investments	$	108,408		$	144		0.13	$	98,424		$	108		0.11	$	105,497		$	182		0.17
Investment securities:
Taxable		2,320,582			53,659		2.31		2,129,908			61,845		2.90		1,720,263			59,817		3.48
Tax-advantaged		386,926			22,518		5.82		399,554			24,355		6.10		364,651			23,073		6.33
Total investment securities		2,707,508			76,177		2.81		2,529,462			86,200		3.41		2,084,914			82,890		3.98
Loans and leases, net:
Taxable		11,934,701			628,426		5.27		9,492,521			505,607		5.33		9,545,296			528,570		5.54
Tax-advantaged		386,627			21,175		5.48		311,342			17,503		5.62		254,377			15,583		6.13
Total loans and leases		12,321,328			649,601		5.27		9,803,863			523,110		5.34		9,799,673			544,153		5.55
Total interest-earning assets		15,137,244			725,922		4.80		12,431,749			609,418		4.90		11,990,084			627,225		5.23
Allowance for loan and lease losses		(189,368	)						(194,746	)						(184,304	)
Other noninterest-earning assets		2,583,421							2,125,775							2,094,105
Total assets	$	17,531,297						$	14,362,778						$	13,899,885
Liabilities
Deposits:
Interest-bearing demand	$	5,453,701		$	20,603		0.38	$	3,884,182		$	21,323		0.55	$	3,481,728		$	22,279		0.64
Savings		989,123			1,208		0.12		815,066			1,161		0.14		766,210			1,173		0.15
Time		3,939,528			47,168		1.20		3,482,801			54,294		1.56		3,628,219			80,511		2.22
Short-term borrowings		732,209			8,711		1.19		658,477			8,133		1.24		627,704			4,156		0.66
FHLB borrowings		1,076,962			13,723		1.27		1,123,801			42,024		3.74		1,056,128			43,552		4.12
Long-term debt		662,027			27,979		4.23		684,065			34,683		5.07		713,101			35,518		4.98
Total interest-bearing liabilities		12,853,550			119,392		0.93		10,648,392			161,618		1.52		10,273,090			187,189		1.82
Demand deposits		1,873,755							1,413,077							1,309,516
Other liabilities		292,388							245,592							232,439
Total liabilities		15,019,693							12,307,061							11,815,045
Equity		2,511,604							2,055,717							2,084,840
Total liabilities & shareholders’ equity	$	17,531,297						$	14,362,778						$	13,899,885
Net interest income / yield on average earning assets				$	606,530		4.01				$	447,800		3.60				$	440,036		3.67

Additional Information

• Average loan balances include nonaccrual loans.

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

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

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Table 9

Changes in Net Interest Income - Tax Equivalent Basis

	2012 Versus 2011 Increase (Decrease) Due to Change in									2011 Versus 2010 Increase (Decrease) Due to Change in
	Average Volume			Average Rate			Total			Average Volume			Average Rate			Total
	(Dollars in thousands)
Interest Income
Other short-term investments	$	12		$	23		$	35		$	(11	)	$	(63	)	$	(74	)
Investment securities:
Taxable		5,192			(13,378	)		(8,186	)		12,856			(10,829	)		2,027
Tax-advantaged		(756	)		(1,081	)		(1,837	)		2,150			(867	)		1,283
Total investment securities		4,436			(14,459	)		(10,023	)		15,006			(11,696	)		3,310
Loans (net of unearned income):
Taxable		128,657			(5,838	)		122,819			(2,908	)		(20,055	)		(22,963	)
Tax-advantaged		4,133			(461	)		3,672			3,279			(1,359	)		1,920
Total loans		132,790			(6,299	)		126,491			371			(21,414	)		(21,043	)
Total interest-earning assets	$	137,238		$	(20,735	)	$	116,503		$	15,366		$	(33,173	)	$	(17,807	)
Interest Expense
Deposits:
Interest-bearing demand	$	7,099		$	(7,819	)	$	(720	)	$	2,411		$	(3,367	)	$	(956	)
Savings		227			(180	)		47			73			(85	)		(12	)
Time		6,523			(13,649	)		(7,126	)		(3,113	)		(23,104	)		(26,217	)
Short-term borrowings		885			(307	)		578			213			3,764			3,977
FHLB borrowings		(1,683	)		(26,618	)		(28,301	)		2,685			(4,213	)		(1,528	)
Long-term debt		(1,087	)		(5,617	)		(6,704	)		(1,464	)		629			(835	)
Total interest-bearing liabilities		11,964			(54,190	)		(42,226	)		805			(26,376	)		(25,571	)
Net Interest Income	$	125,274		$	33,455		$	158,729		$	14,561		$	(6,797	)	$	7,764

Additional Information

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

Provision and Allowance for Loan and Lease Losses

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

Commercial loans and commercial real estate loans of $0.5 million or greater are internally risk rated, using a standard rating system, by our loan officers and periodically reviewed by loan review personnel. Consumer loans, residential real estate loans, and leases are generally analyzed in the aggregate as they are of relatively small dollar size and homogeneous in nature.

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Under our methodology for calculating the allowance for loan and lease losses, loss rates for the last three years on a rolling quarter-to-quarter basis, weighted towards the more recent periods, are determined for: (a) commercial credits (including agriculture, commercial, commercial real estate, land acquisition, development and construction); and (b) consumer credits (including residential real estate, consumer direct, consumer indirect, consumer revolving, and leases). After determining the loss rates, management adjusts these rates for certain considerations, such as trends in delinquency and other economic factors, and then applies the adjusted loss rates to loan balances of these portfolio segments.

In addition to using loss rates, secured commercial non-accrual loans of $0.5 million or greater are reviewed for impairment. Those loans that have specific loss allocations are identified and included in the reserve allocation. Risk-rated loans that are not reviewed for impairment are segregated into homogeneous pools with loss allocation rates that reflect the severity of risk. Loss rates are adjusted by applying other factors to the calculations. These factors include adjustments for current economic trends and other external factors, delinquency and risk trends, credit concentrations, credit administration policy, migration analysis, and other special allocations for unusual events or changes in products and volume.

This methodology provides an in-depth analysis of the bank’s portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis, including a risk-rate review of commercial credit relationships.

It is our policy not to renegotiate the terms of a commercial loan simply because of a delinquency status. However, we use our Troubled Debt Restructuring Program to work with delinquent borrowers when the delinquency is temporary. A commercial loan is transferred to non-accrual status if it is not well-secured and in the process of collection, and is considered delinquent in payment if either principal or interest is past due ninety days or more. Interest income received on impaired commercial loans in 2012 and 2011, was $4.3 million and $6.7 million, respectively. Interest income that would have been recorded on these loans under the original terms in 2012 and 2011 was $9.3 million and $15.7 million, respectively. At December 31, 2012, we had no binding outstanding commitments to advance additional funds with respect to these impaired loans.

Consumer loans are typically charged-off when they are 120 days past due unless they are secured by real estate. Loans secured by real estate are evaluated on the basis of collateral value. Loans that are well-secured may continue to accrue interest, while other loans are charged down to net realizable value and placed on non-accrual depending upon their loan-to-value ratio.

While the economy remained sluggish in 2011, we have seen some improvement in 2012, which we believe is reflected in the improvement in the credit quality of our loan portfolio. As a result, we decreased our provision for loan and lease losses in accordance with our assessment process, which took into consideration a $58.7 million decrease in nonaccrual loans and leases since December 31, 2011, as noted in Table 19. The provision for loan and lease losses was $64.0 million for the year ended December 31, 2012 and $110.0 million for the year ended December 31, 2011. The allowance for loan and lease losses at December 31, 2012 was 1.43% of period-end loans and leases, or $184.0 million, and 1.80% of period-end loans and leases, or $188.1 million, at December 31, 2011. Loans of $2.0 billion were acquired as part of the Tower transaction. These loans were acquired at their fair value, which incorporates a discount for credit losses. This results in increases to loan and lease balances on Susquehanna’s balance sheet without additional allowance for loan and lease losses, thus contributing to the decline in the allowance for loan and lease losses to period-end loans and leases ratio. Subsequent to the acquisition, these loans are subject to Susquehanna’s credit policies.

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Table 10

Provision and Allowance for Loan and Lease Losses

	2012			2011			2010			2009			2008
	(Dollars in thousands)
Allowance for loan and lease losses, January 1	$	188,100		$	191,834		$	172,368		$	113,749		$	88,569
Additions to provision for loan and lease losses charged to operations		64,000			110,000			163,000			188,000			63,831
Loans and leases charged-off during the year:
Commercial, financial, and agricultural		(22,758	)		(25,552	)		(22,604	)		(33,887	)		(17,433	)
Real estate - construction		(17,598	)		(36,585	)		(65,709	)		(65,906	)		(8,885	)
Real estate secured - residential		(14,343	)		(18,663	)		(18,562	)		(7,441	)		(3,883	)
Real estate secured - commercial		(27,509	)		(45,213	)		(43,086	)		(20,593	)		(2,154	)
Consumer		(3,364	)		(3,922	)		(3,464	)		(3,641	)		(8,075	)
Leases		(4,463	)		(5,310	)		(8,710	)		(11,873	)		(4,800	)
Total charge-offs		(90,035	)		(135,245	)		(162,135	)		(143,341	)		(45,230	)
Recoveries of loans and leases previously charged-off:
Commercial, financial, and agricultural		9,515			5,835			4,478			4,779			1,625
Real estate - construction		3,561			7,106			6,974			1,306			5
Real estate secured - residential		1,930			1,916			923			286			226
Real estate secured - commercial		4,610			3,795			3,744			5,685			145
Consumer		1,228			1,371			1,254			1,120			3,626
Leases		1,111			1,488			1,228			784			952
Total recoveries		21,955			21,511			18,601			13,960			6,579
Net charge-offs		(68,080	)		(113,734	)		(143,534	)		(129,381	)		(38,651	)
Allowance for loan and lease losses, December 31	$	184,020		$	188,100		$	191,834		$	172,368		$	113,749
Average loans and leases outstanding	$	12,321,328		$	9,803,863		$	9,799,673		$	9,809,873		$	9,169,996
Period-end loans and leases		12,894,741			10,447,930			9,633,197			9,827,279			9,653,873
Net charge-offs as a percentage of average loans and leases		0.55	%		1.16	%		1.46	%		1.32	%		0.42	%
Allowance as a percentage of period-end loans and leases		1.43	%		1.80	%		1.99	%		1.75	%		1.18	%

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 December 31, 2012. There can be no assurance, however, that we will not sustain losses in future periods that could be greater than the size of the allowance at December 31, 2012. The allowance for loan and lease losses as a percentage of non-accrual loans and leases (coverage ratio) increased to 188% at December 31, 2012, from 120% at December 31, 2011. Loans of $2.0 billion were acquired as part of the Tower transaction. These loans were acquired at their fair value, with both specific and general credit write-downs taken. This method allows for loan and lease balances to increase on Susquehanna’s balance sheet without recording an additional allowance for loan and lease losses, thus reducing the increase in the coverage ratio. For more information on our accounting policy for purchased loans, refer to “Note 1. Summary of Significant Accounting Policies” to the consolidated financial statements appearing in Part II, Item 8.

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Should the economic climate deteriorate further, borrowers may experience increasing difficulty in meeting their payment obligations, and the level of non-performing loans and assets, charge-offs, and delinquencies could rise and require further increases in the provision. In addition, regulatory authorities, as an integral part of their examinations, periodically review the level of the allowance for loan and lease losses and may require additions to the allowance based upon their judgments about information available to them at the time of examination.

Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income was 22%, 30%, and 26% for 2012, 2011, and 2010, respectively. For 2011, the ratio was 25% when the net realized gain on acquisition is excluded from the noninterest income component.

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

Table 11

Noninterest Income

	Years Ended December 31,									% Change
										2012 vs. 2011			2011 vs. 2010
	2012			2011			2010
	Dollars in thousands
Service charges on deposit accounts	$	34,428		$	31,728		$	34,467			8.5	%		(7.9	)%
Vehicle origination and servicing fees		10,366			7,862			6,826			31.8			15.2
Asset management fees		29,138			28,153			28,362			3.5			(0.7	)
Income from fiduciary-related activities		10,266			7,333			7,259			40.0			1.0
Commissions on brokerage, life insurance, and annuity sales		8,301			8,202			7,567			1.2			8.4
Commissions on property and casualty insurance sales		15,894			14,047			12,030			13.1			16.8
Other commissions and fees		21,510			23,728			24,661			(9.3	)		(3.8	)
Income from bank-owned life insurance		6,471			4,931			4,965			31.2			(0.7	)
Net gain on sale of loans and leases		20,244			12,747			10,918			58.8			16.8
Net realized gain on sales of securities		1,674			3,878			13,408			(56.8	)		(71.1	)
Net impairment losses recognized in earnings		(241	)		(3,364	)		(3,891	)		(92.8	)		(13.5	)
Other		8,708			4,280			5,576			103.5			(23.2	)
		166,759			143,525			152,148			16.2			(5.7	)
Net realized gain on acquisition		0			39,143			0			nm			nm
Total noninterest income	$	166,759		$	182,668		$	152,148			(8.7	)		20.1

Noninterest income, excluding net realized gain on acquisition, increased $23.2 million, or 16.2%, in 2012 compared to 2011. This net increase was primarily the result of the following:

• Increased service charges on deposit accounts of $2.7 million;

• Increased vehicle origination and servicing fees of $2.5 million:

• Increased income from fiduciary-related activities of $2.9 million;

• Increased commissions on property and casualty insurance sales of $1.8 million;

• Decreased other commissions and fees of $2.2 million;

• Increase income from bank-owned life insurance of $1.5 million;

• Increased net gain on sale of loans and leases of $7.5 million; and

• Increased other non-interest income of $4.4 million.

40

Service charges on deposit accounts. The 8.5% increase is primarily the result of the Abington and Tower transactions.

Vehicle origination and servicing fees. The 31.8% increase is due to lease production at our Hann subsidiary increasing $176.2 million, or 94.3%, due to expanded territories and Hurricane Sandy, in 2012.

Income from fiduciary-related activities. The 40.0% increase primarily is the result of increased fees related to the acquisition of Tower trust accounts.

Commissions on property and casualty insurance sales. The 13.1% increase primarily is the result of increased volume at Addis, as well as higher premium rates from their carriers.

Other commissions and fees. The 9.3% decrease is primarily the result of $5.9 million lower debit card fees, resulting from the Dodd-Frank Act regulatory changes, partially offset by an increase in other miscellaneous commissions and fees.

Income from bank-owned life insurance. The 31.2% increase is primarily the result of the Abington and Tower transactions.

Net gain on sale of loans and leases. The 58.8% increase is the result of the increase of $238.9 million, or 76.8%, in the volume of mortgages sold due to the decline in mortgage interest rates from 2011, and expanded territories resulting from the acquisitions of Abington and Tower.

Other non-interest income. The 103.5% increase primarily is the result of $1.1 million gain on sale of various assets, $1.0 million increase in safe deposit box and real estate rental income, and $2.3 million of miscellaneous income.

Noninterest Expenses

Total noninterest expenses for the year ended December 31, 2012 were $466.8 million, excluding extinguishment of debt and merger related expenses, an increase of $71.6 million, or 18.1%, from the year ended December 31, 2011 when total noninterest expenses were $395.2 million.

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

Table 12

Noninterest Expense

	Years Ended December 31,						% Change
							2012 v. 2011			2011 v. 2010
	2012		2011		2010
	Dollars in thousands
Salaries and employee benefits	$	251,583	$	209,235	$	191,806		20.2	%		9.1	%
Occupancy		45,231		37,446		35,997		20.8			4.0
Furniture and equipment		15,725		12,596		13,647		24.8			(7.7	)
Advertising and marketing		12,317		11,470		12,606		7.4			(9.0	)
FDIC insurance		20,486		16,602		16,763		23.4			(1.0	)
Legal fees		8,150		9,302		8,786		(12.4	)		5.9
Amortization of intangible assets		12,525		8,705		9,438		43.9			(7.8	)
Vehicle lease disposal		6,342		10,584		14,543		(40.1	)		(27.2	)
Other		94,447		79,229		79,064		19.2			0.2
		466,806		395,169		382,650		18.1			3.3
Merger related		17,351		14,991		0		15.7			nm
Loss on extinguishment of debt		5,860		50,020		0		(88.3	)		nm
Total noninterest expenses	$	490,017	$	460,180	$	382,650		6.5			20.3

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Components within this category increased or decreased as follows:

• Increased salaries and employee benefits of $42.3 million;

• Increased occupancy of $7.8 million;

• Increased furniture and equipment of $3.1 million;

• Increased FDIC insurance of $3.9 million;

• Increased amortization of intangible assets of $3.8 million;

• Decreased vehicle lease disposal of $4.2 million;

• Increased other noninterest expense of $15.2 million.

Salaries and employee benefits. The 20.2% increase is the result of the additional 447 employees acquired through the Abington and Tower transactions, and increased commission compensation, incentive bonus, and annual 3% merit increases.

Occupancy. The increase of 20.8% is primarily the result of additional rent expense due to offices acquired through the Abington and Tower transactions, and increased general maintenance costs.

Furniture and equipment. The 24.8% increase is the result of additional depreciation expense due to the Abington and Tower transactions, and increased general maintenance costs.

FDIC insurance. The 23.4% increase is the result of acquiring $2.9 billion of deposits through the Abington and Tower transactions.

Amortization of intangible assets. The 43.9% increase is the result of additional intangibles with finite lives acquired through the Abington and Tower transactions.

Vehicle lease disposal. The decrease of 40.1% is primarily the result of lower residual value expense and fewer cars being returned to Hann after maturity of the lease.

Other non-interest expenses. The 19.2% increase is the result of increased expenses relating to insurance ($3.2 million), consulting ($2.1 million), foreclosure, repossession and other real estate owned ($1.5 million), telephone and data communications expenses ($0.8 million), and other operating expenses related to the Abington and Tower transactions.

Income Taxes

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

The increase in our rate in 2012 was primarily due to the effect of the non-taxable bargain purchase accounting from the Abington acquisition, occurring in 2011. With the exception of the bargain purchase accounting, items impacting the effective tax rate in 2012, including tax-advantaged investment and loan income, were comparable to 2011. For additional information about our income taxes, refer to “Note 12. Income Taxes” to the consolidated financial statements appearing in Part II, Item 8.

Financial Condition

Summary of 2012 Compared to 2011

Total assets at December 31, 2012, were $18.0 billion, an increase of 20.5% when compared to total assets of $15.0 billion at December 31, 2011. Loans and leases increased to $12.9 billion at December 31, 2012, from $10.4 billion at December 31, 2011. Total deposits increased to $12.6 billion at December 31, 2012, from $10.3 billion at December 31, 2011. These increases were primarily due to the acquisition of Tower in the first quarter of 2012.

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Equity capital at December 31, 2012 was $2.6 billion, an increase of $0.4 billion from December 31, 2011 when equity capital was $2.2 billion. The acquisitions of Abington and Tower, respectively resulted in 30.8 million and 26.7 million common shares issued, respectively, and a net increase in equity of $150.8 million and $302.1 million, respectively. As a result, book value per common share was $13.92 at December 31, 2012 and $13.96 at December 31, 2011. Tangible book value per common share was $6.88 at December 31, 2012 and $7.28 at December 31, 2011. For additional information concerning the changes in equity capital, refer to the “Consolidated Statements of Changes in Shareholders’ Equity” in Part II, Item 8.

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

At December 31, 2012, 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 we have made the determination that the impact on our financial statements would be minimal. For additional information about our financial assets and financial liabilities carried at fair value, refer to “Note 22. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

Investment Securities

Available-for-sale securities increased $282.9 million, or 12.3%, at December 31, 2012 as compared to December 31, 2011. Excluding the securities acquired in the Tower acquisition, securities available for sale increased 6.3%, or $145.6 million.

At December 31, 2012, we held no securities of any one issuer (other than securities of U.S. Government agencies and corporations, which, by regulation, may be excluded from this disclosure) where the aggregate book value exceeded 10% of shareholders’ equity.

Table 13

Fair Value of Investment Securities

Year ended December 31,	Available-for-Sale
	2012		2011		2010
	(Dollars in thousands)
U.S. Government agencies	$	114,408	$	148,485	$	268,175
State and municipal		435,777		401,979		396,660
Mortgage-backed
Agency residential mortgage-backed		1,880,562		1,531,405		1,323,569
Non-agency residential mortgage-backed		27,450		69,071		116,811
Commercial mortgage-backed		40,380		56,819		104,842
Other debt obligations
Other structured financial products		9,550		13,293		12,503
Other debt securities		45,255		51,135		41,000
Other equity securities		24,519		22,847		23,837
Total investment securities	$	2,577,901	$	2,295,034	$	2,287,397

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Table 14

Maturities of Investment Securities

At December 31, 2012	Within 1 Year			After 1 Year but Within 5 Years			After 5 Years but Within 10 Years			After 10 Years			Total
	(Dollars in thousands)
Available-for-Sale
U.S. Government agencies
Fair value	$	0		$	112,389		$	2,019		$	0		$	114,408
Amortized cost		0			111,367			2,000			0			113,367
Yield		0.00	%		1.47	%		1.50	%		0.00	%		1.47	%
State and municipal securities
Fair value	$	8,781		$	13,525		$	89,504		$	323,967		$	435,777
Amortized cost		8,690			12,911			86,385			295,501			403,487
Yield (TE)		4.21	%		5.34	%		4.03	%		5.90	%		5.45	%
Agency residential mortgage-backed securities
Fair value	$	0		$	2,179		$	861,108		$	1,017,275		$	1,880,562
Amortized cost		0			2,035			847,363			994,113			1,843,511
Yield		0.00	%		4.03	%		1.79	%		2.31	%		2.07	%
Non-agency residential mortgage-backed securities
Fair value	$	0		$	0		$	48		$	27,402		$	27,450
Amortized cost		0			0			47			29,381			29,428
Yield		0.00	%		0.00	%		2.57	%		4.60	%		4.60	%
Commercial mortgage-backed securities
Fair value	$	0		$	10,337		$	0		$	30,043		$	40,380
Amortized cost		0			10,054			0			28,793			38,847
Yield		0.00	%		5.91	%		0.00	%		5.95	%		5.94	%
Other structured financial products
Fair value	$	0		$	0		$	0		$	9,550		$	9,550
Amortized cost		0			0			0			25,011			25,011
Yield		0			0			0			1.05	%		1.05	%
Other debt securities
Fair value	$	0		$	5,283		$	0		$	39,972		$	45,255
Amortized cost		0			4,995			0			38,081			43,076
Yield		0			2.73	%		0			5.70	%		5.36	%
Equity securities
Fair value	$	0		$	0		$	0		$	24,519		$	24,519
Amortized cost		0			0			0			24,097			24,097
Yield		0			0			0			1.78	%		1.78	%
Total Securities
Fair value	$	8,781		$	143,713		$	952,679		$	1,448,209		$	2,577,901
Amortized cost		8,690			141,362			935,795			1,410,880			2,520,824
Yield		4.21	%		2.22	%		2.00	%		3.23	%		2.72	%

Additional Information

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

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

Loans and Leases

During 2012, we saw the economy within our market show some improvement. As a result of this and the Tower acquisition, loans and leases, net of unearned income, increased 23.4%, from $10.4 billion at December 31, 2011, to $12.9 billion at December 31, 2012. Excluding the loans acquired in the Tower

44

transaction, loans and leases increased 4.5%. Commercial, financial, and agricultural loans increased $402.6 million ($265.6 million excluding Tower), net of charge-offs of $22.8 million. Real estate construction loans, which we consider to be higher-risk loans, increased by $18.6 million ($190.9 million decline excluding Tower), net of charge-offs of $17.6 million. This 23.0% decrease, excluding Tower, in real estate construction loans was primarily due to our plan to decrease that portfolio, thereby reducing our exposure in a segment that has been particularly stressed during this recession, to the current level which we believe to be appropriate from a risk perspective. For additional information about our real estate construction portfolio, refer to the discussion under “Risk Assets” presented in PART II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition. Consumer loans increased by $120.2 million ($105.2 million excluding Tower) since December 31, 2011. Loans secured by commercial real estate increased by $827.7 million ($27.3 million decline excluding Tower) in 2012. Loans secured by residential real estate increased by $853.3 million ($94.5 million excluding Tower) during the same period, and leasing assets increased by $224.5 million, or 33.2%, from December 31, 2011.

Table 15 presents loans outstanding, by type of loan, in our portfolio for the past five years. Our bank subsidiary historically has reported a significant amount of loans secured by real estate. Many of these loans have real estate collateral taken as additional security not related to the acquisition of the real estate pledged. Open-ended home equity loans totaled $1.3 billion at December 31, 2012. Senior liens on 1-4 family residential properties totaled $2.1 billion at December 31, 2012, and much of the $3.7 billion in loans secured by non-farm, non-residential properties represented collateralization of operating lines of credit or term loans that finance equipment, inventory, or receivables. Loans secured by farmland totaled $241.0 million, while loans secured by multi-family residential properties totaled $357.8 million at December 31, 2012.

Table 15

Loan and Lease Portfolio

At December 31,	2012					2011					2010					2009					2008
	Amount		% of Loans to Total Loans and Leases			Amount		% of Loans to Total Loans and Leases			Amount		% of Loans to Total Loans and Leases			Amount		% of Loans to Total Loans and Leases			Amount		% of Loans to Total Loans and Leases
	(Dollars in thousands)
Commercial, financial, and agricultural	$	2,273,611		17.6	%	$	1,871,027		17.9	%	$	1,816,519		18.9	%	$	2,050,110		21.0	%	$	2,063,942		21.4	%
Real estate:
construction		847,781		6.6			829,221		7.9			877,223		9.1			1,114,709		11.3			1,313,647		13.6
residential		4,065,818		31.5			3,212,562		30.8			2,666,692		27.7			2,369,380		24.1			2,298,709		23.8
commercial		3,964,608		30.8			3,136,887		30.0			2,998,176		31.0			3,060,331		31.1			2,875,502		29.8
Consumer		842,552		6.5			722,329		6.9			603,084		6.3			482,266		4.9			419,371		4.3
Leases		900,371		7.0			675,904		6.5			671,503		7.0			750,483		7.6			682,702		7.1
Total	$	12,894,741		100.0	%	$	10,447,930		100.0	%	$	9,633,197		100.0	%	$	9,827,279		100.0	%	$	9,653,873		100.0	%

45

Table 16 presents the maturity of commercial, financial, and agricultural loans, as well as real estate – construction loans. Table 17 presents the allocation of the allowance for loan and lease losses by type of loan.

Table 16

Loan Maturity and Interest Sensitivity

At December 31, 2012	Under One Year		One to Five Years		Over Five Years		Total
	(Dollars in thousands)
Maturity
Commercial, financial, and agricultural	$	1,140,768	$	910,249	$	222,594	$	2,273,611
Real estate - construction		402,105		290,532		155,144		847,781
	$	1,542,873	$	1,200,781	$	377,738	$	3,121,392
Rate sensitivity of loans with maturities greater than 1 year
Variable rate			$	490,317	$	40,289
Fixed rate				710,464		337,449
			$	1,200,781	$	377,738

Table 17

Allocation of Allowance for Loan and Lease Losses

At December 31,	2012		2011		2010		2009		2008
	(Dollars in thousands)
Commercial, financial, and agricultural	$	30,207	$	30,086	$	31,608	$	27,350	$	22,599
Real estate - construction		25,171		36,868		50,250		54,305		31,734
Real estate secured - residential		40,292		28,839		28,321		22,815		16,189
Real estate secured - commercial		68,673		77,672		69,623		56,623		33,765
Consumer		3,568		3,263		2,805		3,090		3,253
Leases		13,341		10,561		8,643		7,958		5,868
Purchased loans now impaired (2)		1,087		0		0		0		0
Overdrafts		154		35		36		37		34
Loans in process		1,278		742		513		121		285
Unallocated		249		35		35		69		22
Total	$	184,020	$	188,100	$	191,834	$	172,368	$	113,749
Reserve for unfunded commitments (1)	$	3,732	$	975	$	975	$	975	$	975

(1) Included in Other liabilities.

(2) Non-impaired at acquisition.

Substantially all of our loans and leases are to enterprises and individuals in our market area. As shown in Table 18, there is no concentration of loans to borrowers in any one industry, or related industries, which exceeds 10% of total loans at December 31, 2012.

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Table 18

Loan Concentrations

At December 31, 2012	Permanent		Construction		All Other		Total Amount		% of Nonaccrual in Each Category			% of Total Loans and Leases Outstanding
	(Dollars in thousands)
Real estate - residential	$	764,479	$	37,642	$	46,180	$	848,301		2.51	%		6.58	%
Real estate - retail		491,169		6,068		1,672		498,909		0.60	%		3.87	%
Lessors of professional offices		422,567		31,006		12,484		466,057		3.95	%		3.61	%
Residential construction		148,364		250,810		22,490		421,663		3.88	%		3.27	%
Manufacturing		118,118		1,437		213,762		333,317		1.87	%		2.58	%
Elderly/chid care services		155,174		29,852		142,288		327,315		0.00	%		2.54	%
Land development (site work) construction		101,274		183,088		23,514		307,876		6.16	%		2.39	%
Medical services		95,223		57		212,767		308,046		0.32	%		2.39	%
Agricultural		234,697		5,510		48,862		289,069		4.48	%		2.24	%
Hotels/motels		242,063		12,465		24,744		279,272		1.36	%		2.17	%
Commercial construction		148,411		95,976		18,159		262,546		0.68	%		2.04	%
Public services		86,557		13,111		132,886		232,555		1.65	%		1.80	%
Warehouses		220,539		1,090		181		221,810		0.00	%		1.72	%
Wholesalers		66,992		8,828		139,378		215,198		5.57	%		1.67	%
Contractors		89,773		4,490		83,442		177,704		3.24	%		1.38	%
Retail consumer goods		103,739		351		72,793		176,882		2.10	%		1.37	%
Motor vehicles		104,829		22		52,134		156,985		1.41	%		1.22	%
Financial Services		19,886		0		118,226		138,112		3.81	%		1.07	%
Real estate - mixed use		125,997		1,218		673		127,888		0.72	%		0.99	%
Restaurants/bars		106,551		107		16,400		123,058		2.89	%		0.95	%
Recreation		96,251		5,199		16,973		118,423		2.22	%		0.92	%
Transportation		16,837		166		71,677		88,680		0.39	%		0.69	%
Industrial		31,071		0		51,626		82,698		1.90	%		0.64	%
Real estate services		72,509		320		1,993		74,821		0.71	%		0.58	%
Insurance Services		16,224		14		46,492		62,729		1.76	%		0.49	%

47

At December 31, 2011	Permanent		Construction		All Other		Total Amount		% of Nonaccrual in Each Category			% of Total Loans and Leases Outstanding
	(Dollars in thousands)
Real estate - residential	$	578,523	$	34,654	$	29,345	$	642,522		3.94	%		6.15	%
Real estate - retail		411,759		5,394		2,018		419,171		1.36	%		4.01	%
Lessors of professional offices		325,603		9,537		2,338		337,478		2.05	%		3.23	%
Residential construction		109,232		199,998		24,062		333,292		6.76	%		3.19	%
Land development (site work) construction		64,081		226,896		34,886		325,863		4.16	%		3.12	%
Motor vehicles		272,758		277		43,795		316,830		0.76	%		3.03	%
Manufacturing		100,409		1,144		163,209		264,762		0.68	%		2.53	%
Elderly/chid care services		84,899		49,421		109,507		243,827		0.00	%		2.33	%
Agricultural		193,701		3,983		35,080		232,764		4.47	%		2.23	%
Hotels/motels		204,245		12,007		2,062		218,314		0.33	%		2.09	%
Medical services		72,287		624		142,992		215,903		1.46	%		2.07	%
Commercial construction		104,050		83,407		24,252		211,709		0.85	%		2.03	%
Warehouses		183,656		2,257		480		186,393		0.07	%		1.78	%
Wholesalers		45,331		6,405		120,733		172,469		0.54	%		1.65	%
Retail consumer goods		92,309		144		55,803		148,256		1.95	%		1.42	%
Public services		54,872		4,467		87,360		146,699		0.44	%		1.40	%
Contractors		61,873		3,015		72,545		137,433		4.27	%		1.32	%
Restaurants/bars		90,430		1,179		13,405		105,014		4.88	%		1.01	%
Recreation		64,574		5,560		14,530		84,664		0.45	%		0.81	%
Transportation		9,785		382		63,002		73,169		1.55	%		0.70	%
Industrial		5,163		25,000