NOTE 2. Acquisitions

Abington Bancorp, Inc.

On October 1, 2011, Susquehanna acquired all of the outstanding common stock of Abington Bancorp, Inc. (“Abington”), headquartered in Jenkintown, Pennsylvania, in a stock-for-stock transaction in which Abington was merged with and into Susquehanna. Abington operated 20 offices in Pennsylvania at the date of acquisition. The results of operations acquired in the Abington transaction have been included in Susquehanna’s financial results since the acquisition date, October 1, 2011. Abington shareholders received 1.32 shares of Susquehanna stock in exchange for each outstanding share of Abington common stock, resulting in Susquehanna issuing a total of 26.7 million common shares.

Tower Bancorp, Inc.

On February 17, 2012, Susquehanna acquired all of the outstanding common stock of Tower Bancorp, Inc. (“Tower”), headquartered in Harrisburg, Pennsylvania, through the merger of Tower with and into Susquehanna. The results of operations acquired in the Tower transaction have been included in Susquehanna’s financial results since the acquisition date, February 17, 2012. Tower shareholders received, at their election, either 3.4696 shares of Susquehanna common stock, or $28.00 in cash, or some combination of shares and cash, for each share of Tower common stock held immediately prior to the effective time of the Tower merger, with $88.0 million of the aggregate merger consideration being paid in cash. A total of 30.8 million shares of Susquehanna common stock were issued in connection with the Tower merger.

The Tower transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at estimated fair value on the acquisition date. Assets acquired totaled $2,391,157, including $1,975,488 of loans and leases (including $854,993 of commercial real estate loans, $136,979 of commercial

loans and leases, and $758,803 of residential real estate loans). Liabilities assumed aggregated $2,251,770, including $2,074,372 of deposits. The transaction added $302,112 to the Susquehanna shareholders’ equity. Goodwill of $250,730 was recorded as a result of the transaction, including an adjustment of $3,869 to the previously estimated purchase price allocation. The consideration transferred for Tower’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:


	February 17, 2012
Purchase price:
Value of:
Common shares issued and options assumed	$	302,112
Cash		88,005

Total purchase price		390,117


Identifiable assets:
Cash and due from banks		85,518
Unrestricted short-term investments		9,171
Securities available for sale		137,254
Loans and leases		1,975,488
Intangible assets		27,334
Other assets		156,392

Total identifiable assets		2,391,157


Liabilities:
Deposits		2,074,372
Short-term borrowings		10,228
Long-term borrowings		103,923
Other liabilities		63,247

Total liabilities		2,251,770


Net goodwill resulting from acquisition	$	250,730

In many cases, determining the fair value of the acquired assets and assumed liabilities required Susquehanna to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the valuation of acquired loans.

The following is a summary of the loans acquired in the Tower acquisition:


	Purchased Credit Impaired Loans		Purchased Non- Impaired Loans		Total Purchased Loans
Contractually required principal and interest at acquisition	$	348,889	$	2,376,071	$	2,724,960
Contractual cash flows not expected to be collected		127,318		135,736		263,054

Expected cash flows at acquisition		221,571		2,240,335		2,461,906
Interest component of expected cash flows		54,418		432,000		486,418

Basis in purchased loans at acquisition – estimated fair value	$	167,153	$	1,808,335	$	1,975,488

The core deposit intangible of $24,005 is being amortized over an estimated useful life of approximately 10 years.

The fair value of checking, savings and money market deposit accounts acquired from Tower was assumed to be approximately the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates expected contractual payments discounted at market rates for similar certificates.

In connection with the Tower acquisition, Susquehanna incurred merger-related expenses related to personnel, occupancy and equipment, and other costs of integrating and conforming acquired operations with and into Susquehanna. Those expenses consisted largely of costs related to professional services, conversion of systems and/or integration of operations, and termination of existing contractual arrangements of Tower to purchase various services; initial marketing and promotion expenses designed to introduce Susquehanna to its new customers; travel costs; and printing, postage, supplies, and other costs of completing the transaction and commencing operations in new markets and offices. A summary of merger-related expenses included in the consolidated statement of income follows:


	Three Months Ended September 30,
	2012						2011
	Abington		Tower		Total		Abington		Tower		Total
Salaries and employee benefits	$	2	$	489	$	491	$	0	$	0	$	0
Consulting		2		403		405		607		0		607
Legal		193		152		345		602		0		602
Branch writeoffs		0		0		0		0		0		0
Net occupancy and equipment		0		0		0		0		0		0
All other		170		89		259		84		0		84

	$	367	$	1,133	$	1,500	$	1,293	$	0	$	1,293


	Nine Months Ended September 30,
	2012						2011
	Abington		Tower		Total		Abington		Tower		Total
Salaries and employee benefits	$	2	$	3,544	$	3,546	$	0	$	0	$	0
Consulting		68		4,546		4,614		628		0		628
Legal		372		1,471		1,843		1,983		0		1,983
Branch writeoffs		0		1,371		1,371		0		0		0
Net occupancy and equipment		0		2,840		2,840		0		0		0
All other		805		1,278		2,083		169		0		169

	$	1,247	$	15,050	$	16,297	$	2,780	$	0	$	2,780

Pro Forma Condensed Combined Financial Information

If the Abington acquisition had been completed on January 1, 2011, total revenue, net of interest expense, would have been approximately $152.4 million and $455.5 million, respectively, for the three-month and nine-month periods ended September 30, 2011, and net income from continuing operations would have been approximately $17.0 million and $41.5 million for the same periods.

If the Tower acquisition had been completed on January 1, 2011, total revenue, net of interest expense, would have been approximately $173.2 million and $517.8 million, respectively, for the three-month and nine-month periods ended September 30, 2011, and net income from continuing operations would have been approximately $21.2 million and $45.7 million for the same periods. Total revenue, net of interest expense, and net income from continuing operations would have been approximately $573.8 million and $98.1 million, respectively, for the nine-month period ended September 30, 2012.

Pro forma results of operations do not include the impact of conforming certain acquiree accounting policies to Susquehanna’s policies. The pro forma financial information does not indicate the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.