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 six months of 2009 were impacted by a number of issues related to the recession, including the industry-wide increase in FDIC insurance premiums and special assessments, 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. In addition, we recorded pre-tax charges of $2.9 million related to our consolidation initiative to combine certain branches in our central Pennsylvania market that are in close proximity to each other. We also had an other-than-temporary impairment charge of $0.9 million relating to our two corporate synthetic collateralized debt obligations. 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:



                                                Originally
                                                Published
                                                  Goals             Updated 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 %)                 3.0 %
  Tax rate                                              32.0 %       Not meaningful

Although some economists believe the economic downturn has bottomed out, we believe the residual impact of the recession will continue to create a harsh environment for many of our customers and will likely continue to weigh on our quarterly results in the near term.

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 presenting the disclosures required by generally accepted accounting principles.

Summary of 2009 Compared to 2008

Net loss applicable to common shareholders for the second quarter of 2009 was $11.9 million, a decrease of $41.1 million from net income applicable to common shareholders of $29.2 million for the second quarter of 2008. Net interest income increased 1.1%, to $100.1 million for the second quarter of 2009, from $99.1 million for the second quarter of 2008. Noninterest income decreased 22.1%, to $34.8 million for the second quarter of 2009, from $44.7 million for the second quarter of 2008. Noninterest expenses increased 14.2%, to $103.2 million for the second quarter of 2009, from $90.3 million for the second quarter of 2008.

Net loss applicable to common shareholders for the first six months of 2009 was $10.1 million, a decrease of $67.3 million from net income available to common shareholders of $57.2 million for the first six months of 2008. Net interest income decreased 0.9%, to $195.4 million for the first six months of 2009, from $197.2 million for the first six months of 2008. Noninterest income decreased 12.1%, to $77.0 million for the first six months of 2009, from $87.6 million for the first six months of 2008. Noninterest expenses increased 8.6%, to $198.0 million for the first six months of 2009, from $182.3 million for the first six months of 2008.

Additional information is as follows:

                                           Three Months Ended          Six Months Ended
                                                June 30,                   June 30,
                                           2009          2008         2009         2008
 Diluted Earnings per Common Share         ($0.14 )     $  0.34       ($0.12 )    $  0.67
 Return on Average Assets                   -0.23 %        0.89 %      -0.03 %       0.88 %
 Return on Average Equity                   -1.60 %        6.81 %      -0.18 %       6.66 %
 Return on Average Tangible Equity (1)      -2.76 %       18.48 %       0.39 %      17.37 %
 Efficiency Ratio                           74.64 %       61.55 %      70.97 %      62.73 %
 Net Interest Margin                         3.52 %        3.66 %       3.46 %       3.69 %

(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         Six Months Ended
                                                            June 30,                  June 30,
                                                      2009           2008         2009         2008
Return on average equity (GAAP basis)                  -1.60 %         6.81 %      -0.18 %      6.66 %
Effect of excluding average intangible assets and
related amortization                                   -1.16 %        11.67 %       0.57 %     10.71 %
Return on average tangible equity                      -2.76 %        18.48 %       0.39 %     17.37 %

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
                                                June 30, 2009                             June 30, 2008
                                      Average                                   Average
                                      Balance         Interest    Rate (%)      Balance         Interest    Rate (%)
Assets
Short-term investments             $     106,007      $     188       0.71   $      82,325      $     427       2.09
Investment securities:
Taxable                                1,515,498         18,940       5.01       1,777,900         23,238       5.26
Tax-advantaged                           347,668          5,751       6.63         303,332          4,921       6.52

Total investment securities            1,863,166         24,691       5.32       2,081,232         28,159       5.44

Loans and leases, (net):
Taxable                                9,602,816        136,322       5.69       8,843,985        142,775       6.49
Tax-advantaged                           219,631          3,706       6.77         194,638          3,595       7.43

Total loans and leases                 9,822,447        140,028       5.72       9,038,623        146,370       6.51

Total interest-earning assets         11,791,620        164,907       5.61      11,202,180        174,956       6.28

Allowance for loan and lease
losses                                  (132,740 )                                 (93,557 )
Other non-earning assets               2,061,656                                 2,107,951

Total assets                       $  13,720,536                             $  13,216,574

Liabilities
Deposits:
Interest-bearing demand            $   2,825,359          5,785       0.82   $   2,711,535          8,574       1.27
Savings                                  742,607            388       0.21         740,925          1,296       0.70
Time                                   4,281,599         36,241       3.40       4,079,074         39,250       3.87
Short-term borrowings                    931,512          1,070       0.46         664,190          2,864       1.73
FHLB borrowings                        1,053,123         10,093       3.84       1,394,087         13,229       3.82
Long-term debt                           448,568          7,913       7.08         422,404          7,704       7.34

Total interest-bearing
liabilities                           10,282,768         61,490       2.40      10,012,215         72,917       2.93

Demand deposits                        1,225,629                                 1,223,112
Other liabilities                        262,894                                   257,621

Total liabilities                     11,771,291                                11,492,948
Equity                                 1,949,245                                 1,723,626

Total liabilities and
shareholders' equity               $  13,720,536                             $  13,216,574

Net interest income / yield on
average earning assets                                $ 103,417       3.52                      $ 102,039       3.66

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.

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 Six-Month Period Ended           For the Six-Month Period Ended
                                               June 30, 2009                            June 30, 2008
                                     Average                                  Average
                                     Balance         Interest    Rate (%)     Balance         Interest    Rate (%)
Assets
Short-term investments             $    114,269      $     475       0.84   $    103,241      $   1,449       2.82
Investment securities:
Taxable                               1,560,947         39,522       5.11      1,774,857         47,190       5.35
Tax-advantaged                          345,177         11,415       6.67        285,344          9,171       6.46

Total investment securities           1,906,124         50,937       5.39      2,060,201         56,361       5.50

Loans and leases, (net):
Taxable                               9,529,093        270,979       5.73      8,719,087        291,230       6.72
Tax-advantaged                          220,158          7,340       6.72        192,258          7,137       7.47

Total loans and leases                9,749,251        278,319       5.76      8,911,345        298,367       6.73

Total interest-earning assets        11,769,644        329,731       5.65     11,074,787        356,177       6.47

Allowance for loan and lease
losses                                 (125,413 )                                (91,637 )
Other non-earning assets              2,050,455                                2,099,954

Total assets                       $ 13,694,686                             $ 13,083,104

Liabilities
Deposits:
Interest-bearing demand            $  2,750,482         12,603       0.92   $  2,715,572         19,813       1.47
Savings                                 725,683          1,108       0.31        727,042          2,838       0.78
Time                                  4,424,441         75,938       3.46      4,109,917         82,858       4.05
Short-term borrowings                   883,222          2,135       0.49        603,311          6,189       2.06
FHLB borrowings                       1,053,624         20,153       3.86      1,319,134         25,985       3.96
Long-term debt                          448,194         15,855       7.13        420,501         15,546       7.43

Total interest-bearing
liabilities                          10,285,646        127,792       2.51      9,895,477        153,229       3.11

Demand deposits                       1,208,200                                1,201,401
Other liabilities                       254,561                                  258,680

Total liabilities                    11,748,407                               11,355,558
Equity                                1,946,279                                1,727,546

Total liabilities and
shareholders' equity               $ 13,694,686                             $ 13,083,104

Net interest income / yield on
average earning assets                               $ 201,939       3.46                     $ 202,948       3.69

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 increased to $100.1 million for the second quarter of 2009, as compared to $99.1 million for the same period in 2008. For the six months ended June 30, 2009, net interest income decreased to $195.4 million, as compared to $197.2 million for the same period in 2008.

Net interest income as a percentage of net interest income plus noninterest income was 74.2% for the quarter ended June 30, 2009, and 68.9% for the quarter ended June 30, 2008. Net interest income as a percentage of net interest income plus noninterest income was 71.7% for the six months ended June 30, 2009, and 69.2% for the six months ended June 30, 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 $1.0 million increase in our net interest income for the second quarter of 2009, as compared to the second quarter of 2008, was primarily the result of a $589.4 million increase in average earning assets due to loan growth.

The $1.9 million decrease in our net interest income for the first six months of 2009, as compared to the first six months of 2008, was primarily the result of a 23 basis point decline in net interest margin, as earning asset yields declined further than cost of funds.

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 six 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 $149.1 million increase in nonperforming loans since June 30, 2008 and the rising charge-off level noted below. As presented in Table 2, the provision for loan and lease losses was $50.0 million for the second quarter of 2009, and $13.8 million for the second quarter of 2008. The provision was $85.0 million for the first six months of 2009, and $23.6 million for first six months of 2008.

Of the $199.4 million of non-accrual loans and leases at June 30, 2009 (refer to "Table 3 - Risk Assets"), $166.5 million, or 83.5%, represented non-accrual, non-consumer loan relationships greater than $0.5 million that had been evaluated and considered impaired. Of the $194.9 million of total impaired loans (non-accrual loans plus accruing restructured loans), $50.4 million, or 25.9%, 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 second quarter of 2009 increased to $24.6 million, or 1.01% of average loans and leases, when compared to net charge-offs for the second quarter of 2008 of $10.7 million, or 0.48% of average loans and leases.

Net charge-offs for the first six months of 2009 increased to $41.2 million, or 0.85% of average loans and leases, when compared to net charge-offs for the first six months of 2008 of $16.1 million, or 0.36% of average loans and leases. Furthermore, 49.4% of net charge-offs came from the real estate - construction portfolio as real estate demand and values in some of our market areas are under considerable downward pressure.

The allowance for loan and lease losses was 1.59% of period-end loans and leases, or $157.5 million, at June 30, 2009; 1.18% of period-end loans and leases, or $113.7 million, at December 31, 2008; and 1.04% of period-end loans and leases, or $96.0 million, at June 30, 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 June 30, 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 June 30, 2009.

Susquehanna Bancshares, Inc. and Subsidiaries

Table 2 - Allowance for Loan and Lease Losses



                                              Three Months Ended                 Six Months Ended
                                                   June 30,                          June 30,
                                            2009             2008             2009             2008
                                                             (dollars in thousands)
Balance - Beginning of period            $   132,164      $    92,995      $   113,749      $    88,569
Additions                                     50,000           13,765           85,000           23,602
. . .