Management's discussion and analysis of the significant changes in the consolidated results of operations, financial condition, and cash flows of Susquehanna Bancshares, Inc. and its subsidiaries is set forth below for the periods indicated. Unless the context requires otherwise, the terms "Susquehanna," "we," "us," and "our" refer to 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, 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; our 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") on residual loss exposure; our ability to collect all amounts due under our outstanding synthetic collateralized debt obligations; and our ability to achieve our 2009 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;

• continued levels of our loan and lease quality and origination volume;

• the adequacy of loss reserves;

• 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;

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

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

• 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 Susquehanna 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, Stratton Management Company, LLC and subsidiary ("Stratton"), and The Addis Group, LLC.

Our web-site address is www.susquehanna.net. We make available free of charge, through the Investor Relations section of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web-site address in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Our results for the first quarter of 2009 were impacted by a number of issues related to the recession, including the industry-wide increase in FDIC insurance premiums, a reduction in net interest margin, and an increase in our provision for loan and lease losses as a result of further deterioration in credit quality. We have, however, strong liquidity, and our capital ratios are well in excess of regulatory minimums to be considered "well-capitalized." With these factors in mind, we have updated our 2009 financial goals as follows:

Updated Financial Goals for 2009

Our updated financial goals for 2009 are as follows:



                                                  Previously
                                                  Published            Updated
                                                    Goals               Goals
    Net interest margin                                   3.70 %              3.50 %
    Loan growth                                            8.0 %               5.0 %
    Deposit growth                                         1.0 %               1.0 %
    Noninterest income growth                              6.0 %               1.0 %
    Noninterest expense growth                            (1.0 %)              4.0 %
    Tax rate                                              32.0 %              24.0 %

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 for purposes of the disclosures required by FAS No. 141, "Business Combinations."

Summary of First Quarter 2009 Compared to First Quarter 2008

Net income available to common shareholders for the first quarter of 2009 was $1.9 million, a decrease of $26.1 million, or 93.4%, from net income available to common shareholders of $28.0 million for the first quarter of 2008. Net interest income decreased 3.0%, to $95.3 million for the first quarter of 2009, from $98.2 million for the first quarter of 2008. Noninterest income decreased 1.6%, to $42.2 million for the first quarter of 2009, from $42.9 million for the first quarter of 2008. Noninterest expenses increased 3.1%, to $94.8 million for the first quarter of 2009, from $92.0 million for the first quarter of 2008.

Additional information is as follows:

                                                     Three Months Ended
                                                          March 31,
                                                      2009          2008
           Diluted Earnings per Common Share       $     0.02      $  0.33
           Return on Average Assets                      0.18 %       0.87 %
           Return on Average Equity                      1.26 %       6.51 %
           Return on Average Tangible Equity (1)         3.60 %      16.35 %
           Efficiency Ratio                             67.38 %      63.95 %
           Net Interest Margin                           3.40 %       3.71 %

(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.

                                                                   Three Months Ended
                                                                       March 31,
                                                                 2009            2008
Return on average equity (GAAP basis)                              1.26 %           6.51 %
Effect of excluding average intangible assets and related
amortization                                                       2.34 %           9.84 %
Return on average tangible equity                                  3.60 %          16.35 %

Susquehanna Bancshares, Inc. and Subsidiaries

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

(dollars in thousands)

Interest rates and interest differential-taxable equivalent basis



                                       For the Three-Month Period Ended          For the Three-Month Period Ended
                                                March 31, 2009                            March 31, 2008
                                       Average                                   Average
                                       Balance         Interest    Rate (%)      Balance         Interest    Rate (%)
Assets
Short-term investments              $      122,623     $     287       0.95   $      124,157     $   1,022       3.31
Investment securities:
Taxable                                  1,606,900        20,582       5.19        1,771,813        23,952       5.44
Tax-advantaged                             342,659         5,665       6.70          267,357         4,249       6.39

Total investment securities              1,949,559        26,247       5.46        2,039,170        28,201       5.56

Loans and leases, (net):
Taxable                                  9,454,551       134,657       5.78        8,594,189       148,456       6.95
Tax-advantaged                             220,691         3,634       6.68          189,878         3,540       7.50

Total loans and leases                   9,675,242       138,291       5.80        8,784,067       151,996       6.96

Total interest-earning assets           11,747,424     $ 164,825       5.69       10,947,394     $ 181,219       6.66

Allowance for loan and lease
losses                                    (118,005 )                                 (89,717 )
Other non-earning assets                 2,039,130                                 2,091,989

Total assets                        $   13,668,549                            $   12,949,666

Liabilities
Deposits:
Interest-bearing demand             $    2,674,774     $   6,818       1.03   $    2,719,609     $  11,239       1.66
Savings                                    708,570           720       0.41          713,158         1,542       0.87
Time                                     4,568,870        39,697       3.52        4,140,762        43,608       4.24
Short-term borrowings                      834,395         1,065       0.52          542,433         3,325       2.47
FHLB borrowings                          1,054,131        10,060       3.87        1,244,179        12,756       4.12
Long-term debt                             447,817         7,940       7.19          418,599         7,842       7.53

Total interest-bearing
liabilities                             10,288,557     $  66,300       2.61        9,778,740     $  80,312       3.30

Demand deposits                          1,190,576                                 1,179,689
Other liabilities                          246,136                                   259,771

Total liabilities                       11,725,269                                11,218,200
Equity                                   1,943,280                                 1,731,466

Total liabilities and
shareholders' equity                $   13,668,549                            $   12,949,666

Net interest income / yield on
average earning assets                                 $  98,525       3.40                      $ 100,907       3.71

Additional Information

Average loan balances include non-accrual loans.

Tax-exempt 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.

Net Interest Income - Taxable Equivalent Basis

Our major source of operating revenues is net interest income, which decreased to $95.3 million for the first quarter of 2009, as compared to $98.2 million for the same period in 2008. Net interest income as a percentage of net interest income plus noninterest income was 69.3% for the quarter ended March 31, 2009, and 69.6% for the quarter ended March 31, 2008.

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.

The $2.9 million decrease in our net interest income for the first quarter of 2009, as compared to the first quarter of 2008, was primarily the result of a decline in our net interest margin of 31 basis points. This reduction in margin was due primarily to a $79.1 million increase in nonaccrual loans and the slightly asset-sensitive position of our balance sheet in a declining interest-rate environment.

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 Item 3, "Quantitative and Qualitative Disclosures About Market 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 and lease 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.

During the first three months of 2009, we continued to experience a challenging operating environment. Given the economic pressures that are impacting some of our borrowers, we have increased our allowance for loan and lease losses in accordance with our assessment process, which took into consideration a $79.1 million increase in nonperforming loans since March 31, 2008 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $35.0 million for the first quarter of 2009, and $9.8 million for the first quarter of 2008.

Of the $153.5 million of non-accrual loans and leases at March 31, 2009 (refer to "Table 3 - Risk Assets"), $120.6 million, or 78.6%, represented non-consumer loans greater than $0.5 million that had been evaluated and considered impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Of the $120.6 million of impaired loans, $36.3 million, or 30.1%, 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.

Net charge-offs for the first quarter of 2009 increased to $16.6 million, or 0.70% of average loans and leases, when compared to net charge-offs for the first quarter of 2008 of $5.4 million, or 0.25% of average loans and leases.

The allowance for loan and lease losses was 1.35% of period-end loans and leases, or $132.2 million, at March 31, 2009; 1.18% of period-end loans and leases, or $113.7 million, at December 31, 2008; and 1.05% of period-end loans and leases, or $93.0 million, at March 31, 2008.

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 March 31, 2009. There can be no assurance, however, that we will not sustain loan and lease losses in future periods that could be greater than the size of the allowance at March 31, 2009.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses



                                                           Three Months Ended March 31,
                                                             2009                 2008
                                                              (dollars in thousands)
Balance - Beginning of period                           $       113,749        $    88,569
Additions                                                        35,000              9,837

                                                                148,749             98,406

Charge-offs                                                     (19,019 )           (7,365 )
Recoveries                                                        2,434              1,954

Net charge-offs                                                 (16,585 )           (5,411 )

Balance - Period end                                    $       132,164        $    92,995

Net charge-offs as a percentage of average loans
and leases (annualized)                                            0.70 %             0.25 %
Allowance as a percentage of period-end loans and
leases                                                             1.35 %             1.05 %
Average loans and leases                                $     9,675,242        $ 8,784,067
Period-end loans and leases                                   9,766,063          8,887,005

Noninterest Income

Noninterest income, as a percentage of net interest income plus noninterest income, was 30.7% for the first quarter of 2009, and 30.4% for the first quarter of 2008.

Noninterest income decreased $0.7 million, or 1.6%, for the first quarter of 2009, over the first quarter of 2008. This net decrease is primarily a result of the following:

• Decreased service charges on deposit accounts of $1.5 million;

• Decreased vehicle origination, servicing, and securitization fees of $1.3 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 $0.5 million;

• Decreased income from bank-owned life insurance of $1.9 million; and

• Increased other of $3.3 million.

Service charges on deposit accounts. The 13.9% decrease primarily was the result of changes in customers' behavior regarding overdrafts.

Vehicle origination, servicing, and securitization fees. The 39.2% decrease primarily 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.

Wealth management fee income. The 6.1% net increase primarily was the result of the contribution from Stratton, which was acquired on April 30, 2008. However, asset management fees are based on the market value of assets being managed, which has declined as a result of market conditions. As a result, our overall fee income has declined since the third quarter of 2008.

Income from bank-owned life insurance. The 53.6% decrease was the result of a decline in the return on the underlying investments due to the economic environment.

Other. The 31.2% increase in other income is the net result of a $6.9 million gain on the sale of our Central Atlantic Merchant Services accounts in March 2009, a general decline in other commissions and fees of $2.2 million for the first quarter of 2009, and a one-time credit of $1.2 million in the first quarter of 2008 relating to Visa's IPO redemption.

Noninterest Expenses

Noninterest expenses increased $2.9 million, or 3.1%, from $92.0 million for the first quarter of 2008, to $94.8 million for the first quarter of 2009. This net increase is primarily a result of the following:

• Increased salaries and employee benefits of $1.5 million;

• Decreased advertising and marketing of $2.0 million;

• Increased FDIC insurance of $5.8 million; and

• Decreased other of $3.1 million.

Salaries and employee benefits. The 3.3% net increase is primarily attributable to the acquisition of Stratton on April 30, 2008.

Advertising and marketing. The 47.4% 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, as determined by the FDIC.

Other. The 13.4% net decrease in other expenses is the result of various changes within this category primarily associated with cost-saving initiatives previously announced.

Income Taxes

Our effective tax rate for the first quarter of 2009 was 21.37%. Our effective tax rate for the first quarter of 2008 was 28.68%. The decrease was due to an increase in the percentage of tax-advantaged income relative to total income in 2009 compared to the percentage of tax-advantaged income relative to total income in 2008.

Summary of March 31, 2009 Compared to December 31, 2008

Total assets at March 31, 2009 were $13.7 billion, an increase of $50.2 million, as compared to total assets at December 31, 2008. Total deposits increased $73.3 million at March 31, 2009, from December 31, 2008. Equity capital was $1.9 billion at March 31, 2009, or $19.04 per common share, and $1.9 billion, or $19.21 per common share, at December 31, 2008. The decline in book value per share primarily was the result of the payment of dividends to common and preferred shareholders totaling $25.0 million in the first quarter of 2009 in excess of net income for the quarter. On April 15, 2009, our board of directors declared a second-quarter dividend of $0.05 per common share, a reduction from the first-quarter dividend of $0.26 per common share. Reducing the quarterly common dividend will enable us to retain approximately $18.0 million in additional capital quarterly.

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

Effective January 1, 2008, we adopted FAS No. 157, "Fair Value Measurements" and FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." At March 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. For additional information about our financial assets and financial liabilities carried at fair value, refer to "Note 12. Fair Value Disclosures" to the financial statements appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

. . .