Summary of AMERISERV FINANCIAL INC /PA/

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
The following discussion and analysis of financial condition and results of operations of AmeriServ Financial, Inc. should be read in conjunction with the consolidated financial statements of AmeriServ Financial, Inc. including the related notes thereto, included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006 2008 SUMMARY OVERVIEW:
The net income of AmeriServ in the fourth quarter of 2008 exceeded net income for the same period of 2007 by 75%. This resulted from a $71 million increase in loans outstanding and a 76 basis point increase in the net interest margin. The conservative balance sheet that AmeriServ has maintained since 2005 was well positioned for the Federal Reserve program to lower interest rates. At the same time, AmeriServ had ample liquidity to respond to a number of attractive lending opportunities which increased net loans. The result was that the fourth quarter proved to be the strongest quarter recorded in 2008, with no unusual events.
The impact of the fourth quarter on the full year was significant. Net income in 2008 totaled $5.5 million and surpassed that of 2007 by 82% as earnings per share increased from $0.14 per share in 2007 to $0.25 per share in 2008. Return on assets for the full year was 0.62% or 28 basis points above the full year 2007. These performance improvements were in spite of the decline in the equity markets which reduced the late year revenue streams of both the Trust Company and West Chester Capital Advisors
However, all this is not to say that 2008 was a year without challenges. The stumbles in the economy caused AmeriServ to increase its loan loss provision by $2.6 million over 2007 to improve its coverage of non-performing assets to 195% (as compared with 137% at December 31, 2007). After two years of reducing expenses, in 2008 expenses increased by 2.8%. This increase was not in salaries and benefits, but chiefly in external professional expenses to gain the best guidance as we manage through these turbulent times. Overall, we believe the fourth quarter and full year results were encouraging, especially considering the well documented troubles that persist in banking and which now have spread into the national and global economy.
During 2007 and 2008, and now extending into 2009, we have become sadly familiar with a new set of phrases. We speak daily of sub-prime mortgages, of a credit crunch, of financial bailouts and the like. We hear leading economists and governmental experts tell us that their next recommended program will finally be the answer to the nation's dilemma. But we have also noticed - in spite of these frequently encouraging pronouncements - the economy has continued its decline. Employment reductions have become commonplace, bankruptcy filings are disturbingly frequent and none of the hastily designed economic solutions have arrested the decline.
Here at AmeriServ we observe these developments with an attitude of careful concern. As a company operating in the heart of the Rust Belt, we learned it is foolhardy to swim against the tide. During the period 2002 through 2005, we learned just how difficult it is to overcome mounting real world difficulties. Our positive performance during the troubles of 2008 tells us that AmeriServ is once again a healthy company.
Now the challenge is to keep it healthy while the banking industry and the global economy continue to experience what can only be termed as stunning losses. It was this commitment to protect the reinvented AmeriServ that caused the Board of Directors to elect to participate in the Treasury Department Capital Purchase Program (CPP). The infusion of $21 million of new capital on December 19, 2008, serves as a sort of "rainy day fund" to protect our shareholders should this recession deepen into a depression. However, it also provides a solid foundation so AmeriServ can continue to make new job-creating business loans in the community, thus enabling local consumers to pay their bills and feed their families.
In better times this additional capital can also position AmeriServ to be immediately proactive once the long promised economic recovery begins. The Board's decision reflects our view that this additional capital further strengthens AmeriServ today - and for the future. Unfortunately, participation in the CPP forced us to suspend our recently announced common stock dividend. We requested an exception from this restriction in a detailed submission to the authorities, but our request was denied. We will continue to monitor the CPP program and file a new exception request as soon as conditions suggest an approval is possible. But for the present, as stated, we will strive to manage this 23% increase in capital to build an even stronger AmeriServ that is a sound, rewarding, long term investment.
PERFORMANCE OVERVIEW. . .The following table summarizes some of the Company's key profitability performance indicators for each of the past three years.

                                                YEAR ENDED DECEMBER 31,
                                              2008         2007        2006
                                                 (IN THOUSANDS, EXCEPT
                                               PER SHARE DATA AND RATIOS)
             Net income                    $  5,509      $ 3,034     $ 2,332
             Diluted earnings per share        0.25         0.14        0.11
             Return on average assets          0.62 %       0.34 %      0.27 %
             Return on average equity          5.93         3.51        2.74

The Company reported net income of $5.5 million or $0.25 per diluted share for 2008. This represents an increase of $2.5 million or 82% over 2007 net income of $3.0 million or $0.14 per diluted share. The Company's return on assets improved to 0.62% in 2008 compared to 0.34% in 2007. Our conservative balance sheet positioning allowed AmeriServ Financial to report improved financial performance during a historic period of turmoil and crisis within the financial markets. The Company has no direct exposure to sub-prime mortgages, Fannie Mae or Freddie Mac preferred stock, pooled trust preferred securities, or credit exposure to any of the large financial firms that have recently failed or been taken over. The growth in earnings in 2008 was driven by increased net interest income and higher non-interest revenue, which more than offset an increased provision for loan losses and higher non-interest expenses.
The Company reported net income of $3.0 million or $0.14 per diluted share for 2007. This represented an increase of $702,000 or 30.1% when compared to net income of $2.3 million or $0.11 per diluted share for 2006. The increase in net income in 2007 was due to increased non-interest revenue and lower non-interest expense, which more than offset the negative impact of reduced net interest income, a higher provision for loan losses and increased income tax expense. The increase in non-interest revenue was attributable to the West Chester Capital Advisors acquisition, which was completed in March 2007. Also, the Company benefited from higher trust revenue and increased gains on asset sales in 2007.
NET INTEREST INCOME AND MARGIN. . . .The Company's net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company's earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table summarizes the Company's net interest income performance for each of the past three years:

                                             YEAR ENDED DECEMBER 31,
                                         2008           2007         2006
                                          (IN THOUSANDS, EXCEPT RATIOS)
               Interest income       $  47,819       $ 49,379     $ 46,565
               Interest expense          18,702        25,156       22,087

               Net interest income       29,117        24,223       24,478
               Net interest margin         3.64 %        3.06 %       3.12 %

2008 NET INTEREST PERFORMANCE OVERVIEW... The Company's net interest income in 2008 increased by $4.9 million or 20.2% from the prior year and the net interest margin was up by 58 basis points over the same comparative period. The Company's balance sheet positioning allowed it to benefit from the significant Federal Reserve reductions in short-term interest rates and the return to a more traditional positively sloped yield curve. As a result of these changes, the Company's interest expense on deposits and borrowings declined at a faster rate than the interest income on loans and investments. Additionally, an improved earning asset mix with fewer investment securities and more loans outstanding also contributed to the increased net interest income and margin in 2008. Total loans increased by $71 million or 11.1% with $43 million of the growth occurring during the fourth quarter of 2008 as we were able to extend credit to quality borrowers within the communities in which we operate. Overall, net interest income has now increased for eight consecutive quarters.
COMPONENT CHANGES IN NET INTEREST INCOME: 2008 VERSUS 2007... Regarding the separate components of net interest income, the Company's total interest income for 2008 decreased by $1.6 million when compared to 2007. This decrease was due to a 27 basis point decrease in the earning asset yield to 5.96%. Within the earning asset base, the yield on the total loan portfolio decreased by 45 basis points to 6.37% and reflects the lower interest rate environment in 2008 as the Federal Reserve reduced the federal funds rate by 400 basis points during 2008. The total investment securities yield, however, has increased by five basis points to 4.13%. The Company took advantage of the positively sloped yield curve in the second quarter of 2008 to position the investment portfolio for better future earnings by selling some of the lower yielding securities in the portfolio at a loss and replacing them with higher yielding securities with a modestly longer duration.
The $8.8 million increase in the volume of average earning assets was due to a $34.3 million or 5.6% increase in average loans partially offset by a $21.6 million or 12.3% decrease in average investment securities. The loan growth was driven by increased

commercial real estate loans as a result of successful new business development efforts particularly in the suburban Pittsburgh market. The Company has found increased commercial lending opportunities in the Pittsburgh market in 2008 due to the retrenchment of several larger competitors as a result of the turmoil in the financial markets. The decline in investment securities was caused by the call of certain agency securities and ongoing cash flow from mortgage-backed securities. The Company has elected to utilize this cash from lower yielding securities to fund higher yielding loans in an effort to improve the Company's earning asset yield.
The Company's total interest expense for 2008 decreased by $6.5 million or 25.7% when compared to 2007. This decrease in interest expense was due to a lower cost of funds. The total cost of funds for 2008 declined by 94 basis points to 2.75% and was driven down by lower short-term interest rates and a more favorable funding mix in 2008. Specifically, the costs of interest bearing deposits decreased by 85 basis points to 2.69% while the cost of short-term borrowings dropped by 293 basis points to 1.96%. Total average interest bearing deposits decreased by $60.2 million or 9.3% due almost entirely to a decline in Trust Company specialty deposits as wholesale borrowings provided the Company with a lower cost funding source than these deposits for the majority of 2008. Wholesale borrowings averaged 9.3% of total assets in 2008. Additionally, the Company's funding mix also benefited from a $5.3 million increase in non-interest bearing demand deposits and an increase in retail money market deposits as customers have opted for short-term liquidity during this period of volatility and decline in the equity markets. With the recent increase in the Company's loan to deposit ratio to slightly over 100%, the Company expects to more actively utilize the trust specialty deposits as a funding source in 2009 along with a more aggressive strategy to try to grow retail deposits.
2007 NET INTEREST PERFORMANCE OVERVIEW... The Company's 2007 net interest income on a tax-equivalent basis decreased by $260,000 or 1.1% from 2006 due to a six basis point drop in the net interest margin to 3.06%. The decline in both net interest income and net interest margin resulted from the Company's cost of funds increasing at a faster pace than the earning asset yield, particularly during the first six months of 2007. This resulted from deposit customer preference for higher yielding certificates of deposit and money market accounts due to the inverted/flat yield curve with short-term interest rates exceeding intermediate to longer term rates during that period. This net interest margin pressure overshadowed solid loan and deposit growth within our community bank. Average loans in 2007 grew by $43 million or 7.7% while average deposits increased by $14 million or 1.9% when compared to 2006. However, the Federal Reserve reductions in short-term interest rates that began late in the third quarter of 2007 favorably impacted the Company. On a quarterly basis, the Company's net interest margin showed improvement throughout 2007 increasing from 2.97% in the first quarter to 3.08% in the fourth quarter. This helped to reverse a trend of four consecutive quarters of net interest income and margin contraction experienced in 2006 where the margin declined from 3.20% to a low of 2.93% in the fourth quarter.
COMPONENT CHANGES IN NET INTEREST INCOME: 2007 VERSUS 2006...Regarding the separate components of net interest income, the Company's total interest income for 2007 increased by $2.8 million or 6.0% when compared to 2006. This increase was due to a 30 basis point increase in the earning asset yield to 6.23%, and was aided by an $8 million increase in average earning assets. Within the earning asset base, the yield on the total loan portfolio increased by 18 basis points to 6.82% and reflects the higher interest rate environment in place during most of 2007, which allowed the Company to book new loans at rates moderately higher than those currently in the portfolio. The yield on the total investment securities portfolio increased by 12 basis points to 4.08% as the Company has generally elected to not replace maturing lower yielding securities. Also reduced amortization expense on the Company's lower balance of mortgage-backed securities favorably impacted the portfolio yield.
The $8 million increase in average earning assets was due to a $43 million or 7.7% increase in average loans, partially mitigated by a $38 million or 17.0% reduction in average investment securities. This loan growth was driven by increased commercial and commercial real estate loans as a result of successful new business development efforts. In 2007 the Company focused on growing the higher yielding and more rate sensitive commercial loans at a faster rate than the commercial real-estate loans. The decline in investment securities was caused by regularly scheduled maturities and ongoing cash flow from mortgage-backed securities.
The Company's total interest expense for 2007 increased by $3.1 million or 13.9% when compared to 2006. This increase in interest expense was due to a higher cost of funds and an increase in total average interest bearing liabilities which were $4.0 million higher in 2007. The total cost of funds for 2007 increased by 43 basis points to 3.69% and was driven up by higher short-term interest rates and increased deposits when compared to 2006. Specifically, total average deposits increased by $14 million or 1.9% compared to 2006, while the cost of interest bearing deposits increased by 49 basis points to 3.54%. The increased cost of deposits reflects the higher short-term interest rate environment for the majority of 2007 as well as a customer movement of funds from lower cost savings accounts into higher yielding certificates of deposit. Average wholesale borrowings declined by $9 million in 2007 and averaged only 2.8% of total assets in 2007.
The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing

liabilities), and (v) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of these tables loan balances exclude non-accrual loans, but interest income recorded on non-accrual loans on a cash basis, which is deemed to be immaterial, is included in interest income. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of approximately 34% is used to compute tax-equivalent yields.

                                                                               YEAR ENDED DECEMBER 31,
                                          2008                                          2007                                          2006
                                         INTEREST                                      INTEREST                                      INTEREST
                          AVERAGE         INCOME/        YIELD/         AVERAGE         INCOME/        YIELD/         AVERAGE         INCOME/        YIELD/
                          BALANCE         EXPENSE         RATE          BALANCE         EXPENSE         RATE          BALANCE         EXPENSE         RATE
                                                                         (IN THOUSANDS, EXCEPT PERCENTAGES)
Interest earning
assets:
Loans, net of
unearned income          $ 641,766       $  41,100          6.37 %     $ 607,507       $  41,654          6.82 %     $ 564,173       $  37,693          6.64 %
Deposits with banks            583              13          2.23             500              20          4.00             706              23          3.26
Federal funds sold             114               4          3.54           2,278             121          5.26              62               3          5.21
Short-term
investment in money
market funds                 7,136             140          1.96           8,857             203          2.29           5,573             188          3.37
Investment
securities:
Available for sale         136,344           5,770          4.03         155,003           6,433          3.96         191,683           7,680          3.92
Held to maturity            17,292             875          5.06          20,257           1,039          5.04          24,448           1,074          4.39

Total investment
securities                 153,636           6,645          4.13         175,260           7,472          4.08         216,131           8,754          3.96

TOTAL INTEREST
EARNING ASSETS/
INTEREST INCOME            803,235          47,902          5.96         794,402          49,470          6.23         786,645          46,661          5.93

Non-interest earning
assets:
Cash and due from
banks                       16,786                                        17,750                                        18,841
Premises and
equipment                    9,333                                         8,623                                         8,324
Other assets                72,249                                        70,369                                        68,920
Allowance for loan
losses                      (7,837 )                                      (7,755 )                                      (8,750 )

TOTAL ASSETS             $ 893,766                                     $ 883,389                                     $ 873,980

Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand                   $  64,683       $     654          1.01 %     $  67,132       $   1,184          1.76 %     $  57,817       $     606          1.05 %
Savings                     70,255             535          0.76          71,922             549          0.76          81,964             643          0.78
Money market               107,843           2,417          2.24         158,947           6,040          3.80         172,029           5,741          3.34
Other time                 341,185          12,074          3.54         346,134          15,038          4.34         319,220          12,242          3.83

Total interest
bearing deposits           583,966          15,680          2.69         644,135          22,811          3.54         631,030          19,232          3.05

Federal funds
purchased and other
short-term
borrowings                  71,636           1,403          1.96          19,844             972          4.89          32,821           1,672          5.09
Advances from
Federal Home Loan
Bank                        11,725             499          4.26           4,852             253          5.22             967              63          6.45
Guaranteed junior
subordinated
deferrable interest
debentures                  13,085           1,120          8.57          13,085           1,120          8.57          13,085           1,120          8.57

TOTAL INTEREST
BEARING
LIABILITIES/INTEREST
EXPENSE                    680,412          18,702          2.75         681,916          25,156          3.69         677,903          22,087          3.26

Non-interest bearing
liabilities:
Demand deposits            110,601                                       105,306                                       104,266
Other liabilities            9,816                                         9,703                                         6,765
Stockholders' equity        92,937                                        86,464                                        85,046

TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY                   $ 893,766                                     $ 883,389                                     $ 873,980

Interest rate spread                                        3.21                                          2.54                                          2.67
Net interest
income/net interest
margin                                      29,200          3.64 %                        24,314          3.06 %                        24,574          3.12 %
Tax-equivalent
adjustment                                     (83 )                                         (91 )                                         (96 )

Net interest income                      $  29,117                                     $  24,223                                     $  24,478

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

                                            2008 vs. 2007                                   2007 vs. 2006
                                         INCREASE (DECREASE)                             INCREASE (DECREASE)
                                          DUE TO CHANGE IN:                               DUE TO CHANGE IN:
                               AVERAGE                                         AVERAGE
                                VOLUME           RATE           TOTAL           VOLUME           RATE           TOTAL
                                                                    (IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned
income                         $  3,258        $ (3,812 )      $   (554 )      $  2,928        $  1,033        $  3,961
Deposits with banks                   4             (11 )            (7 )           (14 )            11              (3 )
Federal funds sold                  (87 )           (30 )          (117 )           118               -             118
Short-term investments in
money market funds                  (36 )           (27 )           (63 )            33             (18 )            15
Investment securities:
Available for sale                 (777 )           114            (663 )        (1,317 )            70          (1,247 )
Held to maturity                   (169 )             5            (164 )          (257 )           222             (35 )

Total investment
securities                         (946 )           119            (827 )        (1,574 )           292          (1,282 )

Total interest income             2,193          (3,761 )        (1,568 )         1,491           1,318           2,809

INTEREST PAID ON:
Interest bearing demand
deposits                            (42 )          (489 )          (531 )           111             467             578
Savings deposits                    (14 )             -             (14 )           (78 )           (16 )           (94 )
Money market                     (1,591 )        (2,032 )        (3,623 )          (369 )           668             299
Other time deposits                (213 )        (2,751 )        (2,964 )         1,084           1,712           2,796
Federal funds purchased
and other short-term
borrowings                          561            (129 )           432            (637 )           (63 )          (700 )
Advances from Federal
Home Loan Bank                      283             (37 )           246             199              (9 )           190

Total interest expense           (1,016 )        (5,438 )        (6,454 )           310           2,759           3,069

Change in net interest
income                         $  3,209        $  1,677        $  4,886        $  1,181        $ (1,441 )      $   (260 )

LOAN QUALITY. . .AmeriServ Financial's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. The Company's policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $250,000 within a 12-month period. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business loans $250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment. The following table sets forth information concerning AmeriServ Financial's loan delinquency and other non-performing assets.

AT DECEMBER 31,

. . .