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

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

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

The accounting guidance requires the measurement of fair value to maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect Susquehanna's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

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

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

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

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

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

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

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

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

Non-agency mortgage-backed securities: Refer to the description in “Note 3-Investment Securities”.

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

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

Other structured financial products: The significant unobservable inputs used in the fair value measurement of Susquehanna's other structured financial products are conditional repayment rate, loss severity, and conditional default rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and directionally opposite change in the assumption used for repayment rate. In addition, refer to the description in “Note 3-Investment Securities.”

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

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

Restricted investments in bank stocks consists of Federal Reserve Bank (“FRB”) stock, Federal Home Loan Bank (“FHLB”) stock, and Atlantic Central Bankers Bank stock. Federal law requires a member institution of the FRB and FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership. The carrying amount approximates fair value.

The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are indicative of orderly transactions in the current market. For commercial loans and leases, internal risk grades are used to adjust discount rates for risk migration and expected losses. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using benchmark-based rates. The carrying amount of accrued interest receivable approximates fair value.

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

Fair values were based upon quoted rates of similar instruments issued by banking institutions with similar credit ratings. The carrying amounts of accrued interest payable approximate fair values.

The fair values of interest rate swaps are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.

The methodology nets the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds, mutual settlements, and guarantees.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2013 and 2012, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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

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

For additional information regarding derivatives, refer to “Note 13 – Derivative Financial Instruments” above.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

		The following tables present the financial instruments carried at fair value at September 30, 2013 and December 31, 2012, on
the consolidated balance sheets and by levels within the valuation hierarchy.

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in		Significant
						Active Markets for		Other		Significant
						Identical		Observable		Unobservable
						Instruments		Inputs		Inputs
Description				September 30, 2013		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale securities:
	U.S. Government Agencies			$	85,193	$	0	$	85,193	$	0
	Obligations of states and political
		subdivisions			401,278		0		401,278		0
	Agency residential mortgage-backed
		securities			1,884,810		0		1,884,810		0
	Non-agency residential mortgage-
		backed securities			23,596		0		574		23,022
	Commercial mortgage-backed
		securities			10,492		0		10,492		0
	Other structured financial products				11,444		0		0		11,444
	Other debt securities				42,829		0		42,829		0
	Other equity securities				23,733		20,912		0		2,821
Derivatives: ⁽¹⁾
	Designated as hedging instruments				1,457		0		1,457		0
	Not designated as hedging
		instruments			21,479		0		21,479		0
			Total	$	2,506,311	$	20,912	$	2,448,112	$	37,287
Liabilities
Derivatives: ⁽²⁾
	Designated as hedging instruments			$	36,209	$	0	$	36,209	$	0
	Not designated as hedging
		instruments			18,503		0		18,503		0
			Total	$	54,712	$	0	$	54,712	$	0

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in		Significant
						Active Markets for		Other		Significant
						Identical		Observable		Unobservable
						Instruments		Inputs		Inputs
Description				December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale securities:
	U.S. Government Agencies			$	114,408	$	0	$	114,408	$	0
	Obligations of states and political
		subdivisions			435,777		0		435,777		0
	Agency residential mortgage-
		backed securities			1,880,562		0		1,880,562		0
	Non-agency residential mortgage-
		backed securities			27,450		0		650		26,800
	Commercial mortgage-backed
		securities			40,380		0		40,380		0
	Other structured financial products				9,550		0		0		9,550
	Other debt securities				45,255		0		45,255		0
	Other equity securities				24,519		21,266		97		3,156
Derivatives: ⁽¹⁾
	Designated as hedging instruments				878		0		878		0
	Not designated as hedging
		instruments			25,037		0		25,037		0
			Total	$	2,603,816	$	21,266	$	2,543,044	$	39,506
Liabilities
Derivatives: ⁽²⁾
	Designated as hedging instruments			$	51,172	$	0	$	51,172	$	0
	Not designated as hedging
		instruments			20,954		0		20,954		0
			Total	$	72,126	$	0	$	72,126	$	0

⁽¹⁾	Included in Other assets
⁽²⁾	Included in Other liabilities

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

		The following tables present roll-forwards of the balance sheet amounts for the three and nine month periods ended September
30, 2013 and 2012, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

				Available-for-sale Securities
								Non-
								agency
						Other		Residential
						Structured		Mortgage-
				Equity		Financial		backed
				Securities		Products		Securities		Total
Balance at July 1, 2013				$	2,820	$	10,506	$	24,549	$	37,875
	Total gains or losses (realized/unrealized):
		Included in earnings:
			Other-than-temporary impairment ⁽¹⁾		0		0		0		0
		Included in other comprehensive income (before taxes)			1		938		(1,527)		(588)
Balance at September 30, 2013				$	2,821	$	11,444	$	23,022	$	37,287

Balance at July 1, 2012				$	3,159	$	8,462	$	4,288	$	15,909
	Total gains or losses (realized/unrealized):
		Included in earnings:
			Other-than-temporary impairment ⁽¹⁾		0		0		0		0
		Included in other comprehensive income (before taxes)			1		(70)		(201)		(270)
	Sales				0		0		0		0
Balance at September 30, 2012				$	3,160	$	8,392	$	4,087	$	15,639

Balance at January 1, 2013				$	3,156	$	9,550	$	26,800	$	39,506
	Total gains or losses (realized/unrealized):
		Included in earnings:
			Other-than-temporary impairment ⁽¹⁾		(97)		0		(388)		(485)
		Included in other comprehensive income (before taxes)			(238)		1,894		(3,390)		(1,734)
Balance at September 30, 2013				$	2,821	$	11,444	$	23,022	$	37,287

Balance at January 1, 2012				$	3,430	$	13,293	$	0	$	16,723
	Total gains or losses (realized/unrealized):
		Included in earnings:
			Other-than-temporary impairment ⁽¹⁾		(144)		0		3,092		2,948
		Included in other comprehensive income (before taxes)			(126)		(4,901)		(360)		(5,387)
	Sales				0		0		(18,782)		(18,782)
	Transfers into Level III				0		0		20,137		20,137
Balance at September 30, 2012				$	3,160	$	8,392	$	4,087	$	15,639

⁽¹⁾	Included in noninterest income, net realized gain on sale of securities.

Susquehanna's policy is to recognize transfers in and transfers out of Levels 1, 2, and 3 as of the end of a reporting period.

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

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

	The following tables present assets measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012,
on the consolidated balance sheets and by the valuation hierarchy.

				Quoted
				Prices
				in Active		Significant
				Markets for		Other		Significant
				Identical		Observable		Unobservable
				Instruments		Inputs		Inputs
	Description	September 30, 2013		(Level 1)		(Level 2)		(Level 3)
	Impaired loans	$	73,649	$	0	$	0	$	73,649
	Foreclosed assets		17,760		0		0		17,760
		$	91,409	$	0	$	0	$	91,409

				Quoted
				Prices
				in Active		Significant
				Markets for		Other		Significant
				Identical		Observable		Unobservable
				Instruments		Inputs		Inputs
	Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
	Impaired loans	$	65,731	$	0	$	0	$	65,731
	Foreclosed assets		26,245		0		0		26,245
		$	91,976	$	0	$	0	$	91,976

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


		Fair Value at		Valuation		Range
Asset		September 30, 2013		Technique(s)	Unobservable Input	(Weighted Average)

Non-agency residential mortgage-				Discounted Cash Flow	Conditional repayment rate	10.6%
	backed securities	$	23,022	Discounted Cash Flow	Loss severity	37.8%
					Conditional default rate	3.6%

Other structured financial products			11,444	Discounted Cash Flow	Credit default rates, call options and deferrals, waterfall structure, and covenants.	Varies by individual security, refer to Note 3
				Discounted Cash Flow



Other equity securities			2,821	Discounted Cash Flow	Cash flows from dividends and terminal value	0.2x - 1.5x
				Discounted Cash Flow	Cash flows from dividends and terminal value	(.8x)

Impaired loans			73,649	Discounted Cash Flow	Cash flows based upon current discount rates and terminal value	0.9% - 8.1%
				Discounted Cash Flow		(3.7%)


Foreclosed assets			17,760	Discounted Cash Flow	Third party appraisals less estimated selling costs	0.0% - 100.0%
				Discounted Cash Flow	Third party appraisals less estimated selling costs	(28.0%)

		Fair Value at		Valuation		Range
Asset		December 31, 2012		Technique(s)	Unobservable Input	(Weighted Average)

Non-agency residential mortgage-				Discounted Cash Flow	Conditional repayment rate	10.4%
	backed securities	$	26,800	Discounted Cash Flow	Loss severity	43.8%
					Conditional default rate	3.6%

Other structured financial products			9,550	Discounted Cash Flow	Credit default rates, call options and deferrals, waterfall structure, and covenants.	Varies by individual security, refer to Note 3
				Discounted Cash Flow



Other equity securities			3,156	Discounted Cash Flow	Cash flows from dividends and terminal value	0.2x - 1.5x
				Discounted Cash Flow	Cash flows from dividends and terminal value	(0.9x)

Impaired loans			65,731	Discounted Cash Flow	Cash flows based upon current discount rates and terminal value	2.9% - 5.6%
				Discounted Cash Flow		(4.2%)


Foreclosed assets			26,245	Discounted Cash Flow	Third party appraisals less estimated selling costs	0.0% - 100.0%
				Discounted Cash Flow	Third party appraisals less estimated selling costs	(24.0%)

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

Additional Disclosures about Fair Value of Financial Instruments

	The following table represents the carrying amounts and estimated fair values of Susquehanna's financial instruments. The
methods and assumptions used to estimate the fair value of each class of financial instruments are described above.

			September 30, 2013
			Carrying
			Amount		Fair Value		Level 1		Level 2		Level 3
	Financial assets:
		Cash and due from banks	$	377,730	$	377,730	$	377,730	$	0	$	0
		Short-term investments		77,729		77,729		0		77,729		0
		Investment securities		2,483,375		2,483,375		20,912		2,425,176		37,287
		Restricted investment in bank stocks		160,787		160,787		0		160,787		0
		Loans and leases		13,376,454		13,477,467		0		0		13,477,467
		Derivatives		22,936		22,936		0		22,936		0
	Financial liabilities:
		Deposits		12,721,685		12,702,818		0		12,702,818		0
		Short-term borrowings		688,456		688,456		0		688,456		0
		FHLB borrowings		1,593,272		1,593,362		0		1,593,362		0
		Long-term debt		457,804		463,940		0		463,940		0
		Derivatives		54,712		54,712		0		54,712		0

			December 31, 2012
			Carrying
			Amount		Fair Value		Level 1		Level 2		Level 3
	Financial assets:
		Cash and due from banks	$	277,042	$	277,042	$	277,042	$	0	$	0
		Short-term investments		119,176		119,176		0		119,176		0
		Investment securities		2,577,901		2,577,901		21,266		2,517,129		39,506
		Restricted investment in bank stocks		152,434		152,434		0		152,434		0
		Loans and leases		12,894,741		12,954,918		0		0		12,954,918
		Derivatives		25,915		25,915		0		25,915		0
	Financial liabilities:
		Deposits		12,580,046		12,544,069		0		12,544,069		0
		Short-term borrowings		817,577		817,577		0		817,577		0
		FHLB borrowings		1,199,062		1,200,358		0		1,200,358		0
		Long-term debt		513,401		512,632		0		512,632		0
		Derivatives		72,126		72,126		0		72,126		0