UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K/A

Amendment No. 1

(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, 2009

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
Susquehanna Capital I Capital Stock (and the Guarantee by Susquehanna Bancshares, Inc. with respect thereto)	New York Stock Exchange

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

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

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

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

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

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

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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $413,300,027 as of June 30, 2009, based upon the closing price quoted on the Nasdaq Global Select Market for such date. The number of shares issued and outstanding of the registrant’s common stock as of February 22, 2010, was 86,474,350.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Explanatory Note: This Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) amends our Form 10-K for the year ended December 31, 2009, initially filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2009 (the “original 2009 Form 10-K”).

This Form 10-K/A amends and restates in its entirety Item 7 of Part II of the original 2009 Form 10-K. The sole purpose of the amendment is to clarify that in Table 11—Construction, Land Development, and Other Land Loans—Portfolio Status, the Other Internally Monitored column of the table represents loans with initial signs of some financial weakness and potential problem loans that are on our internally monitored loan list and to revise the numbers included in that column of the table to exclude our non-accrual and past-due loans presented in the prior three columns of the table as defined in footnote 1 to the original 2009 Form 10-K. The original 2009 Form 10-K inadvertently included our non-accrual and past-due loans in the Other Internally Monitored column of the table. Other than the changes in Table 11, no other changes were reflected in the amendment and restatement of Item 7.

This Form 10-K/A only amends and restates Item 7 of Part II of the original 2009 Form 10-K and no other items in the original 2009 Form 10-K are amended hereby. The foregoing items have not been updated to reflect other events occurring after the filing of the original 2009 Form 10-K or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 15 of Part IV of the original 2009 Form 10-K has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Section 302 of the Sarbanes Oxley Act of 2002.

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.

Certain statements in this document may be considered to be “forward-looking statements” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect,” “estimate,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective” and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, expectations regarding Susquehanna’s future operating results or financial condition, expectations regarding the timing of a repurchase of the securities issued to the U.S. Treasury, Susquehanna’s potential exposures to various types of market risks, such as interest rate risk and credit risk; whether Susquehanna’s allowance for loan and lease losses is adequate to meet probable loan and lease losses; our ability to maintain loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; out ability to monitor the impact of the recession moving into the commercial and industrial, commercial real estate, and consumer segments; the impact of a breach by Auto Lenders Liquidation Center, Inc. (“Auto Lenders”), a third-party residual value guarantor of our auto leasing subsidiary, on residual loss exposure; the unlikelihood that more than 10% of the home equity line of credit loans in securitization transactions will convert from variable interest rates to fixed interest rates; our ability to collect all amounts due under our outstanding synthetic collateralized debt obligations; and our ability to achieve our 2010 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

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

• adverse changes in the automobile industry;

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

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

• the adequacy of loss reserves;

• impairment of goodwill or other assets;

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

• continued relationships with major customers;

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

• adverse national and regional economic and business conditions;

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

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

• the ability to hedge certain risks economically;

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

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

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

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

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

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

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

• the effects of and changes in the rate of Federal Deposit Insurance Corporation premiums; and

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

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

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

The following information refers to 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. and subsidiaries (“VFAM”), Stratton Management Company, LLC and subsidiary (“Stratton”), and The Addis Group, LLC (“Addis”).

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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 significant 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 critical 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 valuation of recorded interests in securitized assets, the valuation of goodwill, 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. Determining the amount of the allowance for loan and lease losses is considered a critical 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.

Recorded interests in securitized assets are established and accounted for based on discounted cash flow modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including estimates of repayment rates, credit loss experience, and discount rates that consider the risk involved. Since the values of these assets are sensitive to changes in estimates, the valuation of recorded interests in securitized assets is considered a critical accounting estimate. For additional information about our recorded interests, refer to “Note 21. Securitization Activity” to the consolidated financial statements appearing in Part II, Item 8.

Management evaluates the valuation of goodwill on an annual basis and more often if situations or the economic environment warrant it. In performing these evaluations, managements 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 Intangible Assets” 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 23. 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 critical accounting areas is also discussed within the body of this document.

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Executive Overview

Allowance for Loan and Lease Losses

The deterioration in economic conditions continues to impact our credit quality. Net charge-offs as a percentage of average loans and leases were 1.32% for 2009, compared to 0.42% for 2008. Non-performing assets as a percentage of loans, leases, and other real estate owned were 2.48% for 2009, compared to 1.20% for 2008. Given the pressures facing our customers and loan portfolio, we increased our provision for loan and lease losses to $188.0 million for 2009, compared to $63.8 million for 2008. See the discussion regarding loan and lease losses in “Results of Operations, Provision and Allowance for Loan and Lease Losses.”

The following table compares our 2009 financial targets to actual results:

	Target			Actual
Net interest margin		3.70	%		3.58	%
Loan growth		8.0	%		1.80	%
Deposit growth		1.0	%		(1.0	%)
Noninterest income growth		6.0	%		15.0	%
Noninterest expense growth		(1.0	%)		4.2	%
Effective tax rate (benefit)		32.0	%		(520.6	%)
Preferred dividend and discount accretion	$	16.7	million	$	16.7	million

Given the current economic climate and real estate trends, we recognize that the tightening credit market poses challenges for financial institutions. However, we believe that it creates opportunities as well. With that in mind, our financial targets for 2010 are as follows:

	Target(1)
Net interest margin		3.75	%
Loan growth		6.0	%(2)
Deposit growth		4.0	%
Noninterest income growth		(14.0	%)
Noninterest expense growth		(1.0	%)
Tax rate		25.0	%
Preferred dividend and discount accretion	$	16.8	million

(1) These financial targets include no securitization activity in 2010, and the growth percentages are based upon 2009 reported numbers and not core numbers.

(2) Targeted loan growth of 6.0% includes the effect of the adoption of accounting standards updates to U.S. GAAP relating to consolidation of variable interest entities. As a result of adopting these updates, we will increase our outstanding loans balances, on January 1, 2010, by $249.0 million.

Acquisitions

Stratton Holding Company

On April 30, 2008, we completed the acquisition of Stratton Holding Company, an investment management company based in Plymouth Meeting, Pennsylvania with approximately $3.0 billion in assets under management. Stratton became a wholly owned subsidiary of Susquehanna and part of the family of Susquehanna wealth management companies. The addition of Stratton brings increased diversification in our investment expertise, including experience in mutual fund management. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. The acquisition of Stratton was considered immaterial.

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Community Banks, Inc.

On November 16, 2007, we completed the acquisition of Community Banks, Inc. (“Community”) in a stock and cash transaction valued at approximately $871.0 million. Under the terms of the merger agreement, shareholders of Community were entitled to elect to receive for each share of Community common stock that they owned, either $34.00 in cash or 1.48 shares of Susquehanna common stock. The acquisition expands our territory into the Harrisburg market and deepens our foundation in central Pennsylvania. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. For the required disclosures relating to our acquisition of Community, refer to “Note 2. Acquisitions” to the consolidated financial statements appearing in Part II, Item 8.

Widmann, Siff & Co., Inc.

On August 1, 2007, we acquired Widmann, Siff & Co., Inc., an investment advisory firm in Radnor, Pennsylvania. Widmann, Siff had more than $300.0 million in assets under management, including accounts serving individuals, pension and profit-sharing plans, corporations, and family trusts. The acquisition was accounted for under the purchase method, and all transactions since the acquisition date are included in our consolidated financial statements. The acquisition of Widmann, Siff was considered immaterial.

Results of Operations

Summary of 2009 Compared to 2008

Results of operations for the year ended December 31, 2009 include the following pre-tax transactions:

• a $6.2 million FDIC special assessment;

• a $2.9 million consolidation charge:

• a $10.7 million net gain on securities transactions; and

• a $6.9 million net gain on the sale of our Central Atlantic Merchant Services accounts.

Results of operations for the year ended December 31, 2008 include the following pre-tax charges:

• a $6.5 million loss related to an interest rate swap termination;

• a $2.5 million merger charge composed of the following:

Employee termination benefits	$	1.60 million
Legal fees		0.25 million
Technology costs		0.65 million

• a $17.5 million securities impairment charge; and

• a $2.1 million VFAM customer-loss contingency.

Net loss applicable to common shareholders for the year ended December 31, 2009, was $4.0 million, a decrease of $85.8 million over net income applicable to common shareholders of $81.8 million in 2008. The provision for loan and lease losses increased 194.5%, to $188.0 million for 2009, from $63.8 million for 2008. Net interest income increased 2.6%, to $408.8 million for 2009, from $398.3 million in 2008. Noninterest income increased 15.0%, to $163.7 million for 2009, from $142.3 million in 2008, and noninterest expenses increased 4.2%, to $382.5 million for 2009, from $367.2 million for 2008.

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Additional information is as follows:

	Twelve Months Ended December 31,
	2009			2008
Diluted Earnings per Common Share	$	(0.05	)	$	0.95
Return on Average Assets		0.09	%		0.62	%
Return on Average Equity		0.65	%		4.80	%
Return on Average Tangible Equity(1)		2.19	%		13.35	%
Efficiency Ratio		65.28	%		66.46	%
Net Interest Margin		3.58	%		3.62	%

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 is consistent with the treatment by bank regulatory agencies, which excludes goodwill and other intangible assets from the calculation of risk-based capital ratios. A reconciliation of return on average equity to return on average tangible equity is set forth below.

	2009		2008
Return on average equity (GAAP basis)	0.65	%	4.80	%
Effect of excluding average intangibleassets and related amortization	1.54	%	8.55	%
Return on average tangible equity	2.19	%	13.35	%

Net Interest Income - Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which increased to $408.8 million in 2009, as compared to $398.3 million in 2008. Net interest income as a percentage of net interest income plus other income was 71% for the twelve months ended December 31, 2009, 74% for the twelve months ended December 31, 2008, and 70% for the twelve months ended December 31, 2007.

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

Table 1 presents average balances, taxable equivalent interest income and expense, and yields earned or paid on these assets and liabilities. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Table 2 illustrates the changes in net interest income caused by changes in average volume, rates, and yields.

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

Interest Rates and Interest Differential - Tax Equivalent Basis

	2009						2008						2007
	Average Balance			Interest		Rate(%)	Average Balance			Interest		Rate(%)	Average Balance			Interest		Rate(%)
	(Dollars in thousands)
Assets
Short-term investments	$	104,531		$	597	0.57	$	101,715		$	2,411	2.37	$	97,583		$	4,782	4.90
Investment securities:
Taxable		1,520,832			74,244	4.88		1,759,424			91,531	5.20		1,485,561			73,837	4.97
Tax-advantaged		347,538			22,985	6.61		296,211			19,560	6.60		69,389			4,380	6.31
Total investment securities		1,868,370			97,229	5.20		2,055,635			111,091	5.40		1,554,950			78,217	5.03
Loans and leases, (net):
Taxable		9,583,567			544,117	5.68		8,972,747			581,070	6.48		5,876,948			439,680	7.48
Tax-advantaged		226,306			15,272	6.75		197,249			14,375	7.29		102,930			7,708	7.49
Total loans and leases		9,809,873			559,389	5.70		9,169,996			595,445	6.49		5,979,878			447,388	7.48
Total interest-earning assets		11,782,774		$	657,215	5.58		11,327,346		$	708,947	6.26		7,632,411		$	530,387	6.95
Allowance for loan and lease losses		(145,163	)					(98,321	)					(64,993	)
Other noninterest-earning assets		2,051,947						2,089,321						1,337,310
Total assets	$	13,689,558					$	13,318,346					$	8,904,728
Liabilities
Deposits:
Interest-bearing demand	$	2,882,949		$	22,124	0.77	$	2,604,337		$	33,667	1.29	$	2,173,731		$	61,572	2.83
Savings		731,787			1,690	0.23		723,612			4,848	0.67		480,065			4,278	0.89
Time		4,187,549			136,481	3.26		4,402,956			167,431	3.80		2,720,688			124,673	4.58
Short-term borrowings		976,975			4,267	0.44		654,149			10,796	1.65		423,827			17,464	4.12
FHLB borrowings		1,033,536			40,119	3.88		1,337,505			50,944	3.81		653,605			27,600	4.22
Long-term debt		448,245			30,327	6.77		421,795			31,082	7.37		237,910			14,667	6.16
Total interest-bearing liabilities		10,261,041		$	235,008	2.29		10,144,354		$	298,768	2.95		6,689,826		$	250,254	3.74
Demand deposits		1,222,365						1,205,381						935,018
Other liabilities		247,599						247,529						241,697
Total liabilities		11,731,005						11,597,264						7,866,541
Equity		1,958,553						1,721,082						1,038,187
Total liabilities & shareholders’ equity	$	13,689,558					$	13,318,346					$	8,904,728
Net interest income / yield on average earning assets				$	422,207	3.58				$	410,179	3.62				$	280,133	3.67

Additional Information

Average loan balances include non accrual loans.

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

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

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Table 2 - Changes in Net Interest Income - Tax Equivalent Basis

	2009 Versus 2008 Increase (Decrease) Due to Change in									2008 Versus 2007 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	$	65		$	(1,879	)	$	(1,814	)	$	194	$	(2,565	)	$	(2,371	)
Investment securities:
Taxable		(11,887	)		(5,400	)		(17,287	)		14,119		3,575			17,694
Tax-advantaged		3,395			30			3,425			14,969		211			15,180
Total investment securities		(8,492	)		(5,370	)		(13,862	)		29,088		3,786			32,874
Loans (net of unearned income):
Taxable		37,821			(74,774	)		(36,953	)		206,809		(65,419	)		141,390
Tax-advantaged		2,013			(1,116	)		897			6,879		(212	)		6,667
Total loans		39,834			(75,890	)		(36,056	)		213,688		(65,631	)		148,057
Total interest-earning assets	$	31,407		$	(83,139	)	$	(51,732	)	$	242,970	$	(64,410	)	$	178,560
Interest Expense
Deposits:
Interest-bearing demand	$	3,297		$	(14,840	)	$	(11,543	)	$	10,426	$	(38,331	)	$	(27,905	)
Savings		54			(3,212	)		(3,158	)		1,809		(1,239	)		570
Time		(7,892	)		(23,058	)		(30,950	)		66,803		(24,045	)		42,758
Short-term borrowings		3,755			(10,284	)		(6,529	)		6,785		(13,453	)		(6,668	)
FHLB borrowings		(11,782	)		957			(10,825	)		26,291		(2,947	)		23,344
Long-term debt		1,880			(2,635	)		(755	)		13,103		3,312			16,415
Total interest-bearing liabilities		(10,688	)		(53,072	)		(63,760	)		125,217		(76,703	)		48,514
Net Interest Income	$	42,095		$	(30,067	)	$	12,028		$	117,753	$	12,293		$	130,046

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.

The $10.5 million increase in our net interest income in 2009, as compared to 2008, was primarily the result of a $455.4 million increase in average earning assets mainly due to loan growth, offset by a slight decline of four basis points in the net interest margin.

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

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management’s estimate of probable incurred losses in the loan and lease portfolio. Our provision for loan and lease losses is based upon management's quarterly review of the loan 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.

9

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.

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, delinquency and risk trends, credit concentrations, credit administration, migration analysis, and other special allocations for unusual events or changes in products.

This methodology provides an in-depth analysis of the bank’s portfolio and reflects the estimated 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. Rather, a commercial loan is typically 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 90 days or more. Interest income received on impaired commercial loans in 2009 and 2008, was $6.3 million and $0.5 million, respectively. Interest income that would have been recorded on these loans under the original terms was $36.5 million and $5.5 million for 2009 and 2008, respectively. At December 31, 2009, 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 or placed on non-accrual depending upon their loan-to-value ratio.

Throughout 2009, we continued to experience a challenging operating environment. Given the economic pressures that have impacted some of our borrowers, we increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $114.2 million increase in nonaccrual loans and leases since December 31, 2008 and the rising charge-off level, predominantly related to our construction portfolio, noted in Table 3. Also, as presented in Table 3, the provision for loan and lease losses was $188.0 million for the year ended December 31, 2009 and $63.8 million for the year ended December 31, 2008. The allowance for loan and lease losses at December 31, 2009 was 1.75% of period-end loans and leases, or $172.4 million, and 1.18% of period-end loans and leases, or $113.7 million, at December 31, 2008.

10

Table 3 - Provision and Allowance for Loan and Lease Losses

	2009			2008			2007			2006			2005
	(Dollars in thousands)
Allowance for loan and lease losses, January 1	$	113,749		$	88,569		$	62,643		$	53,714		$	54,093
Allowance acquired in business combination		—			—			19,119			5,514			—
Additions to provision for loan and lease losses charged to operations		188,000			63,831			21,844			8,680			12,335
Loans and leases charged-off during the year:
Commercial, financial, and agricultural		33,887			17,433			4,758			2,883			8,827
Real estate - construction		65,906			8,885			1,949			5			45
Real estate secured - residential		7,441			3,883			1,829			1,284			1,407
Real estate secured - commercial		20,593			2,154			3,200			454			1,805
Consumer		3,641			8,075			3,790			3,379			3,455
Leases		11,873			4,800			3,659			3,111			2,816
Total charge-offs		143,341			45,230			19,185			11,116			18,355
Recoveries of loans and leases previously charged-off:
Commercial, financial, and agricultural		4,779			1,625			536			1,188			1,694
Real estate - construction		1,306			5			10			6			—
Real estate secured - residential		286			226			406			454			370
Real estate secured - commercial		5,685			145			426			1,360			1,007
Consumer		1,120			3,626			1,792			1,957			1,649
Leases		784			952			978			886			921
Total recoveries		13,960			6,579			4,148			5,851			5,641
Net charge-offs		129,381			38,651			15,037			5,265			12,714
Allowance for loan and lease losses, December 31	$	172,368		$	113,749		$	88,569		$	62,643		$	53,714
Average loans and leases outstanding	$	9,809,873		$	9,169,996		$	5,979,878		$	5,517,812		$	5,234,463
Period-end loans and leases		9,827,279			9,653,873			8,751,590			5,560,997			5,218,659
Net charge-offs as a percentage of average loans and leases		1.32	%		0.42	%		0.25	%		0.10	%		0.24	%
Allowance as a percentage of period-end loans and leases		1.75	%		1.18	%		1.01	%		1.13	%		1.03	%

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, 2009. 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, 2009. The allowance for loan and lease losses as a percentage of non-accrual loans and leases (coverage ratio) decreased to 79% at December 31, 2009, from 108% at December 31, 2008.

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.

11

Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income, was 29%, 26%, and 30% for 2009, 2008, and 2007, respectively.

Noninterest income increased $21.4 million, or 15.0%, in 2009, over 2008. This net increase was primarily the result of the following:

• Decreased service charges on deposit accounts of $9.0 million;

• Decreased vehicle origination, servicing, and securitization fees of $3.3 million;

• Decreased income from bank-owned life insurance of $7.5 million;

• Increased gains on sales of loans and leases of $4.4 million;

• Increased net realized gains on securities of $11.6 million;

• Decreased other-than-temporary impairment of securities related to credit losses of $16.4 million; and

• Increased other income of $8.4 million.

Service charges on deposit accounts. The 19.5% decrease primarily was the result of changes in customers’ behavior regarding overdrafts.

Vehicle origination, servicing, and securitization fees. The 33.7% decrease was the result of a reduction in securitization fees, as no auto lease securitizations have occurred since February 2007, and a reduction in origination fees due to lower volumes, as new vehicle sales have declined significantly.

Income from bank-owned life insurance. The 57.9% decrease was the result of a decline in the return on the underlying investments due to the economic environment.

Net gain on sale of loans and leases. The 67.8% increase primarily was the result of an increased volume of mortgage loans originated and sold.

Net realized gains on the sale of securities. During 2009, we realized net gains of $11.8 million on the sale of securities with an aggregate book value of $200.8 million. During 2008, we realized net gains of $0.2 million on the sale of securities with an aggregate book value of $60.0 million.

Other-than-temporary impairment of securities related to credit losses. During 2008, we recognized a $17.6 million other-than-temporary impairment related to the two synthetic collateralized debt obligations in our available-for-sale portfolio. During 2009, we recognized an additional $1.1 million other-than-temporary impairment related to the same securities because additional credit events occurred in the underlying reference companies.

Other. The 27.4% net increase primarily is the result of:

• a $6.9 million gain realized on the sale of our Central Atlantic Merchant Services accounts in March 2009;

• a general net decline in other commissions and fees of $2.7 million during 2009;

• a $1.0 million fixed-asset write-off due to our branch consolidation in 2009;

• a reclassification of the fair value of cash flow hedges related to a forecasted sale of vehicle leases, from accumulated other comprehensive loss to earnings, of $6.5 million in 2008;

• a one-time credit of $1.2 million in 2008 relating to Visa’s IPO redemption; and

• sundry other changes within this category.

12

Noninterest Expenses

Noninterest expenses increased $15.3 million, or 4.2%, in 2009, over 2008. This net increase is primarily the result of the following:

• Increased salaries and employee benefits of $2.8 million;

• Decreased advertising and marketing of $3.3 million;

• Increased FDIC insurance of $22.5 million; and

• Decreased other of $5.4 million.

Salaries and employee benefits. The 1.5% net increase is primarily attributable to:

• the acquisition of Stratton on April 30, 2008;

• increased net periodic pension cost of $1.3 million relating to the amortization of net actuarial losses;

• branch-consolidation-related severance charges of $1.0 million in the second quarter of 2009;

• normal increases in salaries and benefits;

• our consolidation efforts, which have resulted in reduced staff and associated cost savings of approximately $7.3 million; and

• severance charges of $1.6 million in 2008.

Advertising and marketing. The 26.7% decrease is the result of discretionary reductions in advertising and marketing initiatives.

FDIC insurance. The increase in FDIC insurance expense is a direct result of increased assessment rates and a $6.2 million special assessment incurred in May 2009, as determined by the FDIC.

Other. The 6.1% net decrease in other expenses is the result of a decrease in 2009 of approximately $7.8 million associated with cost-saving initiatives previously announced, increased credit-related costs of $4.5 million in 2009, and the $2.1 million charge in 2008 to mitigate losses to VFAM’s customers who held positions in a money market mutual fund managed by an independent mutual fund company, and various other changes within this category.

Income Taxes

Our effective tax rates for 2009 and 2008 were (520.6%) and 24.6%, respectively.

The decrease in our rate in 2009 was due to the significant decrease in pretax book income in 2009 relative to 2008. With the exception of pretax book income, items impacting the effective rate in 2009, including tax-advantaged investment and loan income, were comparable to 2008. For additional information about our income taxes, refer to “Note 11. Income Taxes” to the consolidated financial statements appearing in Part II, Item 8.

13

Financial Condition

Summary of 2009 Compared to 2008

Total assets at December 31, 2009, were $13.7 billion, relatively unchanged from December 31, 2008 when total assets were also $13.7 billion. Loans and leases, increased to $9.8 billion at December 31, 2009, from $9.7 billion at December 31, 2008. Total deposits decreased slightly to $9.0 billion at December 31, 2009, from $9.1 billion at December 31, 2008.

Equity capital was $2.0 billion at December 31, 2009, or $19.53 per common share, compared to $1.9 billion, or $19.21 per common share, at December 31, 2008. The calculation of book value per common share excludes from Shareholders’ Equity the carrying value of the preferred stock issued to the U.S. Treasury as part of the Capital Purchase Program. 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, 2009, 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 23. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

Investment Securities

Securities identified as “available for sale” are reported at their fair value, and the difference between that value and their amortized cost is recorded in the equity section, net of taxes, as a component of other comprehensive income. Accordingly, as a result of changes in the interest-rate environment and the economy in general, our total equity was positively impacted by $57.2 million. Unrealized gains, net of deferred taxes, on available-for-sale securities totaled $26.0 million at December 31, 2009, and unrealized losses, net of deferred taxes, on available-for-sale securities totaled $32.7 million at December 31, 2009.

In 2008, we recorded a pre-tax impairment charge of $17.5 million related to two synthetic collateralized debt obligations held in our investment portfolio. Each security has a par value of $10.0 million and one hundred underlying reference companies. Due to the significant developments that affected the market, a number of credit events have reduced the fair value of these securities. In 2009, we recorded an additional pre-tax impairment charge of $1.1 million. At December 31, 2009, both securities had been given below-investment-grade ratings by the rating agencies. These are the only two securities of this type that we currently hold in our $1.9 billion investment portfolio.

Securities identified as “trading account securities” are to be marked to market with the change recorded in the income statement. Presently, we do not engage in trading activity, but we do engage in active portfolio management that requires the majority of our security portfolios to be identified as available for sale. While U.S. GAAP requires segregation into held-to-maturity and available-for-sale categories (see Table 4), it does not change our policy concerning the purchase of only high quality securities. Strategies employed address liquidity, capital adequacy, and net interest margin considerations, which then determine the assignment of purchases into these two categories. Table 5 illustrates the maturities of these security portfolios and the weighted-average yields based upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35% federal income tax rate.

14

Table 4 - Carrying Value of Investment Securities(1)

Year ended December 31,	2009				2008				2007
	Available- for-Sale		Held-to- Maturity		Available- for-Sale		Held-to- Maturity		Available- for-Sale		Held-to- Maturity
	(Dollars in thousands)
U.S. Government agencies	$	371,019	$	—	$	444,022	$	—	$	533,019	$	—
State and municipal		353,419		4,371		308,546		4,595		268,633		4,792
Mortgage-backed						965,853				1,078,401
Agency residential mortgage-backed		680,182
Non-agency residential mortgage-backed		135,465
Commercial mortgage-backed		165,025
Other debt obligations				4,550		6,364		4,550		68,227
Synthetic collateralized debt obligations		1,331
Other structured financial products		15,319
Equity securities of the Federal Home Loan Bank		74,342
Equity securities of the Federal Reserve Bank		45,725
Other equity securities		24,519				145,961				110,880
Total investment securities	$	1,866,346	$	8,921	$	1,870,746	$	9,145	$	2,059,160	$	4,792

(1) Categories for 2009 are presented in greater detail than in prior years in accordance with accounting guidance issued in 2009. Amounts presented in 2008 and 2007 have not been restated.

At December 31, 2009, 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.

For additional information about our investment securities portfolio, refer to “Note 4. Investment Securities” and “Note 23. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

15

Table 5 - Maturities of Investment Securities

At December 31, 2009	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	$	66,839		$	203,650		$	100,530		$	—		$	371,019
Amortized cost		65,804			199,756			100,505			—			366,065
Yield		3.15	%		3.95	%		2.35	%		—			3.37	%
State and municipal securities
Fair value	$	615		$	4,222		$	34,979		$	313,603		$	353,419
Amortized cost		615			4,093			33,854			304,692			343,254
Yield (TE)		6.54	%		6.03	%		6.12	%		6.32	%		6.30	%
Agency residential mortgage-backed securities
Fair value	$	6,635		$	44,652		$	87,655		$	541,240		$	680,182
Amortized cost		6,528			43,617			86,266			525,344			661,755
Yield		4.29	%		4.00	%		3.84	%		4.13	%		4.09	%
Non-agency residential mortgage-backed securities
Fair value	$	—		$	—		$	89		$	135,376		$	135,465
Amortized cost		—			—			97			168,379			168,476
Yield		—			—			3.32	%		5.85	%		5.85	%
Commercial mortgage-backed securities
Fair value	$	—		$	20,403		$	—		$	144,622		$	165,025
Amortized cost		—			19,821			—			143,014			162,835
Yield		—			6.11	%		—			6.05	%		6.06	%
Synthetic collateralized debt obligations
Fair value	$	—		$	—		$	1,331		$	—		$	1,331
Amortized cost		—			—			1,301			—			1,301
Yield		—			—			1.18	%		—			1.18	%
Other structured financial products
Fair value	$	—		$	—		$	—		$	15,319		$	15,319
Amortized cost		—			—			—			26,294			26,294
Yield		—			—			—			1.01	%		1.01	%
Equity securities
Fair value													$	144,586
Amortized cost														146,664
Yield														2.67	%
Held-to-Maturity
State and municipal
Fair value	$	—		$	—		$	—		$	4,371		$	4,371
Amortized cost		—			—			—			4,371			4,371
Yield		—			—			—			2.99	%		2.99	%
Other
Fair value	$	—		$	—		$	—		$	4,550		$	4,550
Amortized cost		—			—			—			4,550			4,550
Yield		—			—			—			6.36	%		6.36	%
Total Securities
Fair value	$	74,089		$	272,927		$	224,584		$	1,159,081		$	1,875,267
Amortized cost		72,947			267,287			222,023			1,167,723			1,885,565
Yield		3.28	%		4.15	%		3.50	%		5.15	%		4.32	%

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 included in this table regarding mortgage-backed securities is based on final maturities.

16

Loans and Leases

Our experience in recent months indicates that many consumers and businesses in our markets are proceeding cautiously in the current economic environment. In some cases, they appear to be delaying or changing plans for taking on additional debt, and as a result, there has been a reduced demand for loans among credit-worthy borrowers. Nevertheless, loans and leases, net of unearned income, increased a modest 1.8%, from $9.7 billion at December 31, 2008, to $9.8 billion at December 31, 2009. Real estate construction loans, which we consider to be higher-risk loans, however, declined $198.9 million (including net of charge-offs of $64.6 million). This was primarily due to our plan to decrease our real estate construction loan portfolio, thereby reducing our exposure in a segment that has been particularly stressed during this recession.

Our participation in the U.S. Treasury’s Capital Purchase Program brings with it a responsibility to make credit available to our local communities, and we have every intention of continuing our record of strong loan growth. We remain committed, however, to maintaining credit quality and doing business in our market area with customers we know.

In September 2008, we announced that, due to adverse market conditions, our previously disclosed plan to sell vehicle leases would not proceed. As a result, the $238.4 million in vehicle leases held for sale at December 31, 2007 and those subsequently originated are now classified as held for investment.

Table 6 presents loans outstanding, by type of loan, in our portfolio for the past five years. Our bank subsidiary has historically 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 $547.4 million at December 31, 2009, and an additional $313.0 million was outstanding on loans with junior liens on residential properties at December 31, 2009. Senior liens on 1-4 family residential properties totaled $1.3 billion at December 31, 2009, and much of the $2.0 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 $184.8 million, while loans secured by multi-family residential properties totaled $202.4 million at December 31, 2009.

Table 6 - Loan and Lease Portfolio

At December 31,	2009				2008				2007				2006				2005
	Amount		Percentage of Loans to Total Loans and Leases		Amount		Percentage of Loans to Total Loans and Leases		Amount		Percentage of Loans to Total Loans and Leases		Amount		Percentage of Loans to Total Loans and Leases		Amount		Percentage of Loans to Total Loans and Leases
	(Dollars in thousands)
Commercial, financial, and agricultural	$	2,050,110	21.0	%	$	2,063,942	21.4	%	$	1,781,981	20.4	%	$	978,522	17.6	%	$	832,695	16.0	%
Real estate:
construction		1,114,709	11.3			1,313,647	13.6			1,292,953	14.8			1,064,452	19.1			934,601	17.9
residential		2,369,380	24.1			2,298,709	23.8			2,151,923	24.6			1,147,741	20.6			1,355,513	26.0
commercial		3,060,331	31.1			2,875,502	29.8			2,661,841	30.3			1,577,534	28.5			1,257,860	24.1
Consumer		482,266	4.9			419,371	4.3			411,159	4.7			313,848	5.6			319,925	6.1
Leases		750,483	7.6			682,702	7.1			451,733	5.2			478,900	8.6			518,065	9.9
Total	$	9,827,279	100.0	%	$	9,653,873	100.0	%	$	8,751,590	100.0	%	$	5,560,997	100.0	%	$	5,218,659	100.0	%

Table 7 represents the maturity of commercial, financial, and agricultural loans, as well as real estate construction loans. Table 8 presents the allocation of the allowance for loan and lease losses by type of loan.

17

Substantially all of our loans and leases are to enterprises and individuals in our market area. As shown in Table 9, there is no concentration of loans to borrowers in any one industry, or related industries, which exceeds 10% of total loans.

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

Table 7 - Loan Maturity and Interest Sensitivity

At December 31, 2009	Under One Year		One to Five Years		Over Five Years		Total
	(Dollars in thousands)
Maturity
Commercial, financial, and agricultural	$	706,931	$	824,019	$	519,160	$	2,050,110
Real estate - construction		575,264		363,888		175,557		1,114,709
	$	1,282,195	$	1,187,907	$	694,717	$	3,164,819
Rate sensitivity of loans with maturities greater than 1 year
Variable rate			$	501,080	$	453,561	$	954,641
Fixed rate				686,827		241,155		927,982
			$	1,187,907	$	694,716	$	1,882,623

Table 8 - Allocation of Allowance for Loan and Lease Losses

At December 31,	2009		2008		2007			2006		2005
	(Dollars in thousands)
Commercial, financial, and agricultural	$	27,350	$	22,599	$	23,970		$	16,637	$	16,205
Real estate - construction		54,305		31,734		20,552			12,419		5,833
Real estate secured - residential		22,815		16,189		12,125			6,891		7,967
Real estate secured - commercial		56,623		33,765		23,320			15,065		11,571
Consumer		3,090		3,253		4,778			4,568		5,475
Leases		7,958		5,868		4,203			6,589		6,645
Overdrafts		37		34		57			21		18
Loans in process		121		285		—			—		—
Unallocated		69		22		(436	)		453		—
Total	$	172,368	$	113,749	$	88,569		$	62,643	$	53,714

18

Table 9 - Loan Concentrations

At December 31, 2009, Susquehanna's portfolio included the following industry concentrations:

	Permanent		Construction		All Other		Total Amount		% Nonaccrual in Each Category	% of Total Loans and Leases Outstanding
	(Dollars in thousands)
Real estate - residential	$	534,201	$	73,751	$	28,041	$	635,993	2.62	6.47
Land development (site work) construction		132,234		391,028		31,801		555,063	6.94	5.65
Motor vehicles		429,997		17		41,837		471,851	1.09	4.80
Residential construction		104,425		301,502		29,143		435,070	11.41	4.43
Retail real estate		325,498		5,152		1,918		332,568	2.19	3.38
Lessors of professional offices		317,611		8,027		1,346		326,984	1.90	3.33
Hotels/motels		293,297		19,428		2,805		315,530	2.92	3.21
Manufacturing		138,146		377		158,543		297,066	0.63	3.02
Agriculture		183,415		1,274		47,128		231,817	2.38	2.36
Medical services		66,431		7,192		147,410		221,033	0.97	2.25
Wholesalers		49,261		769		133,382		183,412	0.94	1.87
Warehouses		162,619		11,487		7,222		181,328	—	1.85
Commercial construction		65,012		107,398		5,720		178,130	4.10	1.81
Retail consumer goods		91,070		85		75,172		166,327	2.33	1.69
Public services		55,955		588		107,603		164,146	0.43	1.67
Contractors		62,176		8,216		78,158		148,550	2.64	1.51
Elderly/child care services		77,103		4,647		59,165		140,915	—	1.43
Recreation		67,316		11,846		14,242		93,404	2.61	0.95
Restaurants/bars		68,987		583		22,309		91,879	5.52	0.93
Transportation		10,680		4		66,342		77,026	2.20	0.78
Real estate services		33,724		18,821		7,614		60,159	0.55	0.61
Insurance services		11,026		111		43,951		55,088	—	0.56

Risk Assets

Non-performing assets are nonaccrual loans and leases and other real estate owned. Nonaccrual loans are those loans for which the accrual of interest has ceased and where all previously accrued-but-not-collected interest is reversed. Other real estate owned is property acquired through foreclosure or other means and is recorded at the lower of its carrying value or the fair market value of the of the related real estate collateral at the transfer date less estimated selling costs.

At December 31, 2009, non-performing assets totaled $243.8 million and included $24.3 million in other real estate acquired through foreclosure. At December 31, 2008, non-performing assets totaled $115.6 million, and included $10.3 million in other real estate acquired through foreclosure. In addition, troubled debt restructurings totaled $58.2 million at December 31, 2009 and $2.6 million at December 31, 2008. Table 10 is a presentation of the five-year history of risk assets.

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Table 10 - Risk Assets

At December 31,	2009			2008			2007			2006			2005
	(Dollars in thousands)
Non-performing assets:
Nonaccrual loans and leases:
Commercial, financial, and agricultural	$	20,282		$	13,882		$	2,799		$	1,264		$	2,921
Real estate - construction		97,717			49,774			20,998			9,631			—
Real estate secured - residential		37,254			18,271			11,755			5,900			5,629
Real estate secured - commercial		59,181			22,477			18,261			11,307			5,872
Consumer		27			844			397			2			76
Leases		5,093			65			2,531			2,221			2,894
Total nonaccrual loans and leases		219,554			105,313			56,741			30,325			17,392
Other real estate owned		24,292			10,313			11,927			1,544			2,620
Total non-performing assets	$	243,846		$	115,626		$	68,668		$	31,869		$	20,012
Total non-performing assets as a percentage of period-end loans and leases and other real estate owned		2.48	%		1.20	%		0.78	%		0.57	%		0.38	%
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases		79	%		108	%		156	%		207	%		309	%
Loans contractually past due 90 days and still accruing	$	14,820		$	22,316		$	12,199		$	9,364		$	8,998
Restructured loans		58,244			2,566			2,582			5,376			—

Nonaccrual loans and leases increased from $105.3 million at December 31, 2008, to $219.6 million at December 31, 2009. The net increase was primarily the result of the effects of the continuing economic deterioration on our borrowers, especially those in our construction portfolio. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus other real estate owned increased from 1.20% at December 31, 2008 to 2.48% at December 31, 2009. Furthermore, at December 31, 2009, 44.5% of nonaccrual loans and leases were in our real estate – construction portfolio, as real estate demand and values in some of our market areas are under considerable downward pressure. We consider these real-estate construction loans to be higher-risk loans. Additional information about our real estate – construction loan portfolio is presented in Tables 11, 12, and 13. Categories within these tables are defined as follows:

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

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

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

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Table 11 - Construction, Land Development, and Other Land Loans - Portfolio Status

Category	Balance at December 31, 2009		% of Total Construction		Past Due 30-89 Days		Past Due 90 Days and Still Accruing		Nonaccrual		Other Internally Monitored(1)		Net Charge-offs(2)		Reserve(3)
	(dollars in thousands)
1-4 Family:
Construction	$	259,781	23.3	%	0.1	%	0.0	%	18.2	%	18.8	%	6.2	%	6.3	%
Land development		220,180	19.8		0.3		0.1		0.3		19.3		16.5		3.8
Raw land		12,673	1.1		0.0		0.0		0.1		17.9		0.0		3.4
		492,634	44.2		0.2		0.2		9.7		19.0		11.0		5.1
All Other:
Construction:
Investor		252,305	22.6		0.9		0.0		7.9		9.5		0.5		5.8
Owner-occupied		13,854	1.2		0.0		0.0		8.6		0.0		1.6		3.4
Land development:
Investor		295,407	26.6		0.1		0.0		8.3		23.3		0.3		4.1
Owner-occupied		10,456	0.9		0.0		0.0		0.0		13.2		0.0		3.6
Raw land:
Investor		49,178	4.4		12.8		0.0		7.7		20.0		3.2		3.2
Owner-occupied		875	0.1		0.0		0.0		27.9		0.0		0.0		3.9
		622,075	55.8		1.1		0.0		8.0		16.8		0.6		4.7
Total	$	1,114,709	100.0		0.7		0.0		8.8		17.7		5.5		4.9

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

(2) represents the amount of net charge-offs in each category for the last twelve months divided by the category loan balance at December 31, 2009 plus the net charge-offs.

(3) represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at December 31, 2009.

Table 12 - Construction, Land Development, and Other Land Loans - Collateral Locations

Category	Balance at December 31, 2009		Geographical Location by %
			Maryland		New Jersey		Pennsylvania		Other
	(dollars in thousands)
1-4 Family:
Construction	$	259,781	49.0	%	10.5	%	37.4	%	3.1	%
Land development		220,180	51.8		6.3		34.6		7.3
Raw land		12,673	60.7		0.0		39.3		0.0
		492,634	50.6		8.3		36.2		4.9
All Other:
Construction:
Investor		252,305	12.0		22.1		61.6		4.3
Owner-occupied		13,854	73.0		14.9		8.1		4.0
Land development:
Investor		295,407	29.2		2.0		52.8		16.1
Owner-occupied		10,456	47.1		0.0		50.8		2.2
Raw land:
Investor		49,178	25.3		9.9		64.4		0.4
Owner-occupied		875	53.0		27.9		19.1		0.0
		622,075	23.2		11.1		56.2		9.5
Total	$	1,114,709	35.3		9.9		47.4		7.5

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Table 13 - Construction, Land Development, and Other Land Loans - Portfolio Characteristics

Category	Balance at December 31, 2009		Global Debt Coverage Ratio Less than 1.1 Times(1)
	(dollars in thousands)
1-4 Family:
Construction	$	259,781	47.4	%
Land development		220,180	22.2
Raw land		12,673	1.9
		492,634	34.9
All Other:
Construction:
Investor		252,305	15.8
Owner-occupied		13,854	20.1
Land development:
Investor		295,407	25.7
Owner-occupied		10,456	18.4
Raw land:
Investor		49,178	50.4
Owner-occupied		875	51.9
		622,075	23.4
	$	1,114,709	28.5

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

Of the $219.6 million of non-accrual loans and leases at December 31, 2009, $193.1 million, or 87.9%, represented non-consumer-loan relationships greater than $0.5 million that had been evaluated and considered impaired. Of the $249.3 million of impaired loans, $118.9 million, or 47.7%, had no related reserve. The determination that no related reserve for these collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

Real estate acquired through foreclosure is recorded at the lower of its carrying value or the fair market value of the property at the transfer date, as determined by a current appraisal, less estimated costs to sell. Prior to foreclosure, the recorded amount of the loan is written-down, if necessary, to the fair value of the related real estate collateral by charging the allowance for loan and lease losses. Subsequent to foreclosure, gains or losses on the sale of real estate acquired through foreclosure are recorded in operating income, and any losses determined as a result of periodic valuations are charged to other operating expense. Real estate acquired through foreclosure increased $14.0 million from December 31, 2008 to December 31, 2009.

Loans with principal and/or interest delinquent 90 days or more and still accruing interest totaled $14.8 million at December 31, 2009, a decrease of $7.5 million, from $22.3 million at December 31, 2008. However continued deterioration in the economy may adversely affect certain borrowers and may cause additional loans to become past due beyond 90 days or be placed on non-accrual status because of the uncertainty of receiving full payment of either principal or interest on these loans.

Potential problem loans consist of loans that are performing under contract but for which potential credit problems have caused us to place them on our internally monitored loan list. These loans, which are not included in Table 10, totaled $306.2 million at December 31, 2009 and $185.0 million at December 31, 2008. The increase

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of $121.2 million can be attributed to the deterioration of economic conditions throughout 2009 and migrations to our internally monitored loan list that occur in the normal course of business. Further deterioration in the state of the economy and its concomitant impact on these borrowers, as well as future events, such as regulatory examination assessments, may result in these loans and others not currently so identified being classified as non-performing assets in the future.

In light of the on-going current economic situation, we continue to undertake the following additional measures to recognize and resolve troubled credits:

• we review all credit relationships in the categories of Commercial Real Estate, Commercial Construction – Real Estate, and Residential Real Estate with aggregate exposure of $5.0 million and loans of $2.5 million or greater during the third month of each quarter to determine the status of their global cash flows. This review includes a stress test for an increase of 1.0% in interest rates;

• we hold credit quality meetings during the second month of each quarter to review all criticized and classified loans. This includes reviewing global cash flows and stress testing for an increase of 1.0% in interest rates;

• we complete a fifteen-month rolling projection of potential non-accrual loans, charge-offs, foreclosed assets, loans ninety days past due and still accruing, total delinquencies, troubled debt restructurings, specific reserves, and recoveries over $0.5 million during the third month of every quarter. These projections are reviewed and discussed by executive management;

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

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

• We have established risk-based pricing to reflect the cost of classified and criticized loans.

Furthermore, we have continued our loan portfolio review using various scenarios for potential deterioration and loss levels. This review takes into account both the current economic environment and the most recent loss projections from our credit risk department. Our most stressed scenario projects that annual losses for 2010 and 2011 will be higher than our annual 2009 net-charge-off rate. Based on our current expectations, we consider this level of losses for 2010 and 2011 to be unlikely. Even under this scenario, however, our regulatory capital levels remain more than two hundred basis points above the current well-capitalized thresholds.

We believe that 2010 will be a challenging year, with the effects of the recession moving into the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame and to mitigate the effect on our earnings.

Goodwill and Other Identifiable Intangible Assets

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

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

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Based upon our analyses at December 31, 2009, the fair value of the bank and the wealth management reporting units exceeded their carrying values. Goodwill assigned to these units was $915.4 million and $82.7 million, respectively. Fair value of the bank and the wealth management reporting units exceeded carrying value by 3.1% and 41.8%, respectively. We will continue to monitor and evaluate the carrying value of goodwill for possible future impairment as conditions warrant.

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

Deposits

Our deposit base is consumer-oriented, consisting of time deposits, primarily certificates of deposit with various terms, interest-bearing demand accounts, savings accounts, and demand deposits. Average deposit balances by type and the associated average rate paid are summarized in Table 14.

Table 14 - Average Deposit Balances

Year ended December 31,	2009				2008				2007
	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
	(Dollars in thousands)
Demand deposits	$	1,222,365	0.00	%	$	1,205,381	0.00	%	$	935,018	0.00	%
Interest-bearing demand deposits		2,882,949	0.77			2,604,337	1.29			2,173,731	2.83
Savings deposits		731,787	0.23			723,612	0.67			480,065	0.89
Time deposits		4,187,549	3.26			4,402,956	3.80			2,720,688	4.58
Total	$	9,024,650			$	8,936,286			$	6,309,502

Total deposits decreased $92.1 million, or 1.0%, from December 31, 2008, to December 31, 2009. This decrease is in keeping with our strategy to reduce our portfolio of high-cost certificates of deposit while building core deposits. Time deposits decreased by 20.1%; however, noninterest-bearing demand deposits increased 5.0%, interest-bearing demand deposits increased 29.0%, and savings deposits increased 7.0%. As we continue to fine tune our mix of deposits, the objective is to grow our deposit portfolio with a focus on core deposits.

We do not rely upon time deposits of $0.1 million or more as a principal source of funds, as they represent only 13.0% of total deposits. Table 15 presents a breakdown by maturity of time deposits of $0.1 million or more as of December 31, 2009.

Table 15 - Deposit Maturity

The maturities of time deposits of $0.1 million or more at December 31, 2009, were as follows:

(Dollars in thousands)
Three months or less	$	235,042
Over three months through six months		178,479
Over six months through twelve months		408,019
Over twelve months		344,311
Total	$	1,165,851

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Borrowings

Short-term Borrowings

Short-term borrowings, which include securities sold under repurchase agreements, federal funds purchased, borrowings through the Federal Reserve’s Term Auction Facility, and Treasury tax and loan notes, increased by $130.5 million, or 14.3%, from December 31, 2008, to December 31, 2009. This net increase was used to fund loan growth and replace the decrease in deposits previously discussed.

Federal Home Loan Bank (“FHLB”) Borrowings and Long-term Debt

FHLB borrowings decreased $46.0 million from December 31, 2008 to December 31, 2009. This decrease is the result of increasing our short-term borrowings at lower interest rates. There has been no substantial change to our long-term debt or junior subordinated debentures.

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

Contractual Obligations and Commercial Commitments

Table 16 presents certain of our contractual obligations and commercial commitments and their expected year of payment or expiration.

Table 16 - Contractual Obligations and Commercial Commitments at December 31, 2009

Contractual Obligations	Payments Due by Period
	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Certificates of deposit	$	3,706,656	$	2,420,474	$	776,983	$	496,382	$	12,817
FHLB borrowings		1,023,817		220,245		336,340		232,178		235,054
Long-term debt		448,374		—		75,000		75,000		298,374
Operating leases		116,939		12,876		22,878		19,783		61,402
Residual value guaranty fees		12,240		4,620		7,620		—		—
Other Commercial Commitments	Commitment Expiration by Period
	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years
	(Dollars in thousands)
Stand-by letters of credit	$	296,790	$	173,778	$	123,012	$	—	$	—
Commercial commitments		830,774		624,821		205,953		—		—
Real estate commitments		246,572		21,437		225,135		—		—

Capital Adequacy

Risk-based capital ratios, based upon guidelines adopted by bank regulators in 1989, focus upon credit risk. Assets and certain off-balance-sheet items are segmented into one of four broad risk categories and weighted according to the relative percentage of credit risk assigned by the regulatory authorities. Off-balance-sheet instruments are converted into a balance sheet credit equivalent before being assigned to one of the four risk-weighted categories. To supplement the risk-based capital ratios, the regulators issued a minimum leverage ratio guideline (Tier 1 capital as a percentage of average assets less excludable intangibles).

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

25

The maintenance of a strong capital base at the parent company level as well as at the bank level is an important aspect of our philosophy. We and the bank have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered “well capitalized” under regulatory guidelines.

For additional information related to our risk-based capital ratios, see “Note 15. Capital Adequacy” to the consolidated financial statements appearing in Part II, Item 8.

Market Risks

The types of market risk exposures generally faced by banking entities include:

• equity market price risk;

• liquidity risk;

• interest rate risk;

• foreign currency risk; and

• commodity price risk.

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

Equity Market Price Risk

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

Liquidity Risk

The maintenance of adequate liquidity — the ability to meet the cash requirements of our customers and other financial commitments — is a fundamental aspect of our asset/liability management strategy. Our policy of diversifying our funding sources — purchased funds, repurchase agreements, and deposit accounts — allows us to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At December 31, 2009, our bank subsidiary had approximately $898.9 million available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and $559.6 million more would have been available provided that additional collateral had been pledged. In addition, at December 31, 2009, we had unused federal funds lines of $857.0 million and no brokered certificates of deposit.

Over the past few years, as an additional source of liquidity, we periodically entered into securitization transactions in which we sold the beneficial interests in loans and leases to qualified special purpose entities (QSPEs). Since our last securitization, which occurred in February 2007, adverse market conditions have made such transactions extremely difficult, as evidenced by our inability to complete the securitization forecasted for 2008. As an alternative source of funding, we have pledged the leases previously held for sale, certain auto loans, certain commercial finance leases, and certain investment securities to obtain collateralized borrowing availability at the Federal Reserve’s Discount Window and Term Auction Facility. At December 31, 2009, we had unused collateralized availability of $331.8 million.

Liquidity, however, is not entirely dependent on increasing our liability balances. Liquidity is also evaluated by taking into consideration maturing or readily marketable assets. Unrestricted short-term investments totaled $88.0 million for the year ended December 31, 2009, and represented additional sources of liquidity.

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

Interest Rate Risk

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

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

Our interest rate risk using the static gap analysis is presented in Table 17. This method reports the difference between interest-rate sensitive assets and liabilities at a specific point in time. Management uses the static gap methodology to identify our directional interest-rate risk. Table 17 also illustrates our estimated interest-rate sensitivity (periodic and cumulative) gap positions as calculated as of December 31, 2009 and 2008. These estimates include anticipated prepayments on commercial and residential loans, and mortgage-backed securities, in addition to certain repricing assumptions relative to our core deposits. Traditionally, an institution with more assets repricing than liabilities over a given time frame is considered asset sensitive, and one with more liabilities repricing than assets is considered liability sensitive. An asset sensitive institution will generally benefit from rising rates, and a liability sensitive institution will generally benefit from declining rates. Static gap analysis is widely accepted because of its simplicity in identifying interest rate risk exposure; but it ignores market spread adjustments, the changing mix of the balance sheet, planned balance sheet management strategies, and the change in prepayment assumptions.

Table 17 - Balance Sheet Gap Analysis

At December 31, 2009	1-3 months			3-12 months			1-3 years			Over 3 years			Total
	(Dollars in thousands)
Assets
Short-term investments	$	88,095		$	—		$	—		$	26		$	88,121
Investments		608,387			435,581			364,794			466,505			1,875,267
Loans and leases, net of unearned income		4,026,948			1,595,099			2,348,673			1,856,559			9,827,279
Total	$	4,723,430		$	2,030,680		$	2,713,467		$	2,323,090		$	11,790,667
Liabilities
Interest-bearing demand	$	1,095,982		$	424,999		$	1,219,805		$	522,026		$	3,262,812
Savings		46,481			139,441			409,028			148,737			743,687
Time		959,875			1,149,550			373,442			53,258			2,536,125
Time in denominations of $100 or more		445,994			585,161			126,167			13,209			1,170,531
Total borrowings		1,325,426			72,014			498,349			617,105			2,512,894
Total	$	3,873,758		$	2,371,165		$	2,626,791		$	1,354,335		$	10,226,049
Impact of other assets, other liabilities, capital, and noninterest-bearing deposits:	$	(27,347	)	$	238,228		$	(694,532	)	$	(1,080,967	)
Interest Sensitivity Gap:
Periodic	$	822,325		$	(102,257	)	$	(607,856	)	$	(112,212	)
Cumulative					720,068			112,212			—
Cumulative gap as a percentage of total assets		6	%		5	%		1	%		0	%

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At December 31, 2008	1-3 months			3-12 months			1-3 years			Over 3 years			Total
	(Dollars in thousands)
Assets
Short-term investments	$	119,357		$	—		$	—		$	3		$	119,360
Investments		462,765			579,848			534,363			302,914			1,879,890
Loans and leases, net of unearned income		3,725,781			1,589,377			2,435,705			1,903,010			9,653,873
Total	$	4,307,903		$	2,169,225		$	2,970,068		$	2,205,927		$	11,653,123
Liabilities
Interest-bearing demand	$	1,071,670		$	257,505		$	841,626		$	357,674		$	2,528,475
Savings		43,454			130,364			382,402			139,055			695,275
Time		901,119			1,436,219			648,362			59,952			3,045,652
Time in denominations of $100 or more		663,036			724,078			191,048			17,512			1,595,674
Total borrowings		1,084,887			26,995			301,856			1,014,347			2,428,085
Total	$	3,764,166		$	2,575,161		$	2,365,294		$	1,588,540		$	10,293,161
Impact of other assets, other liabilities, capital, and noninterest-bearing deposits:	$	(70,770	)	$	(226,129	)	$	(663,312	)	$	(399,751	)
Interest Sensitivity Gap:
Periodic	$	472,967		$	(632,065	)	$	(58,538	)	$	217,636
Cumulative					(159,098	)		(217,636	)		—
Cumulative gap as a percentage of total assets		3	%		-1	%		-2	%		0	%

In addition to static gap reports comparing the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates, we also utilize simulation analysis that measures our exposure to interest rate risk. The financial simulation model calculates the income effect and the economic value of assets, liabilities and equity at current and forecasted interest rates, and at hypothetical higher and lower interest rates at one percent intervals. The income effect and economic value of defined categories of financial instruments is calculated by the model using estimated cash flows based on embedded options, prepayments, early withdrawals, and weighted average contractual rates and terms. For economic value calculations, the model also considers discount rates for similar financial instruments. The economic values of longer-term fixed-rate financial instruments are generally more sensitive to changes in interest rates. Adjustable-rate and variable-rate financial instruments largely reflect only a change in economic value representing the difference between the contractual and discounted rates until the next contractual interest rate repricing date, unless subject to rate caps and floors.

A portion of our loan portfolio consists of commercial and residential mortgage loans containing embedded options, which permit the borrower to repay the principal balance of the loan prior to maturity (“prepayments”) without penalty. A loan’s susceptibility for prepayment is dependent upon a number of factors, including the current interest rate versus the contractual interest rate of the loan, the financial ability of the borrower to refinance, the economic benefit and the availability of refinancing at attractive terms in addition to general changes in customers’ needs. Refinancing may also depend upon economic and other factors in specific geographic areas that affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease depending on the current relative levels and expectations of future short-term and long-term interest rates.

Changes in market rates and general economic conditions will have an impact on an organization’s mortgage-backed security portfolio. This will have an associated change on our sensitivity position in changing economic times. Savings and checking deposits generally may be withdrawn upon the customer's request without prior notice. A continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, resulting in a dependable source of funds. Time deposits generally have early withdrawal penalties, while term FHLB borrowings and subordinated notes have prepayment penalties, which discourage customer withdrawal of time deposits and prepayment of FHLB borrowings and subordinated notes prior to maturity.

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Our floating-rate loan portfolio is primarily indexed to national interest rate indices. The portfolio is funded by interest-bearing liabilities which are determined by other indices, primarily deposits and FHLB borrowings. A changing interest rate environment may result in different levels of changes to the different indices resulting in disproportionate changes in the value of, and the net earnings generated from, such financial instruments. Basis risk is the result of this inconsistent change in the indices, with historical relationships not always being a good indicator.

Tables 18 and 19 reflect the estimated income effect and economic value of assets, liabilities, and equity calculated using certain assumptions we determined as of December 31, 2009, and 2008, at then current interest rates and at hypothetical higher (given the state of current interest rates, hypothetical lower interest rates are meaningless) in 1% and 2% increments. As noted in Table 18, the economic value of equity at risk as of December 31, 2009, is -11%, at an interest rate change of positive 2%, while Table 19 discloses that net interest income at risk as of December 31, 2009, is -1%, at an interest rate change of positive 2%.

Table 18 - Balance Sheet Shock Analysis

At December 31, 2009	Base Present Value			1%			2%
Assets
Cash and due from banks	$	203,240		$	203,240		$	203,240
Short-term investments		88,121			88,121			88,121
Investment securities:
Held-to-maturity		4,371			4,371			4,371
Available-for-sale		1,881,526			1,851,133			1,769,028
Loans and leases, net of unearned income		9,808,728			9,552,825			9,413,657
Other assets		1,867,724			1,867,724			1,867,724
Total assets	$	13,853,710		$	13,567,414		$	13,346,141
Liabilities
Deposits:
Non-interest bearing	$	1,204,984		$	1,182,276		$	1,160,196
Interest-bearing		7,633,206			7,582,835			7,533,285
Total borrowings		2,505,306			2,441,528			2,383,192
Other liabilities		220,926			220,926			220,926
Total liabilities		11,564,422			11,427,565			11,297,599
Total economic equity		2,289,288			2,139,849			2,048,542
Total liabilities and equity	$	13,853,710		$	13,567,414		$	13,346,141
Economic equity ratio		17	%		16	%		15	%
Value at risk	$	—		$	(149,439	)	$	(240,746	)
% Value at risk		0	%		-7	%		-11	%

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At December 31, 2008	-1%			Base Present Value			1%			2%
Assets
Cash and due from banks	$	237,701		$	237,701		$	237,701		$	237,701
Short-term investments		119,360			119,360			119,360			119,360
Investment securities:
Held-to-maturity		4,595			4,595			4,595			4,595
Available-for-sale		2,043,042			1,903,994			1,955,460			1,906,938
Loans and leases, net of unearned income		9,939,763			9,798,658			9,662,752			9,534,731
Other assets		1,905,912			1,905,912			1,905,912			1,905,912
Total assets	$	14,250,373		$	13,970,220		$	13,885,780		$	13,709,237
Liabilities
Deposits:
Non-interest bearing	$	1,175,472		$	1,156,090		$	1,134,222		$	1,112,961
Interest-bearing		7,928,187			7,886,192			7,833,551			7,781,807
Total borrowings		2,369,715			2,313,670			2,261,996			2,226,531
Other liabilities		242,492			242,492			242,492			242,492
Total liabilities		11,715,866			11,598,444			11,472,261			11,363,791
Total economic equity		2,534,507			2,371,776			2,413,519			2,345,446
Total liabilities and equity	$	14,250,373		$	13,970,220		$	13,885,780		$	13,709,237
Economic equity ratio		18	%		17	%		17	%		17	%
Value at risk	$	162,731		$	—		$	41,743		$	(26,330	)
% Value at risk		7	%		0	%		2	%		-1	%

Table 19 - Net Interest Income Shock Analysis

At December 31, 2009	Base Scenario			1%			2%
Interest income:
Short-term investments	$	418		$	2,877		$	5,165
Investments		80,866			86,620			89,515
Loans and leases		555,494			581,980			620,313
Total interest income		636,778			671,477			714,993
Interest expense:
Interest-bearing demand and savings		21,443			37,380			58,057
Time		73,321			85,484			97,682
Total borrowings		80,916			90,773			100,636
Total interest expense		175,680			213,637			256,375
Net interest income	$	461,098		$	457,840		$	458,618
Net interest income at risk	$	—		$	(3,258	)	$	(2,480	)
% Net interest income at risk		0	%		-1	%		-1	%

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At December 31, 2008	-1%			Base Scenario			1%			2%
Interest income:
Short-term investments	$	1,272		$	1,399		$	2,692		$	4,097
Investments		91,409			98,238			104,826			109,122
Loans and leases		500,779			539,814			580,126			620,796
Total interest income		593,460			639,451			687,644			734,015
Interest expense:
Interest-bearing demand and savings		16,137			26,194			38,844			55,670
Time		126,359			134,170			149,078			164,031
Total borrowings		75,664			77,694			88,365			99,029
Total interest expense		218,160			238,058			276,287			318,730
Net interest income	$	375,300		$	401,393		$	411,357		$	415,285
Net interest income at risk	$	(26,093	)	$	—		$	9,964		$	13,892
% Net interest income at risk		-7	%		0	%		2	%		3	%

Derivative Financial Instruments and Hedging Activities

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

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

In September 2008, we announced that, due to adverse market conditions, a forecasted sale of vehicle leases would not occur, and the associated interest rate swap agreements were terminated. In accordance with generally accepted accounting principles, we reclassified $2.1 million (net of taxes of $1.1 million) from accumulated comprehensive loss to earnings and recognized an additional reduction in pre-tax income of $3.3 million.

For additional information about our derivative financial instruments, refer to “Note 22. Derivative Financial Instruments” and “Note 23. Fair Value Disclosures” to the consolidated financial statements appearing in Part II, Item 8.

Vehicle Leasing Residual Value Risk

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

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

Securitizations and Off-Balance-Sheet Financings

Table 20 - Components of Loans and Leases Serviced

	As of December 31, 2009		As of December 31, 2008
	(Dollars in thousands)
Lease Securitization Transactions*	$	0	$	123,608
Home Equity Loan Securitization Transactions*		248,554		286,577
Agency Arrangements and Lease Sales*		13,551		31,645
Leases and Loans Held in Portfolio		9,827,279		9,653,873
Total Leases and Loans Serviced	$	10,089,384	$	10,095,703

* Off balance sheet

Securitization Transactions

We have used the securitization of financial assets as a source of funding and a means to manage capital. Hann and our bank subsidiary have sold beneficial interests in automobile leases and related vehicles and home equity loans to qualified special purpose entities. These transactions were accounted for as sales under U.S. GAAP, and a net gain or loss was recognized at the time of the initial sale.

The QSPEs then issued beneficial interests in the form of senior and subordinated asset-backed securities backed or collateralized by the assets sold to the QSPEs. The senior classes of the asset-basked securities received investment grade credit ratings at the time of issuance. These ratings were achieved through the creation of lower-rated subordinated classes of asset-backed securities, as well as subordinated interests retained by Susquehanna.

Excess cash flows represent the cash flows from the underlying assets less distributions of cash flows to beneficial interest holders in accordance with the distribution priority requirements of the transaction. We, as servicer, distribute to third-party beneficial interest holders contracted returns. We retain the right to remaining cash flows after distributions to these third-party beneficial interest holders. The cash flows were discounted to present value and recorded as interest-only strips. The resulting interest-only strips are subordinate to the rights of each of the third-party beneficial interest holders. We estimated the fair value of these interest-only strips based on the present value of future expected cash flows, using management’s estimate of the key assumptions regarding credit losses, prepayment speeds, and discount rates commensurate with the risks involved at the time the assets were sold to the applicable QSPE and adjusted quarterly based on changes in these key economic risk factors. Based upon the information found in the table in “Note 21. Securitization Activity” to the consolidated financial statements appearing in Part II, Item 8 we believe that any adverse change of 20% in the key economic assumptions would not have a significant effect on the fair value of our interest-only strips.

In order to facilitate lease securitizations and other off-balance-sheet financings, Hann formed Hann Auto Trust, a Delaware statutory trust (the “Origination Trust”), on September 30, 1997, pursuant to a trust agreement between Hann, as settlor and initial beneficiary, and a third-party trustee. The primary business purpose of the Origination Trust is to enter into lease contracts with respect to automobiles, sport utility vehicles, light-duty trucks, and other vehicles and to serve as record holder of title to such leased vehicles. Unlike ordinary accounts receivable or lease paper, a motor vehicle can only be transferred if the transferor signs the back of the certificate

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of title and certifies the odometer reading, and the transferee applies for a new certificate of title in its own name. With the use of an origination or “titling” trust like the Origination Trust, a party may hold a beneficial interest in a lease and the related vehicle (including the related cash flows), but because legal ownership of the vehicle remains with the trust, the vehicle need not be retitled. The Origination Trust was created to avoid the administrative difficulty and expense associated with retitling leased vehicles in a securitization, sale-leaseback, or other financing of automobile and truck leases and the related vehicles. Upon formation, the Origination Trust issued to Hann the undivided trust interest representing the entire beneficial interest in the unallocated assets of the Origination Trust.

Hann purchases vehicles and related leases directly from motor vehicle dealers. The motor vehicle dealers title these vehicles in the name of the Origination Trust at the time of the purchase. Hann initially owns the beneficial interest in all leases and related vehicles. Under the trust agreement for the Origination Trust, Hann may instruct the trustees of the trust: (i) to establish a special unit of beneficial interest in the Origination Trust (commonly referred to as a “SUBI”) and (ii) to allocate a separate portfolio of leases and the related vehicles leased under the leases to that SUBI. The SUBI will evidence an indirect beneficial interest, rather than a direct legal interest, in the assets allocated thereto. Under the terms of the trust agreement and the Delaware Statutory Trust Act, the holder of a SUBI will have no interest in the assets allocated to the undivided trust interest or to any other SUBI, and the holder of the undivided trust interest will have no interest in the assets allocated to any SUBI. Hann creates and transfers beneficial interests in the Origination Trust that represent the rights in pools of leases and related vehicles included in securitization, sale-leaseback, agency, and other transactions.

The beneficial interests in the Origination Trust represented by a SUBI have only been used for securitizations, sale-leasebacks, agency transactions, and as a method of permitting affiliates of Hann to hold the beneficial interest in a pool of leases and related vehicles. There are no other transactions using a SUBI in the Origination Trust.

The leases, for accounting purposes, are treated as direct financing receivables as a result of a residual purchase agreement with Auto Lenders. Although we have not retained residual value risk in the automobile leases and related vehicles, in the event of a breach by Auto Lenders, a QSPE may suffer residual losses, which we expect would decrease the value of the interest-only strips recognized by us.

Summary of Securitization Transactions in Prior Reporting Periods

Home Equity Loans

In September 2006, one of our banking subsidiaries, Susquehanna Bank PA, entered into a term securitization transaction of fixed-rate home mortgage loans and adjustable-rate HELOCs (the “September 2006 transaction”). Some of the loans sold were originated by two of our other banking subsidiaries, Susquehanna Bank and Susquehanna Bank DV, and sold to Susquehanna Bank PA immediately prior to the closing of the securitization. In connection with the September 2006 transaction, Susquehanna Bank PA sold a portfolio of fixed-rate home equity loans with an aggregate principal balance of approximately $238.0 million and a portfolio of adjustable-rate HELOCs with an aggregate principal balance of approximately $111.4 million to a wholly owned special purpose subsidiary (the “Transferor”). In the transaction documents for the September 2006 transaction, Susquehanna Bank PA provides, among other things, representations and warranties with respect to the home equity loans transferred. In the event that any such representations and warranties were materially untrue with respect to any assets when transferred, the affected loans must be repurchased by Susquehanna Bank PA. We provide a guaranty of such repurchase obligation. The Transferor sold the portfolio acquired from Susquehanna Bank PA to a newly formed statutory trust (the “Issuer”). The equity interests of the Issuer (other than a non-economic interest representing tax ownership of the securitized fixed-rate home equity loan portfolio) are owned by the Transferor. The Transferor financed the purchase of the portfolio of home equity loans from Susquehanna Bank PA primarily through the issuance by the Issuer of $345.2 million of floating-rate asset-backed notes to third-party investors. In connection with the securitization, Susquehanna retained servicing responsibilities for the loans.

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A portion of the HELOCs, which generally accrue interest at a variable rate, include a feature that permits the obligor to “convert” all or a portion of the loan from a variable interest rate to a fixed interest rate. The maximum dollar amount of the portfolio balances sold in the September 2006 transaction that is subject to this conversion feature was $72.0 million at the transaction cut-off date. During the draw period, the obligor may request that Susquehanna establish fixed-rate repayment terms for an amount not to exceed the then outstanding balance under the credit line. Requests must be for amounts which do not exceed the credit limit, and no event of default shall have occurred and be continuing at the time of the request. We complete all required underwriting at the time of origination, and no additional underwriting occurs at the time the obligor exercises the fixed-rate conversion feature. The credit limit will include credit advances under the credit line and outstanding balances under the previously requested fixed-rate repayments. The minimum fixed-rate repayment request is three thousand dollars. The obligor may elect to submit fixed-rate repayment requests at any time during the draw period. The obligor is limited to three fixed-rate repayment schedules at any time. The reason for permitting the conversion feature is to be competitive in our marketplace, as many other financial institutions offer this feature.

In the September 2006 transaction, one class of the Issuer’s floating-rate asset-backed notes was backed by variable-rate HELOCs. However, approximately 70.5% of the HELOCs as of the cut-off date for the transaction included a feature that permits the obligor to “convert” all or a portion of the outstanding balance from a variable interest rate to a fixed interest rate. If a significant portion of obligors elected to fix the rate of interest on their mortgage loans, then the Issuer might have insufficient funds to make payments on the floating-rate notes backed by the HELOCs as rates increase beyond the rate of the fixed-rate loans. To mitigate the effect of this remote risk, the external parties involved in structuring the September 2006 Transaction and Susquehanna worked together to formulate a solution acceptable to the parties. The parties determined that the Issuer’s ability to make interest payments on the class of floating-rate notes backed by the HELOCs was unlikely to be materially and adversely affected if the Issuer’s portfolio of HELOCs included up to 10% fixed-rate loans. After that threshold was exceeded, however, Susquehanna Bank PA would be required to repurchase loans with converted balances in an amount not to exceed 10% of the original principal balance of the HELOCs, which is approximately $11.1 million. Under the transaction agreements, Susquehanna Bank is neither required nor permitted to repurchase more than 10% of the original principal balance of the converted loans. However, because up to 50.5% of the HELOCs could be held by the Issuer as fixed-rate loans in excess of the 10% threshold acceptable to the parties, the Issuer entered into an interest rate protection agreement with Susquehanna, structured in accordance with U.S. GAAP, to protect the third-party beneficial interest holders above the 10% threshold. The interest rate protection agreement counterparty is Susquehanna, and the agreement provides the Issuer with an additional source of funds to make payments on the floating-rate notes if the floating rate exceeds the fixed rates of the loans for which the related obligors have exercised their fixed-rate conversion feature.

Based on our historical experience with HELOCs with the conversion feature, we determined that it was highly unlikely that more than 10% of the HELOCs held by the Issuer would be converted by the related obligors from variable-rate to fixed-rate obligations. This conclusion is based in part on our experience with HELOCs that have conversion features, which tend to be converted by obligors from variable rate to fixed rate within the first three-to-six months after origination. The securitized pool, at the time the loans were transferred to the Issuer, was generally seasoned more than six months. Further, we determined that it is highly unlikely that we will have any liability under the interest rate protection agreement provided for in the transaction agreements because we believe that, based upon historical experience and business understanding of obligor behavior, less than 10% of the HELOCs will be converted by the related obligors to fixed-rate loans. The estimated maximum cost and fair value to Susquehanna of complying with the interest rate protection discussed above is considered de minimis.

This transaction was accounted for as a sale under U.S. GAAP. For additional information concerning the initial valuation of retained interests, please see “Note 21. Securitization Activity” to the consolidated financial statements appearing in Part II, Item 8. The gain recognized in this transaction was $8.2 million. The initial interest-only strips recorded for this transaction were $18.5 million, and the fair value of these interest-only strips at December 31, 2009, was $11.2 million.

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In December 2005, one of our banking subsidiaries, Susquehanna Bank, entered into a term securitization transaction of HELOCs (the “2005 HELOC transaction”). Some of the loans sold were originated by two of our other banking subsidiaries, Susquehanna Bank and Susquehanna Bank DV, and sold to Susquehanna Bank PA immediately prior to the closing of the securitization. In connection with the 2005 HELOC transaction, Susquehanna Bank PA sold a portfolio of loans with an aggregate total of approximately $239.8 million to a wholly owned special purpose subsidiary (the “Transferor”). In the transaction documents for the 2005 HELOC transaction Susquehanna Bank PA provides, among other things, representations and warranties with respect to the home equity loans transferred. In the event that any such representations and warranties were materially untrue with respect to any assets when transferred, the affected loans must be repurchased by Susquehanna Bank PA. We provide a guaranty of such repurchase obligation. The Transferor sold the portfolio acquired from Susquehanna Bank PA to a newly formed statutory trust (the “Issuer”). The equity interests of the Issuer are owned by the Transferor. The Transferor financed the purchase of the portfolio of HELOCs from Susquehanna Bank PA primarily through the issuance by the Issuer of $239.8 million of floating-rate asset-backed notes to third-party investors. In connection with the securitization, Susquehanna retained servicing responsibilities for the loans.

Some of the HELOCs, which generally accrue interest at a variable rate, include a feature that permits the obligor to “convert” all or a portion of the loan from a variable interest rate to a fixed interest rate. Specifically, during the draw period, the obligor may request that Susquehanna establish fixed-rate repayment terms for an amount not to exceed the then outstanding balance under the credit line. Requests must be for amounts which do not exceed the credit limit, and no event of default shall have occurred and be continuing at the time of the request. We complete all required underwriting at the time of origination, and no additional underwriting occurs at the time the obligor exercises the fixed-rate conversion feature. The credit limit will include credit advances under the credit line and outstanding balances under the previously requested fixed-rate repayments. The minimum fixed-rate repayment request is three thousand dollars. The obligor may elect to submit fixed-rate repayment requests at any time during the draw period. The obligor is limited to three fixed-rate repayment schedules at any time. The reason for permitting the conversion feature is to be competitive in our marketplace as many other financial institutions offer this feature, and the maximum dollar amount of the portfolio balances sold which is subject to this conversion feature was $84.7 million at the transaction cut-off date.

Under the transaction documents for the 2005 HELOC transaction, if the aggregate principal balance of loans converted to fixed-rate loans exceeds 10% of the outstanding aggregate principal balance of the portfolio, then Susquehanna Bank PA is required to repurchase converted loans in excess of this 10% threshold until the aggregate principal balance of loans repurchased by Susquehanna Bank PA for this reason is equal to 10% of the original principal balance of the loans. If, after giving effect to any repurchase by Susquehanna Bank PA of loans with converted balances, the aggregate principal balance of fixed-interest-rate loans exceeds 10% of the aggregate principal balance of the portfolio, then an interest rate protection agreement between the Issuer and Susquehanna becomes operative. Under the interest rate protection agreement, the Issuer will be obligated to make fixed payments, which will be based on the fixed rates of the converted mortgage loans, and we will be obligated to make floating payments, which will be based on the indices of the variable-rate mortgage loans. We do not expect to repurchase any converted loans nor enter into any interest rate protection agreements.

In this transaction, the Issuer issued floating-rate asset-backed notes to third-party investors, which were backed by variable-rate HELOCs. However, approximately 35.35% of the loans as of the cut-off date for the transaction included a feature that permits the obligor to “convert” all or a portion of the outstanding balance from a variable interest rate to a fixed interest rate. If a significant portion of obligors elected to fix the rate of interest on their mortgage loans, then the Issuer might have insufficient funds to make payments on the floating-rate notes as rates increase beyond the rate of the fixed-rate loans. To mitigate the effect of this remote risk, the external parties involved in structuring the 2005 HELOC Transaction and Susquehanna worked together to formulate a solution acceptable to the parties. The parties determined that the Issuer’s ability to make interest payments on the floating-rate notes was unlikely to be materially and adversely affected if the Issuer’s assets included up to 10% fixed-rate loans. After that threshold was exceeded, however, Susquehanna Bank PA would

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be required to repurchase loans with converted balances in an amount not to exceed 10% of the original principal balance of the HELOCs, which is approximately $24.0 million. Under the transaction agreements, Susquehanna Bank PA is neither required nor permitted to repurchase more than 10% of the original principal balance of the converted loans. However, because up to 15.35% of loans could be held by the Issuer as fixed-rate loans in excess of the 10% threshold acceptable to the parties, the Issuer entered into an interest rate protection agreement with us, structured in accordance with U.S. GAAP, to protect the third-party beneficial interest holders, above the 10% threshold. The interest rate protection agreement counterparty is Susquehanna, and the agreement provides the issuer with an additional source of funds to make payments on the floating-rate notes if the floating-rate exceeds the fixed-rates of the loans for which the related obligors have exercised their fixed-rate conversion feature. Our estimated maximum cost of complying with the interest rate protection is considered de minimis.

Based on our historical experience with HELOCs with the conversion feature, we determined that it was highly unlikely that more than 10% of the HELOCs held by the Issuer would be converted by the related obligors from variable-rate to fixed-rate obligations. This conclusion is based in part on our experience with HELOCs that have conversion features, which tend to be converted by obligors from variable-rate to fixed-rate within the first three-to-six months after origination. The securitized pool, at the time the loans were transferred to the Issuer, was generally seasoned more than six months.

This transaction was accounted for as a sale under U.S. GAAP. For additional information concerning the initial valuation of retained interests, please see “Note 21. Securitization Activity” to the consolidated financial statements appearing in Part II, Item 8. The gain recognized in this transaction was $6.6 million. The initial recorded interest-only strips for this transaction were $8.0 million, and the fair value of these interest-only strips at December 31, 2009, was $6.6 million.

Leases

In February 2007, each of our wholly owned commercial and retail banking subsidiaries (each, a “Sponsor Subsidiary”) entered into a term securitization transaction (the “2007 transaction”). In connection with the 2007 transaction, each Sponsor Subsidiary sold and contributed the beneficial interest in a portfolio of automobile leases and related vehicles to a separate wholly owned QSPE (each QSPE, a “Transferor” and collectively, the “Transferors”). Collectively, the Sponsor Subsidiaries sold and contributed the beneficial interest in $300.4 million in automobile leases and the related vehicles to the Transferors. However, the transaction documents for the 2007 transaction provide, among other things, that any assets that failed to meet the eligibility requirements when transferred by the applicable Sponsor Subsidiary must be repurchased by such Sponsor Subsidiary. Each Transferor sold and contributed the portfolio acquired from the related Sponsor Subsidiary to a newly formed statutory trust (the “Issuer”). The equity interests of the Issuer are owned pro rata by the Transferors (based on the value of the portfolio conveyed by each Transferor to the Issuer). The Transferors financed the purchases of the beneficial interests from the Sponsor Subsidiaries primarily through the issuance by the Issuer of $260.3 million of fixed-rate asset-backed notes to third-party investors. The Issuer also issued an additional $7.8 million of notes, which have been retained pro rata by the Transferors in the same ratio as the Transferors retain the equity interests of the Issuer.

This transaction was accounted for as a sale under U.S. GAAP. For additional information concerning the initial valuation of retained interests, please see “Note 21. Securitization Activity” to the consolidated financial statements appearing in Part II, Item 8. The gain recognized in this transaction was $2.7 million. The initial interest-only strip recorded for this transaction was $4.0 million. In the fourth quarter of 2009, Hann, as servicer, issued a clean-up call for this transaction and recorded $25.9 million in lease receivables.

In March 2006, each of our wholly owned commercial and retail banking subsidiaries (each, a “Sponsor Subsidiary”) entered into a term securitization transaction (the “2006 transaction”). In connection with the 2006 transaction, each Sponsor Subsidiary sold and contributed the beneficial interest in a portfolio of automobile leases and related vehicles to a separate wholly owned QSPE (each QSPE a “Transferor” and, collectively the

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“Transferors”). Collectively, the Sponsor Subsidiaries sold and contributed the beneficial interest in $356.1 million in automobile leases and related vehicles to the Transferors. In the third quarter of 2008, Hann, as servicer, issued a clean-up call for this transaction and recorded $31.8 million in lease receivables.

In March 2005, each of our wholly owned commercial and retail banking subsidiaries entered into a term securitization transaction (the “2005 transaction”). In connection with the 2005 transaction, each Sponsor Subsidiary sold and contributed the beneficial interest in a portfolio of automobile leases and related vehicles to a separate wholly owned QSPE. Collectively, the Sponsor Subsidiaries sold and contributed the beneficial interest in $366.8 million in automobile leases and related vehicles to the Transferors. In the first quarter of 2008, Hann, as servicer, issued a clean-up call for this transaction and recorded $32.1 million in lease receivables.

Agency Agreements and Lease Sales

Agency arrangements and lease sales generally occur on economic terms similar to vehicle lease terms and generally result in no accounting gains or losses to Hann and no retention of credit, residual value, or interest rate risk with respect to the sold assets. Agency arrangements involve the origination and servicing by Hann of automobile leases for other financial institutions, and lease sales involve the sale of previously originated leases (with servicing retained) to other financial institutions. Hann generally is entitled to receive all of the administrative fees collected from obligors, a servicing fee, and in the case of agency arrangements, an origination fee per lease. Lease sales are generally accounted for as sales under U.S. GAAP.

Servicing Fees under the Securitization Transactions, Agency Agreements, and Lease Sales

In accordance with U.S. GAAP, a servicing asset or servicing liability is recognized each time Susquehanna undertakes an obligation to service a financial asset by entering into a servicing contract in a transfer of financial assets that meets the requirements for sale accounting.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of servicing rights is netted against loan servicing fee income.

Overall, however, Susquehanna enters into securitization transactions primarily to achieve low-cost funding for the growth of its loan and lease portfolio and to manage capital, and not primarily to maximize its ongoing servicing fee revenue.

Leases

The servicing fees paid to Hann under the lease securitization transactions, agency agreements, and lease sales approximate current market value and are set by contract at the time of sale. Hann has not recorded servicing assets or liabilities with regard to those transactions because its expected servicing costs are approximately equal to its expected servicing income. Based upon Susquehanna’s on-going experience with vehicle-lease sales, this rate has been, and continues to be, the prevailing market rate when compared to similar transactions. However, if these circumstances were to change, Susquehanna would adjust its evaluation as to whether a servicing asset or liability should be recorded. In addition, if servicing costs were to exceed servicing income, Hann would record the present value of that liability as an expense.

Home Equity Loans

The parent company acts as servicer for securitized home equity loans and has recorded servicing assets based on the present value of estimated future net servicing income. The initial carrying values of retained interests, including servicing rights, were determined by allocating the carrying value among the assets sold and retained based on their relative fair values. At December 31, 2009, these servicing assets totaled $1.2 million and

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were reported in other assets. In accordance with U.S. GAAP, our servicing rights are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Furthermore, we assess servicing assets for impairment or increased obligation based on fair value at each reporting date.

We consider our servicing assets to be immaterial items and therefore have not applied the disclosure provisions of U.S. GAAP.

Recently Adopted Accounting Guidance

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

In August 2009, FASB issued ASU No. 2009-5, “Fair Value Measurement and Disclosures: Measuring Liabilities at Fair Value.” This ASU provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available and was effective for the first reporting period beginning after issuance. Adoption of this guidance has had no material impact on results of operations or financial condition.

In June 2009, FASB issued ASU No. 2009-01 — Topic 105 — Generally Accepted Accounting Principles — amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles. This ASU establishes the FASB Accounting Standards Codification™ as the source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. This ASU was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of this guidance has had no material impact on results of operations or financial condition.

In May 2009, FASB issued an update to Topic 855 — Subsequent Events. This update established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Adoption of this guidance has had no material impact on results of operations or financial condition. See “Note 24. Subsequent Events” to the consolidated financial statements appearing in Part II, Item 8. for the required disclosures.

In April 2009, FASB issued three updates intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairment of securities. The update to Topic 820 – Fair Value Measurements and Disclosures provides guidelines for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The update to Topic 825 — Financial Instruments enhances consistency in financial reporting by increasing the frequency of fair value disclosures. The update to Topic 320 — Investments — Debt and Equity Securities provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. These updates were effective for interim and annual periods ending after June 15, 2009. Adoption of this guidance has had no material impact on results of operations or financial condition.

In April 2009, FASB issued an update to Topic 805 — Business Combinations. This update addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This update was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition

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was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of this guidance has had no material impact on results of operations or financial condition.

In December 2008, FASB issued an update to Topic 715 — Compensation — Retirement Benefits. This update provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Adoption of this guidance has had no material impact on results of operations or financial condition. See “Note 17. Benefit Plans” to the consolidated financial statements appearing in Part II, Item 8 for the required disclosures.

In November 2008, FASB issued an update to Topic 323 — Investments — Equity Method and Joint Ventures. This update clarifies the accounting for certain transactions and impairment considerations involving equity method investments and was effective for fiscal years beginning on or after December 15, 2008. Adoption of this guidance has had no material impact on results of operation or financial condition.

In June 2008, FASB issued an update to Topic 260 — Earnings Per Share. This update states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This update was effective for financial statements issued for fiscal years beginning after December 15, 2008. All prior-period EPS data presented was to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Susquehanna has granted share-based payment awards that contain nonforfeitable rights to dividends; however, Susquehanna has determined that their effect on the computation of EPS is immaterial.

In April 2008, FASB issued updates to Topic 350 — Intangibles — Goodwill and Other and Topic 275 — Risks and Uncertainties. These updates amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. These updates were effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Adoption of this guidance has had no material impact on results of operations or financial condition.

In February 2008, FASB issued an update to Topic 860 — Transfer and Servicing. This update provides guidance on a repurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties, that is entered into contemporaneously with, or in contemplation of, the initial transfer. This update was effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Adoption of this guidance has had no material impact on results of operations or financial condition.

In December 2007, FASB issued an update to Topic 805 — Business Combinations. This update requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This update was effective for fiscal years beginning after December 15, 2008. At December 31, 2009, adoption of this guidance has had no material impact on results of operations or financial condition.

In December 2007, FASB issued an update to Topic 810 — Consolidation. This update requires that a reporting entity provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This update was effective for fiscal years beginning after December 15, 2008. Adoption of this guidance has had no material impact on results of operations or financial condition.

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Recently Issued Accounting Guidance

In June 2009, FASB issued ASU 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities and ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. ASU 2009-16 will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASU 2009-17 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. Both ASUs are effective as of the beginning of an enterprise’s first annual reporting period that begins after November 15, 2009, with earlier application prohibited. As a result of adopting this guidance, Susquehanna, as primary beneficiary, will be required to consolidate two securitization trusts. The consolidation will result in an aggregate increase in loan balances of $249.0 million and an aggregate increase in long-term debt of $242.1 million on January 1, 2010. In addition, Susquehanna expects to record a cumulative-effect-adjustment that will reduce retained earnings by approximately $4.7 million.

Summary of 2008 Compared to 2007

Results of Operations

The acquisition of Community Banks, Inc. on November 16, 2007 had a significant impact on our results of operations for the year ended December 31, 2008. Consequently, comparisons to the years ended December 31, 2007 and 2006 may not be particularly meaningful.

Furthermore, results of operations for the year ended December 31, 2008 included the following pre-tax charges:

• a $6.5 million loss related to an interest rate swap termination;

• a $2.5 million merger charge composed of the following:

Employee termination benefits	$	1.60 million
Legal fees		0.25 million
Technology costs		0.65 million

• a $17.5 million securities impairment charge; and

• a $2.1 million VFAM customer-loss contingency.

Also, results of operations for the twelve months ending December 31, 2007 included a pre-tax loss of $11.8 million related to a restructuring of our investment portfolio.

Net income for the year ended December 31, 2008, was $82.6 million, an increase of $13.5 million, or 19.6%, over net income of $69.1 million in 2007. Net interest income increased 44.4%, to $398.3 million for 2008, from $275.9 million in 2007. Noninterest income increased 17.9%, to $142.3 million for 2008, from $120.7 million in 2007, and noninterest expenses increased 32.6%, to $367.2 million for 2008, from $277.0 million for 2007.

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Additional information is as follows:

	Twelve Months Ended December 31,
	2007			2008
Diluted Earnings per Common Share	$	0.95		$	1.23
Return on Average Assets		0.62	%		0.78	%
Return on Average Equity		4.80	%		6.66	%
Return on Average Tangible Equity(1)		13.35	%		11.56	%
Efficiency Ratio		66.46	%		69.10	%
Net Interest Margin		3.62	%		3.67	%

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

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

	2008		2007
Return on average equity (GAAP basis)	4.80	%	6.66	%
Effect of excluding average intangible assets and related amortization	8.55	%	4.90	%
Return on average tangible equity	13.35	%	11.56	%

Net Interest Income - Taxable Equivalent Basis

Net interest income increased to $398.3 million in 2008, as compared to $275.9 million in 2007. Net interest income as a percentage of net interest income plus other income was 74% for the twelve months ended December 31, 2008, 70% for the twelve months ended December 31, 2007, and 65% for the twelve months ended December 31, 2006.

The $122.4 million increase in our net interest income in 2008, as compared to 2007, was primarily the result of the net contribution from interest-earning assets and interest-bearing liabilities acquired from Community on November 16, 2007. Our net interest margin, however, declined 5 basis points, from 3.67% for the year ended December 31, 2007, to 3.62% for the year ended December 31, 2008. This decrease in net interest margin was primarily due to a decrease in lower-cost transaction and savings deposits with an offsetting increase in higher-cost time deposits.

Provision and Allowance for Loan and Lease Losses

Throughout 2008, we continued to experience a challenging operating environment. Given the economic pressures that impacted some of our borrowers, we increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $48.6 million increase in nonperforming loans and leases since December 31, 2007 and the rising charge-off level noted below. The provision for loan and lease losses was $63.8 million for the year ended December 31, 2008, and $21.8 million for the year ended December 31, 2007. The allowance for loan and lease losses at December 31, 2008 was 1.18% of period-end loans and leases, or $113.7 million, and 1.01% of period-end loans and leases, or $88.6 million, at December 31, 2007. The allowance for loan and lease losses as a percentage of non-performing loans and leases (coverage ratio) decreased to 105% at December 31, 2008, from 149% at December 31, 2007.

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Interest income received on impaired commercial loans in 2008 and 2007 was $0.5 million and $0.07 million, respectively. Interest income that would have been recorded on these loans under the original terms was $5.5 million and $1.8 million for 2008 and 2007, respectively. At December 31, 2008, we had no binding outstanding commitments to advance additional funds with respect to these impaired loans.

Net charge-offs as a percentage of average loans and leases for the year ended December 31, 2008 were 0.42%, compared to 0.25% for 2007.

At December 31, 2008, non-performing assets totaled $118.2 million and included $10.3 million in other real estate acquired through foreclosure and $2.6 million in restructured loans. At December 31, 2007, non-performing assets totaled $71.3 million, and included $11.9 million in other real estate acquired through foreclosure and $2.6 million in restructured loans. The increase in non-performing assets primarily was the result of the impact on our borrowers of the deterioration in economic conditions.

Of the $105.3 million of non-accrual loans and leases at December 31, 2008, $83.5 million, or 79.3%, represented non-consumer-loan relationships greater than $0.5 million that had been evaluated and considered impaired. Of the $83.5 million of impaired loans, $21.4 million, or 25.6%, had no related reserve. The determination that no related reserve for these collateral-dependent loans was required was based on the net realizable value of the underlying collateral.

Real estate acquired through foreclosure decreased $1.6 million from December 31, 2007 to December 31, 2008.

Loans with principal and/or interest delinquent 90 days or more and still accruing interest totaled $22.3 million at December 31, 2008, an increase of $10.1 million, from $12.2 million at December 31, 2007.

Potential problem loans totaled $185.0 million at December 31, 2008, and $133.8 million at December 31, 2007. The increase of $51.2 million was attributed to the deterioration of economic conditions throughout 2008 and migrations to our internally monitored loan list that occurred in the normal course of business.

Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income, was 26%, 30%, and 35% for 2008, 2007, and 2006, respectively.

Noninterest income increased $21.7 million, or 17.9%, in 2008, over 2007. In general, increases in noninterest income were attributable to the effects of the Community acquisition on November 16, 2007. Non-Community related changes of note were as follows:

• Decreased vehicle origination, servicing, and securitization fees of $4.5 million;

• Increased wealth management fee income (includes asset management fees, income from fiduciary-related activities, and commissions on brokerage, life insurance, and annuity sales) of $8.5 million;

• Decreased gains on sales of loans and leases of $1.9 million;

• Increased net realized loss on securities of $5.5 million;

• Increased other income of $8.7 million.

Vehicle origination, servicing, and securitization fees. The 31.5% decrease was the result of a decrease in vehicle lease managed balances due to significant competition from captive finance companies and a reduction in securitization fees due to the closing of the auto lease securitization market in 2008.

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Wealth management fee income. The 26.5% increase primarily was the result of the contribution from Stratton Management Company, which was acquired on April 30, 2008.

Gains on sale of loans and leases. In 2007, we recognized a $2.7 million gain in an auto lease securitization transaction. In 2008, there were no securitization transactions.

Net realized loss on securities. During the third quarter of 2008, we recognized a $17.5 million other-than-temporary impairment of certain corporate synthetic collateralized debt obligations in our available-for-sale investment portfolio. During the second quarter of 2007, we restructured our available-for-sale investment portfolio and recognized an $11.8 million loss on the sale of selected securities.

Other. During the third quarter of 2008, we reclassified the fair value of cash flow hedges related to a forecasted sale of vehicle leases from accumulated other comprehensive loss to earnings and recognized a reduction in other noninterest income of $6.5 million. This reduction was more than offset by the additional other revenue generated by the Community acquisition.

Noninterest Expenses

Noninterest expenses increased $90.2 million, or 32.6%, in 2008, over 2007. In general, increases in noninterest expenses were attributable to the effects of the Community acquisition on November 16, 2007. Non-Community-related changes of note were as follows:

Salaries and employee benefits. Included in salaries and employee benefits was a $1.6 million restructuring charge recorded in September 2008 related to the merger of our three bank subsidiaries.

Other. Included in other noninterest expenses was a $2.1 million charge recorded in September 2008 to mitigate losses of customers of VFAM who held positions in a money market mutual fund managed by an independent mutual fund company.

Income Taxes

Our effective tax rates for 2008 and 2007 were 24.6% and 29.3%, respectively.

The decrease in our effective tax rate for 2008 was the result of an increase in tax-advantaged income relative to total income in 2008, as compared to tax-advantaged income relative to total income in 2007. The increase in tax-advantaged income is due, in part, to the large municipal bond portfolio acquired in the Community acquisition on November 16, 2007.

Financial Condition

Total assets at December 31, 2008, were $13.7 billion, an increase of 4.6%, as compared to total assets of $13.1 billion at December 31, 2007. Loans and leases, increased to $9.7 billion at December 31, 2008, from $8.8 billion at December 31, 2007. Total deposits increased to $9.1 billion in 2008, from $8.9 billion during the same time period in 2007.

Equity capital was $1.9 billion at December 31, 2008, or $19.21 per common share, compared to $1.7 billion, or $20.12 per common share, at December 31, 2007. The calculation of book value per common share excluded from Shareholders’ Equity the carrying value of the preferred stock issued to the U.S. Treasury as part of the Capital Purchase Program.

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

At December 31, 2008, 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.

Investment Securities

As a result of changes in the interest-rate environment and the economy in general, our total equity was negatively impacted by $69.3 million. Unrealized losses, net of taxes, on available-for-sale securities totaled $63.8 million at December 31, 2008, and unrealized gains, net of taxes, on available-for-sale securities totaled $5.4 million at December 31, 2007.

In September 2008, we recorded a pre-tax impairment charge of $17.5 million related to two synthetic collateralized debt obligations held in our investment portfolio. Each security had a par value of $10.0 million and one hundred underlying reference companies. Through August 31, 2008, there were no credit events (i.e. bankruptcies, conservatorships, or receiverships) related to any of the reference companies. However, given the significant developments that had affected the market, a number of credit events reduced the fair value of one security to 12.5% of par as of September 30, 2008, and the fair value of the other security to 12.0% of par as of September 30, 2008. We believed that it was probable that we would be unable to collect all amounts due according to the contractual terms of these securities. Accordingly, we recognized an other-than-temporary impairment and established new cost bases for the securities reflecting the September 30, 2008 fair value. At December 31, 2008, one security was given a below-investment-grade rating by the rating agencies, while the other security was rated BBB-. These were the only two securities of this type that we held in our $1.9 billion investment portfolio.

During May and June of 2007, while planning for the Community acquisition and the resulting growth and composition of the investment portfolio, our management performed a comprehensive review of our available-for-sale investments. Management determined that for administrative and operational purposes, small remaining portions in mortgage-backed securities (“odd lots,” or securities with remaining par amounts of less than $2.0 million) should be sold. These odd lots, totaling $182.0 million, resulted from previous mergers and bank mergers and from principal amortization over time. Additionally, we determined that all collateralized mortgage obligations, regardless of the remaining par amount, with an aggregate total of $51.0 million should be sold. Many of these mortgage obligations were acquired in the historic low-interest-rate environment of 2002 through 2004. The restructuring involved the sale of approximately 16.0% of our available-for-sale investment portfolio, and resulted in a pre-tax charge of approximately $11.8 million in June 2007.

At December 31, 2008, 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.

Loans and Leases

Loans and leases increased $902.3 million, from December 31, 2007 to December 31, 2008. The 10.3% increase was due to internal growth that was accomplished through our sales and marketing efforts and the fact that loan demand was solid in our market area.

In September 2008, we announced that, due to adverse market conditions, our previously disclosed plan to sell vehicle leases would not proceed. As a result, the $238.4 million in vehicle leases held for sale at December 31, 2007 and those subsequently originated were classified as held for investment.

In January 2007, we exercised an early buyout option associated with Hann’s sale-leaseback transaction. As a result, Hann acquired approximately $78.4 million of beneficial interests in automobile leases and related vehicles. A significant portion of these automobile leases and related vehicles was sold to our banking

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subsidiaries and subsequently included in the February 2007 $300.4 million vehicle lease securitization transaction.

Our bank subsidiary has historically 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 $353.1 million at December 31, 2008, and an additional $394.8 million was outstanding on loans with junior liens on residential properties at December 31, 2008. Senior liens on 1-4 family residential properties totaled $1.3 billion at December 31, 2008, and much of the $2.7 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 $178.2 million, while loans secured by multi-family residential properties totaled $203.5 million at December 31, 2008.

Substantially all of our loans and leases were to enterprises and individuals in our market area. There is no concentration of loans to borrowers in any one industry, or related industries, which exceeds 10% of total loans.

Goodwill and Other Identifiable Intangible Assets

Goodwill recognized as a result of the Community acquisition was $615.5 million, and intangibles with finite lives were $40.5 million.

We performed our annual goodwill impairment test as of May 31, 2008, and determined that there was no impairment. However, given the continuing downturn in the economy and overall market conditions since that time and the fact that our market capitalization had been below the book value of our equity, we decided an interim goodwill impairment test was required under U.S. GAAP as of December 31, 2008.

Based upon our analyses at May 31 and December 31, 2008, market value exceeded book value for the reporting units, and there was no goodwill impairment.

Deposits

Total deposits increased $121.4 million, or 1.4%, from December 31, 2007, to December 31, 2008. This relatively small increase reflects the intense competition within our marketplace to attract new deposits.

Short-term Borrowings

Short-term borrowings, which included securities sold under repurchase agreements, federal funds purchased, borrowings through the Federal Reserve’s Term Auction Facility, and Treasury tax and loan notes, increased by $341.8 million, or 60.1%, from December 31, 2007, to December 31, 2008.

Since our loan growth had been greater than our deposit growth, we used short-term borrowings, primarily in the forms of federal funds purchased and the term auction facility, to fund loans.

Federal Home Loan Bank Borrowings and Long-term Debt

Federal Home Loan Bank borrowings decreased $76.0 million from December 31, 2007 to December 31, 2008. This decrease was the result of increasing our short-term borrowings at lower interest rates.

On December 31, 2008, we issued a $25.0 million subordinated note to another financial institution. The note bears interest at three-month LIBOR plus 4.50% and matures in December 2018.

Capital Adequacy

We and the bank had leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity was considered “well capitalized” under regulatory guidelines.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SUSQUEHANNA BANCSHARES, INC.
By:	/s/    WILLIAM J. REUTER
	William J. Reuter, Chairman of the Board and Chief Executive Officer

/s/    DREW K. HOSTETTER        

Drew K. Hostetter, Executive Vice President, Treasurer and Chief Financial Officer

Dated: March 3, 2010

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EXHIBIT INDEX

Exhibit Numbers		Description and Method of Filing
(a	)	The following documents are filed as part of this report:
		(1)	Financial Statements. See Item 8 of this report for the consolidated financial statements of Susquehanna and its subsidiaries (including the index to financial statements).
			Financial Statement Schedules. Not Applicable.
			Exhibits. A list of the Exhibits to this Form 10-K is set forth in (b) below.
(b	)	Exhibits.
		(3)	3.1	Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed December 17, 2007.
			3.1.a	Statement with Respect to Shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Susquehanna, is incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.
			3.2	By-laws. Incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed March 4, 2008.
		(4)	Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna’s Common Stock and the rights of Susquehanna’s note holders are contained in the following documents or instruments, which are incorporated herein by reference.
			4.1	Indenture, dated as of November 4, 2002, by and between Susquehanna and JP Morgan Trust Company, National Association, relating to the 6.05% subordinated notes due 2012, incorporated by reference to Exhibit 4.1 to Susquehanna’s Registration Statement on Form S-4, Registration No. 333-102265.
			4.2	Global Note relating to the 6.05% subordinated notes due 2012, dated February 27, 2003 is incorporated by reference to Exhibit 4.3 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
			4.3	Registration Rights Agreement, dated as of November 4, 2002, by and among Susquehanna, Keefe Bruyette & Woods Inc. and the other initial purchasers referred to therein is incorporated by reference to Exhibit 4.3 to Susquehanna’s Registration Statement on Form S-4, Registration Statement No. 333-102265.
			4.4	First Supplemental Indenture, dated May 3, 2004, to Indenture dated November 4, 2002, by and between Susquehanna and J.P. Morgan Trust Company, National Association, relating to the 4.75% fixed rate/floating rate subordinated notes due 2014 is incorporated by reference to Exhibit 4.1 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.
			4.5	Global Note to the 4.75% fixed rate/floating rate subordinated notes due 2014, dated May 3, 2004, is incorporated by reference to Exhibit 4.2 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.

Exhibit Numbers	Description and Method of Filing
		4.6	Registration Rights Agreement, dated as of May 3, 2004, by and among Susquehanna, Keefe Bruyette & Woods Inc. and the other initial purchasers referred to therein is incorporated by reference to Exhibit 4.3 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.
		4.7	Amended and Restated Trust Agreement, dated as of December 12, 2007, among Susquehanna, The Bank of New York, The Bank of New York (Delaware), the Administrative Trustees named therein and the Holders is incorporated by reference to Exhibit 4.1 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2007.
		4.8	Guarantee Agreement between Susquehanna and The Bank of New York, as Trustee, dated December 12, 2007, is incorporated by reference to Exhibit 4.2 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2007.
		4.9	Supplemental Indenture between Susquehanna and The Bank of New York, as Trustee, dated December 12, 2007, is incorporated by reference to Exhibit 4.3 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2007.
		4.10	9.375% Capital Efficient Note is incorporated by reference to Exhibit 4.4 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2007.
		4.11	9.375% Capital Securities Note is incorporated by reference to Exhibit 4.11 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
		4.12	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, is incorporated by reference to Exhibit 4.1 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.
		4.13	Warrant to Purchase Shares of Common Stock of Susquehanna, dated December 12, 2008, issued to the United States Department of the Treasury, is incorporated by reference to Exhibit 4.1 of Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.
		4.14	Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. Susquehanna agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.
	(10)	Material Contracts.
		10.1	Letter Agreement dated December 12, 2008 by and between Susquehanna and of Susquehanna’s Current Report on Form 8-K, filed December 12, 2008.* the United States Department of the Treasury, is incorporated by reference to Exhibit 10.1
		10.2	Form of Waiver of Senior Executive Officers is incorporated by reference to Exhibit 10.2 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.3	Form of Letter Agreement by and between the Senior Executive Officers and Susquehanna is incorporated by reference to Exhibit 10.3 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

Exhibit Numbers	Description and Method of Filing
		10.4	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and William J. Reuter is incorporated by reference to Exhibit 10.4 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.5	Employment Agreement, dated November 16, 2007, between Susquehanna and Eddie L. Dunklebarger is incorporated by reference to Exhibit 10.3* of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
		10.6	Employment Agreement, as amended and restated effective dated January 1, 2009, between Susquehanna and Drew K. Hostetter is incorporated by reference to Exhibit 10.6 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.7	Employment Agreement dated November 4, 2003, but effective as of January 1, 2004, between Susquehanna, Valley Forge Asset Management Corporation and Bernard A. Francis, Jr. is incorporated by reference to Exhibit 10.1 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. First Amendment to Employment Agreement dated January 18, 2005 is incorporated by reference to Exhibit 10.1 of Susquehanna’s Current Report on Form 8-K filed January 21, 2005. Second Amendment to Employment Agreement dated February 26, 2007 is incorporated by reference to Exhibit 10.1 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007. Letter Agreement between Susquehanna, Valley Forge Asset Management Corporation and Bernard A. Francis, Jr., dated December 1, 2008, is incorporated by reference to Exhibit 10.7 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.8	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael M. Quick is incorporated by reference to Exhibit 10.8 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.9	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and James G. Pierné is incorporated by reference to Exhibit 10.9 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.10	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Edward Balderston, Jr. is incorporated by reference to Exhibit 10.10 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.11	Employment Agreement, dated November 16, 2007, between Susquehanna, Susquehanna Bank PA and Jeffrey M. Seibert is incorporated by reference to Exhibit 10.11 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.12	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Peter J. Sahd is incorporated by reference to Exhibit 10.12 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

Exhibit Numbers	Description and Method of Filing
		10.13	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Rodney A. Lefever is incorporated by reference to Exhibit 10.13 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.14	Employment Agreement, effective January 1, 2009, between Susquehanna and Lisa M. Cavage is incorporated by reference to Exhibit 10.14 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.15	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and John H. Montgomery is incorporated by reference to Exhibit 10.15 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.16	Employment Agreement, as amended and restated effective January 1, 2009, between Susquehanna and Michael E. Hough is incorporated by reference to Exhibit 10.16 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.17	Employment Agreement, effective January 1, 2009, between Susquehanna and Joseph R. Lizza is incorporated by reference to Exhibit 10.17 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.18	Form of Notice to Executives Subject to Compensation Limitations under the American Recovery and Reinvestment Act of 2009, given to Susquehanna’s 25 most highly compensated employees, including its named executive officers, regarding certain restrictions on compensation, dated November 30, 2009 is incorporated by reference to Exhibit 10.18 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.*
		10.19	Recoupment Policy with Respect to Incentive Awards (including Resolutions of the Board of Directors of Susquehanna amending certain incentive plans to incorporate such policy) is incorporated by reference to Exhibit 10.19 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.*
		10.20	Description of the Susquehanna Incentive Plan is incorporated by reference to Item 5.02 of Susquehanna’s Current Report on Form 8-K, filed March 4, 2008. *
		10.21	Description of discretionary grants of restricted stock units to Susquehanna’s named executive officers on December 22, 2009 is incorporated by reference to Item 5.02 of Susquehanna’s Current Report on Form 8-K, filed December 24, 2009.* Form of Restricted Stock Unit Grant Agreement is incorporated by reference to Exhibit 10.1 of Susquehanna’s Current Report on Form 8-K, filed December 24, 2009.*
		10.22	Susquehanna’s Executive Deferred Income Plan, effective January 1, 2009, is incorporated by reference to Exhibit 10.21 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.23	Susquehanna’s Supplemental Executive Retirement Plan as amended and restated effective January 1, 2009, is incorporated by reference to Exhibit 10.22 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.24	Forms of The Insurance Trust for Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement and Split Dollar Policy Endorsement are incorporated by reference to Exhibit 10(v) of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.*

Exhibit Numbers	Description and Method of Filing
		10.25	Community Banks, Inc. Survivor Income Agreement, including Split Dollar Addendum to Community Banks, Inc. Survivor Income Agreement, is incorporated by reference to Exhibit 10.18 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ending December 31, 2007.*
		10.26	Amended and Restated Salary Continuation Agreement between Community Banks, Inc. and Eddie L. Dunklebarger, dated January 1, 2004, as amended November 16, 2007, is attached incorporated by reference to Exhibit 10.19 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
		10.27	Susquehanna’s Key Employee Severance Pay Plan, amended and restated as of January 1, 2009, is incorporated by reference to Exhibit 10.26 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.28	Descriptions of Executive Life Insurance Program, Executive Supplemental Long Term Disability Plan, Francis Life Insurance Policy and the bonus programs offered by Valley Forge Asset Management Corp. are incorporated by reference to Exhibit 10.15 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.*
		10.29	Susquehanna’s 2005 Equity Compensation Plan is incorporated by reference to Exhibit 10.16 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.*
		10.30	Susquehanna’s Equity Compensation Plan is incorporated by reference to Exhibit 10.17 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.*
		10.31	Community Banks, Inc. 1998 Long-Term Incentive Plan is incorporated by reference to Exhibit 99.1 of Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
		10.32	Director Compensation Schedule, effective January 1, 2009, is incorporated by reference to Exhibit 10.31 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*
		10.33	Description of grants of nonqualified stock options and restricted stock to Susquehanna’s non-employee directors is incorporated by reference to Exhibit 10.17 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009.*
		10.34	Community Banks, Inc. Directors Stock Option Plan is incorporated by reference to Exhibit 99.2 of Susquehanna’s Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-144397).*
		10.35	The Farmers and Merchants National Bank of Hagerstown Executive Supplemental Income Plan, dated March 6, 1984, is incorporated by reference to Exhibit 10.28 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.*
		10.36	Description of Eddie L. Dunklebarger term life insurance policy is incorporated by reference to Exhibit 10.35 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.*

Exhibit Numbers	Description and Method of Filing
		10.37	A copy of Susquehanna’s Excessive and Luxury Expenditure Policy is available at www.susquehanna.net. Click on “Investor Relations, then “Governance Documents,” then “Excessive and Luxury Expenditure Policy.”*
		10.38	2002 Amended Servicing Agreement dated January 1, 2002 between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. is incorporated by reference to Exhibit 10(vi) of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. First Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10(vi) of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. Second Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.6 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Third Amendment to the 2002 Amended Servicing Agreement and Fourth Amendment to the 2002 Amended Servicing Agreement are incorporated by reference to Exhibit 10.6 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. Fifth Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.8 of Susquehanna’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005. Sixth Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.25 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Seventh Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.2 of Susquehanna’s Quarterly Report on Form 10-Q for quarterly period ended June 30, 2006. Eighth Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.23 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Ninth Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.30 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Tenth Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.36 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Eleventh Amendment to the 2002 Amended Servicing Agreement is incorporated by reference to Exhibit 10.38 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
	(14)	Code of Ethics
		14.1	A copy of Susquehanna’s Code of Ethics is available on Susquehanna’s website at www.susquehanna.net. Click on “Investor Relations,” then “Governance Documents,” then “Code of Ethics of Susquehanna Bancshares, Inc.”
	(21)	Subsidiaries of the registrant is incorporated by reference to Exhibit 21 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
	(23)	Consent of PricewaterhouseCoopers LLP is incorporated by reference to Exhibit 23 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
	(31)	Rule 13a-14(a)/15d-14(a) Certifications
		31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.
		31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.
	(32)	Section 1350 Certifications are incorporated by reference to Exhibit 32 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
	(99)	Additional Exhibits
		99.1	Principal Executive Officer Certification is incorporated by reference to Exhibit 99.1 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Exhibit Numbers	Description and Method of Filing
		99.2	Principal Financial Officer Certification is incorporated by reference to Exhibit 99.2 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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

(c) Financial Statement Schedule. None Required.