Susquehanna is exposed to certain risks arising from both its business operations and economic conditions, and principally manages its exposures through management of its core business activities. Susquehanna manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, Susquehanna enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Susquehanna's derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to certain variable-rate liabilities. Susquehanna also has derivatives that are a result of a service it provides to certain qualifying customers, and therefore, are not used to manage interest-rate risk in its assets or liabilities. Susquehanna manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net exposure resulting from such transactions. All derivatives are recorded at fair value.

Susquehanna's objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of its variable-rate borrowings, Susquehanna uses interest rate swaps designated as cash flow hedges that involve the receipt of variable amounts from a counterparty in exchange for fixed-rate payments from Susquehanna. As of September 30, 2011, Susquehanna had 8 interest rate swaps with an aggregate notional amount of $715,104 that were designated as cash flow hedges of interest-rate risk. One of these interest rate swaps, with a notional amount of $40,104 and a fair value of $40, relates to a consolidated variable interest entity.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During the first nine months of 2011, such derivatives were used to hedge the variable cash outflows associated with Federal Home Loan Bank borrowings, federal funds borrowings, and long-term debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Amounts recorded in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Susquehanna's variable-rate liabilities. During the next 12 months, Susquehanna estimates that $17,390 will be reclassified as an increase to interest expense.

Derivatives not designated as hedges are used to manage Susquehanna's exposure to interest rate movements and other identified risks but do not meet the strict requirements of hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly in earnings.

Susquehanna has interest rate derivatives, including interest rate swaps and option products, resulting from a service it provides to certain customers with high-quality credit ratings. Susquehanna executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. The credit risk associated with derivatives executed with these customers is essentially the same as that involved in extending loans and is subject to our normal credit policies. Susquehanna obtains collateral based upon its assessment of the customers' credit quality. Those derivatives are simultaneously hedged by offsetting derivatives that Susquehanna executes with a third party to minimize Susquehanna's net risk exposure resulting from those transactions. At September 30, 2011, Susquehanna had 92 derivative transactions related to this program with an aggregate notional amount of $597,294. For the first nine months of 2011, Susquehanna recognized a net gain of $122 related to changes in fair value of the derivatives in this program. For the first nine months of 2010, Susquehanna recognized a net gain of $71 related to changes in fair value of the derivatives in this program.

Susquehanna has agreements with certain of its derivative counterparties that contain the following provisions:

At September 30, 2011, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $57,182. At September 30, 2011, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $68,190. If Susquehanna had breached any of the above provisions at September 30, 2011, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

Three months ended September 30, 2011


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Gain Recognized in Income (Ineffective Portion)		Amount of Gain Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(10,510	)		Interest expense		$	(4,687	)		Other expense	$	291

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Loss Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	(362	)
		Other expense			(36	)

Three months ended September 30, 2010


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Gain Recognized in Income (Ineffective Portion)		Amount of Gain Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(11,368	)		Interest expense		$	(2,295	)		Other expense	$	48

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Loss Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	(91	)

Nine months ended September 30, 2011


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Gain Recognized in Income (Ineffective Portion)		Amount of Gain Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(15,286	)		Interest expense		$	(12,312	)		Other expense	$	509

Derivatives not designated or qualifying as hedging instruments	Location of Gain (Loss) Recognized in Income on Derivatives			Amount of Gain (Loss) Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	152
		Other expense			(159	)

Nine months ended September 30, 2010


Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI			Location of Loss Reclassified from Accumulated OCI into Income			Amount of Loss Reclassified from Accumulated OCI into Income			Location of Loss Recognized in Income (Ineffective Portion)		Amount of Loss Recognized in Income (Ineffective Portion)
Interest rate contracts:	$	(34,756	)		Interest expense		$	(4,761	)		Other expense	$	(413	)

Derivatives not designated or qualifying as hedging instruments	Location of Loss Recognized in Income on Derivatives			Amount of Loss Recognized in Income on Derivatives
Interest rate contracts:		Other income		$	(19	)