UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D. C. 20549
 FORM
10-K
 
 
 T ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 for the
fiscal year ended December
31, 2008
 
 or
 
 £ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 Commission
File No:  2-96144
 
 CITIZENS
FINANCIAL CORP.
 (exact
name of registrant as specified in its charter)
 
 Delaware
                      
                      55-0666598(State
      of Incorporation)
                      
                      (I.R.S.
      Employer Identification Number)213
      Third St.Elkins, West Virginia
                      
                      26241(Address
      of Principal Executive Offices)
                      
                      (Zip
      Code)Registrant's
      Telephone Number, Including
      Area Code:
                      
                      (304)
636-4095
 
 Securities
Registered Pursuant to Section 12(b) of the Act:  None
 
 Securities
Registered Pursuant to Section 12(g) of the Act:  None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
  Yes
      £
                No
      T
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
 
 Yes
      £
                No
      T
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes
      T
                No
      £
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
 
 Yes
      T
                No
      £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated
filer,”  “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check One):
 
 Large
      Accelerated Filer £
                Accelerated
      Filer £
                Non-Accelerated
      Filer £
                Smaller
      Reporting Company T
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 
 Yes
      £
                No
      T
  1
  The
aggregate market value of Citizens Financial Corp. common stock, representing
all of its voting stock that was held by nonaffiliates as of the last business
day of Citizens most recently completed second fiscal quarter, approximated
$15,261,703.
 
 As of
March 11, 2009 Citizens Financial Corp. had 1,829,504 shares of common stock
outstanding with a par value of $2.00.
 
 Documents
incorporated by reference:  None
  2
  CITIZENSFINANCIAL CORP.
 FORM
10-K INDEX
  PagePart
      I
                                    Item
      1
                                    Business
                                    4Item
      1A
                                    Risk
      Factors
                                    Not
      applicableItem
      2
                                    Properties
                                    10Item
      3
                                    Legal Proceedings
                                    10Item
      4
                                    Submission of Matters to a Vote of Security
      Holders
                                    10Part
      II
                                    Item
      5
                                    Market for Registrant’s Common Equity, Related Stockholders
      Matters, and Issuer Purchases of Equity Securities
                                    10Item
      6
                                    Selected
      Financial Data
                                    Not
      applicableItem
      7
                                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                    18Item
      7A
                                    Quantitative
      and Qualitative Disclosures Amount Market Risk
                                    Not
      applicableItem
      8
                                    Financial Statements and Supplementary Data
                                    26Item
      9
                                    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                                    55Item
      9A
                                    Controls and Procedures
                                    55Item
      9B
                                    Other Information
                                    55Part
      III
                                    Item
      10
                                    Directors, Executive Officers, and Corporate
      Governance
                                    56Item
      11
                                    Executive Compensation
                                    57Item
      12
                                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                    60Item
      13
                                    Certain Relationships and Related Transactions and Director
      Independence
                                    61Item
      14
                                    Principal Accounting Fees and Services
                                    62Part
      IV
                                    Item
      15
                                    Exhibits and Financial Statement Schedules
                                    62
 3
  CitizensFinancial Corp.
 Form 10-K, Part
I
 
 Item
1.  Business
 
 
 Organizational History and
Subsidiaries
 
 Citizens
Financial Corp., ("Citizens" or the “company"), is a $283 million bank holding
company providing retail and commercial banking services primarily in central
and eastern West Virginia.  Citizens was incorporated in the State of
Delaware in 1986 and is the parent company and sole owner of Citizens National
Bank of Elkins (the “bank”).
 
 The bank
was organized in West Virginia in 1923, received approval of the Comptroller of
the Currency in 1924, and has continuously operated as a national bank
headquartered in Elkins, West Virginia since that time.  In 1987, the
stockholders of the bank approved an Agreement and Plan of Reorganization
whereby the bank became a wholly-owned subsidiary of Citizens Financial
Corp.  Since its formation, the bank has expanded to a six branch
network by acquiring the Tucker County Bank in Parsons, West Virginia in 1984
and the Petersburg, West Virginia office of South Branch Valley National Bank in
2000.  It also opened branch offices in Beverly, West Virginia in
1992, in Slatyfork, West Virginia in 2000, and in Marlinton, West Virginia in
2002.
 
 Business of Citizens and
Subsidiary
 
 As a bank
holding company, Citizens’ operations have been limited to the ownership of its
subsidiary.  To date, it has not sought to conduct any other form of
permitted business activity, nor are there any current plans to do
so.
 
 Citizens
National Bank, however, provides a wide range of retail and commercial banking
services including demand, savings and time deposits; residential, consumer and
commercial loans; letters of credit; safe deposit and wire transfer services;
and ATM, telebanking and internet banking services.  In addition, the
bank operates a trust department and has formed relationships which allow it to
provide brokerage and financial planning services as well as fixed rate
residential mortgages.
 
 In
competing with other financial service providers, the bank utilizes selective
pricing and marketing strategies but primarily relies on developing personal
relationships with customers and providing superior customer service. The bank
is heavily involved in local charitable, civic, educational and community
development efforts and prides itself on being a responsible corporate
citizen.
 
 Lending
Activities
 
 One of
the objectives held by the bank’s founders is the granting of loans to
creditworthy individuals and businesses, and the bank now provides such services
from each of its six offices.  In this regard, the bank has developed
three primary loan portfolios:  real estate, commercial, and consumer.
The real estate loan portfolio can be further segmented into four distinct
categories:  construction, home equity, residential mortgage, and
commercial mortgage.  Construction loans are typically made for the
construction of residential or commercial properties and have short maturity
intervals of one year or less.  These loans are often times converted
to permanent financing and transferred to either the residential or commercial
real estate categories.  Home equity loans are generally lines of
credit issued on residential properties that allow customers to access funds
through check writing privileges.  Residential mortgage loans are
typically made for the purchase or refinancing of single family homes and are
usually secured by a first lien deed of trust.  In general, these
loans do not exceed an 80% loan to value ratio as determined by the use of
independent appraisals or evaluations and carry a variable interest
rate.  Nearly all residential real estate loans are made within the
bank’s primary market area, and they tend to be in amounts of under
$100,000.  Loans, be they for residential real estate or other
purposes, which exceed the established lending limit of the loan officer require
approval of a superior officer or the directors loan
committee.  Historically, we have not experienced significant losses
in this area, and these loans are viewed among the least risky made by the
bank.  However, recent events surrounding the national housing market
and the economic recession may increase the risk within this type of
lending.  In addition, these loans, particularly those with larger
balances, are subject to periodic review by the bank’s loan review
function.
 
 Commercial
real estate loans consist of commercial mortgages which are generally secured by
nonresidential and multifamily (five or more) residential
properties.  These loans are typically made to local businesses and
are subject to many of the same criteria and controls as residential real estate
loans.  These loans do tend to be larger than residential real estate
loans and usually require approval of the directors’ loan committee as a
result.  Because of their size and higher degree of risk, these loans
are usually subject to more extensive credit analysis prior to being made,
require the appraisal of the real property collateral, and are subject to
periodic reviews by the bank’s loan review function.
  4
 Index
  The
commercial loan portfolio consists of loans to local businesses and are secured
by liens on accounts receivable, inventory, machinery and equipment, or other
business assets.  If necessary, personal guarantees of the business
owners, key man life insurance, and other forms of collateral are also required
although business cash flow represents the primary source of
repayment.  These loans are subject to the risks of the borrower’s
industry.  Such industries include auto dealerships, lumbering and
lumber related businesses, various tourism and hospitality businesses, and
retail and wholesale merchants.  Commercial loans are typically among
the largest loans made by the bank and are considered to carry a higher level of
risk than smaller loans.  Underwriting standards require a
comprehensive credit analysis, and the appraisal of real property and
significant machinery, such as lumbering equipment, held as
collateral.  We attempt to limit risk by diversifying the commercial
loan portfolio within the constraints of our economic market and closely
monitoring any concentrations of credit. Periodic credit reviews of commercial
loans are performed by the loan review function.
 
 Due to
the limited size of our market area as well as the increased competition for
home mortgage and auto loans, we also participate in commercial loans in
surrounding markets through other community banks similar to
ourselves.  These loans may be secured by commercial real estate or
other business property although the primary source of repayment is from
business operations.  Because these loans may be outside our primary
market area they are subject to extensive analysis including the business and
credit history of the borrowers and any guarantors, cash flow and payment
abilities, collateral valuations and other pertinent
factors.  Additional security such as the assignment of life insurance
and various loan covenants designed to limit risk are also obtained when
necessary.  As of December 31, 2007, these loans totaled $27.3
million, or 15.3% of our total loan portfolio.
 
 Consumer
loans are made to individuals for the financing of household and personal needs,
often the purchase of a car.  In such cases, the car is typically held
as collateral although the bank does grant unsecured consumer loans usually for
small amounts and with significantly higher interest rates than otherwise
offered.  Cash flow analysis and knowledge of the financial strength
and character traits of the borrower are important considerations in granting
many consumer loans.  When securing consumer loans with cars, the
value of the car relative to the loan is a key factor and is determined by auto
industry guides. Loan terms on consumer loans are typically three to six years,
depending on the type of collateral.  Unlike real estate and
commercial loans, few consumer loans require loan committee approval or are
subject to review by the loan review function.  As a result, risk is
closely tied to adherence to proper underwriting procedures and the condition of
the local economy.
 
 Our
credit policies and procedures are updated periodically and approved by the
board of directors annually.  These policies and procedures are
applied uniformly throughout Citizens’ banking network and are designed to
ensure credit quality is maintained while meeting the legitimate credit needs of
the communities we serve. Adherence to policies is ensured through testing
performed by both the internal audit function and compliance
officer.  Further information on our lending activities may be found
in the Management’s Discussion and Analysis portion of this report as well as in
the Notes to the accompanying consolidated financial statements.
 
 Investment
Activities
 
 Funds not
needed to satisfy loan demand or other operational needs are invested in a
portfolio of securities designed to improve earnings, provide liquidity, and
balance interest sensitivity concerns.  Our investment policy is
updated periodically and approved by the board of directors
annually.  This policy limits securities which may be held to those of
the U.S. government or its agencies having maturities of less than ten years;
bank qualified, investment grade municipal obligations maturing in less than
twenty years; investment grade corporate bonds with maturities of five years or
less; and mortgage backed obligations of the federal government having a
weighted average life of under 10 years.  All purchases, sales and
calls of securities, together with municipal and corporate holdings of any
single issuer which exceed 10% of capital and any holdings with a credit quality
below investment grade, are reported to the board of directors
monthly.
 
 The
investment portfolio is managed by the bank’s chief financial officer who meets
with the president on a quarterly basis to discuss investment strategies and
related liquidity and interest sensitivity issues.  Additional
information about the company’s investing activities is contained in the
Management’s Discussion and Analysis and in the Notes to the accompanying
consolidated financial statements.
 
 Deposit
Functions
 
 Our
primary source of funding is provided by our deposit base.  We offer a
variety of deposit products including demand deposits, savings, and time
deposits to customers in our market area to satisfy their saving, investing, and
retirement needs.  We do not solicit or accept out of market or
wholesale deposits, nor do we utilize the services of any deposit
brokers.  As is the case with our lending activities, some selective
pricing and marketing strategies are utilized in an effort to attract and retain
deposits, but developing strong customer relationships and providing superior
customer service remain central to the bank’s success.
  5
 Index
  Banking
Operations
 
 Operationally,
we have centralized administrative and support functions in an attempt to
achieve consistency and efficiency.  The bank’s main office provides
services such as bookkeeping, accounting, loan processing and administration,
compliance, marketing, training and development, human resources, and
information technology support.  Data processing, internal audit, and
loan review, while administered through the main office, are provided through
third parties who are experts in their fields.
 
 Employees
 
 As of
February 28, 2009, Citizens National Bank had a staff of 84 full-time equivalent
employees.  The bank’s employees are not represented by any union or
other collective bargaining agreement and employee relations are believed to be
good.  Citizens Financial Corp. does not have any paid
employees.
 
 Competition
 
 Despite
having a generally rural marketplace, Citizens faces a high degree of
competition for its services from other banks, savings institutions, credit
unions, insurance companies, mutual funds, securities brokers, financial
planners, mortgage brokers, credit card companies, and some governmental
agencies.  We  believe our focus on providing superior,
personalized services, as well as the ability to offer trust, brokerage, and
fixed rate mortgage products, help us prosper within this
environment.
 
 We
maintain offices in Randolph, Tucker, Grant and Pocahontas Counties, West
Virginia where a total of 27 banking offices representing 12 banks are
located.  As of June 30, 2008, the most recent date data is available,
Citizens held a 24.8% share of the $900 million deposit base in those
counties.
 
 Technological
advances have created new ways to serve customers and new forms of
competition.  We offer internet banking as a way of reaching customers
and meeting competitive demands.  Internet banking thus joins our
other delivery channels which include telebanking, ATMs and in-person branch
delivery.
 
 Economic Characteristics of
Citizens’ Marketplace
 
 Citizens
serves an area of West Virginia including the counties of Randolph, Tucker,
Grant and Pocahontas.  This market is a largely rural, mountainous
region covering approximately 2,876 square miles with a civilian labor force of
24,480.
 
 The
economy of this area typically does not experience highs or lows to the same
degree as the national economy and is generally less prosperous than the nation
as a whole.  Major industries in the area include lumber and wood
products, tourism, and poultry operations.  Other major sources of
employment include public schools, hospitals and other health care providers and
various forms of local and state governmental services.  As of
December, 2008, the unemployment rate in this market was 6.5% compared to 4.4%
for West Virginia and 7.1% nationwide.  Average annual wages in the
area approximate $29,804 which is below both state and national
levels.  Ongoing roadway improvements are helping to improve access to
and transportation within the area and are expected to provide long-term
economic benefits.  However, the local economy is not expected to
undergo significant changes in the short-term.
 
 Supervision and
Regulation
 
 The
following is a summary of certain statutes and regulations affecting Citizens
and its subsidiary and is qualified in its entirety by reference to such
statutes and regulations:
 
 Bank Holding Company
Regulation
 
 Citizens
is a bank holding company under the Bank Holding Company Act of 1956 (“BHCA”),
which restricts its activities as well as any acquisition by it of voting stock
or assets of any bank, savings association or other
company.   The holding company is subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve
Board.   The subsidiary bank is subject to restrictions imposed
by the Federal Reserve Act on transactions with affiliates, including any loans
or extensions of credit to the holding company or its subsidiaries, investments
in the stock or other securities thereof and the taking of such stock or
securities as collateral for loans to any borrower; the issuance of guarantees,
acceptances or letters of credit on behalf of the holding company and its
subsidiaries; purchases or sales of securities or other assets; and the payment
of money or furnishing of services to the holding company and other
subsidiaries.   The bank is prohibited from acquiring direct or
indirect control of more than 5% of any class of voting stock or substantially
all of the assets of any bank holding company without the prior approval of the
Federal Reserve Board.   Citizens and its subsidiary is
prohibited from engaging in certain tying arrangements in connection with
extensions of credit and/or the provision of other property or services to a
customer by the holding company or its subsidiaries.
  6
 Index
  The BHCA
also permits Citizens to purchase or redeem its own
securities.  However, Regulation Y provides that prior notice must be
given to the Federal Reserve Board if the gross consideration for such purchase
or consideration, when aggregated with the net consideration paid by the company
for all such purchases or redemptions during the preceding 12 months, is equal
to 10 percent or more of the company’s consolidated net worth.  Prior
notice is not required if (i) both before and immediately after the redemption,
the bank holding company is well-capitalized; (ii) the financial holding company
is well-managed; and (iii) the bank holding company is not the subject of any
unresolved supervisory issues.
 
 The
Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act
of 1999) permits bank holding companies to become financial holding
companies.   This allows them to affiliate with securities firms
and insurance companies and to engage in other activities that are financial in
nature.   A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, is well managed and
has at least a satisfactory rating under the Community Reinvestment
Act.   No regulatory approval will be required for a financial
holding company to acquire a company, other than a bank or savings association,
engaged in activities that are financial in nature or incidental to activities
that are financial in nature, as determined by the Federal Reserve
Board.
 
 The
Financial Services Modernization Act defines "financial in nature" to include:
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve Board has determined to be
closely related to banking.   A bank also may engage, subject to
limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development and real estate investment, through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory Community Reinvestment Act rating.
 
 Bank Subsidiary
Regulation
 
 Citizens
National Bank, as a national banking association, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency
(“OCC”).  It is also a member of the Federal Reserve System, and as
such is subject to applicable provisions of the Federal Reserve Act and
regulations issued thereunder.
 
 The
deposits of the bank are insured by the Federal Deposit Insurance Corporation
(“FDIC”) to the extent provided by law.  Accordingly, the bank is also
subject to regulation by the FDIC.  The FDIC may terminate a bank’s
deposit insurance upon finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, rule, order or condition enacted
or imposed by the bank’s regulatory agency.
 
 Capital
Requirements
 
 As a bank
holding company, Citizens is subject to the Federal Reserve Board’s risk-based
capital guidelines.  The guidelines establish a systematic framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
account and minimizes disincentives to holding liquid, low-risk
assets.  Under the guidelines, bank holding companies must maintain
capital sufficient to meet both a risk-based asset ratio test and leverage ratio
test on a consolidated basis.  The risk-based ratio is determined by
allocating assets and specified off-balance-sheet commitments into four weighted
categories, with higher levels of capital being required for categories
perceived as representing greater risk.
 
 Citizens
National Bank is subject to substantially similar capital requirements adopted
by its applicable regulatory agencies.  In addition, the Federal
Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a
regulatory framework which ties the level of supervisory intervention by bank
regulatory authorities primarily to a depository institution’s capital
category.  Among other things, FDICIA authorized regulatory
authorities to take “prompt corrective action” with respect to depository
institutions that do not meet minimum capital requirements.  FDICIA
established five capital tiers:  well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.  Citizens is well capitalized as detailed in Note 13
to the accompanying consolidated financial statements.
  7
 Index
  FDIC
Assessments
 
 The FDIC
imposes an assessment against all depository institutions for deposit
insurance.  This assessment is based on the risk category of the
institution and, prior to 2009, ranged from five to 43 basis points of an
institution’s deposits.  On October 7, 2008, as a result of decreases
in the reserve ratio of the DIF, the FDIC issued a proposed rule establishing a
Restoration Plan for the DIF.  The rulemaking proposed that, effective
January 1, 2009, assessment rates would increase uniformly by seven basis points
for the first quarter 2009 assessment period.  The rulemaking proposed
to alter the way in which the FDIC’s risk-based assessment system differentiates
for risk and set new deposit insurance assessment rates, effective April 1,
2009.  Under the proposed rule, the FDIC would first establish an
institution’s initial base assessment rate.  This initial base
assessment rate would range, depending on the risk category of the institution,
from 10 to 45 basis points.  The FDIC would then adjust the initial
base assessment (higher or lower) to obtain the total base assessment
rate.  The adjustment to the initial base assessment rate would be
based upon an institution’s levels of unsecured debt, secured liabilities, and
brokered deposits.  The total base assessment rate would range from
eight to 77.5 basis points of the institution’s deposits.  On December
22, 2008, the FDIC published a final rule raising the current deposit insurance
assessment rates uniformly for all institutions by seven basis points (to a
range from 12 to 50 basis points) for the first quarter of
2009.  However, the FDIC approved an extension of the comment period
on the parts of the proposed rulemaking that would become effective on April 1,
2009.  The FDIC expects to issue a second final rule early in 2009, to
be effective April 1, 2009, to change the way that the FDIC’s assessment
differentiates for risk and to set new assessment rates beginning with the
second quarter of 2009.  On February 27, 2009, the FDIC proposed an
emergency assessment charged to all financial institutions of 0.20% of insured
deposits as of June 30, 2009, payable on September 30, 2009.  In March
of 2009, the FDIC reduced the amount of the proposed assessment to 0.10% of
insured deposits as of June 30, 2009.
 
 Troubled Asset Relief
Program – Capital Purchase Program
 
 On
October 3, 2008, the Federal government enacted the Emergency Economic
Stabilization Act of 2008 (“EESA”).  EESA was enacted to provide
liquidity to the U.S. financial system and lessen the impact of looming economic
problems.  The EESA included broad authority.  The
centerpiece of the EESA is the Troubled Asset Relief Program
(“TARP”).  EESA’s broad authority was interpreted to allow the U.S.
Treasury to purchase equity interests in both healthy and troubled financial
institutions.  The equity purchase program is commonly referred to as
the Capital Purchase Program (“CPP”).  The company does not plan to
participate in the CPP at this time, as the company’s capital levels continue to
exceed the requirements to be considered well-capitalized.
 
 America Recovery and
Reinvestment Act of 2009
 
 On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus
or economic recovery package.  ARRA includes a wide variety of
programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs.  In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future TARP recipients that are in addition to those
previously announced by the U.S. Treasury, until the institution has repaid the
U.S. Treasury, which is now permitted under ARRA without penalty and without the
need to raise new capital, subject to the U.S. Treasury’s consultation with the
recipient’s appropriate regulatory agency.
 
 Future
Legislation
 
 Various
other legislative and regulatory initiatives, including proposals to overhaul
the banking regulatory system and to limit the investments that a depository
institution may make with insured funds, are from time to time introduced in
Congress and state legislatures, as well as regulatory agencies.  Such
legislation may change banking statutes and the operating environment of the
company and the bank in substantial and unpredictable ways, and could increase
or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance depending upon whether any of this potential
legislation will be enacted, and if enacted, the effect that it or any
implementing regulations, would have on the financial condition or results of
operations of the company or the bank.  With the recent enactments of
EESA and ARRA, the nature and extent of future legislative and regulatory
changes affecting financial institutions is very unpredictable at this
time.  The company cannot determine the ultimate effect that such
potential legislation, if enacted, would have upon its financial condition or
operations.
 
 Federal and State
Laws
 
 Citizens
National Bank is subject to regulatory oversight under various consumer
protection and fair lending laws.   These laws govern, among
other things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment.  Failure to abide by federal
laws and regulations governing community reinvestment could limit the ability of
a bank to open a new branch or engage in a merger
transaction.   Community reinvestment regulations evaluate how
well and to what extent a bank lends and invests in its designated service area,
with particular emphasis on low-to-moderate income communities and borrowers in
such areas.
  8
 Index
  Monetary Policy and Economic
Conditions
 
 The
business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board.   The Federal
Reserve Board regulates money and credit conditions and interest rates to
influence general economic conditions primarily through open market operations
in U.S. government securities, changes in the discount rate on bank borrowings
and changes in the reserve requirements against depository institutions'
deposits.   These policies and regulations significantly affect
the overall growth and distribution of loans, investments and deposits, and the
interest rates charged on loans, as well as the interest rates paid on
deposits.
 
 The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of financial institutions in the past and are expected to
continue to have significant effects in the future.   In view of
the changing conditions in the economy and the money markets and the activities
of monetary and fiscal authorities, we cannot definitely predict future changes
in interest rates, credit availability or deposit levels.
 
 Effect of Environmental
Regulation
 
 Citizens
National Bank’s primary exposure to environmental risk is through its lending
activities.   In cases when management believes environmental
risk potentially exists, the bank mitigates its environmental risk exposures by
requiring environmental site assessments at the time of loan origination to
confirm collateral quality as to commercial real estate parcels posing higher
than normal potential for environmental impact, as determined by reference to
present and past uses of the subject property and adjacent
sites.   Environmental assessments are typically required prior
to any foreclosure activity involving non-residential real estate
collateral.
 
 With
regard to residential real estate lending, management reviews those loans with
inherent environmental risk on an individual basis and makes decisions based on
the dollar amount of the loan and the materiality of the specific
credit.
 
 We
anticipate no material effect on capital expenditures, earnings or competitive
position as a result of compliance with federal, state or local environmental
protection laws or regulations.
 
 International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot
Act)
 
 The
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001 (the “Patriot Act”) was adopted in response to the September 11, 2001
terrorist attacks.   The Patriot Act provides law enforcement
with greater powers to investigate terrorism and prevent future terrorist
acts.   Among the broad-reaching provisions contained in the
Patriot Act are several designed to deter terrorists’ ability to launder money
in the United States and provide law enforcement with additional powers to
investigate how terrorists and terrorist organizations are
financed.   The Patriot Act creates additional requirements for
banks, which were already subject to similar regulations.   The
Patriot Act authorizes the Secretary of the Treasury to require financial
institutions to take certain “special measures” when the Secretary suspects that
certain transactions or accounts are related to money
laundering.   These special measures may be ordered when the
Secretary suspects that a jurisdiction outside of the United States, a financial
institution operating outside of the United States, a class of transactions
involving a jurisdiction outside of the United States or certain types of
accounts are of “primary money laundering concern.”  The special
measures include the following:  (a) require financial
institutions to keep records and report on the transactions or accounts at
issue; (b) require financial institutions to obtain and retain information
related to the beneficial ownership of any account opened or maintained by
foreign persons; (c) require financial institutions to identify each customer
who is permitted to use a payable-through or correspondent account and obtain
certain information from each customer permitted to use the account; and (d)
prohibit or impose conditions on the opening or maintaining of correspondent or
payable-through accounts.
 
 Sarbanes-Oxley
 
 On July
30, 2002, the Senate and the House of Representatives of the United States
enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other
issues, corporate governance, auditing and accounting, executive compensation,
and enhanced and timely disclosure of corporate information.
 
 Effective
August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, Citizens’
chief executive officer and chief financial officer are each required to certify
that Citizens’ Quarterly and Annual Reports do not contain any untrue statement
of a material fact.  The rules have several requirements, including
having these officers certify that:  they are responsible for
establishing, maintaining and regularly evaluating the effectiveness of
Citizens’ internal controls; they have made certain disclosures to Citizens’
auditors and the audit committee of the Board of Directors about Citizens’
internal controls; and they have included information in Citizens’ Quarterly and
Annual Reports about their evaluation and whether there have been significant
changes in Citizens’ internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation.  In 2007, additional regulations under Section 404 of
Sarbanes-Oxley became applicable to Citizens.  In response to Section
404, management assesses the company’s system of internal control over financial
reporting in order to determine whether the system is effective and that it
meets the criteria of the Internal Control-Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on current information, we expect that in 2009, Section
404 will require that our independent auditors also provide an attestation on
management’s assertion of internal control over financial
reporting.
  9
 Index
  Item2.  Properties
 
 We
provide services from offices owned by the bank including its approximately
16,940 square foot main office located at 213 Third Street, Elkins, West
Virginia.  In addition, the bank owns a drive-in facility directly
across from its main office on Third Street and it has owned and operated a
5,000 square foot full service branch in Parsons, West Virginia since
1984.  In 1992, a branch facility was opened in Beverly, West Virginia
which contains approximately 1,840 square feet.  This facility, which
is also owned, provides drive-in and ATM service in addition to traditional
deposit and teller services.  Loan services were recently established
at this location in November 2007.  During 2000 the bank acquired and
opened a full service facility in Petersburg, West Virginia.  That
facility was expanded in 2004 to 2,980 square feet.  We also
constructed a full service facility in Slatyfork, West Virginia containing 3,200
square feet in 2000.  All of these facilities are fully utilized for
banking purposes except the Parsons branch which leases approximately 800 square
feet to a cable television company.
 
 In
January 2002, the bank opened a full-service branch located in leased space
within a supermarket in Marlinton, West Virginia.  In 2004, we
completed the construction of a 3,500 square foot free-standing branch in
Marlinton and which allowed us to exit the supermarket facility.
 
 The bank
also owns two properties which adjoin its main office for future
expansion.  In 2006, a parking lot was constructed on one such
property.  A portion of the office space in the other property is
leased to tenants, while we also use a section of the building for storage and
office space.  In 2004 we purchased a property adjacent to our Beverly
branch as a means of both maintaining our own property value and providing for
expansion needs. This facility was occupied by a tenant until
2008.  This facility is currently vacant.
 
 Citizens
Financial Corp. does not own or lease any property.  To date Citizens
has utilized the bank's facilities and has not occupied more than a minimal
amount of space.  No compensation is paid to the bank in any way for
such usage as it is deemed to be insignificant.
 
 Item3.  Legal Proceedings
 
 As of
December 31, 2008 Citizens Financial Corp. was not involved in any material
legal proceedings.  The bank is involved in various legal proceedings
which occur in the normal course of business, however.  After
consultation with legal counsel, we believe that all such litigation will be
resolved without materially affecting the company’s financial position or
results of operations.  In addition, there are no material proceedings
known to be threatened or contemplated against the company or its
subsidiaries.
 
 Item4.  Submission of Matters to a Vote of Security
Holders
 
 No
matters were submitted to a vote of security holders of Citizens Financial Corp.
during the fourth quarter of 2008.
  PartII
  Item 5.  Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 
 Historically,
the stock of Citizens Financial Corp. has traded only sporadically. The stock is
traded on the over the counter bulletin board system, and a number of brokerage
firms provide an efficient and orderly market for transactions involving its
shares. There are no further plans, understandings, arrangements or agreements
to list the stock on any larger exchanges at this time.
 
 Citizens
has only one class of stock, that being common stock, and all voting rights are
vested in its holders.  The shareholders of Citizens are entitled to
one vote for each share of common stock owned on all matters subject to a vote
of shareholders.  At February 28, 2009 shareholders of record numbered
approximately 460.  The company has no plans to issue any other forms
of capital.
 
 On March
7, 2006, Citizens board of directors declared a stock split which was paid on
April 14, 2006, in the form of a 200% stock dividend to shareholders of record
April 3, 2006.  The primary reason for doing so was to reduce the
share price of the stock in an effort to improve its
liquidity.  Citizens stock, which is neither widely held nor widely
traded, is an over the counter bulletin board stock with the symbol
CIWV.OB.  Distribution of this stock dividend required the use of all
authorized shares.  On April 22, 2006, the shareholders authorized an
additional 2,250,000 shares for future use.
  10
 Index
  Citizens
maintains a policy under which it may repurchase shares of its own stock,
subject to certain limitations, when the Board of Directors determines it is in
the best interest of the company to do so.  Such shares are purchased
on the open market through independent brokers.  At both December 31,
2008 and 2007, the company had repurchased 420,496 shares.  The
purchase of these shares has not had a material impact on either capital or
liquidity.  No plans currently exist regarding their use and there are
no plans regarding future purchases.
 
 The
following table presents the high and low market prices for Citizens' common
stock for the periods indicated.
 
 High
                            
                            
                            Low2009First
      Quarter throughFebruary
      28, 2009
                            
                            $
                            7.00
                            
                            
                            $
                            6.602008First
      Quarter
                            
                            $
                            10.82
                            
                            
                            $
                            10.05Second
      Quarter
                            
                            $
                            12.71
                            
                            
                            $
                            8.93Third
      Quarter
                            
                            $
                            9.82
                            
                            
                            $
                            7.78Fourth
      Quarter
                            
                            $
                            9.30
                            
                            
                            $
                            7.002007First
      Quarter
                            
                            $
                            19.89
                            
                            
                            $
                            18.92Second
      Quarter
                            
                            $
                            19.28
                            
                            
                            $
                            17.19Third
      Quarter
                            
                            $
                            17.68
                            
                            
                            $
                            13.28Fourth
      Quarter
                            
                            $
                            14.85
                            
                            
                            $
                            11.25
 
 The
prices listed above are based upon information available to management through
those brokers which deal in the company’s stock as well as through certain
internet quotation services and are believed to accurately represent the amount
at which its stock was traded during the periods indicated. Prices reflect
amounts paid by purchasers of the stock and, therefore, may include commissions
or fees paid to brokers.  The amounts of such commissions or fees, if
any, are not known to management.  No attempt was made by management
to ascertain the prices for every sale made during these periods.
 
 Citizens
shareholders are entitled to receive dividends when and as declared by its Board
of Directors.  Dividends are typically paid
quarterly.  Aggregate dividends were $0.40 per share in 2008 and $0.48
per share in 2007.  Payment of dividends by Citizens is dependent upon
payment of dividends to it by the subsidiary bank.  The ability of the
bank to pay dividends is subject to certain limitations imposed by national
banking laws as outlined in Note 13 to the accompanying consolidated financial
statements.
 
 No shares
of Citizens stock have been authorized for issuance under any type of equity
compensation plan.  In addition, at no time during the last three
years have we sold any Citizens stock which was not registered under the
Securities Act of 1933.
 11
 Index
  The
following table provides information with respect to Citizens’ purchases of its
own common stock during the fourth quarter of the fiscal year.  All
such purchases were made under a general policy, noted earlier, permitting the
Board of Directors to make such purchases when it is believed to be in the best
interest of the company to do so and not as part of any publicly announced plan
or program.
 
 ISSUER
PURCHASES OF EQUITY SECURITIES
 
 Period
                  Total
      Number
                    of
      shares
                    purchased
                  Average
                    price
      paid
                    per share
                  Total
      Number
                    of
      shares
                    purchased
      as
                    part
      of publicly
                    announced
      plans
                    or programs
                  Maximum
                    Number
                    of
      shares that
                    may
      yet be
                    purchased
      under
                    the
      plans or
                    programsOctober
      1-31, 2008
                  -
                  N/A
                  N/A
                  N/ANovember
      1-30, 2008
                  -
                  N/A
                  N/A
                  N/ADecember
      1-31, 2008
                  -
                  N/A
                  N/A
                  N/A
 
 
 Additional
information required under Securities Act Industry Guide 3 for Bank Holding
Companies follows:
  12
 Index
  Distribution
of Assets, Liabilities & Shareholders' Equity;
 Interest
Rates and Interest Differential
  2008
                                                                          
                                                                          
                                                                          2007Avg Bal
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Yield/Rate
                                                                          
                                                                          
                                                                          Avg Bal
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Yield/Rate(in
      thousands of dollars)
                                                                          
                                                                          
                                                                          (in
      thousands of dollars)Interest
      Earning Assets:Federal
      funds sold and interest bearing deposits with other banks
                                                                          
                                                                          $
                                                                          5,352
                                                                          
                                                                          
                                                                          $
                                                                          156
                                                                          
                                                                          
                                                                          
                                                                          2.91
                                                                          %
                                                                          
                                                                          $
                                                                          2,166
                                                                          
                                                                          
                                                                          $
                                                                          110
                                                                          
                                                                          
                                                                          
                                                                          5.08
                                                                          %Securities:Taxable
                                                                          
                                                                          
                                                                          49,121
                                                                          
                                                                          
                                                                          
                                                                          2,237
                                                                          
                                                                          
                                                                          
                                                                          4.55
                                                                          
                                                                          
                                                                          
                                                                          43,295
                                                                          
                                                                          
                                                                          
                                                                          1,844
                                                                          
                                                                          
                                                                          
                                                                          4.26Tax-exempt
      (1)
                                                                          
                                                                          
                                                                          22,627
                                                                          
                                                                          
                                                                          
                                                                          1,270
                                                                          
                                                                          
                                                                          
                                                                          5.61
                                                                          
                                                                          
                                                                          
                                                                          15,835
                                                                          
                                                                          
                                                                          
                                                                          883
                                                                          
                                                                          
                                                                          
                                                                          5.58Loans
      (net of unearned interest) (1) (2)
                                                                          
                                                                          
                                                                          175,544
                                                                          
                                                                          
                                                                          
                                                                          12,026
                                                                          
                                                                          
                                                                          
                                                                          6.85
                                                                          
                                                                          
                                                                          
                                                                          170,263
                                                                          
                                                                          
                                                                          
                                                                          13,474
                                                                          
                                                                          
                                                                          
                                                                          7.91Total
      interest earning assets  (1)
                                                                          
                                                                          
                                                                          252,644
                                                                          
                                                                          
                                                                          
                                                                          15,689
                                                                          
                                                                          
                                                                          
                                                                          6.21
                                                                          
                                                                          
                                                                          
                                                                          231,559
                                                                          
                                                                          
                                                                          
                                                                          16,311
                                                                          
                                                                          
                                                                          
                                                                          7.04Nonearning
      assets:Cash
      and due from banks
                                                                          
                                                                          
                                                                          5,556
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4,951Bank
      premises and equipment, net
                                                                          
                                                                          
                                                                          4,190
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4,260Other
      assets
                                                                          
                                                                          
                                                                          6,633
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          6,677Allowance
      for loan losses
                                                                          
                                                                          
                                                                          (2,009
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (1,920
                                                                          )Total
      assets
                                                                          
                                                                          $
                                                                          267,014
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          245,527Interest
      Bearing Liabilities:Savings
      deposits
                                                                          
                                                                          $
                                                                          21,553
                                                                          
                                                                          
                                                                          
                                                                          90
                                                                          
                                                                          
                                                                          
                                                                          0.42
                                                                          
                                                                          
                                                                          $
                                                                          21,867
                                                                          
                                                                          
                                                                          
                                                                          121
                                                                          
                                                                          
                                                                          
                                                                          0.55Time
      deposits
                                                                          
                                                                          
                                                                          106,544
                                                                          
                                                                          
                                                                          
                                                                          4,325
                                                                          
                                                                          
                                                                          
                                                                          4.06
                                                                          
                                                                          
                                                                          
                                                                          99,855
                                                                          
                                                                          
                                                                          
                                                                          4,536
                                                                          
                                                                          
                                                                          
                                                                          4.54NOW
      accounts
                                                                          
                                                                          
                                                                          55,232
                                                                          
                                                                          
                                                                          
                                                                          1,240
                                                                          
                                                                          
                                                                          
                                                                          2.25
                                                                          
                                                                          
                                                                          
                                                                          44,999
                                                                          
                                                                          
                                                                          
                                                                          1,277
                                                                          
                                                                          
                                                                          
                                                                          2.84Money
      market accounts
                                                                          
                                                                          
                                                                          5,550
                                                                          
                                                                          
                                                                          
                                                                          25
                                                                          
                                                                          
                                                                          
                                                                          0.45
                                                                          
                                                                          
                                                                          
                                                                          5,603
                                                                          
                                                                          
                                                                          
                                                                          28
                                                                          
                                                                          
                                                                          
                                                                          0.50Borrowings
                                                                          
                                                                          
                                                                          25,367
                                                                          
                                                                          
                                                                          
                                                                          709
                                                                          
                                                                          
                                                                          
                                                                          2.79
                                                                          
                                                                          
                                                                          
                                                                          22,294
                                                                          
                                                                          
                                                                          
                                                                          819
                                                                          
                                                                          
                                                                          
                                                                          3.67Total
      interest bearing liabilities
                                                                          
                                                                          
                                                                          214,246
                                                                          
                                                                          
                                                                          
                                                                          6,389
                                                                          
                                                                          
                                                                          
                                                                          2.98
                                                                          
                                                                          
                                                                          
                                                                          194,618
                                                                          
                                                                          
                                                                          
                                                                          6,781
                                                                          
                                                                          
                                                                          
                                                                          3.48Noninterest
      bearing liabilities:Demand
      deposits
                                                                          
                                                                          
                                                                          27,914
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          26,623Other
      liabilities
                                                                          
                                                                          
                                                                          3,215
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3,373Shareholders'
      equity
                                                                          
                                                                          
                                                                          21,639
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          20,913Total
      liabilities and shareholder's equity
                                                                          
                                                                          $
                                                                          267,014
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          245,527Net
      interest income (1)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          9,300
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          9,530Net
      interest income to average earning assets  (1)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3.68
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4.12
                                                                          %
 (1)
Yields on tax-exempt holdings are expressed on a tax equivalent basis using a
34% tax rate.
 
 (2) For
the purpose of these computations, nonaccruing loans are included in the amounts
of average loans outstanding.
  13
 Index
  Rate
Volume Analysis
 
 The
following table sets forth a summary on the changes in interest earned and
interest expense  detailing the amounts attributable to (i) changes in
volume (change in the average volume times the prior year's average rate), (ii)
changes in rate (change in the average rate times the prior year's average
volume).  The changes in rate/volume (change in the average volume
times the change in the average rate), has been allocated to the changes in
volume and  changes in rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
 
 2008
      Compared to 2007Increase
                              
                              
                              (Decrease)
                              
                              
                              Due to(in
      thousands of dollars)Volume
                              
                              
                              Rate
                              
                              
                              TotalInterest
      earned on:Federal
      funds sold and interest bearing deposits with other banks
                              
                              $
                              (62
                              )
                              
                              $
                              108
                              
                              
                              $
                              46Taxable
      securities
                              
                              
                              132
                              
                              
                              
                              261
                              
                              
                              
                              393Tax-exempt
      securities
                              
                              
                              7
                              
                              
                              
                              380
                              
                              
                              
                              387Loans
                              
                              
                              (1,853
                              )
                              
                              
                              405
                              
                              
                              
                              (1,448
                              )Total
      interest earned
                              
                              
                              (1,776
                              )
                              
                              
                              1,154
                              
                              
                              
                              (622
                              )Interest
      expense on:Savings
      deposits
                              
                              
                              (29
                              )
                              
                              
                              (2
                              )
                              
                              
                              (31
                              )Time
      deposits
                              
                              
                              (501
                              )
                              
                              
                              290
                              
                              
                              
                              (211
                              )NOW
      accounts
                              
                              
                              (298
                              )
                              
                              
                              261
                              
                              
                              
                              (37
                              )Money
      market accounts
                              
                              
                              (3
                              )
                              
                              
                              -
                              
                              
                              
                              (3
                              )Other
      borrowing
                              
                              
                              (213
                              )
                              
                              
                              103
                              
                              
                              
                              (110
                              )Total
      interest expense
                              
                              
                              (1,044
                              )
                              
                              
                              652
                              
                              
                              
                              (392
                              )Net
      interest income
                              
                              $
                              (732
                              )
                              
                              $
                              502
                              
                              
                              $
                              (230
                              )
 14
 Index
  Securities
Portfolio
 
 Presentation
of the amortized cost of securities as of December 31, 2008 and 2007 may be
found in Note 3 to the accompanying consolidated financial
statements.
 
 The
following table sets forth the maturities of securities as of December 31, 2008
and the weighted average yields of such securities (calculated on the as is of
the amortized cost and effective yields weighted for the scheduled maturity of
each security).
 
 Within
      One
                                              
                                              
                                              After
      One but
                                              
                                              
                                              After
      Five but
                                              
                                              
                                              After
      TenYear
                                              
                                              
                                              Within Five Years
                                              
                                              
                                              Within Ten Years
                                              
                                              
                                              Years
                                              
                                              
                                              TotalAmount
                                              
                                              
                                              Yield
                                              
                                              
                                              Amount
                                              
                                              
                                              Yield
                                              
                                              
                                              Amount
                                              
                                              
                                              Yield
                                              
                                              
                                              Amount
                                              
                                              
                                              Yield
                                              
                                              
                                              Amount
                                              
                                              
                                              Yield(in
      thousands of dollars)U.S.
      Treasury and other U.S. government agencies and
    corporations
                                              
                                              $
                                              16,991
                                              
                                              
                                              
                                              4.24
                                              %
                                              
                                              $
                                              21,194
                                              
                                              
                                              
                                              4.55
                                              %
                                              
                                              $
                                              13,039
                                              
                                              
                                              
                                              5.32
                                              %
                                              
                                              $
                                              -
                                              
                                              
                                              
                                              -
                                              %
                                              
                                              $
                                              51,224
                                              
                                              
                                              
                                              4.64
                                              %State
      and political subdivisions (1)
                                              
                                              
                                              2,322
                                              
                                              
                                              
                                              5.09
                                              
                                              
                                              
                                              6,458
                                              
                                              
                                              
                                              5.39
                                              
                                              
                                              
                                              14,168
                                              
                                              
                                              
                                              5.45
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              22,948
                                              
                                              
                                              
                                              5.39Other
      securities
                                              
                                              
                                              2,137
                                              
                                              
                                              
                                              3.23
                                              
                                              
                                              
                                              2,996
                                              
                                              
                                              
                                              5.31
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,192
                                              
                                              
                                              
                                              0.54
                                              
                                              
                                              
                                              6,325
                                              
                                              
                                              
                                              3.71Total
                                              
                                              $
                                              21,450
                                              
                                              
                                              
                                              4.23
                                              %
                                              
                                              $
                                              30,648
                                              
                                              
                                              
                                              4.80
                                              %
                                              
                                              $
                                              27,207
                                              
                                              
                                              
                                              5.39
                                              %
                                              
                                              $
                                              1,192
                                              
                                              
                                              
                                              0.54
                                              %
                                              
                                              $
                                              80,497
                                              
                                              
                                              
                                              4.78
                                              %
 
 The
portfolio contains no securities of any single issuer in which the aggregate
amortized cost of such securities exceeds ten percent of shareholders'
equity.
 
 (1)
Tax-equivalent adjustments, using a rate of 34%, have been made in calculating
yields on obligations of state and political subdivisions.
  15
 Index
  Loan
Portfolio
 
 Types of
Loans
 
 The
distribution of loans by major category for each of the last five fiscal year
ends are provided below.  All loans in the portfolio are domestic in
nature.
 
 December 312008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(in
      thousands of dollars)Commercial,
      financial and agricultural
                    
                    $
                    20,262
                    
                    
                    $
                    21,016
                    
                    
                    $
                    26,969
                    
                    
                    $
                    26,589
                    
                    
                    $
                    23,831Real
      estate-construction
                    
                    
                    13,832
                    
                    
                    
                    12,497
                    
                    
                    
                    13,964
                    
                    
                    
                    10,559
                    
                    
                    
                    8,759Real
      estate-mortgage
                    
                    
                    128,912
                    
                    
                    
                    126,445
                    
                    
                    
                    114,966
                    
                    
                    
                    104,868
                    
                    
                    
                    101,083Installment
      loans
                    
                    
                    11,424
                    
                    
                    
                    10,903
                    
                    
                    
                    10,635
                    
                    
                    
                    9,726
                    
                    
                    
                    10,734Other
                    
                    
                    3,624
                    
                    
                    
                    2,012
                    
                    
                    
                    1,611
                    
                    
                    
                    2,051
                    
                    
                    
                    1,636Total
      loans
                    
                    $
                    178,054
                    
                    
                    $
                    172,873
                    
                    
                    $
                    168,145
                    
                    
                    $
                    153,793
                    
                    
                    $
                    146,043
 
 Loan Maturities and Interest
Rate Sensitivity
 
 Note 4 to
the accompanying consolidated financial statements also provides data concerning
the contractual maturities of loans, including commercial, financial and
agricultural loans as well as real estate construction loans, as of December 31,
2008.  Also provided are the amounts due after one year classified as
fixed rate and variable rate loans.
 
 Risk
Elements
 
 Nonperforming
Loans
 
 The table
below presents our nonperforming loan data for each of the last five fiscal year
ends:
 
 December 312008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(in
      thousands of dollars)Nonaccrual
      loans
                    
                    $
                    5,471
                    
                    
                    $
                    4,487
                    
                    
                    $
                    2,208
                    
                    
                    $
                    58
                    
                    
                    $
                    -Loans
      past due 90 days or more still accruing interest
                    
                    
                    313
                    
                    
                    
                    206
                    
                    
                    
                    -
                    
                    
                    
                    538
                    
                    
                    
                    559Troubled
      debt restructurings
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    5,784
                    
                    
                    $
                    4,693
                    
                    
                    $
                    2,208
                    
                    
                    $
                    596
                    
                    
                    $
                    559
 
 Potential Problem
Loans
 
 As stated
in Note 5 to the accompanying consolidated financial statements, impaired loans
totaled $4,997,217 and $4,037,521 at December 31, 2008 and
2007.  These loans were classified as impaired due to doubts about the
borrower’s ability to repay as called for in the loan
documents.  Additional information regarding these loans may also be
found in Note 5
 
 Loan
Concentrations
 
 Information
concerning loan concentrations is provided in Note 4 to the accompanying
consolidated financial statements.
 
  16
 Index
  Summary of Loan Loss
Experience
 
 The
following table provides an analysis of our allowance for loan losses for each
of the last five fiscal year ends.
 
 December 312008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(in
      thousands of dollars)Balance,
      beginning of year
                    
                    $
                    1,763
                    
                    
                    $
                    1,873
                    
                    
                    $
                    1,597
                    
                    
                    $
                    1,378
                    
                    
                    $
                    1,396Charge
      offs:Commercial,
      financial and agricultural
                    
                    
                    302
                    
                    
                    
                    1,538
                    
                    
                    
                    123
                    
                    
                    
                    -
                    
                    
                    
                    1,031Real
      estate-mortgage
                    
                    
                    1,441
                    
                    
                    
                    348
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    36Installment
                    
                    
                    28
                    
                    
                    
                    49
                    
                    
                    
                    39
                    
                    
                    
                    90
                    
                    
                    
                    198Total
                    
                    
                    1,771
                    
                    
                    
                    1,935
                    
                    
                    
                    162
                    
                    
                    
                    90
                    
                    
                    
                    1,165Recoveries:Commercial,
      financial and agricultural
                    
                    
                    181
                    
                    
                    
                    8
                    
                    
                    
                    4
                    
                    
                    
                    5
                    
                    
                    
                    192Real
      estate-mortgage
                    
                    
                    90
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    -Installment
                    
                    
                    10
                    
                    
                    
                    34
                    
                    
                    
                    11
                    
                    
                    
                    28
                    
                    
                    
                    20Total
                    
                    
                    281
                    
                    
                    
                    42
                    
                    
                    
                    15
                    
                    
                    
                    34
                    
                    
                    
                    212Net
      charge offs
                    
                    
                    1,490
                    
                    
                    
                    1,893
                    
                    
                    
                    147
                    
                    
                    
                    56
                    
                    
                    
                    953Provisions
      for loan losses
                    
                    
                    1,959
                    
                    
                    
                    1,783
                    
                    
                    
                    423
                    
                    
                    
                    275
                    
                    
                    
                    935Balance,
      end of year
                    
                    $
                    2,232
                    
                    
                    $
                    1,763
                    
                    
                    $
                    1,873
                    
                    
                    $
                    1,597
                    
                    
                    $
                    1,378Ratio
      of net charge-offs during the period to average loans outstanding during
      the period
                    
                    
                    0.84
                    %
                    
                    
                    1.11
                    %
                    
                    
                    0.09
                    %
                    
                    
                    0.04
                    %
                    
                    
                    0.67
                    %
 
 The
amount charged to the provision for loan losses and the related balance in the
allowance for loan losses is based upon periodic evaluations of the loan
portfolio by management.  These evaluations consider several factors
including, but not limited to, its analysis of overall loan quality, changes in
the mix and size of the loan portfolio, previous loss experience, general
economic conditions and information about specific borrowers.
 
 The
following tables provide an allocation of the allowance for loan losses for each
of the last five year ends as well as the percent of loans in each category to
total loans.
 
 Allocation of Allowance For Loan
      LossesDecember 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Commercial,
      financial and agricultural
                        
                        $
                        1,001
                        
                        
                        $
                        552
                        
                        
                        $
                        1,077
                        
                        
                        $
                        901
                        
                        
                        $
                        717Real
      estate-construction
                        
                        
                        368
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Real
      estate-mortgage
                        
                        
                        786
                        
                        
                        
                        879
                        
                        
                        
                        589
                        
                        
                        
                        320
                        
                        
                        
                        282Installment
      and other
                        
                        
                        77
                        
                        
                        
                        132
                        
                        
                        
                        65
                        
                        
                        
                        151
                        
                        
                        
                        173Unallocated
                        
                        
                        -
                        
                        
                        
                        200
                        
                        
                        
                        142
                        
                        
                        
                        225
                        
                        
                        
                        206Total
                        
                        $
                        2,232
                        
                        
                        $
                        1,763
                        
                        
                        $
                        1,873
                        
                        
                        $
                        1,597
                        
                        
                        $
                        1,378
 
 Percent of Loans in Each Category to Total
      LoansDecember 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Commercial,
      financial and agricultural
                        
                        
                        11
                        %
                        
                        
                        12
                        %
                        
                        
                        16
                        %
                        
                        
                        17
                        %
                        
                        
                        16
                        %Real
      estate-construction
                        
                        
                        8
                        
                        
                        
                        7
                        
                        
                        
                        8
                        
                        
                        
                        7
                        
                        
                        
                        6Real
      estate-mortgage
                        
                        
                        72
                        
                        
                        
                        73
                        
                        
                        
                        68
                        
                        
                        
                        68
                        
                        
                        
                        69Installment
      and other
                        
                        
                        9
                        
                        
                        
                        8
                        
                        
                        
                        8
                        
                        
                        
                        8
                        
                        
                        
                        9Total
                        
                        
                        100
                        %
                        
                        
                        100
                        %
                        
                        
                        100
                        %
                        
                        
                        100
                        %
                        
                        
                        100
                        %
  17
 Index
  
 Deposits
 
 The
average daily amount of deposits and the rates paid on those deposits for the
years ended December 31, 2008, 2007 and 2006 were previously presented in the
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and
Interest Differential.
 
 A table
summarizing the maturities of time certificates of deposit, including individual
retirement accounts, of $100,000 or more as of December 31, 2008 may be found in
Note 7 to the accompanying consolidated financial statements.  There
were no other time deposits of $100,000 or more at that date.
 
 Return on Equity and
Assets
 
 The
following table shows consolidated operating and capital ratios for the periods
indicated.
 
 Year Ended December 312008
                    
                    
                    2007Return
      on average assets
                    
                    
                    0.35
                    %
                    
                    
                    0.42
                    %Return
      on average equity
                    
                    
                    4.24
                    
                    
                    
                    4.94Dividend
      payout ratio
                    
                    
                    79.85
                    
                    
                    
                    84.94Average
      equity to assets ratio
                    
                    
                    8.09
                    
                    
                    
                    8.52
 
 Short-term
Borrowing
 
 Information
concerning the company's short-term borrowings is presented in Note 11 to the
accompanying consolidated financial statements.
 
 Disclosure of Contractual
Obligations
 
 The
following table provides information regarding the contractual obligations of
Citizens Financial Corp. at December 31, 2008:
 
 Payments
      Due By Period(in thousands of dollars)Less
      than
                            
                            
                            1 –
      3
                            
                            
                            3
      -5
                            
                            
                            More
      thanTotal
                            
                            
                            1 year
                            
                            
                            years
                            
                            
                            years
                            
                            
                            5 yearsContractual obligationsLong-term
      debt
                            
                            $
                            7,865
                            
                            
                            $
                            409
                            
                            
                            $
                            3,376
                            
                            
                            $
                            3,172
                            
                            
                            $
                            908Capital
      leases
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Operating
      leases
                            
                            
                            79
                            
                            
                            
                            39
                            
                            
                            
                            40
                            
                            
                            
                            -
                            
                            
                            
                            -Purchase
      obligations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Other
      long-term liabilities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            7,944
                            
                            
                            $
                            448
                            
                            
                            $
                            3,416
                            
                            
                            $
                            3,172
                            
                            
                            $
                            908
 
 Item7.  Management's  Discussion and Analysis of Financial
Condition and Results of Operations
 
 INTRODUCTION
 
 The
following discussion and analysis present the significant changes in financial
condition and results of operations of Citizens Financial Corp. and our
subsidiary, Citizens National Bank of Elkins, for the periods
indicated.  It should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this report.
 
 Description of
Business
 
 Citizens
Financial Corp. is a $283 million Delaware corporation headquartered in Elkins,
West Virginia.  From there, our wholly-owned subsidiary, Citizens
National Bank of Elkins, provides loan, deposit, trust, brokerage and other
banking and related services to customers in northcentral and eastern West
Virginia and nearby areas through six branch offices.  We conduct no
business other than the ownership of our bank subsidiary.
  18
 Index
 
 FORWARD LOOKING
STATEMENTS
 
 This
report contains forward looking statements which reflect our current
expectations based on information available to us.  These forward
looking statements involve uncertainties related to the general economic
conditions in our nation and other broad based issues such as interest rates and
regulations, as well as to other factors which may be more specific to our own
operations.  Examples of such factors may include our ability to
attract and retain key personnel, implementing new technological systems,
providing new products to meet changing customer and competitive demands, our
ability to successfully manage growth strategies, controlling costs, maintaining
our net interest margin, maintaining good credit quality, and others including
those set forth in the risk factor section of this report.  Forward
looking statements can be identified by words such as “may”, “will”, “expect”,
“anticipate”, “believe”, “estimate”, “plans”, “intends”, or similar
words.  We do not attempt to update any forward looking
statements.  When provided, we intend forward looking information to
assist readers in understanding anticipated future operations and we include
them pursuant to applicable safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.  Although we believe the expectations
reflected in our forward looking statements are reasonable, actual results could
differ materially.
 
 CRITICAL ACCOUNTING
POLICIES
 
 Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles and follow general practices within the financial
services industry.  Application of these principles requires us to
make estimates, assumptions, and judgments that affect the amounts reported in
our financial statements and accompanying notes.  These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements and could change as new information becomes
available.  Consequently, later financial statements could reflect
different estimates, assumptions, and judgments.
 
 Some
policies rely more heavily on the use of estimates, assumptions, and judgments
than others and, therefore, have a greater possibility of producing results that
could be materially different than originally reported.  Our most
significant accounting policies, including an explanation of how assets and
liabilities are valued, may be found in Note 1 to the consolidated financial
statements in our 2008 Annual Report to Shareholders and Form 10-K.
 
 The
allowance for loan losses represents our estimate of probable credit losses
inherent in the loan portfolio.  Determining the amount of the
allowance requires significant judgment and the use of estimates related to the
amount and timing of expected future cash flows on impaired loans, the estimated
amount of losses in pools of homogeneous loans, and the effect of various
economic and business factors, all of which may be subject to significant
change.  Due to these uncertainties, as well as the sensitivity of our
financial statements to the assumptions and estimates needed to determine the
allowance, we have identified the determination of the allowance for loan losses
as a critical accounting estimate. As such, it could be subject to revision as
new information becomes available.  Should this occur, changes to the
provision for loan losses, which may increase or decrease future earnings, may
be necessary.  A discussion of the methods we use to determine our
allowance for loan losses is presented later in this report.
 
 OVERVIEW
 
 The
current economic crisis has had a significant impact on the banking industry and
our national economy during the past couple of years.  This recession
has driven consumers to reduce spending and in-turn prompted companies to
respond by cutting expenses through significant reductions in labor
force.  What began as a slowdown in housing, has now ballooned into
the largest financial crisis since the Great Depression.  While our
local economy does not usually experience the same level of contraction as the
national economy, local industries such as lumber, trucking, and tourism are
seeing reduced demand.  This has prompted local layoffs and reductions
in consumer spending.  Citizens has not been immune to these economic
conditions.  In the last two years we have experienced lower than
anticipated earnings due to the failure of two commercial enterprises affected
by the slumping economy.  In 2008, a long-standing local automobile
dealership was forced to cease operations resulting in a loan charge-off of $1.3
million, while in 2007 a local manufactured housing business closed due to lack
of demand for its products resulting in a $1.2 million charge-off.
 
 Earnings
for the last two years have been characterized by larger provisions for loan
loss primarily attributable to these two commercial credits.  In 2008,
the company earned $916,000 compared to $1,034,000 in 2007.  The
company’s return on average assets was 0.35% and 0.42% for 2008 and 2007,
respectively.  While many banks in the country have seen a broad-based
weakening in their credit portfolio in the wake of the sub-prime exposures and
housing crisis, Citizens has not participated in sub-prime lending and does not
operate in markets where housing prices are falling
dramatically.  Citizens has been somewhat insulated from these credit
issues.  However, as this recession continues the company may
experience additional loan losses as the financial crisis continues to impact
more and more sectors of the economy.  In 2008, we recognized
additional risks that are present in the current economy and increased our
allowance for loan losses from $1,763,000 at year-end 2007 to $2,232,000 at
December 31, 2008.  Management has developed detailed strategies to
manage the credits that present the greatest risk to our
portfolio.  We monitor the situation with these credits continuously
and keep in close contact with borrowers in order to assess our position and
respond appropriately.
  19
 Index
 
 With the
economic recession has come relaxed loan demand.  Our loan portfolio
grew by only $5. 2 million, or 3.0%, to $178.1 million in
2008.  However, deposits have grown by $16.1 million, or 8.0%, to
$217.4 million.  Of this amount, $13.1 million was expected to be a
temporary deposit from one customer.  Repurchase agreements have also
increased by $14.5 million to $28.8 million.  With the additional
funding from deposits and repurchase agreements, we increased our investment
portfolio by $23.5 million to $82.1 million.  Many of these investment
purchases were short-term instruments that would provide additional liquidity,
if necessary.  Overall, total assets increased by $35.9 million or
14.6% to $282.5 million.
 
 A more
detailed discussion of the factors impacting our results of operations and
financial condition follows.  Amounts and percentages used in that
discussion, as well as in this overview, have been rounded.
 
 RESULTS OF
OPERATIONS
 
 Net Interest
Income
 
 Net
interest income represents the primary component of our earnings. It is the
difference between interest and fee income generated by interest earning assets
and interest expense incurred to carry interest bearing
liabilities.  Net interest income is affected by changes in balance
sheet composition and interest rates.  We attempt to maximize net
interest income by determining the optimal product mix in light of current and
expected yields on assets, cost of funds and economic conditions while
maintaining an acceptable degree of risk.
 
 By the
end of 2008, the Federal Reserve had effectively reduced the target Federal
Funds rate to zero from its high in September 2007 of 5.25%.  This
severe decline in rates caused our yield on earning assets to fall 83 basis
points in 2008, resulting in a decrease in interest income of $790,000 to
$15,177,000, despite a $21.1 million increase in our average earning asset
base.  This decrease in income is primarily attributable to decreasing
loan rates on our variable rate loan portfolio.
 
 Interest
expense has decreased by only $391,000 to $6,390,000 as rates on interest
bearing liabilities declined by 50 basis points, while average interest bearing
liabilities have increased by $19.6 million.  Competitive pressures to
price certificates of deposit higher than we would have liked combined with
already low rates on savings and other similar products impacted our ability to
reduce interest expense.
 
 Overall,
as reflected on our income statement, net interest income decreased by $399,000
to $8,787,000 in 2008.  On a tax equivalent basis, net interest income
decreased by the lesser amount of $230,000 to $9,300,000 as we increased our
investment in tax-exempt municipal bonds in the latter part of
2007.
 
 With
rates at these historically low levels and the expectation that rates will
remain at these levels for some time, Citizens will seek ways to lower the cost
of our interest bearing liabilities in order to maintain a strong net interest
margin.  Citizens has begun doing this through a new free checking
promotion to attempt to garner additional non-interest bearing
deposits.
 
 Provision for Loan
Losses
 
 The
provision for loan losses is our estimate of the amount which must be charged
against current earnings in order to maintain the allowance for loan losses at a
level considered adequate to provide for losses which are inherent in the loan
portfolio.  This amount is determined through quarterly evaluations of
the loan portfolio.  Our provision for loan losses totaled $1,959,000
in 2008 and $1,783,000 in 2007.  These levels of provision are much
higher than Citizens has historically experienced.  The higher 2008
provision is primarily the result of a local automobile dealership that was
unable to continue operations.  The 2007 provision is mainly the
result of the failure of a local manufactured housing business.
 
 Because
the amount of the provision for loan losses is a function of our overall
assessment of loan quality and the adequacy of the allowance for loan losses,
which itself relies on significant use of judgment and estimates, the provision
for loan loss expense may increase or decrease in the future.  Please
refer to the Credit Quality and Allowance for Loan Losses section of this report
where we further discuss the estimation methods and assumptions we use in
analyzing the allowance and the quality of our loan portfolio as these are
critical factors in determining our provision for loan losses.
 
 Noninterest
Income
 
 Noninterest
income, which includes all revenues other than interest and fees on earning
assets, is an important factor in our overall profitability.  Total
noninterest income increased $82,000, or 4.5%, to $1,921,000 in
2008.
 
 This
increase is the result of several factors, most notably rising levels of service
and trust fees.  Service fees are the largest single component of
noninterest income and increased $125,000 in 2008 due to higher overdraft fees
and increasing fees from our debit cards and ATM network. Trust income increased
by $75,000 in 2008 to $306,000 as we settled several estates during the
year.  Our insurance commissions also increased by $10,000 to $44,000
in 2008.
  20
 Index
  
 In 2008,
the company had net security losses of $49,000 which compares to $2,000 of
security gains in 2007.  The loss in 2008 was primarily the result of
the sale of a particular corporate debt security which was displaying increased
business risk.  This sale resulted in a $57,000
loss.  Additional information related to this sale can be found in the
“Securities Portfolio and Federal Funds Sold” section of this
report.  Securities are typically held until maturity, unless they are
called.  However, we may sell certain securities from time to time in
order to satisfy asset/liability management needs or respond to increased risk
in the securities portfolio as we did in 2008.
 
 Fees we
earn from our secondary market loan operations declined by $28,000 to $72,000 in
2008 as loan demand slowed, reflecting the overall housing trends.  We
expect that income from this program will increase in 2009 as interest rates are
at historic lows and individuals will want to lock in these low fixed rates by
refinancing current mortgages.  Other noninterest income decreased by
$49,000 to $245,000 due mainly to lower fees from cashing noncustomer checks and
processing wire transfers, as well as the elimination of fees received from the
outsourcing of our cashier’s check processing. In 2008, we brought our cashier’s
check processing back in-house as our outsourced provider was exiting that line
of business.
 
 We plan
to perform a review of our noninterest income in 2009 to identify areas which
might produce increased revenue. We believe we may be able to improve
performance in several areas and that our diverse services, such as trust,
brokerage and secondary market mortgages, provide us with a competitive
advantage in several of our markets.  Many of our competitors do not
offer such a wide array of services.
 
 Noninterest
Expense
 
 Noninterest
expense includes all items of expense other than interest expense, the provision
for loan losses, and income taxes.  Historically, our level of
noninterest expense has been higher than average, partly due to the relatively
smaller branch facilities our market area can support.
 
 In 2008,
noninterest expense decreased by $227,000, or 2.8%, to
$7,746,000.  The decrease was primarily related to lower costs
associated with the valuation, operation, and disposition of real estate
acquired in satisfaction of loans.  These costs decreased by $406,000
to $35,000 in 2008.  In 2007, we experienced a much higher level of
costs in this area that were largely the result of commercial real estate loan
foreclosures.  In addition to these savings, the company also incurred
lower expenses related to equipment and stationery, which declined by $20,000
and $27,000, respectively.
 
 Salaries
and employee benefits increased by $127,000 or 3.3%, to $4,011,000 in 2008. Of
this amount, salaries increased by $96,000, or 3.4%, to $2,962,000 as a result
of normal employee increases.  Benefit costs increased $31,000, or
3.0%, to $1,049,000 largely as a result of increased employee pension
costs.  In addition, data processing costs and software expenses
increased by $48,000 and $44,000, respectively.  A portion of these
increases is related to the implementation of a new loan processing
software.
 
 There are
a number of factors that could negatively impact noninterest expense in the
future.  For example, costs associated with foreclosed properties
could increase if foreclosure activity increases.  In addition,
medical claims under our partially self-insured group medical plan may
increase.  Also, we may incur additional costs related to compliance
with the Sarbanes-Oxley Act.  Currently, we are required to comply
with Section 404(a) of the Act and issue a conclusion about management’s
assessment of internal control over financial reporting.  We expect
that we will become subject to Section 404(b) in 2009, and will be required to
have our independent accountants attest to our conclusions.  This will
likely increase our legal and professional expenses.
 
 Income
Taxes
 
 The
company’s provision for income taxes includes both federal and state income
taxes.  The company has a combined statutory tax rate for federal and
state tax of approximately 38.0%.    Total taxes were
$87,000, or 8.7%, of pre-tax income in 2008 and $235,000, or 18.5%, of pre-tax
income in 2007.  The reason for the lower level of tax in both of
these years is primarily the result of higher levels of loan
charge-offs.  In addition, an increasing investment in tax-exempt
municipal bonds has contributed to the lower rate.  With the exception
of income earned on loans to and bonds issued by municipalities, and income from
certain life insurance policies, all of our income is taxable.  The
company was subject to alternative minimum tax in both
years.  However, we expect to fully recover this tax by offsetting it
against taxable income in future years.  Note 10 of the accompanying
consolidated financial statements provides additional information concerning our
income tax expense.
  21
 Index
 
 FINANCIAL
CONDITION
 
 Loan
Portfolio
 
 Ripple
effects from the national housing crisis, higher fuel prices, volatile equity
markets, job losses, and general uncertainty in the economy continue to
influence both consumers and businesses in our markets.  Our local
lumber, trucking, and tourism industries have experienced reduced
activity.  The unsteadiness in the economy combined with the higher
food and fuel costs have influenced consumers to limit spending.  All
of these factors have contributed to limiting our loan growth during 2008 with
total loans growing by $5.2 million, or 3.0%, to $178.1 million.
 
 Over the
last several years, Citizens has experienced growth in the commercial loan area,
but in 2008 this growth was limited to $1.1 million or 1.4%.  Total
commercial loans were $80.1 million at the end of 2008.  Of this
amount, commercial loans secured by real estate increased by $1.9 million, or
3.3%, to $59.8 million, while other commercial loans declined by $0.8 million,
or 3.6%, to $20.3 million.  Most of our commercial loan portfolio is
secured by real estate, whether or not repayment is linked to cash generated by
the use or sale of the real property.  In cases where repayment is
linked to such use, the timing and stability of cash flow, secondary sources of
repayment, loan guarantees, and collateral valuations are all important
considerations in granting the loan.
 
 Retail
lending, or lending to consumers for autos, homes, or other purposes, has been
difficult for Citizens for several years.  Non-traditional financers
such as auto manufacturers and specialized mortgage lenders have become very
aggressive in attracting consumers away from traditional banking
institutions.  In 2008, we witnessed many troubling economic events on
Wall Street that are the result of fallout from these non-traditional financing
activities.  Citizens has not participated in these non-traditional
lending activities often termed as “sub-prime” lending.  We offer our
clients traditional mortgage options to fit their current income levels and
focus on adding quality consumer credits to our portfolio.
 
 Within
the retail classification, our residential mortgage portfolio has remained
stable this year with a $1.0 million, or 1.6%, increase to $62.7
million.  In addition, Citizens has seen a $500,000, or 4.8%, increase
in our consumer installment loan portfolio which totaled $11.4 million at
year-end.  The majority of this increase was generated by our
attractive automobile lending program and a new lending program for recreational
vehicles that began in 2008.
 
 Citizens
will continue to actively seek new strategies and programs to increase the
retail segment of our business in order to enhance the portfolio diversification
and reduce the inherent risk in our portfolio.  We recently began a
new consumer deposit promotion designed to broaden our consumer base through a
new “free checking” product.  We hope to use this broader consumer
base to expand our retail lending opportunities.
 
 Finally,
other loans primarily comprised of tax-exempt entities grew by $1.6 million to
$3.6 million as we helped fund a local project.
 
 Credit Quality and Allowance
for Loan Losses
 
 Many
financial institutions across the country are facing major losses from the
housing crisis and the problems caused by sub-prime lending.  Reduced
consumer spending and economic uncertainty have resulted in significantly higher
levels of unemployment than seen in recent years and higher levels of business
failures.  On the national level, credit has tightened and markets
have become illiquid amid fears of “toxic” housing assets and business failures.
The credit needs of large corporations, such as the Detroit automobile
manufacturers, have gone unmet by the private sector, and the Federal government
has had to step in to prevent these giants from collapsing.
 
 While our
local economy does not usually see the same level of contraction or growth as
the national economy, we have certainly seen a significant impact from recent
economic events.  In recent months local businesses have announced job
cuts and consumers have significantly reduced spending.  Businesses in
our communities have been forced to cease operations; such is the case with a
long-standing local auto dealership which closed its doors during the fourth
quarter.  The failure of this dealership has resulted in a $1.3
million loan charge-off at December 31, 2008.  The loan had been
performing satisfactorily as recently as September 30, 2008, but declining sales
ultimately forced this dealership to cease operations.  We are now in
the process of working with the borrower to find a buyer for the dealership.
However, should the borrower not be successful in selling the business, we
expect to start foreclosure proceedings.  The remaining balance on
this particular credit is $1.5 million, and management believes this balance to
be secured based on the most recent appraisal of the property.
 
 The
economic uncertainty continues to have an impact on our loan portfolio as we
have experienced increases in past due and impaired loans.  At
December 31, 2008, the bank had total past due loans of $7.6 million, which is
$4.7 million higher than the prior year-end.  Included in these past
due loans are impaired loans of $5.0 million.  At December 31, 2007,
impaired loans totaled $4.0 million.  The increase is centered in two
land development loans that have become delinquent.  Management is
working diligently and developing detailed strategies to manage these credits
which present the greatest risk to our portfolio.  We monitor the
situation with these credits continuously and keep in close contact with
borrowers in order to assess our position and respond
appropriately.
  22
 Index
 
 The
inherent risk of loss in our portfolio is addressed through the allowance for
loan losses.  We maintain our allowance for loan losses at a level we
consider adequate to provide for losses that we believe are inherent in the loan
portfolio.  This determination is based on quarterly evaluations in
which a specific analysis and a pooled analysis are computed.  The
specific analysis is used to individually assign an allowance to larger balance,
nonhomogenous loans—typically commercial loans.  The pooled analysis
is used to quantify the loss on pools of smaller balance, homogenous loans such
as residential mortgages and consumer loans.  The pooled analysis
considers such factors as historical loss experience, changes in lending
policies and staff, current and anticipated economic conditions, changes in the
nature and volume of the portfolio, past due loan trends, changes in our loan
review system, and levels of concentrations of credit.  Because these
analyses determine the adequacy of the allowance for loan losses, they also
determine the provision for loans losses that must be charged to
earnings.
 
 As of
December 31, 2008, our allowance for loan losses was $2,232,000, or 1.25%, of
gross loans compared to $1,763,000, or 1.02%, at year-end 2007.  The
allowance includes reserves on specifically analyzed loans of $533,000 at
December 31, 2008, which is similar to the $624,000 at year-end
2007.  Reserves on the remaining pools of homogeneous loans totaled
$612,000 at year-end, while at December 31, 2007, these totaled
$308,000.  Because this portion of the allowance is based on our loan
loss history, the increase of $304,000 is primarily the result of adding the
large commercial charge-off we sustained last year to our historical loss
calculation.  The allowance also includes adjustments to the reserves
on the pools of homogenous loans for various economic and environmental
factors.  These adjustments totaled $1,087,000 at December 31, 2008,
which is $456,000 higher than year-end 2007.  The majority of this
increase is related to events or reactions to economic factors such as
increasing unemployment, consumer price increases, minimum wage burdens on small
businesses, and increased potential for residential foreclosures.  At
December 31, 2007, our allowance contained a unallocated reserve of $200,000 due
to the economic uncertainty present at that time.  We believe we have
adequately addressed those uncertainties through the other factors indicated
above, and therefore, we have no unallocated reserve remaining at December 31,
2008.
 
 Based on
information available to us we believe our analysis is comprehensive and our
allowance is adequate as of the report date.  However, there can be no
assurance that additional provisions for loan losses will not be required in the
future as a result of changes in the assumptions which underlie our estimates
and judgments or changes in economic conditions or the conditions of individual
borrowers.  As the economic recession continues we may discover
additional credits in our portfolio that present greater risk.
 
 Securities Portfolio and
Federal Funds Sold
 
 Funds
which are not needed to satisfy loan demand or operating needs are invested in
securities as a means of improving earnings while also providing liquidity and
balancing interest sensitivity concerns.  The securities we purchase
are limited to U.S. government agency issues, including mortgage backed issues
of U.S. agencies, obligations of state and political subdivisions and investment
grade corporate debt.  All of our securities are classified as
available for sale.  The Board of Directors is informed of all
securities transactions each month, and a series of policy statements limit the
amount of credit and interest rate risk we may take.
 
 During
2008 our securities portfolio grew by $23.5 million to $82.1
million.  A portion of this growth was due to an investment
transaction in which we funded a $5 million security purchase with long-term
borrowings from Federal Home Loan Bank of Pittsburgh.  We expect this
transaction to have a pre-tax profit margin between 1.0% and 1.9% over the next
two years, depending on the interest rate environment.  Increased
deposits funded the remainder of the securities growth.  Specifically,
one of our customers has a deposit that we believed to be temporary totaling
$13.1 million at year-end.  This temporary deposit was invested in
short-term securities, as well as short-term certificates of
deposit.  All such certificates of deposit are fully FDIC
insured.
 
 Over the
last year we have primarily purchased securities issued by government agencies
including $21.4 million of debenture purchases and $17.9 million of
mortgage-backed securities purchases.  All of the mortgage-backed
securities were fixed rate securities that had average lives of less than six
years when purchased.  In addition the company purchased $9.2 million
of corporate debt securities and $2.6 million of municipal
instruments.  Overall, our portfolio is currently comprised of $30.9
million of government agency securities, $21.6 million of government agency
mortgage-backed securities, $23.3 million of municipal instruments, $5.1 million
of corporate debt securities, and $1.2 million of correspondent and Federal
Reserve Bank stock.
  23
 Index
 
 We have
always maintained what we believe is a conservative investment portfolio
strategy.  We typically invest in securities with relatively short
durations, fixed rates, and good credit ratings.  We do not invest in
any mortgage backed securities or collateralized mortgage obligations, other
than those that carry the implied faith and credit of the U.S.
government.  In 2008 we witnessed events that were once
unimaginable—the government took Fannie Mae and Freddie Mac into conservatorship
and large financial institutions were merged in order to prevent bank
failures.  In addition, the U.S. Treasury implemented a $700 billion
rescue package, and the FDIC introduced liquidity programs to restore confidence
in the financial sector.  These unprecedented events prompted Citizens
to look closely at its securities portfolio to ensure that we adequately manage
credit risk.  As a result, we took what we believed were prudent risk
management steps and sold one corporate debt security, incurring a loss of
$57,000, in order to remove this asset from our balance sheet.  This
security had a par value of $1.5 million, and the issuer was demonstrating
financial difficulties.  Our remaining securities are performing
adequately, and all of them carry at least investment grade credit ratings from
the major credit rating agencies, with the exception of one local municipal bond
which is not rated.
 
 As
illustrated in Note 3 to the consolidated financial statements, a number of our
securities have fair values which are less than their amortized book
value.  As mentioned above, the issuers of these securities carry good
to exceptional credit ratings and we believe they are of sound financial
condition.  The quality of the issuer, as well as our intent and
ability to hold these investments until maturity, support that we do not
consider these investments to be other than temporarily impaired.
 
 Our
short-term investments, including federal funds sold and interest bearing
deposits with other banks, have increased by $9.4 million since prior year-end
and include the certificate of deposit investments we made in response to the
large customer deposit mentioned above.
 
 Deposits and Other Funding
Sources
 
 Total
deposits increased by $16.1 million to $217.4 million in 2008.  The
majority of this growth was centered in certificates of deposit (CDs) which
increased $24.2 million to $125.0 million.  The growth in CDs was
attributable to a new product called the Certificate of Deposit Account Registry
Service (CDARS) that we implemented in fourth quarter of 2008 in order to allow
customers to maintain full FDIC insurance coverage on their
deposits.  The program works by placing CDs for our customers at
several different institutions across the country in amounts less than the
applicable FDIC insurance limit.  In turn, other banks provide
reciprocal deposits back to our institution for the same amount.  In
this way, we are able to maintain the customer relationship, provide full FDIC
insurance, and have the ability to invest our customer’s funding
locally.
 
 Aside
from the growth in CDs, noninterest bearing demand deposits increased by $1.6
million to $29.6 million at year end, while money market accounts and savings
accounts increased by the lesser amounts of $313,000 and $509,000,
respectively.  However, interest bearing checking accounts declined by
$10.6 million, as we transferred some of this into the CDARS program for a
particular customer and placed the remaining funds into a repurchase
agreement.
 
 Our
short-term borrowings consist of repurchase agreements and overnight borrowings
such as Federal Funds purchased.  These borrowings totaled $31.5
million at December 31, 2008, and have increased by $11.9 million since year-end
2007.  The majority of the increase is related to a new repurchase
agreement we executed with a customer in 2008 in which we transferred existing
deposits of the customer into this new account.
 
 Long-term
borrowings historically consist of Federal Home Loan Bank
borrowings.  In 2008, we borrowed $5 million in order to invest in a
mortgage-backed security as noted earlier.  In addition, we borrowed
$530,000 to fund a specific fixed rate loan for one of our
customers.  At December 31, 2008, long-term borrowings totaled $7.9
million, which is $5.1 million higher than year-end 2007.
 
 Capital
Resources
 
 Total
capital of $20.8 million, or 7.38% of assets, decreased $239,000 in
2008.  This decline in capital is the result of recording the change
in pension and other post-retirement plan assets and benefit obligations in
other comprehensive income.  Additional information related to this
change can be found in Note 10 of the accompanying financial statements. We
believe this level of capital, as well as our capital structure, is adequate to
support current and anticipated future operations.  A complete
analysis of our capital accounts is provided in the accompanying Statement of
Changes in Shareholders’ Equity.  During 2008, the company reduced the
annual dividend from $0.48 per share in 2007 to $0.40 in 2008, as a means of
both maintaining the adequacy of our capital and aligning dividends with our
earnings level.
 
 Banks and
bank holding companies are subject to several risk-weighted capital
measures.  As detailed in Note 14, we continue to maintain capital
levels well in excess of the amount needed to be considered well capitalized
under the regulations.  This should continue to be the case throughout
the foreseeable future, and we are not aware of any trends or uncertainties
which are expected to materially impair our capital position.
  24
 Index
 
 Trading
activity in the stock continues to be light with 29,600 shares trading in 2008,
none of which were treasury shares.  Similar to many other financial
institutions across the country that have experienced depressed earnings, our
performance pushed our stock value downward in 2008.  The price at
year-end was $7.00, which is $4.25 less than December 31, 2007.  The
stock continues to trade on the over-the-counter market under the symbol
CIWV.OB.
 
 Off-Balance-Sheet
Obligations
 
 A
discussion of our involvement in off-balance-sheet obligations is presented in
Note 13 to the consolidated financial statements contained in this
report.
 
 Liquidity
 
 The
objective of our liquidity management program is to ensure the continuous
availability of funds to meet the withdrawal demands of customers, the credit
needs of borrowers, and to provide for other operational
needs.  Liquidity is provided by various sources including unpledged
investment securities, federal funds sold, loan repayments, a stable and growing
deposit base and, when necessary, external borrowings.
 
 We
monitor liquidity on a regular basis by preparing projected balance sheets and
analyzing our sources and uses of funds.  Historically, we have
satisfied our liquidity needs through internal sources of funds with the
exception of certain loans which have been funded by borrowing funds from the
Federal Home Loan Bank of Pittsburgh.  We have access to approximately
$102 million through various FHLB programs.  In the current economic
environment, loan demand remains soft and liquidity needs have lessened as a
result.  We are not aware of any other trends, commitments, events or
uncertainties which may impair our ability to satisfy our operating cash
needs.
 
 Impact of
Inflation
 
 Our
financial statements and related data in this report are prepared in conformity
with U.S. generally accepted accounting principles which require our financial
position and results of operations to be measured in terms of historical dollars
except for the available for sale securities portfolio.  Consequently,
the relative value of money generally is not considered.  Nearly all
of our assets and liabilities are monetary in nature and, as a result, interest
rates and competition in the market area tend to have a more significant impact
on performance than the effect of inflation.
 
 However,
inflation does affect noninterest expenses such as personnel costs and the cost
of services and supplies we use. We attempt to offset such increases by
controlling the level of noninterest expenditures and increasing levels of
noninterest income.  Because inflation has generally been low during
the time covered by these financial statements, the impact of inflation on our
earnings has not been significant.  Although inflation could become a
more significant factor, current Federal Reserve policy does not appear to
indicate that it will be in the foreseeable future.
  25
 Index
  Item8.  Financial Statements and Supplementary
Data
 
 CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2008 and 2007
 
 ASSETS
                  
                  2008
                  
                  
                  2007Cash
      and due from banks
                  
                  $
                  3,943,066
                  
                  
                  $
                  7,049,699Interest
      bearing deposits with other banks
                  
                  
                  9,438,048
                  
                  
                  
                  12,421Securities
      available for sale, at fair value
                  
                  
                  80,859,148
                  
                  
                  
                  57,446,339Restricted
      investments
                  
                  
                  1,191,514
                  
                  
                  
                  1,113,114Loans,
      less allowance for loan losses of $2,231,874 and $1,763,300,
      respectively
                  
                  
                  175,721,333
                  
                  
                  
                  170,939,264Bank
      premises and equipment, net
                  
                  
                  4,105,995
                  
                  
                  
                  4,259,664Accrued
      interest receivable
                  
                  
                  1,409,645
                  
                  
                  
                  1,384,943Other
      assets
                  
                  
                  5,865,361
                  
                  
                  
                  4,389,441Total
      assets
                  
                  $
                  282,534,070
                  
                  
                  $
                  246,594,885LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilitiesDeposits:Noninterest
      bearing
                  
                  $
                  29,552,473
                  
                  
                  $
                  27,919,859Interest
      bearing
                  
                  
                  187,876,377
                  
                  
                  
                  173,376,611Total
      deposits
                  
                  
                  217,428,850
                  
                  
                  
                  201,296,470Short-term
      borrowings
                  
                  
                  31,525,514
                  
                  
                  
                  19,655,942Long-term
      borrowings
                  
                  
                  7,865,485
                  
                  
                  
                  2,718,865Other
      liabilities
                  
                  
                  4,872,665
                  
                  
                  
                  1,842,680Total
      liabilities
                  
                  
                  261,692,514
                  
                  
                  
                  225,513,957Commitments
      and contingencies
                  
                  
                  -
                  
                  
                  
                  -Shareholders'
      equityCommon
      stock, $2.00 par value, authorized 4,500,000 shares, issued 2,250,000
      shares
                  
                  
                  4,500,000
                  
                  
                  
                  4,500,000Retained
      earnings
                  
                  
                  21,109,894
                  
                  
                  
                  20,998,645Accumulated
      other comprehensive loss
                  
                  
                  (936,775
                  )
                  
                  
                  (586,154
                  )Treasury
      stock at cost, 420,496 shares
                  
                  
                  (3,831,563
                  )
                  
                  
                  (3,831,563
                  )Total
      shareholders' equity
                  
                  
                  20,841,556
                  
                  
                  
                  21,080,928Total
      liabilities and shareholders' equity
                  
                  $
                  282,534,070
                  
                  
                  $
                  246,594,885
 
 
 See
Notes to Consolidated Financial Statements
 26
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 CONSOLIDATED
STATEMENTS OF INCOME
 For
The Years Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007Interest
      and dividend incomeInterest
      and fees on loans
                  
                  $
                  11,945,226
                  
                  
                  $
                  13,430,613Interest
      and dividends on securities:Taxable
                  
                  
                  2,237,299
                  
                  
                  
                  1,844,104Tax-exempt
                  
                  
                  838,070
                  
                  
                  
                  582,457Interest
      on interest bearing deposits with other banks
                  
                  
                  127,946
                  
                  
                  
                  95,655Interest
      on federal funds sold
                  
                  
                  28,406
                  
                  
                  
                  13,888Total
      interest and dividend income
                  
                  
                  15,176,947
                  
                  
                  
                  15,966,717Interest
      expenseInterest
      on deposits
                  
                  
                  5,680,569
                  
                  
                  
                  5,961,553Interest
      on short-term borrowings
                  
                  
                  462,174
                  
                  
                  
                  683,957Interest
      on long-term borrowings
                  
                  
                  246,812
                  
                  
                  
                  135,263Total
      interest expense
                  
                  
                  6,389,555
                  
                  
                  
                  6,780,773Net
      interest income
                  
                  
                  8,787,392
                  
                  
                  
                  9,185,944Provision
      for loan losses
                  
                  
                  1,959,299
                  
                  
                  
                  1,783,155Net
      interest income after provision for loan losses
                  
                  
                  6,828,093
                  
                  
                  
                  7,402,789Noninterest
      incomeTrust
      income
                  
                  
                  306,361
                  
                  
                  
                  230,683Service
      fees
                  
                  
                  1,143,088
                  
                  
                  
                  1,017,516Insurance
      commissions
                  
                  
                  44,137
                  
                  
                  
                  34,275Securities
      gains/(losses), net
                  
                  
                  (49,477
                  )
                  
                  
                  2,399Brokerage
      fees
                  
                  
                  159,932
                  
                  
                  
                  159,927Secondary
      market loan fees
                  
                  
                  72,444
                  
                  
                  
                  100,379Other
                  
                  
                  244,853
                  
                  
                  
                  293,562Total
      noninterest income
                  
                  
                  1,921,338
                  
                  
                  
                  1,838,741Noninterest
      expenseSalaries
      and employee benefits
                  
                  
                  4,010,704
                  
                  
                  
                  3,883,356Net
      occupancy expense
                  
                  
                  427,774
                  
                  
                  
                  426,039Equipment
      expense
                  
                  
                  366,801
                  
                  
                  
                  386,476Data
      processing
                  
                  
                  565,348
                  
                  
                  
                  517,265Director
      fees
                  
                  
                  270,386
                  
                  
                  
                  256,220Postage
      expense
                  
                  
                  164,483
                  
                  
                  
                  170,812Professional
      service fees
                  
                  
                  427,187
                  
                  
                  
                  421,406Stationery
                  
                  
                  121,969
                  
                  
                  
                  149,128Software
      expense
                  
                  
                  248,122
                  
                  
                  
                  204,418Net
      cost of operation of other real estate
                  
                  
                  34,537
                  
                  
                  
                  440,881Other
                  
                  
                  1,108,724
                  
                  
                  
                  1,116,616Total
      noninterest expense
                  
                  
                  7,746,035
                  
                  
                  
                  7,972,617Income
      before income taxes
                  
                  
                  1,003,396
                  
                  
                  
                  1,268,913Income
      tax expense
                  
                  
                  86,968
                  
                  
                  
                  235,087Net
      income
                  
                  $
                  916,428
                  
                  
                  $
                  1,033,826Basic
      and fully diluted earnings per common share
                  
                  $
                  0.50
                  
                  
                  $
                  0.57Basic
      and fully diluted average common shares outstanding
                  
                  
                  1,829,504
                  
                  
                  
                  1,829,504
 
 
 See
Notes to Consolidated Financial Statements
  27
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 For
The Years Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007Net
      Income
                  
                  $
                  916,428
                  
                  
                  $
                  1,033,826Other
      comprehensive income/(loss):Gross
      unrealized gains arising during the period
                  
                  
                  1,445,210
                  
                  
                  
                  671,673Adjustment
      for income tax expense
                  
                  
                  (549,179
                  )
                  
                  
                  (255,237
                  )896,031
                  
                  
                  
                  416,436Reclassification
      adjustment for (gains)/losses included in net income
                  
                  
                  49,477
                  
                  
                  
                  (2,399
                  )Adjustment
      for income tax (benefit)/expense
                  
                  
                  (18,802
                  )
                  
                  
                  91330,675
                  
                  
                  
                  (1,486
                  )Change
      in pension and other post-retirement plan assets and benefit
      obligations
                  
                  
                  (2,060,206
                  )
                  
                  
                  374,670Adjustment
      for income tax (benefit)/expense
                  
                  
                  782,879
                  
                  
                  
                  (142,375
                  )(1,277,327
                  )
                  
                  
                  232,295Other
      comprehensive income/(loss), net of tax
                  
                  
                  (350,621
                  )
                  
                  
                  647,245Comprehensive
      Income
                  
                  $
                  565,807
                  
                  
                  $
                  1,681,071
 
 
 See
Notes to Consolidated Financial Statements
  28
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 For
the Years Ended December 31, 2008 and 2007
 
 AccumulatedOther
                  
                  
                  
                  
                  
                  TotalCommon Stock
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Treasury
                  
                  
                  Shareholders’Shares
                  
                  
                  Amount
                  
                  
                  Earnings
                  
                  
                  Income/(Loss)
                  
                  
                  Stock
                  
                  
                  EquityBalance,
      December 31, 2006
                  
                  
                  2,250,000
                  
                  
                  $
                  4,500,000
                  
                  
                  $
                  20,842,981
                  
                  
                  $
                  (1,233,399
                  )
                  
                  $
                  (3,831,563
                  )
                  
                  $
                  20,278,019Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,033,826
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,033,826Cash
      dividends declared ($0.48 per share)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (878,162
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (878,162
                  )Other
      comprehensive income, net of tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  647,245
                  
                  
                  
                  -
                  
                  
                  
                  647,245Balance,
      December 31, 2007
                  
                  
                  2,250,000
                  
                  
                  
                  4,500,000
                  
                  
                  
                  20,998,645
                  
                  
                  
                  (586,154
                  )
                  
                  
                  (3,831,563
                  )
                  
                  
                  21,080,928Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  916,428
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  916,428Cash
      dividends declared ($0.40 per share)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (731,801
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (731,801
                  )Effect
      of initial application of emerging issues task force issue No. 06-4, net
      of tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (52,778
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (52,778
                  )Effect
      of change in pension plan measurement date pursuant to SFAS No. 158, net
      of tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,600
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,600
                  )Other
      comprehensive loss, net of tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (350,621
                  )
                  
                  
                  -
                  
                  
                  
                  (350,621
                  )Balance,
      December 31, 2008
                  
                  
                  2,250,000
                  
                  
                  $
                  4,500,000
                  
                  
                  $
                  21,109,894
                  
                  
                  $
                  (936,775
                  )
                  
                  $
                  (3,831,563
                  )
                  
                  $
                  20,841,556
 
 
 See
Notes to Consolidated Financial Statements
  29
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  916,428
                  
                  
                  $
                  1,033,826Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  315,488
                  
                  
                  
                  320,082Provision
      for loan losses
                  
                  
                  1,959,299
                  
                  
                  
                  1,783,155Deferred
      income tax expense/(benefit)
                  
                  
                  (71,097
                  )
                  
                  
                  59,753Amortization
      of security premiums, net of accretion of security
    discounts
                  
                  
                  52,643
                  
                  
                  
                  24,057Securities
      (gains)/losses, net
                  
                  
                  49,477
                  
                  
                  
                  (2,399
                  )Provision
      for loss on other real estate owned
                  
                  
                  -
                  
                  
                  
                  112,493(Gain)/loss
      on sale of other real estate
                  
                  
                  (300
                  )
                  
                  
                  273,140(Gain)/loss
      on sale of equipment and other assets
                  
                  
                  1,200
                  
                  
                  
                  (11,917
                  )(Increase)/decrease
      in accrued interest receivable
                  
                  
                  (24,702
                  )
                  
                  
                  8,525(Increase)/decrease
      in other assets
                  
                  
                  (908,939
                  )
                  
                  
                  51,532Increase/(decrease)
      in other liabilities
                  
                  
                  851,427
                  
                  
                  
                  (596,684
                  )Net
      cash provided by operating activities
                  
                  
                  3,140,924
                  
                  
                  
                  3,055,563CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sales of securities available for sale
                  
                  
                  2,031,075
                  
                  
                  
                  345,900Proceeds
      from maturities and calls of securities available for sale
                  
                  
                  24,460,000
                  
                  
                  
                  19,365,000Principal
      payments received on securities available for sale
                  
                  
                  3,610,120
                  
                  
                  
                  1,854,838Purchases
      of securities available for sale
                  
                  
                  (52,199,796
                  )
                  
                  
                  (19,732,036
                  )Loans
      made to customers, net
                  
                  
                  (7,430,073
                  )
                  
                  
                  (
      7,761,908
                  )Purchases
      of bank premises and equipment
                  
                  
                  (182,665
                  )
                  
                  
                  (235,331
                  )Proceeds
      from sale of other real estate
                  
                  
                  472,638
                  
                  
                  
                  1,170,650Net
      cash used in investing activities
                  
                  
                  (29,238,701
                  )
                  
                  
                  (4,992,887
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase/(decrease) in demand deposit, NOW, money market and savings
      accounts
                  
                  
                  (8,137,594
                  )
                  
                  
                  3,016,517Net
      increase in time deposits
                  
                  
                  24,269,974
                  
                  
                  
                  1,736,738Net
      increase/(decrease) in short-term borrowings
                  
                  
                  11,869,572
                  
                  
                  
                  (177,492
                  )Proceeds
      from long-term borrowings
                  
                  
                  5,530,000
                  
                  
                  
                  -Repayments
      of long-term borrowings
                  
                  
                  (383,380
                  )
                  
                  
                  (792,905
                  )Dividends
      paid
                  
                  
                  (731,801
                  )
                  
                  
                  (878,162
                  )Net
      cash provided by financing activities
                  
                  
                  32,416,771
                  
                  
                  
                  2,904,696Increase
      in cash and cash equivalents
                  
                  
                  6,318,994
                  
                  
                  
                  967,372Cash
      and cash equivalents:Beginning
                  
                  
                  7,062,120
                  
                  
                  
                  6,094,748Ending
                  
                  $
                  13,381,114
                  
                  
                  $
                  7,062,120SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      payments for:Interest
      on deposits and on other borrowings
                  
                  $
                  6,426,720
                  
                  
                  $
                  6,768,464Income
      taxes
                  
                  $
                  514,746
                  
                  
                  $
                  924,352SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIESOther
      real estate and other assets acquired in settlement of
    loans
                  
                  $
                  753,705
                  
                  
                  $
                  1,257,378Unrealized
      gain on securities available for sale
                  
                  $
                  1,494,688
                  
                  
                  $
                  669,274
 
 
 See
Notes to Consolidated Financial Statements
  30
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Notes
to Consolidated Financial Statements
 
 Note
1.   Significant Accounting Policies
 
 Nature of
Business:  Citizens Financial Corp. (“Citizens” or “the
company” or “we”) was incorporated as a bank holding company in
1987.  Our wholly-owned bank subsidiary, Citizens National Bank of
Elkins (“the bank”) provides retail and commercial loan, deposit, trust and
brokerage services to customers in Randolph, Tucker, Grant and Pocahontas
Counties of West Virginia and nearby areas.
 
 Basis of Financial Statement
Presentation:Our accounting and reporting policies conform to
U.S. generally accepted accounting principles and to general practices within
the banking industry.
 
 Use of
Estimates:In preparing consolidated financial statements in
conformity with U.S. generally accepted accounting principles, we are required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheets and reported
amounts of revenues and expenses during the reporting period.  Actual
results could differ from those estimates.  Material estimates that
are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses and the valuation of deferred
tax assets.
 
 Principles of
Consolidation:  The accompanying consolidated financial
statements include the accounts of Citizens Financial Corp. and its wholly-owned
subsidiary.  All significant intercompany accounts and transactions
have been eliminated in consolidation.
 
 Presentation of Cash
Flows:  For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, balances due from banks (including cash items
in process of clearing) and federal funds sold.  Cash flows from
demand deposits, NOW accounts and savings accounts are reported net since their
original maturities are less than three months.  Cash flows from loans
and certificates of deposit and other time deposits are also reported
net.
 
 Securities:  All of
our debt and equity investment securities are classified as available-for-sale
and carried at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of comprehensive income until
realized.  Gains and losses on the sale of available-for-sale
securities are determined using the specific identification
method.  Premiums and discounts are recognized as interest income
using the interest method over the period to maturity. Declines in the fair
value of available for sale securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses.  In
estimating other-than-temporary impairment losses, we consider (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) our ability
to retain our investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
 
 Loans and Allowance for Loan
Losses:  The bank makes mortgage, commercial and consumer loans
to customers.  Loans which management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are generally
reported at their outstanding principal balance reduced by unearned income and
the allowance for loan losses.  Interest income is accrued daily on
the outstanding principal balance.  Loan origination fees and certain
direct loan origination costs are deferred and amortized as adjustments to the
related loan’s yield over its contractual life.
 
 We
utilize the standards set forth in the Uniform Retail Classification System for
the accrual of interest on consumer loans, while the accrual of interest on all
other loans is discontinued when the loan becomes 90 days delinquent unless the
loan is well secured and in the process of collection.  However, loans
may be placed on nonaccrual, or charged-off, at an earlier date if the
collection of principal and interest is doubtful.  When loans are
placed on nonaccrual all interest which has accrued but not been collected is
reversed against interest income, unless the income was recognized in prior
years in which case it is charged to the allowance for loan
losses.  Interest income during the period when a loan is on
nonaccrual is recorded on a cash basis after recovery of principal is reasonably
assured.  If recovery of principal is not reasonably assured, payments
received on nonaccrual loans are typically applied directly against the
outstanding principal balance until the loan is fully repaid.  Loans
are generally restored to an accrual status when the obligation is brought
current, has performed in accordance with the terms of the note for a reasonable
period of time, and interest is no longer in doubt.
  31
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that are inherent in the loan portfolio.  The
allowance is established by provisions charged to operating expense and reduced
when loans are charged-off.  Subsequent recoveries, if any, are
credited to the allowance.
 
 Management’s
evaluation of the adequacy of the allowance for loan losses is based upon
quarterly assessments of the loan portfolio.  This assessment is
inherently subjective and requires significant estimates that are subject to
revisions as more information becomes available.  Among the factors we
consider are the borrower’s ability to repay, the value of the collateral
securing the loan, historical charge-off and delinquency trends, current
economic and business conditions, lending policies and procedures,
concentrations of credit, and various other factors.
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the company will be unable to collect the scheduled payments when
due according to the contractual terms of the loan agreement.  Loans
that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired.  Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.  Impairment is measured on a
loan-by-loan basis for larger, nonhomogeneous loans including commercial,
commercial real estate, and certain construction loans.  Large groups
of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the bank does not separately identify
individual consumer and residential loans for impairment
disclosures.
 
 The
allowance consists of a specific component which relates to larger loans
classified as special mention, substandard or doubtful and are specifically
evaluated for impairment, as well as a general component for the smaller
homogeneous loans not specifically evaluated.  For specifically
evaluated loans considered impaired an allowance is established when the loans’
discounted cash flows, collateral value or observable market price is less than
its carrying value.  For loans which are evaluated but not considered
impaired, as well as smaller homogeneous loans, an allowance is established by
grouping the loans into pools having similar risk characteristics and applying
historical loss factors, adjusted for current conditions, to each
pool.
 
 Bank Premises and
Equipment:  Land is carried at cost.  Bank premises
and equipment are stated at cost less accumulated
depreciation.  Depreciation is computed primarily by the straight-line
method over the estimated useful lives of the assets.  Premises and
equipment typically have useful lives ranging from 5 to 39
years.  Repairs and maintenance expenditures are charged to operating
expense as incurred.  Major improvements and additions to premises and
equipment are capitalized.
 
 Other Real
Estate:  Other real estate consists of real estate held for
resale which is acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at the lower
of carrying amount or fair value less cost to sell with any write-down charged
to the allowance for loan losses.  After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell.  Expenses incurred
in connection with operating these properties are charged to operating expenses
as incurred; depreciation is not recorded on property held for
sale.  Gains and losses on the sales of these properties are credited
or charged to operating income in the year of the transaction.
 
 Intangible
Assets:Intangible assets represent purchased assets that lack
physical substance but can be distinguished from goodwill because of contractual
or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in combination with a related contract, asset, or
liability.  Intangible assets are tested at least annually for
impairment.
 
 Securities Sold Under Agreements to
Repurchase:  We generally account for securities sold under
agreements to repurchase as collateralized financing
transactions.  Securities pledged as collateral under these financing
arrangements cannot be sold or repledged by the secured party.
 
 Pension and Other Postretirement
Benefits:The bank has a noncontributory, defined benefit
pension plan covering substantially all employees.  The plan provides
benefits that are based on employees’ five year average final compensation and
years of service.  Our funding policy is to make annual contributions
as permitted or required by regulation.  Pension costs are actuarially
determined and charged to expense.
  32
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The bank
also provides certain health care and life insurance benefits for all retired
employees that meet certain eligibility requirements.  The bank's
share of the estimated costs that will be paid after retirement is generally
being accrued by charges to expense over the employees' active service periods
to the dates they are fully eligible for benefits.
 
 Income
Taxes:Deferred tax assets and liabilities are determined
based on differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.  Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.  Valuation allowances are established
when deemed necessary to reduce deferred tax assets to the amount expected to be
realized.
 
 When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other positions.  Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheets along with any associated interest and
penalties that would be payable to the taxing authorities upon
examination.  Interest and penalties associated with unrecognized tax
benefits are classified as additional income taxes in the consolidated
statements of income.
 
 Basic and Fully Diluted Earnings per
Share:  Basic and fully diluted earnings per common share is
computed based upon the weighted average shares outstanding.  The
weighted average shares outstanding were 1,829,504 for the years ended December
31, 2008 and 2007.  We did not have any potentially dilutive
securities during that time.
 
 Trust
Department:  Assets held in an agency or fiduciary capacity by
the bank's trust department are not assets of the bank and are not included in
the accompanying consolidated balance sheets.
 
 Off-Balance-Sheet Credit Related
Financial Instruments.  In the ordinary course of business, we
may enter into commitments to extend credit, including commercial letters of
credit, and standby letters of credit.  These financial instruments
are recorded when they are funded.
 
 Derivative Instruments and Hedging
Activities:The bank recognizes all derivatives on the balance
sheet at fair value.  Derivatives that are not hedges must be adjusted
to fair value through income.  If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.  The ineffective
portion of a derivative’s change in fair value is immediately recognized in
earnings.
 
 Advertising:Advertising
costs are expensed as they are incurred. Advertising expenses were $33,623 and
$39,601 for the years 2008 and 2007, respectively.
 
 Reclassifications:Certain
accounts in the consolidated financial statements for 2007, as previously
presented, have been reclassified to conform to current year
classifications.
 
 Significant New Accounting
Pronouncements:In September 2006, the Financial Accounting
Standards Board (FASB) reached a consensus on Emerging Issues Task Force
(“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF
Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10,
“Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,”
(“EITF Issue 06-10”). Both of these standards require a company to recognize an
obligation over an employee’s service period based upon the substantive
agreement with the employee such as the promise to maintain a life insurance
policy or provide a death benefit postretirement. The company adopted the
provisions of these standards effective January 1, 2008. Additional information
regarding this adoption can be found in Note 10.
  33
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 does not require any new fair value
measurements, but rather, provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those years.  The FASB has approved a one-year deferral for the
implementation of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The company adopted SFAS 157 effective
January 1, 2008. The adoption of SFAS 157 was not material to the consolidated
financial statements.
 
 In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159).  This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
this Statement is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity’s first fiscal year that begins after November 15, 2007, with early
adoption available in certain circumstances. The company adopted SFAS 159
effective January 1, 2008. The company decided not to report any existing
financial assets or liabilities at fair value that are not already reported,
thus the adoption of this statement did not have a material impact on the
consolidated financial statements.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly
change the financial accounting and reporting of business combination
transactions.  SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS 141(R) is effective for acquisition dates on or
after the beginning of an entity’s first year that begins after December 15,
2008.  The company does not expect the implementation of SFAS 141(R)
to have a material impact on its consolidated financial statements, at this
time.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB No. 51” (SFAS 160).  The Standard will significantly change the
financial accounting and reporting of noncontrolling (or minority) interests in
consolidated financial statements.  SFAS 160 is effective as of the
beginning of an entity’s first fiscal year that begins after December 15, 2008,
with early adoption prohibited.  The company does not expect the
implementation of SFAS 160 to have a material impact on its consolidated
financial statements, at this time.
 
 In
November 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff
that the expected net future cash flows related to the associated servicing of
the loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. SEC registrants are
expected to apply the views in Question 1 of SAB 109 on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007.  Implementation of SAB 109 did not have a
material impact on the company’s consolidated financial statements.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (SAB
110).   SAB 110 expresses the current view of the staff that it
will accept a company’s election to use the simplified method discussed in SAB
107 for estimating the expected term of “plain vanilla” share options regardless
of whether the company has sufficient information to make more refined
estimates.  The staff noted that it understands that detailed
information about employee exercise patterns may not be widely available by
December 31, 2007.  Accordingly, the staff will continue to accept,
under certain circumstances, the use of the simplified method beyond December
31, 2007.  Implementation of SAB 110 did not have a material impact on
the company’s consolidated financial statements.
  34
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS
No. 161 requires that an entity provide enhanced disclosures related to
derivative and hedging activities. SFAS No. 161 is effective for the company on
January 1, 2009.  The adoption of SFAS No. 161 is not expected to have
a material impact on the company’s consolidated financial
statements.
 
 In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under FASB
SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The
intent of FSP No. 142-3 is to improve the consistency between the useful life of
a recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the assets under SFAS No. 141(R). FSP
No. 142-3 is effective for the Company on January 1, 2009, and applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. The
adoption of FSP No. 142-3 is not expected to have a material impact on the
company’s consolidated financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” Management
does not expect the adoption of the provision of SFAS No. 162 to have any impact
on the consolidated financial statements.
 
 In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4
require a seller of credit derivatives to disclose information about its credit
derivatives and hybrid instruments that have embedded credit derivatives to
enable users of financial statements to assess their potential effect on its
financial position, financial performance and cash flows. The disclosures
required by FSP 133-1 and FIN 45-4 were effective for the company on December
31, 2008 and did not have a material impact on the consolidated financial
statements.
 
 In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”).
FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair
value of a financial asset during periods of inactive markets. FSP 157-3 was
effective as of September 30, 2008 and did not have material impact on the
company’s consolidated financial statements.
 
 In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8
requires enhanced disclosures about transfers of financial assets and interests
in variable interest entities. The FSP is effective for interim and annual
periods ending after December 15, 2008. Since the FSP requires only additional
disclosures concerning transfers of financial assets and interest in variable
interest entities, adoption of the FSP will not affect the company’s financial
condition, results of operations or cash flows.
 
 In
January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP
amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
That Continue to Be Held by a Transferor in Securitized Financial Assets,” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and other related guidance. The FSP is effective
for interim and annual reporting periods ending after December 15, 2008 and
shall be applied prospectively. The FSP was effective as of December 31, 2008
and did not have a material impact on the consolidated financial
statements.
 
 Note
2.  Restrictions on Cash and Amounts Due from Banks
 
 The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank.  At December 31, 2008 the reserve requirement was
$75,000.  We had no reserve requirement at December 31,
2007.
  35
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Note
3.  Securities
 
 The
amortized cost, unrealized gains, unrealized losses and estimated fair values of
securities at December 31, 2008 and 2007, are summarized below.  All
such securities are available for sale.
 
 2008CarryingValue(EstimatedAmortized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value)U.S.
      Government agencies and corporations
                  
                  $
                  30,192,224
                  
                  
                  $
                  725,683
                  
                  
                  $
                  -
                  
                  
                  $
                  30,917,907Mortgage
      backed securities - U.S. Government agencies and
    corporations
                  
                  
                  21,031,846
                  
                  
                  
                  554,109
                  
                  
                  
                  10,936
                  
                  
                  
                  21,575,019Corporate
      debt securities
                  
                  
                  5,133,279
                  
                  
                  
                  1,304
                  
                  
                  
                  59,146
                  
                  
                  
                  5,075,437Tax
      exempt state and political subdivisions
                  
                  
                  22,948,432
                  
                  
                  
                  391,380
                  
                  
                  
                  49,067
                  
                  
                  
                  23,290,745Total
      securities available for sale
                  
                  $
                  79,305,781
                  
                  
                  $
                  1,672,476
                  
                  
                  $
                  119,149
                  
                  
                  $
                  80,859,148
 
 2007CarryingValue(EstimatedAmortized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value)U.S.
      Government agencies and corporations
                  
                  $
                  28,083,464
                  
                  
                  $
                  227,154
                  
                  
                  $
                  19,073
                  
                  
                  $
                  28,291,545Mortgage
      backed securities - U.S. Government agencies and
    corporations
                  
                  
                  6,587,411
                  
                  
                  
                  14,238
                  
                  
                  
                  40,667
                  
                  
                  
                  6,560,982Tax
      exempt state and political subdivisions
                  
                  
                  22,716,824
                  
                  
                  
                  91,692
                  
                  
                  
                  214,704
                  
                  
                  
                  22,593,812Total
      securities available for sale
                  
                  $
                  57,387,699
                  
                  
                  $
                  333,084
                  
                  
                  $
                  274,444
                  
                  
                  $
                  57,446,339
 
 The
tables which follow provide summaries of securities which were in an unrealized
loss position at December 31, 2008 and 2007, all of which are available for
sale.  As of December 31, 2008, these securities had a total fair
value of $6,183,696 and carried unrealized losses of $119,149 or
1.93%.  The fair value of securities which have been in a continuous
loss position for the past twelve months total $2,109,123.  The
unrealized loss pertaining to these securities is $51,582 or
2.45%.  The majority of these losses are on corporate debt securities
and municipal instruments.  With the exception of one municipal which
is not rated, all of these instruments carry investment grade ratings from the
major credit rating agencies.  The remaining losses are on securities
issued by U.S. government agencies and corporations which carry the implied
faith and credit of the U.S. Government.    The quality of
the issuer, as well as our intent and ability to hold these investments to
maturity, provide strong evidence that we will fully recover our
investment.  In addition, no losses have been recognized on the
$29,020,029 of securities that carried unrealized losses at December 31,
2007.
 
 2008Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesU.S.
      Government agencies and corporations
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mortgage
      backed securities – U.S.Government agencies and
    corporations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  660,401
                  
                  
                  
                  10,936
                  
                  
                  
                  660,401
                  
                  
                  
                  10,936Corporate
      debt securities
                  
                  
                  3,435,584
                  
                  
                  
                  59,146
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,435,584
                  
                  
                  
                  59,146Tax-exempt
      state and politicalSubdivisions
                  
                  
                  638,989
                  
                  
                  
                  8,421
                  
                  
                  
                  1,448,722
                  
                  
                  
                  40,646
                  
                  
                  
                  2,087,711
                  
                  
                  
                  49,067Total
                  
                  $
                  4,074,573
                  
                  
                  $
                  67,567
                  
                  
                  $
                  2,109,123
                  
                  
                  $
                  51,582
                  
                  
                  $
                  6,183,696
                  
                  
                  $
                  119,149
  36
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 2007Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesU.S.
      Government agencies and corporations
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,973,400
                  
                  
                  $
                  19,073
                  
                  
                  $
                  10,973,400
                  
                  
                  $
                  19,073Mortgage
      backed securities – U.S. Government agencies and
    corporations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,886,591
                  
                  
                  
                  40,667
                  
                  
                  
                  4,886,591
                  
                  
                  
                  40,667Tax-exempt
      state and politicalSubdivisions
                  
                  
                  11,243,398
                  
                  
                  
                  191,945
                  
                  
                  
                  1,916,640
                  
                  
                  
                  22,759
                  
                  
                  
                  13,160,038
                  
                  
                  
                  214,704Total
                  
                  $
                  11,248,398
                  
                  
                  $
                  191,945
                  
                  
                  $
                  17,776,631
                  
                  
                  $
                  82,499
                  
                  
                  $
                  29,020,029
                  
                  
                  $
                  274,444
 
 The maturities, amortized cost and
estimated fair values of securities at December 31, 2008 are summarized as
follows:
 
 CarryingValue(EstimatedAmortized
                    
                    
                    FairCost
                    
                    
                    Value)Due
      within one year
                    
                    $
                    21,450,539
                    
                    
                    $
                    21,661,657Due
      after one through five years
                    
                    
                    30,647,694
                    
                    
                    
                    31,362,013Due
      after five through ten years
                    
                    
                    27,207,548
                    
                    
                    
                    27,835,438Total
                    
                    $
                    79,305,781
                    
                    
                    $
                    80,859,148
 
 Mortgage backed securities have
remaining contractual maturities ranging from 7 months to 19.25 years and are
reflected in the maturity distribution schedule based on their anticipated
average life to maturity, which ranges from 0.30 to 9.38 years. Accordingly,
discounts are accreted and premiums are amortized over the anticipated life to
maturity of the specific obligation.
 
 The proceeds from sales, calls and
maturities of securities, including principal payments received on mortgage
backed  securities, and the related gross gains and losses realized
are as follows:
 
 Proceeds From
                  
                  
                  Gross RealizedYears
      Ended
                  
                  
                  
                  
                  Calls
      and
                  
                  
                  PrincipalDecember 31,
                  
                  Sales
                  
                  
                  Maturities
                  
                  
                  Payments
                  
                  
                  Gains
                  
                  
                  Losses2008
                  
                  $
                  2,031,075
                  
                  
                  $
                  24,460,000
                  
                  
                  $
                  3,610,120
                  
                  
                  $
                  7,325
                  
                  
                  $
                  56,8022007
                  
                  $
                  345,900
                  
                  
                  $
                  19,365,000
                  
                  
                  $
                  1,854,838
                  
                  
                  $
                  2,399
                  
                  
                  $
                  -
 
 At December 31, 2008 and 2007
securities with amortized costs of $44,466,265 and $32,207,744, respectively,
and estimated fair values of $45,375,428 and $32,357,657, respectively, were
pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes required or permitted by law.
 
 At December 31, 2008 and 2007 the
company’s securities portfolio had no concentrations within any specific
industry or issuer.
  37
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The company’s restricted investments
totaled $1,191,514 and $1,113,114 at December 31, 2008 and 2007,
respectively.  These include equity investments in Federal Reserve
Bank stock, Federal Home Loan Bank stock, and Siverton Financial Services Inc.
stock.  Such securities are carried at cost, since they may only be
sold back to the respective issuer or another member.
 
 Note
4.  Loans
 
 Loans
      are summarized as follows:December 31,2008
                    
                    
                    2007Commercial,
      financial and agricultural
                    
                    $
                    20,262,356
                    
                    
                    $
                    21,015,554Real
      estate – construction
                    
                    
                    13,832,198
                    
                    
                    
                    12,497,098Real
      estate – home equity
                    
                    
                    6,410,624
                    
                    
                    
                    6,797,712Real
      estate – residential mortgage
                    
                    
                    62,695,378
                    
                    
                    
                    61,726,209Real
      estate – commercial mortgage
                    
                    
                    59,806,565
                    
                    
                    
                    57,921,473Installment
      loans
                    
                    
                    11,423,736
                    
                    
                    
                    10,902,926Other
                    
                    
                    3,623,570
                    
                    
                    
                    2,011,614Total
      loans
                    
                    
                    178,054,427
                    
                    
                    
                    172,872,576Less:Allowance
      for loan losses
                    
                    
                    2,231,874
                    
                    
                    
                    1,763,300Net
      deferred loan origination fees and costs
                    
                    
                    101,220
                    
                    
                    
                    170,012Loans,
      net
                    
                    $
                    175,721,333
                    
                    
                    $
                    170,939,264
 
 Included in the above balance of net
loans are nonaccrual loans of $5,471,601 and $4,487,291 at December 31,
2008 and 2007, respectively.  If interest on those nonaccrual loans
had been accrued, such income would have approximated $215,830 and $233,744 for
the years ended December 31, 2008 and 2007, respectively.
 
 The bank makes loans to its directors,
executive officers and their related interests in the normal course of
business.  The activity with respect to these loans for the years
ended December 31, 2008 and 2007 follows:
 
 2008
                    
                    
                    2007Balance,
      beginning
                    
                    $
                    6,311,436
                    
                    
                    $
                    6,111,725Additions
                    
                    
                    927,494
                    
                    
                    
                    1,095,224Amounts
      collected
                    
                    
                    (844,527
                    )
                    
                    
                    (895,513
                    )Balance,
      ending
                    
                    $
                    6,394,403
                    
                    
                    $
                    6,311,436
 
 The following represents the maturities
and sensitivities of loans to changes in interest rates at December 31, 2008,
without regard to scheduled periodic principal repayments on amortizing
loans:
 
 Due After 1Due
                  
                  
                  But
      Within
                  
                  
                  
                  
                  
                  DueWithin 1 Yr
                  
                  
                  5 Yrs
                  
                  
                  After 5 Yrs
                  
                  
                  TotalCommercial,
      financial and agricultural
                  
                  $
                  7,070,518
                  
                  
                  $
                  5,049,344
                  
                  
                  $
                  8,142,494
                  
                  
                  $
                  20,262,356Real
      estate – construction
                  
                  
                  10,844,323
                  
                  
                  
                  2,768,361
                  
                  
                  
                  219,514
                  
                  
                  
                  13,832,198Real
      estate – home equity
                  
                  
                  65,959
                  
                  
                  
                  2,924,909
                  
                  
                  
                  3,419,756
                  
                  
                  
                  6,410,624Real
      estate – residential mortgage
                  
                  
                  1,289,323
                  
                  
                  
                  4,737,109
                  
                  
                  
                  56,668,946
                  
                  
                  
                  62,695,378Real
      estate – commercial mortgage
                  
                  
                  5,165,334
                  
                  
                  
                  10,318,667
                  
                  
                  
                  44,322,564
                  
                  
                  
                  59,806,565Installment
      loans
                  
                  
                  729,797
                  
                  
                  
                  7,918,946
                  
                  
                  
                  2,774,993
                  
                  
                  
                  11,423,736Other
                  
                  
                  605,670
                  
                  
                  
                  1,893,156
                  
                  
                  
                  1,124,744
                  
                  
                  
                  3,623,570Total
                  
                  $
                  25,770,924
                  
                  
                  $
                  35,610,492
                  
                  
                  $
                  116,673,011
                  
                  
                  $
                  178,054,427Loans
      due after one year with:Variable
      rates
                  
                  $
                  123,705,427Fixed
      rates
                  
                  
                  28,578,076Total
                  
                  $
                  152,283,503
  38
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Concentrations of Credit
Risk:  The bank grants installment, commercial and residential
loans to customers in central and eastern West Virginia in striving to maintain
a diversified loan portfolio.  Nonetheless, concentrations of credit,
defined as loans to a customer, the customers’ related parties, or to a number
of customers operating in the same industry, which in the aggregate total 25% or
more of capital, can occur.  At December 31, 2008, we had four such
concentrations.
 
 Extensions of credit to companies in
the lodging, restaurant and bar industry totaled $13,471,783.  These
loans are usually made to finance the purchase, operation or improvement of
these establishments and are generally secured by liens on the subject
property.  Extensions of credit for the purchase of rental real estate
totaled $15,804,795.  These loans are usually made to purchase or
improve the subject property and are secured by the rental
unit(s).  Extensions of credit for construction and contractors
totaled $16,558,258.  These loans are generally secured by the subject
property and draw requests are approved based on scheduled work completed and
periodic inspections of construction progress. Also, extensions of credit for
ski resort related loans totaled $25,125,663.  These loans are
extended to business and residential properties in and around various West
Virginia ski resorts.  Additional collateral such as pledges of
accounts receivable, real estate, or personal guarantees may also be required
when granting any of these credits.  The bank evaluates each such
customer’s credit worthiness on a case-by-case basis.  The amount of
collateral obtained is based upon these credit evaluations.
 
 Note
5.  Allowance for Loan Losses
 
 An analysis of the allowance for loan
losses for the years ended December 31, 2008 and 2007, is as
follows:
 
 2008
                    
                    
                    2007Balance,
      beginning of year
                    
                    $
                    1,763,300
                    
                    
                    $
                    1,873,038Charge
      offs:Commercial,
      financial and agricultural
                    
                    
                    301,662
                    
                    
                    
                    1,538,565Real
      estate – commercial mortgage
                    
                    
                    1,362,253
                    
                    
                    
                    347,695Real
      estate – residential mortgage
                    
                    
                    79,238
                    
                    
                    
                    78Installment
                    
                    
                    28,456
                    
                    
                    
                    48,839Total
                    
                    
                    1,771,609
                    
                    
                    
                    1,935,177Recoveries:Commercial,
      financial and agricultural
                    
                    
                    180,901
                    
                    
                    
                    8,055Real
      estate – commercial mortgage
                    
                    
                    88,531
                    
                    
                    
                    -Real
      estate – residential mortgage
                    
                    
                    1,206
                    
                    
                    
                    -Installment
                    
                    
                    10,246
                    
                    
                    
                    34,229Total
                    
                    
                    280,884
                    
                    
                    
                    42,284Net
      charge-offs
                    
                    
                    1,490,725
                    
                    
                    
                    1,892,893Provision
      for loan losses
                    
                    
                    1,959,299
                    
                    
                    
                    1,783,155Balance,
      end of year
                    
                    $
                    2,231,874
                    
                    
                    $
                    1,763,300
 
 The following summary provides
additional information regarding impaired, nonaccrual and past due
loans:
 
 December 31,2008
                  
                  
                  2007Impaired
      loans without a valuation allowance
                  
                  $
                  1,514,794
                  
                  
                  $
                  1,467,156Impaired
      loans with a valuation allowance
                  
                  
                  3,482,423
                  
                  
                  
                  2,570,365Total
      impaired loans
                  
                  $
                  4,997,217
                  
                  
                  $
                  4,037,521Valuation
      allowance related to impaired loans
                  
                  $
                  532,694
                  
                  
                  $
                  623,839Total
      nonaccrual loans excluded from impaired loan disclosure
                  
                  $
                  594,524
                  
                  
                  $
                  449,770Total
      loans past due ninety days or more still accruing
                  
                  
                  312,807
                  
                  
                  
                  206,230
  39
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Year
      Ended December 31,2008
                              
                              
                              2007Average
      investment in impaired loans
                              
                              $
                              3,610,120
                              
                              
                              $
                              4,244,525Interest
      income recognized on impaired loans
                              
                              
                              123,314
                              
                              
                              
                              351,874Interest
      income recognized on a cash basis on impaired loans
                              
                              
                              186,204
                              
                              
                              
                              124,985Interest
      income recognized on nonaccrual loans excluded from impaired loan
      disclosure
                              
                              $
                              23,904
                              
                              
                              $
                              34,206
 
 No additional funds are committed to
be advanced in connection with impaired loans.
 
 Note
6.   Bank Premises and Equipment
 
 The major categories of bank premises
and equipment and accumulated depreciation and amortization at December 31, 2008
and 2007, are summarized as follows:
 
 
 2008
                      
                      
                      2007Land
                      
                      $
                      950,403
                      
                      
                      $
                      950,403Buildings
      and improvements
                      
                      
                      5,347,518
                      
                      
                      
                      5,280,882Furniture
      and equipment
                      
                      
                      2,430,201
                      
                      
                      
                      2,552,090Total
      bank premises and equipment
                      
                      
                      8,728,122
                      
                      
                      
                      8,783,375Less
      accumulated depreciation
                      
                      
                      4,622,127
                      
                      
                      
                      4,523,711Bank
      premises and equipment, net
                      
                      $
                      4,105,995
                      
                      
                      $
                      4,259,664
 
 Depreciation expense for the years
ended December 31, 2008, and 2007 totaled $302,089 and $306,684
respectively.
 
 Note
7.   Deposits
 
 The following is a summary of interest
bearing deposits by type as of December 31, 2008 and 2007:
 
 2008
                    
                    
                    2007Interest
      bearing checking accounts
                    
                    $
                    35,106,350
                    
                    
                    $
                    45,697,691Money
      market accounts
                    
                    
                    5,718,782
                    
                    
                    
                    5,405,844Savings
      accounts
                    
                    
                    22,097,516
                    
                    
                    
                    21,589,320Certificates
      of deposit under $100,000
                    
                    
                    73,691,588
                    
                    
                    
                    59,984,442Certificates
      of deposit of $100,000 or more
                    
                    
                    51,262,141
                    
                    
                    
                    40,699,314Total
                    
                    $
                    187,876,377
                    
                    
                    $
                    173,376,611
 
 Interest
expense on deposits is summarized below:
 
 2008
                    
                    
                    2007Interest
      bearing checking accounts
                    
                    $
                    1,239,557
                    
                    
                    $
                    1,277,151Money
      market accounts
                    
                    
                    25,322
                    
                    
                    
                    27,625Savings
      accounts
                    
                    
                    90,165
                    
                    
                    
                    120,762Certificates
      of deposit under $100,000
                    
                    
                    2,455,900
                    
                    
                    
                    2,636,307Certificates
      of deposit of $100,000 or more
                    
                    
                    1,869,625
                    
                    
                    
                    1,899,708Total
                    
                    $
                    5,680,569
                    
                    
                    $
                    5,961,553
 
 The following is a summary of the
maturity distribution of certificates of deposit in amounts of $100,000 or more
as of December 31, 2008 and 2007:
 
 2008
                  
                  
                  2007Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentThree
      months or less
                  
                  $
                  16,167,296
                  
                  
                  
                  31.54
                  %
                  
                  $
                  3,588,278
                  
                  
                  
                  8.82
                  %Three
      through six months
                  
                  
                  3,729,089
                  
                  
                  
                  7.27
                  
                  
                  
                  6,447,653
                  
                  
                  
                  15.84Six
      through twelve months
                  
                  
                  9,943,468
                  
                  
                  
                  19.40
                  
                  
                  
                  14,167,482
                  
                  
                  
                  34.81Over
      twelve months
                  
                  
                  21,422,288
                  
                  
                  
                  41.79
                  
                  
                  
                  16,495,901
                  
                  
                  
                  40.53Total
                  
                  $
                  51,262,141
                  
                  
                  
                  100.00
                  %
                  
                  $
                  40,699,314
                  
                  
                  
                  100.00
                  %
  40
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 A summary
of the maturities for all time deposits as of December 31, 2008,
follows:
 
 Year
                    
                    Amount2009
                    
                    $
                    78,848,4412010
                    
                    
                    14,538,0182011
                    
                    
                    21,118,9552012
                    
                    
                    8,205,7062013
                    
                    
                    2,182,837After
      2013
                    
                    
                    59,772Total
                    
                    $
                    124,953,729
 
 At December 31, 2008 and 2007, deposits
of related parties including directors, executive officers, and their related
interests of Citizens Financial Corp. and subsidiary approximated $9,410,517 and
$7,190,207, respectively.
 
 Note
8.  Derivative Instruments
 
 From 2001 to 2004, the bank offered a
product known as the Index Powered CD to its customers.  This is a
five-year certificate of deposit which, if held to maturity, provides the
customer with guaranteed return of principal and interest which is linked to the
performance of the Standard and Poor’s 500 Index over the term of the
certificate of deposit.  As of December 31, 2008 and 2007 the notional
value of these deposits was $15,649 and $203,373, respectively.
 
 The
linkage of the interest earned on the certificate of deposit and the return of
the index is considered an equity option and is accounted for as an embedded
derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”).  As required
by SFAS 133, the fair value of the embedded derivative is deducted from the
certificate of deposit creating a discount that is amortized to interest expense
using the effective interest method over the term of the certificate of
deposit.  The corresponding equity option is carried as a liability at
fair value with changes in the value recognized in current
earnings.
 
 To manage
the market risk associated with this product, the bank entered into interest
rate swap agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”) for
the notional amount of the certificate of deposit.  Under these
agreements the bank pays either fixed or variable interest to the FHLB quarterly
over the term of the certificate of deposit and the FHLB pays the bank the
amount of interest due the customer at maturity.
 
 This
interest rate swap also represents a derivative contract and is accounted for as
a fair value hedge under SFAS 133.  As such, it is carried as an asset
at fair value with changes in value being recognized in current
earnings.  The impact of our derivative activities on pretax income
was $(3,157) in 2008, $(19,639) in 2007.
 
 Note
9.   Income Taxes
 
 The
company files income tax returns in the U.S. federal jurisdiction and the state
of West Virginia.  With few exceptions, the company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2005.  The company adopted the
provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1,
2007 with no impact on the financial statements.
 
 The components of applicable income tax
expense/(benefit) for the years ended December 31, 2008 and 2007, are as
follows:
 
 2008
                          
                          
                          2007Current:Federal
                          
                          $
                          97,152
                          
                          
                          $
                          135,605State
                          
                          
                          60,913
                          
                          
                          
                          39,729158,065
                          
                          
                          
                          175,334Deferred:Federal
                          
                          
                          (63,612
                          )
                          
                          
                          53,463State
                          
                          
                          (7,485
                          )
                          
                          
                          6,290(71,097
                          )
                          
                          
                          59,753Total
                          
                          $
                          86,968
                          
                          
                          $
                          235,087
  41
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Deferred income taxes reflect the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes.  Deferred tax assets and liabilities represent the future
tax return consequences of temporary differences, which will either be taxable
or deductible when the related assets and liabilities are recovered or
settled.
 
 The tax effects of temporary
differences which give rise to the company's deferred tax assets and liabilities
as of December 31, 2008 and 2007, are as follows:
 
 2008
                      
                      
                      2007Deferred
      tax assets:Allowance
      for loan losses
                      
                      $
                      486,780
                      
                      
                      $
                      404,264Accrued
      income and expenses
                      
                      
                      18,355
                      
                      
                      
                      18,060Employee
      benefit plans
                      
                      
                      1,556,677
                      
                      
                      
                      733,905Net
      loan origination fees and costs
                      
                      
                      37,565
                      
                      
                      
                      64,652Interest
      on nonaccrual loans
                      
                      
                      32,320
                      
                      
                      
                      8,422Deferred
      gain on sale of other real estate
                      
                      
                      18,303
                      
                      
                      
                      18,303Expenses
      on other real estate held for sale
                      
                      
                      1,148
                      
                      
                      
                      -Alternative
      minimum tax
                      
                      
                      46,603
                      
                      
                      
                      -2,197,751
                      
                      
                      
                      1,247,606Deferred
      tax liabilities:Accretion
      on securities
                      
                      
                      (15,758
                      )
                      
                      
                      (31,895
                      )Net
      unrealized gains on securities
                      
                      
                      (590,264
                      )
                      
                      
                      (22,283
                      )Depreciation
                      
                      
                      (228,268
                      )
                      
                      
                      (207,536
                      )(834,290
                      )
                      
                      
                      (261,714
                      )Net
      deferred tax asset
                      
                      $
                      1,363,461
                      
                      
                      $
                      985,892
 
 A reconciliation between the amount
of reported income tax expense and the amount computed by multiplying the
statutory income tax rate by book pretax income for the years ended December 31,
2008 and 2007, is as follows:
 
 2008
                    
                    
                    2007Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentComputed
      tax at applicable statutory rate
                    
                    $
                    341,155
                    
                    
                    
                    34.0
                    %
                    
                    $
                    431,430
                    
                    
                    
                    34.0
                    %Increase/(decrease)
      in taxes resulting from:Tax-exempt
      interest
                    
                    
                    (338,163
                    )
                    
                    
                    (33.7
                    )
                    
                    
                    (226,911
                    )
                    
                    
                    (17.9
                    )State
      income taxes, net of federal tax benefit
                    
                    
                    35,262
                    
                    
                    
                    3.5
                    
                    
                    
                    30,373
                    
                    
                    
                    2.4Tax
      exempt income on retirement plans
                    
                    
                    (29,613
                    )
                    
                    
                    (3.0
                    )
                    
                    
                    (28,485
                    )
                    
                    
                    (2.2
                    )Other
                    
                    
                    78,327
                    
                    
                    
                    7.8
                    
                    
                    
                    28,680
                    
                    
                    
                    2.2Applicable
      income taxes
                    
                    $
                    86,968
                    
                    
                    
                    8.7
                    %
                    
                    $
                    235,087
                    
                    
                    
                    18.5
                    %
 
 Note
10.  Employee Benefit Plans
 
 The bank offers a number of benefit
plans to its employees and directors.  Among them are pension and
other postretirement benefit plans which are described below.
 
 Pension Plan:The
bank has a defined benefit pension plan covering all employees who meet the
eligibility requirements.  To be eligible, an employee must be 21
years of age and have completed one year/1,000 hours of continuous
service.  The plan provides benefits based on the participant’s years
of service and five-year average final compensation.  Our funding
policy is to make annual contributions as permitted or required by applicable
regulations.
 
 401(k) Plan:A
401(k) profit sharing plan is provided for the benefit of all employees who have
attained the age of 21 and completed one year/1,000 hours of continuous
service.  The plan allows participating employees to contribute
amounts up to the limits set by the Internal Revenue Service and permits the
bank to make discretionary contributions to the plan in such amount as the Board
may determine to be appropriate.  Contributions made to the plan by
the bank for the years ended December 31, 2008 and 2007, were $15,000 and
$49,000, respectively.
  42
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Executive Supplemental Income
Plan:  Subsequent to an amendment to the bank’s pension benefit
formula in 1995, it offered a nonqualified executive supplemental income plan to
certain senior officers, some of whom are now retired, as a means of overcoming
the reduced pension benefit.  The plan provides predetermined fixed
monthly income for a period of 180 months to the participants upon
retirement.  It is funded by life insurance contracts which the bank
purchased.  The bank has been named the beneficiary of those
contracts.  The liability accrued under this plan at December 31, 2008
and 2007 was $241,179 and $247,417, respectively.  The cash surrender
values of the underlying insurance contracts at those same dates were $605,162
and $561,602.  Expenses associated with the plan were $13,615 in 2008
and $10,566 in 2007.
 
 Executive and Director Supplemental
Retirement Plan:Effective January 1, 2003, the bank entered
into a non-qualified supplemental executive and director retirement plan with
various officers and directors of the bank which provides them with income
benefits payable at retirement age or death.  In connection with this
plan, the bank purchased life insurance contracts in 2002 for
$2,000,000.  These contracts are not assets of the plan but are
instead owned by the bank and had cash surrender values of $2,360,736 at
December 31, 2008 and $2,273,638 at December 31, 2007.  Liabilities
under the plan were $848,420 at December 31, 2008 and $742,566 at December 31,
2007.  Expenses of the plan, net of income for the increase in the
cash surrender value, were $41,020 in 2008 and $40,081 in 2007.
 
 In September 2006, the Emerging Issues
Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.”  This consensus concludes that for a split-dollar life
insurance arrangement within the scope of this Issue, an employer should
recognize a liability for future benefits in accordance with SFAS 106 (if, in
substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract)
based on the substantive agreement with the employee.  The consensus
is effective for fiscal years beginning after December 15,
2007.  Accordingly the company recorded a liability for the
postretirement cost of the insurance policies carried by the bank to fund the
directors and executive officers supplemental retirement plan.  The
company adopted this issue in the first quarter of 2008 as a change in
accounting principle through a cumulative-effect adjustment to retained earnings
of approximately $53,000, net of income tax.  This adjustment is
presented on our consolidated statements of changes in shareholders’ equity in
this report.
 
 Postretirement Healthcare and Life
Insurance Plan:  The bank sponsors a postretirement healthcare
plan and a postretirement life insurance plan for all retired employees that
meet certain eligibility requirements.  Both plans are contributory
with retiree contributions that are adjustable based on various factors, some of
which are discretionary.  These factors are intended to hold constant
the maximum monthly benefit of $100 payable per eligible retiree for
postretirement health care.  Accordingly, an assumed 1 percentage
point increase or decrease in healthcare cost trend rates would not impact the
healthcare plan’s accumulated postretirement benefit obligation or the aggregate
of the plans service and interest costs.  Both the healthcare plan and
life insurance plan are unfunded.
  43
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (SFAS 158).  The company
adopted SFAS 158 on a prospective basis beginning with the year ended December
31, 2006.  Additional information regarding the company’s pension and
other postretirement benefits is presented below in accordance with SFAS 158 for
2008 and 2007.  In 2008, company adopted additional provisions of SFAS
158 requiring that we change our pension plan measurement date to December
31.  The following disclosures present the pension disclosures with
measurement dates of December 31, 2008 and October 31 2007,
respectively.
 
 Obligations
      and Funded StatusPension Benefits
                  
                  
                  Other Benefits2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Change
      in benefit obligationBenefit
      obligation at beginning of year
                  
                  $
                  4,900,325
                  
                  
                  $
                  4,811,427
                  
                  
                  $
                  559,884
                  
                  
                  $
                  522,934Service
      cost
                  
                  
                  183,646
                  
                  
                  
                  116,060
                  
                  
                  
                  15,957
                  
                  
                  
                  20,070Interest
      cost
                  
                  
                  359,707
                  
                  
                  
                  288,608
                  
                  
                  
                  31,008
                  
                  
                  
                  27,945Actuarial
      (gain)/loss
                  
                  
                  459,712
                  
                  
                  
                  (46,451
                  )
                  
                  
                  3,948
                  
                  
                  
                  30,421Benefits
      paid
                  
                  
                  (314,107
                  )
                  
                  
                  (269,319
                  )
                  
                  
                  (80,694
                  )
                  
                  
                  (41,486
                  )Benefit
      obligation at end of year
                  
                  $
                  5,589,283
                  
                  
                  $
                  4,900,325
                  
                  
                  $
                  530,103
                  
                  
                  $
                  559,884Change
      in plan assetsFair
      value of plan assets atbeginning
      of year
                  
                  $
                  4,502,890
                  
                  
                  $
                  4,059,169
                  
                  
                  $
                  -
                  
                  
                  $
                  -Actual
      return on plan assets
                  
                  
                  (1,284,815
                  )
                  
                  
                  601,238
                  
                  
                  
                  -
                  
                  
                  
                  -Employer
      contribution
                  
                  
                  209,373
                  
                  
                  
                  111,802
                  
                  
                  
                  80,694
                  
                  
                  
                  41,486Benefits
      paid
                  
                  
                  (314,107
                  )
                  
                  
                  (269,319
                  )
                  
                  
                  (80,694
                  )
                  
                  
                  (41,486
                  )Fair
      value of plan assets at end of year
                  
                  $
                  3,113,341
                  
                  
                  $
                  4,502,890
                  
                  
                  $
                  -
                  
                  
                  $
                  -Funded
      status
                  
                  $
                  (2,475,942
                  )
                  
                  $
                  (397,435
                  )
                  
                  $
                  (530,103
                  )
                  
                  $
                  (559,884
                  )Amounts
      recognized on consolidated balance sheets as:Accrued
      benefit liability
                  
                  $
                  (2,475,942
                  )
                  
                  $
                  (397,435
                  )
                  
                  $
                  (530,103
                  )
                  
                  $
                  (559,884
                  )Amounts
      recognized in accumulated other comprehensive income/(loss) consist
      of:Net
      (loss)/gain
                  
                  $
                  (3,175,933
                  )
                  
                  $
                  (1,120,633
                  )
                  
                  $
                  195,448
                  
                  
                  $
                  208,745Prior
      service (cost)/credit
                  
                  
                  -
                  
                  
                  
                  12,555
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      obligation at transition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (83,771
                  )
                  
                  
                  (104,717
                  )Deferred
      tax benefit/(expense)
                  
                  
                  1,206,855
                  
                  
                  
                  421,070
                  
                  
                  
                  (42,437
                  )
                  
                  
                  (39,531
                  )$
                  (1,969,078
                  )
                  
                  $
                  (687,008
                  )
                  
                  $
                  69,240
                  
                  
                  $
                  64,497
 
 The
accumulated benefit obligation of our pension plan was $4,708,521 at December
31, 2008 and $4,315,444 at October 31, 2007.
  44
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Components
of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income
 
 Pension Benefits
                  
                  
                  Other Benefits2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Net
      periodic benefit cost:Service
      cost
                  
                  $
                  157,411
                  
                  
                  $
                  116,060
                  
                  
                  $
                  15,957
                  
                  
                  $
                  20,070Interest
      cost
                  
                  
                  308,320
                  
                  
                  
                  288,608
                  
                  
                  
                  31,008
                  
                  
                  
                  27,945Expected
      return on plan assets
                  
                  
                  (351,156
                  )
                  
                  
                  (330,584
                  )
                  
                  
                  -
                  
                  
                  
                  -Net
      amortization and deferral
                  
                  
                  (12,555
                  )
                  
                  
                  (16,968
                  )
                  
                  
                  11,597
                  
                  
                  
                  8,819Recognized
      net actuarial loss
                  
                  
                  84,779
                  
                  
                  
                  96,135
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      periodic benefit cost
                  
                  
                  186,799
                  
                  
                  
                  153,251
                  
                  
                  
                  58,562
                  
                  
                  
                  56,834Adjustment
      due to change in Measurement date
                  
                  
                  33,226
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      changes in plan assets and benefit obligations recognized in other
      comprehensive income:Net
      (gain)/loss for period
                  
                  $
                  2,154,209
                  
                  
                  $
                  (317,105
                  )
                  
                  $
                  3,948
                  
                  
                  $
                  30,421Amortization
      of prior service cost
                  
                  
                  12,555
                  
                  
                  
                  16,968
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of transition obligation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,946
                  )
                  
                  
                  (20,946
                  )Amortization
      of net loss/(gain)
                  
                  
                  (98,909
                  )
                  
                  
                  (96,135
                  )
                  
                  
                  9,349
                  
                  
                  
                  12,127Total
      recognized in other comprehensive (income)/loss
                  
                  
                  2,067,855
                  
                  
                  
                  (396,272
                  )
                  
                  
                  (7,649
                  )
                  
                  
                  21,602Total
      recognized in net periodic benefit cost and other comprehensive
      (income)/loss
                  
                  $
                  2,287,880
                  
                  
                  $
                  (243,021
                  )
                  
                  $
                  50,913
                  
                  
                  $
                  78,436
 
 Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the plan.
 
 The estimated net loss for the defined
benefit pension plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is
$113,679.  The estimated transition obligation for the other defined
benefit postretirement plans that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the next fiscal year is
$20,946.
 
 AssumptionsPension Benefits
                  
                  
                  Other Benefits2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Weighted-average
      assumptions used to determine net periodic benefit cost:Discount
      rate
                  
                  
                  6.25
                  %
                  
                  
                  6.00
                  %
                  
                  
                  6.00
                  %
                  
                  
                  6.00
                  %Expected
      long-term return on plan assets
                  
                  
                  8.50
                  %
                  
                  
                  8.50
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ARate
      of compensation increase
                  
                  
                  3.00
                  %
                  
                  
                  3.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/AWeighted-average
      assumptions used to determine benefit obligationsDiscount
      rate
                  
                  
                  6.25
                  %
                  
                  
                  6.25
                  %
                  
                  
                  6.00
                  %
                  
                  
                  5.75
                  %Rate
      of compensation increase
                  
                  
                  3.00
                  %
                  
                  
                  3.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
 
 The expected long-term rate of return
for the pension plan is based on the expected return of each of the plan’s asset
categories (detailed in the following table), weighted based on the median of
the target allocation of each category.
  45
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Plan
Assets
 
 Pension BenefitsTarget
                  
                  
                  
                  
                  
                  Percentage
      of PlanAllocation
                  
                  
                  Allowable
                  
                  
                  Assets at December 31,2009
                  
                  
                  Range
                  
                  
                  2008
                  
                  
                  2007Asset
      category:Equity
      securities
                  
                  
                  70
                  %
                  
                  
                  40-80
                  %
                  
                  
                  64
                  %
                  
                  
                  68
                  %Debt
      securities
                  
                  
                  25
                  %
                  
                  
                  20-40
                  %
                  
                  
                  30
                  %
                  
                  
                  27
                  %Real
      estate
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Other
                  
                  
                  5
                  %
                  
                  
                  3-10
                  %
                  
                  
                  6
                  %
                  
                  
                  5
                  %Total
                  
                  
                  100
                  %
                  
                  
                  
                  
                  
                  
                  100
                  %
                  
                  
                  100
                  %
 
 Investment
Policy and Strategy
 
 The
policy, as established by the Pension Committee, is to invest assets per the
target allocations stated above.  The assets will be reallocated
periodically to meet the above target allocations.  The investment
policy will be reviewed periodically, under the advisement of a certified
investment advisor, to determine if the policy should be changed.
 
 The
overall investment return goal is to achieve a return greater than a blended mix
of stated indices tailored to the same asset mix of the plan assets by 0.5%
after fees over a rolling 5-year moving average basis.
 
 Allowable
assets include cash equivalents, fixed income securities, equity securities,
exchange traded index funds and GICs.  Prohibited investments include,
but are not limited to, commodities and future contracts, private placements,
options, limited partnerships, venture capital investments, real estate and IO,
PO, and residual tranche CMOs.  Unless a specific derivative security
is allowed per the plan document, permission must be sought from the Pension
Committee to include such investments.
 
 In order
to achieve a prudent level of portfolio diversification, the securities of any
one company should not exceed more that 10% of the total plan assets, and no
more that the 25% of total plan assets should be invested in any one industry
(other than securities of U.S. Government or Agencies).  Additionally,
no more than 20% of the plan assets shall be invested in foreign securities
(both equity and fixed).
 
 Cash
Flows
 
 Contributions:Our
pension plan calls for a contribution of approximately $729,556 in
2009.  No contributions are expected to be made to our other
postretirement plans, however.
 
 Estimated Future Benefits
Payments: The following benefit payments, which reflect future service,
are expected to be paid:
 
 Pension Benefits
                  
                  
                  Other Benefits2009
                  
                  $
                  341,367
                  
                  
                  $
                  33,5192010
                  
                  
                  340,149
                  
                  
                  
                  34,2152011
                  
                  
                  338,938
                  
                  
                  
                  36,6572012
                  
                  
                  343,298
                  
                  
                  
                  35,2992013
                  
                  
                  356,323
                  
                  
                  
                  35,6582014
      - 2018
                  
                  
                  1,825,148
                  
                  
                  
                  186,583
 
 Note
11.  Other Borrowings
 
 Short-Term
Borrowings:  During 2008 and 2007, our short-term borrowings
consisted of securities sold under agreements to repurchase (repurchase
agreements), advances under a line of credit with the Federal Home Loan Bank of
Pittsburgh (FHLB) and federal funds purchased.  Interest is paid on
the repurchase agreements based on either fixed or variable rates as determined
upon origination.  At December 31, 2008 and 2007, securities with an
amortized cost of $23,873,685 and $14,611,458, respectively, and estimated fair
values of $24,474,136 and $14,750,799, respectively, were pledged to secure the
repurchase agreements.
  46
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 As a member of the FHLB, the bank has
access to various lines of credit under programs administered by the
FHLB.  Borrowings under these arrangements bear interest at the
interest rate posted by the FHLB on the day of the borrowing and are subject to
change daily.  The lines of credit are secured by a blanket lien on
all unpledged and unencumbered assets.
 
 The following information is provided
relative to our short-term borrowing obligations:
 
 Repurchase
                    
                    
                    Line
      of
                    
                    
                    Federal
      FundsAgreement
                    
                    
                    Credit
                    
                    
                    Purchased2008Amount
      outstanding at December 31
                    
                    $
                    28,785,814
                    
                    
                    $
                    1,239,700
                    
                    
                    $
                    1,500,000Weighted
      average interest rate at December 31
                    
                    
                    1.62
                    %
                    
                    
                    0.59
                    %
                    
                    
                    0.75
                    %Maximum
      month-end amount outstanding
                    
                    $
                    29,655,450
                    
                    
                    $
                    3,250,000
                    
                    
                    $
                    2,500,000Average
      daily amount outstanding
                    
                    $
                    18,602,081
                    
                    
                    $
                    379,366
                    
                    
                    $
                    41,803Weighted
      average interest rate for the year
                    
                    
                    2.41
                    %
                    
                    
                    2.86
                    %
                    
                    
                    2.34
                    %2007Amount
      outstanding at December 31
                    
                    $
                    14,258,042
                    
                    
                    $
                    3,997,900
                    
                    
                    $
                    1,400,000Weighted
      average interest rate at December 31
                    
                    
                    3.51
                    %
                    
                    
                    4.32
                    %
                    
                    
                    4.25
                    %Maximum
      month-end amount outstanding
                    
                    $
                    21,888,322
                    
                    
                    $
                    3,997,900
                    
                    
                    $
                    1,400,000Average
      daily amount outstanding
                    
                    $
                    18,868,254
                    
                    
                    $
                    406,537
                    
                    
                    $
                    618Weighted
      average interest rate for the year
                    
                    
                    3.52
                    %
                    
                    
                    4.85
                    %
                    
                    
                    4.78
                    %
  Long-Term
Borrowings:Long-term borrowings of $7,865,485 and $2,718,865
at December 31, 2008 and 2007, respectively, consist of advances from the
FHLB which are used to finance specific lending or investing
activities.  These advances carry fixed interest rates ranging from
2.80% to 5.00% while the weighted average interest rate at December 31, 2008 was
3.82%.  The weighted average interest rate for the year ending
December 31, 2007 was 4.56%.
 
 A summary
of the maturities of the long-term borrowings for the next five years is as
follows:
 
 Year
                      
                      Amount2009
                      
                      $
                      409,2342010
                      
                      
                      1,428,2652011
                      
                      
                      1,948,1802012
                      
                      
                      356,5152013
                      
                      
                      2,815,6872014
      and thereafter
                      
                      
                      907,604Total
                      
                      $
                      7,865,485
 
 Note
12.  Commitments and Contingencies
 
 At
December 31, 2008 and 2007, the bank maintained required reserve balances with
the Federal Reserve Bank of Richmond approximating $217,000 and $338,000,
respectively.  The bank does not earn interest on such reserve
balances.
 
 Litigation:  We are
involved in various legal actions arising in the ordinary course of
business.  In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on our financial condition or results
of operations.
 
 Financial Instruments With
Off-Balance-Sheet Risk:  The bank is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers.  These financial instruments
include commitments to extend credit and standby letters of
credit.  These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.  The contract amounts of these
instruments reflect the extent of involvement the bank has in particular classes
of financial instruments.
  47
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Financial
      instruments whose contract
                      
                      Contract Amountamounts represent credit
    risk
                      
                      2008
                      
                      
                      2007Commitments
      to extend credit
                      
                      $
                      25,318,554
                      
                      
                      $
                      24,602,947Standby
      letters of credit
                      
                      
                      751,423
                      
                      
                      
                      301,223Total
                      
                      $
                      26,069,977
                      
                      
                      $
                      24,904,170
 
 The
bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these
instruments.  The bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The bank evaluates each customer's credit
worthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the bank upon extension of credit, is based on
management's credit evaluation.  Collateral held varies but may
include accounts receivable, inventory, equipment or real estate.
 
 Standby
letters of credit are conditional commitments issued by the bank to guarantee
the performance of a customer to a third party.  Those guarantees are
primarily issued to support private borrowing arrangements.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans.  These letters of credit are
generally uncollateralized.
 
 Note
13.  Shareholders’ Equity and Restrictions on Dividends
 
 The
primary source of funds for the dividends paid by Citizens Financial Corp. is
dividends received from Citizens National Bank.  Dividends paid by the
bank are subject to restrictions by banking regulations.  The most
restrictive provision requires approval by the Office of the Comptroller of the
Currency if dividends declared in any year exceed the year's net income, as
defined, plus the retained net profits of the two preceding years.  At
December 31, 2008, the net retained profits available for distribution to
Citizens Financial Corp. as dividends without regulatory approval approximate
$922,574 or 4.4% of consolidated net assets.
 
 The
company and bank are subject to various regulatory capital requirements
administered by the federal banking agencies.  Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
company and bank must meet specific capital guidelines that involve quantitative
measures of the company’s and bank’s assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices.  The company and bank’s capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.  Prompt corrective action
provisions are not applicable to bank holding companies.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
company and bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average
assets.  We believe, as of December 31, 2008, that the company
and bank meet all capital adequacy requirements to which they are
subject.
 
 The most
recent notification from the Office of the Comptroller of the Currency
categorized the bank as well capitalized under the regulatory framework for
prompt corrective action.  To be categorized as well capitalized the
bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below.  There are no
conditions or events since that notification that we believe have changed the
bank's category.
 
 The
bank’s actual capital amounts and ratios, which are the same as those for the
holding company on a consolidated basis, are presented in the following table
(in thousands).
  48
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 To
      Be Well CapitalizedFor
      Capital
                    
                    
                    Under
      Prompt CorrectiveActual
                    
                    
                    Adequacy Purposes
                    
                    
                    Action ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioAs
      of December 31, 2008:Total
      Capital:Risk Weighted Assets
                    
                    $
                    23,922
                    
                    
                    
                    12.99
                    %
                    
                    $
                    14,733
                    
                    
                    
                    8.00
                    %
                    
                    $
                    18,416
                    
                    
                    
                    10.00
                    %Tier
      I Capital:Risk Weighted Assets
                    
                    
                    21,690
                    
                    
                    
                    11.77
                    
                    
                    
                    7,371
                    
                    
                    
                    4.00
                    
                    
                    
                    11,057
                    
                    
                    
                    6.00Tier
      I Capital:Average Assets
                    
                    
                    21,690
                    
                    
                    
                    7.70
                    
                    
                    
                    11,268
                    
                    
                    
                    4.00
                    
                    
                    
                    14,084
                    
                    
                    
                    5.00As
      of December 31, 2007:Total
      Capital:Risk Weighted Assets
                    
                    $
                    23,328
                    
                    
                    
                    12.52
                    %
                    
                    $
                    14,906
                    
                    
                    
                    8.00
                    %
                    
                    $
                    18,633
                    
                    
                    
                    10.00
                    %Tier
      I Capital:Risk Weighted Assets
                    
                    
                    21,565
                    
                    
                    
                    11.57
                    
                    
                    
                    7,455
                    
                    
                    
                    4.00
                    
                    
                    
                    11,183
                    
                    
                    
                    6.00Tier
      I Capital:Average Assets
                    
                    
                    21,565
                    
                    
                    
                    8.75
                    
                    
                    
                    9,858
                    
                    
                    
                    4.00
                    
                    
                    
                    12,323
                    
                    
                    
                    5.00
 
 Note
14.   Fair Value Measurements
 
 The
company adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on January
1, 2008 to record fair value adjustments to certain assets and liabilities and
to determine fair value disclosures. SFAS 157 clarifies that fair value of
certain assets and liabilities is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.
 
 In
February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which
delayed the effective date of SFAS 157 for certain nonfinancial assets and
nonfinancial liabilities except for those items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. FSP 157-2 defers
the effective date of SFAS 157 for such nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. Thus, the company has only partially applied
SFAS 157. Those items affected by FSP 157-2 include other real estate owned
(OREO), goodwill and core deposit intangibles.
 
 In
October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify
the application of SFAS 157 in a market that is not active and to provide key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 was effective upon
issuance, including prior periods for which financials statements were not
issued.
 
 SFAS 157 specifies a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect the company’s market
assumptions. The three levels of the fair value hierarchy under SFAS 157 based
on these two types of inputs are as follows:
 
 Level 1 –
Valuation is based on quoted prices in active markets for identical assets and
liabilities.
 
 Level 2 –
Valuation is based on observable inputs including quoted prices in active
markets for similar assets and liabilities, quoted prices for identical or
similar assets and liabilities in less active markets, and model-based valuation
techniques for which significant assumptions can be derived primarily from or
corroborated by observable data in the market.
 
 Level 3 –
Valuation is based on model-based techniques that use one or more significant
inputs or assumptions that are unobservable in the market.
  49
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The following describes the valuation
techniques used by the company to measure certain financial assets and
liabilities recorded at fair value on a recurring basis in the financial
statements:
 
 Securities
available for sale: Securities available for sale are recorded at fair value on
a recurring basis. Fair value measurement is based upon quoted market prices,
when available (Level 1). If quoted market prices are not available, fair values
are measured utilizing independent valuation techniques of identical or similar
securities for which significant assumptions are derived primarily from or
corroborated by observable market data. Third party vendors compile prices from
various sources and may determine the fair value of identical or similar
securities by using pricing models that consider observable market data (Level
2).
 
 Derivative
financial liabilities:  The fair value measurement of the interest
rate swaps are based on valuation techniques of similar products for which
assumptions are derived primarily from or corroborated by observable market
data. Third party vendors compile prices from various sources and may determine
the fair value of similar products by using pricing models that considers
observable market data (Level 2).
 
 The
following table presents the balances of financial assets and liabilities
measured at fair value on a recurring basis as of December 31,
2008:
 
 Fair Value Measurements at December 31, 2008
      UsingQuoted
      PricesIn
      Active
                  
                  
                  SignificantMarkets
      for
                  
                  
                  Other
                  
                  
                  SignificantBalance
      as of
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableDecember
      31,
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs2008
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Assets:Securities
      available for sale
                  
                  $
                  82,050,622
                  
                  
                  $
                  -
                  
                  
                  $
                  82,050,622
                  
                  
                  $
                  -Liabilities:Derivative
      financial liabilities
                  
                  
                  251
                  
                  
                  
                  -
                  
                  
                  
                  251
                  
                  
                  
                  -
 
 Certain
financial assets are measured at fair value on a nonrecurring basis in
accordance with GAAP. Adjustments to the fair value of these assets usually
result from the application of lower-of-cost-or-market accounting or write-downs
of individual assets.
 
 The
following describes the valuation techniques used by the company to measure
certain financial assets recorded at fair value on a nonrecurring basis in the
financial statements:
 
 Impaired
Loans: Loans are designated as impaired when, in the judgment of management
based on current information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will not be collected.
The measurement of loss associated with impaired loans can be based on the
observable market price of the loan, the present value of cash flows expected to
be realized from the loan, or the fair value of the collateral. Fair value is
measured based on the value of the collateral securing the loans. Collateral may
be in the form of real estate or business assets including equipment, inventory,
and accounts receivable. The vast majority of the collateral is real estate. The
value of real estate collateral is determined utilizing an income or market
valuation approach based on an appraisal conducted by an independent, licensed
appraiser outside of the company using observable market data (Level 2).
However, if the collateral is a house or building in the process of construction
or if an appraisal of the real estate property is over two years old, then the
fair value is considered Level 3. The value of business equipment is based upon
an outside appraisal if deemed significant, or the net book value on the
applicable business’ financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivables
collateral are based on financial statement balances or aging reports (Level 3).
Impaired loans allocated to the Allowance for Loan Losses are measured at fair
value on a nonrecurring basis. Any fair value adjustments are recorded in the
period incurred as provision for loan losses on the Consolidated Statements of
Income.
 
 The
following table summarizes the company’s financial assets that were measured at
fair value on a nonrecurring basis during the period.
 
 Carrying value at December 31,
      2008Quoted
      PricesIn
      Active
                  
                  
                  SignificantMarkets
      for
                  
                  
                  Other
                  
                  
                  SignificantBalance
      as of
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableDecember
      31,
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs2008
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Assets:Impaired
      Loans
                  
                  $
                  4,464,523
                  
                  
                  $
                  -
                  
                  
                  $
                  2,827,878
                  
                  
                  $
                  1,636,645
  50
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 SFAS No.
107, “Disclosures about Fair Value of Financial Instruments” requires disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that
value.  The following summarizes the methods and significant
assumptions used in estimating fair value under SFAS No. 107:
 
 Cash and Due From
Banks:  The carrying values of cash and due from banks
approximate their estimated fair values.
 
 Federal Funds
Sold:  The carrying values of federal funds sold approximate
their estimated fair values.
 
 Securities:  Fair
value measurement is based upon quoted market prices, when available (Level 1).
If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which
significant assumptions are derived primarily from or corroborated by observable
market data. Third party vendors compile prices from various sources and may
determine the fair value of identical or similar securities by using pricing
models that considers observable market data (Level 2).
 
 Loans:  The
estimated fair values for loans are computed based on scheduled future cash
flows of principal and interest, discounted at interest rates currently offered
for loans with similar terms to borrowers of similar credit
quality.  No prepayments of principal are assumed.
 
 Accrued Interest Receivable and
Payable:  The carrying values of accrued interest receivable
and payable approximate their estimated fair values.
 
 Deposits:  The
estimated fair values of demand deposits (i.e. noninterest bearing and interest
bearing checking), money market, savings and other variable rate deposits
approximate their carrying values.  Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities.  Any
intangible value of long-term relationships with depositors is not considered in
estimating the fair values disclosed.
 
 Short-Term
Borrowings:  The carrying values of short-term borrowings
approximate their estimated fair values.
 
 Long-Term
Borrowings:  The fair values of long-term borrowings are
estimated by discounting scheduled future payments of principal and interest at
current rates available on borrowings with similar terms.
 
 Off-Balance-Sheet
Instruments:  The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counterparties.  The
amounts of fees currently charged on commitments and standby letters of credit
are deemed insignificant, and therefore, the estimated fair values and carrying
values are not shown below.
 
 Derivative Financial
Instruments:  The fair value measurement of the interest rate
swaps are based on valuation techniques of similar products for which
assumptions are derived primarily from or corroborated by observable market
data. Third party vendors compile prices from various sources and may determine
the fair value of similar products by using pricing models that considers
observable market data (Level 2).
  51
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The
carrying values and estimated fair values of the company's financial instruments
are summarized below:
 
 December 31, 2008
                  
                  
                  December 31, 2007Estimated
                  
                  
                  
                  
                  
                  EstimatedCarrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairValue
                  
                  
                  Value
                  
                  
                  Value
                  
                  
                  ValueFinancial
      assets:Cash
      and due from banks
                  
                  $
                  3,943,066
                  
                  
                  $
                  3,943,066
                  
                  
                  $
                  7,049,699
                  
                  
                  $
                  7,049,699Interest
      bearing deposits with other banks
                  
                  
                  9,438,048
                  
                  
                  
                  9,438,048
                  
                  
                  
                  12,421
                  
                  
                  
                  12,421Securities
      available for sale
                  
                  
                  80,859,148
                  
                  
                  
                  80,859,148
                  
                  
                  
                  57,446,339
                  
                  
                  
                  57,446,339Loans,
      net
                  
                  
                  175,721,333
                  
                  
                  
                  182,051,438
                  
                  
                  
                  170,939,264
                  
                  
                  
                  166,266,520Accrued
      interest receivable
                  
                  
                  1,409,645
                  
                  
                  
                  1,409,645
                  
                  
                  
                  1,384,943
                  
                  
                  
                  1,384,943Financial
      liabilities:Deposits
                  
                  $
                  217,428,850
                  
                  
                  $
                  219,261,894
                  
                  
                  $
                  201,296,470
                  
                  
                  $
                  202,239,030Short-term
      borrowings
                  
                  
                  31,525,514
                  
                  
                  
                  31,525,514
                  
                  
                  
                  19,655,942
                  
                  
                  
                  19,655,942Long-term
      borrowings
                  
                  
                  7,865,485
                  
                  
                  
                  8,072,644
                  
                  
                  
                  2,718,865
                  
                  
                  
                  2,720,621Accrued
      interest payable
                  
                  
                  486,238
                  
                  
                  
                  486,238
                  
                  
                  
                  523,403
                  
                  
                  
                  523,403Financial
      instruments:Interest
      rate swaps and call options
                  
                  $
                  251
                  
                  
                  $
                  251
                  
                  
                  $
                  2,957
                  
                  
                  $
                  2,957
 
 The
company assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations.  As a result, the
fair values of the company’s financial instruments will change when interest
rate levels change and that change may be either favorable or unfavorable to the
company.  Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate
risk.  However, borrowers with fixed rate obligations are less likely
to prepay in a rising rate environment and more likely to prepay in a falling
rate environment.  Conversely, depositors who are receiving fixed
rates are more likely to withdraw funds before maturity in a rising rate
environment and less likely to do so in a falling rate
environment.  Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the company’s overall interest rate risk.
  52
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Note
15.  Condensed Financial Statements of Parent Company
 
 Information relative to the parent
company's balance sheets at December 31, 2008 and 2007, and the related
statements of income and cash flows for the years ended December 31, 2008 and
2007, are presented below.
 
 December 31,Balance Sheets
                                        
                                        2008
                                        
                                        
                                        2007AssetsCash
                                        
                                        $
                                        2,091
                                        
                                        
                                        $
                                        2,992Investment
      in subsidiary
                                        
                                        
                                        20,839,465
                                        
                                        
                                        
                                        21,077,936Total
      assets
                                        
                                        $
                                        20,841,556
                                        
                                        
                                        $
                                        21,080,928Shareholders'
      equityCommon
      stock, $2.00 par value, 4,500,000 shares authorized,issued
      2,250,000 shares
                                        
                                        $
                                        4,500,000
                                        
                                        
                                        $
                                        4,500,000Retained
      earnings
                                        
                                        
                                        21,109,894
                                        
                                        
                                        
                                        20,998,645Accumulated
      other comprehensive loss
                                        
                                        
                                        (936,775
                                        )
                                        
                                        
                                        (586,154
                                        )Treasury
      stock at cost, 420,496 shares
                                        
                                        
                                        (3,831,563
                                        )
                                        
                                        
                                        (3,831,563
                                        )Total
      shareholders' equity
                                        
                                        $
                                        20,841,556
                                        
                                        
                                        $
                                        21,080,928For the Years Ended December
      31,Statements of Income
                                        
                                        2008
                                        
                                        
                                        2007Income
      - dividends from subsidiary bank
                                        
                                        $
                                        736,800
                                        
                                        
                                        $
                                        883,801Expenses
      - operating
                                        
                                        
                                        5,900
                                        
                                        
                                        
                                        5,500Income
      before equity in undistributed income of subsidiary
                                        
                                        
                                        730,900
                                        
                                        
                                        
                                        878,301Equity
      in undistributed income of subsidiary
                                        
                                        
                                        185,528
                                        
                                        
                                        
                                        155,525Net
      income
                                        
                                        $
                                        916,428
                                        
                                        
                                        $
                                        1,033,826For the Years Ended December
      31,Statements of Cash Flows
                                        
                                        2008
                                        
                                        
                                        2007Cash
      flows from operating activitiesNet
      income
                                        
                                        $
                                        916,428
                                        
                                        
                                        $
                                        1,033,826Adjustments
      to reconcile net income to netcash provided by operating
      activities:Equity
      in undistributed income of subsidiary
                                        
                                        
                                        (185,528
                                        )
                                        
                                        
                                        (155,525
                                        )Cash
      provided by operating activities
                                        
                                        
                                        730,900
                                        
                                        
                                        
                                        878,301Cash
      flows from investing activities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Cash
      flows from financing activitiesDividends
      paid to shareholders
                                        
                                        
                                        (731,801
                                        )
                                        
                                        
                                        (878,162
                                        )Cash
      used in financing activities
                                        
                                        
                                        (731,801
                                        )
                                        
                                        
                                        (878,162
                                        )Increase/(decrease)
      in cash
                                        
                                        
                                        (901
                                        )
                                        
                                        
                                        139Cash:Beginning
                                        
                                        
                                        2,992
                                        
                                        
                                        
                                        2,853Ending
                                        
                                        $
                                        2,091
                                        
                                        
                                        $
                                        2,992
  53
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors
 Citizens
Financial Corp. and Subsidiary
 Elkins,
West Virginia
 
 
 We have
audited the accompanying consolidated balance sheets of Citizens Financial Corp.
and Subsidiary as of December 31, 2008 and 2007, and the related consolidated
statements of income, changes in shareholders’ equity and cash flows for each of
the two years in the period ended December 31, 2008.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Citizens Financial Corp. and
Subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles.
 
 We were
not engaged to examine management's assertion about the effectiveness of
Citizens Financial Corp. and Subsidiary’s internal control over financial
reporting as of December 31, 2008 included in the accompanying Report of
Management’s Assessment of Internal Control Over Financial Reporting and,
accordingly, we do not express an opinion thereon.
 
 Yount,
      Hyde & Barbour, P.C.Winchester,
      VirginiaMarch
      11, 2009
  54
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Item9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
 
 No
reportable items.
 
 Item9A(T).Controlsand Procedures
 
 As of the end of the period covered by
this Annual Report on Form 10-K, the company, under the supervision and with the
participation of management, including the chief executive officer and principal
financial officer, carried out an evaluation of the effectiveness of the design
and operation of the company’s disclosure controls and procedures pursuant to
Exchange Act Rules 13a-14 and 15d-4.  Based upon that evaluation, the
chief executive officer and principal financial officer concluded that the
company’s disclosure controls and procedures are effective in timely alerting
them to material information relating to the company which is required to be
included in the company’s periodic SEC filings.  The company did not
have any changes in internal control over financial reporting during its fourth
quarter for the year ending December 31, 2008, that materially effected, or were
reasonably likely to effect the company’s internal control over financial
reporting.
 
 Report of Management’s
Assessment of Internal Control Over Financial Reporting
 
 Citizens
Financial Corp. is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this annual
report.  The consolidated financial statements and notes included in
this annual report have been prepared in conformity with United States generally
accepted accounting principles and necessarily include some amounts that are
based on management’s estimates and judgments.
 
 The
management of Citizens Financial Corp. is responsible for establishing and
maintaining effective internal control over financial reporting that is designed
to produce reliable financial statements in conformity with United States
generally accepted accounting principles.  The system of internal
control over financial reporting as it relates to the financial statements is
evaluated for effectiveness by management and tested for reliability through a
program of internal audits.  Actions are taken to correct potential
deficiencies as they are identified.  Any system of internal control,
no matter how well designed, has inherent limitations, including the possibility
that a control can be circumvented or overridden and misstatements due to error
or fraud may occur and not be detected.  Also, because of changes in
conditions, internal control effectiveness may vary over
time.  Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement
preparation.
 
 The Audit
Committee, consisting entirely of independent directors, meets regularly with
management, internal auditors and the independent registered public accounting
firm, and reviews audit plans and results, as well as management’s actions taken
in discharging responsibilities for accounting, financial reporting, and
internal control.  Yount, Hyde & Barbour, P.C., independent
registered public accounting firm, and the internal auditors have direct and
confidential access to the Audit Committee at all times to discuss the results
of their examinations.
 
 Management
assessed the company’s system of internal control over financial reporting as of
December 31, 2008.  In making this assessment, we used the criteria
for effective internal control over financial reporting set forth in Internal
Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Based on this
assessment, management concludes that, as of December 31, 2008, its system of
internal control over financial reporting is effective and meets the criteria of
the Internal Control-Integrated Framework.  This annual report does
not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting.  Management’s
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual
report.
 
 Item9B.  Other Information
 
 No reportable items.
  55
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 PARTIII
 
 Item
10.  Directors, Executive Officers, and Corporate
Governance
 
 The
number of directors of the company may consist of not less than five nor more
than 25 persons in accordance with the company’s Articles of
Incorporation.  The number of directors is fixed by resolution of a
majority vote of shareholders and currently stands at nine.  Among
them, Mr. John A. Yeager, CPA, serves as an independent director and as the
company’s audit committee financial expert.  Mr. Yeager received his
bachelor’s degree in accounting from West Virginia University in 1980 and has
six years experience in public accounting.  During that time, Mr.
Yeager gained experience in the audit of banks whose characteristics and
complexity are similar to Citizens.  Mr. Yeager also has served as
controller for two nonbanking companies for approximately 19
years.  He has served on the board of directors of Citizens National
Bank since April, 1999 and of Citizens Financial Corp. since April,
2003.  His current term on the holding company board expires in April,
2009. The following table sets forth the names of all of the persons who have
served as directors of Citizens Financial Corp. for the year ended December 31,
2008, their ages and principal occupations, their length of service to the
company and the expiration of their present terms.
 
 PrincipalOccupation
                                                              
                                                              PresentDuring
      Past
                                                              Director
                                                              TermName and Age
                                                              Five  Years
                                                              Since (1)
                                                              ExpiresRobert
      N. Alday
                                                              President,
                                                              September,
      1986
                                                              April,
      2009 (2)93
                                                              Phil
      Williams Coal CompanyMax
      L. Armentrout
                                                              President,
      and
                                                              September,
      1986
                                                              April,
      201171
                                                              Chairman
      of the Board,Laurel
      Lands Corp.;Chairman
      of the Board,Citizens
      Financial Corp.William
      J. Brown
                                                              Retired,
      Hess Oil Co., Inc;
                                                              February,
      2000
                                                              April,
      201062
                                                              Managing
      Partner, BrownRental
      GroupEdward
      L. Campbell
                                                              Co-Owner,
                                                              February,
      2000
                                                              April,
      201069
                                                              Retired,
      Campbell’s MarketWilliam
      T. Johnson, Jr.
                                                              President
      and Chief
                                                              April,
      2005
                                                              April,
      201165
                                                              Executive
      Officer andExecutive
      Vice President,Citizens
      National BankCyrus
      K. Kump
                                                              President,
                                                              June,
      1992
                                                              April,
      2009 (2)62
                                                              Kump
      Enterprises;Kerr
      Real EstateVice
      Chairman of the Board,Citizens
      Financial Corp.Robert
      J. Schoonover
                                                              President
      and
                                                              April,
      1998
                                                              April,
      201069
                                                              Chief
      Executive Officer,Citizens
      Financial Corp.and
      Citizens National BankL.
      T. Williams
                                                              Consultant,
                                                              September,
      1986
                                                              April,
      201178
                                                              Retired,
      ElkinsBuilders
      SupplyJohn
      A. Yeager, CPA
                                                              Controller,
                                                              April,
      2003
                                                              April,
      2009 (2)50
                                                              Newlons
      International Sales, LLC
 
 (1)
              All
      of the above named directors, with the exception of Mr. Alday, have also
      served as directors of Citizens National Bank for the past five years on a
      continuous basis.  Mr. Alday has not served Citizens National
      Bank in any official capacity.
 
 (2)
              Mr.
      Alday, Mr. Kump, and Mr. Yeager have been nominated to stand for
      reelection to an additional 3 year term expiring in April,
      2012.
  56
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Set forth
below are the executive officers of Citizens Financial Corp. and subsidiary,
their age, present position and relations that have existed with affiliates and
others during the past five years.
 
 Principal
      Occupation andPresent
                                                  Banking
      Experience DuringName and
      Age
                                                  Position
                                                  the Last Five YearsRobert
      J. Schoonover
                                                  President
      & CEO,
                                                  President
      and Chief Executive Officer,69
                                                  Citizens
      Financial Corp.
                                                  Citizens
      Financial Corp. andCitizens
      National BankWilliam
      T. Johnson, Jr.
                                                  Vice
      President,
                                                  President
      and Chief Executive Officer65
                                                  Citizens
      Financial Corp.
                                                  and
      Executive Vice President,President
      & CEO,
                                                  Citizens
      National BankCitizens
      National BankThomas
      K. Derbyshire
                                                  Vice
      President & Treasurer,
                                                  Executive
      Vice President,50
                                                  Citizens
      Financial Corp.
                                                  Senior
      Vice President and Chief FinancialExecutive
      Vice President,
                                                  Officer,
      Citizens National BankCitizens
      National BankRudy
      F. Torjak, Jr.
                                                  Senior
      Vice President and
                                                  Senior
      Vice President and60
                                                  Chief
      Credit Officer,
                                                  Chief
      Credit Officer,Citizens
      National Bank
                                                  Citizens
      National Bank;Senior
      Vice President-Commercial Loans,Wesbanco,
      Inc.Nathaniel
      S. Bonnell
                                                  Senior
      Vice President and
                                                  Senior
      Vice President and27
                                                  Chief
      Financial Officer,
                                                  Chief
      Financial Officer,Citizens
      National Bank
                                                  and
      Financial Reporting ManagerCitizens
      National
Bank
 
 Citizens has adopted a Code of Ethics
that applies to all employees, including its executive officers.  In
the event that Citizens makes any amendment to, or grants any waivers of, a
provision of the Code of Ethics that applies to the principal executive officer,
principal financial officer or principal accounting officer that requires
disclosure under applicable SEC rules, the company intends to disclose such
amendment or waiver and the reasons therefore, and Citizens will disclose the
nature of such amendment or waiver in a report on Form 8-K.  Citizens’
Code of Ethics may be viewed by accessing our website at www.citizensnationalbank.com.
 
 Item11.  Executive Compensation
 
 Executive
Compensation:The executive officers of Citizens Financial
Corp. serve without compensation from the company.  Those serving as
officers of the subsidiary bank are compensated by the bank for that service,
however.  The principal executive officer of the corporation serves
without compensation from the bank or the company.  He is currently
retired from the bank and receives fees for his role as a director of the
company, as well as from retirement plan distributions.  None of the
company’s executive officers serve under an employment agreement with the
company.  Compensation is primarily comprised of a base salary that is
adjusted by the Board’s personnel committee annually.  The company
currently does not provide equity or incentive based compensation to executive
officers.
  57
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The
following table sets forth the compensation of the company's Principal Executive
Officer (PEO), as well as the two most highly compensated executive officers,
other than the PEO, who were serving as executive officers at the end of the
last completed fiscal and have total annual compensation exceeding
$100,000.
 
 SUMMARY
COMPENSATION TABLE
 
 Name
      and
                                                                                  Principal
      Position
                                                                                
                                                                                Year
                                                                                
                                                                                
                                                                                Salary
      ($)
                                                                                
                                                                                
                                                                                Nonqualified
      Deferred Compensation Earnings (1)
                                                                                
                                                                                
                                                                                All
      Other Compensation (2) (3)
                                                                                
                                                                                
                                                                                TotalRobert
      J. Schoonover,
                                                                                  President
      & CEO
                                                                                  Citizens
      Financial Corp
                                                                                  (Principal
      Executive Officer)
                                                                                
                                                                                
                                                                                2008
                                                                                  2007
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                  -
                                                                                
                                                                                
                                                                                N/A
                                                                                  N/A
                                                                                
                                                                                
                                                                                $
                                                                                66,754
                                                                                  83,991
                                                                                
                                                                                
                                                                                $
                                                                                66,754
                                                                                  83,991William
      T. Johnson, Jr.
                                                                                  VP,
      Citizens Financial Corp.
                                                                                  President
      & CEO,
                                                                                  Citizens
      National Bank
                                                                                
                                                                                
                                                                                2008
                                                                                  2007
                                                                                
                                                                                
                                                                                
                                                                                159,820
                                                                                  145,906
                                                                                
                                                                                
                                                                                $
                                                                                3,313
                                                                                  12,783
                                                                                
                                                                                
                                                                                
                                                                                14,810
                                                                                  17,113
                                                                                
                                                                                
                                                                                
                                                                                177,943
                                                                                  175,772Thomas
      K. Derbyshire
                                                                                  VP
      & Treasurer,
                                                                                  Citizens
      Financial Corp.
                                                                                  Executive
      Vice President,
                                                                                  Citizens
      National Bank
                                                                                
                                                                                
                                                                                2008
                                                                                  2007
                                                                                
                                                                                
                                                                                
                                                                                149,154
                                                                                  136,090
                                                                                
                                                                                
                                                                                
                                                                                5,388
                                                                                  4,533
                                                                                
                                                                                
                                                                                
                                                                                1,952
                                                                                  3,880
                                                                                
                                                                                
                                                                                
                                                                                156,494
                                                                                  144,503
 
 (1)
              Mr.
      Schoonover is retired from the bank and receives payments from
      supplemental retirement plans.  The payment of such benefits
      results in a decrease in the value of each nonqualified deferred
      compensation plan, therefore these have been excluded from the table
      above.  He participates in the executive supplemental income
      plan and the executive and director supplemental retirement plan; the
      change in the values of those plans was $(35,173) in 2008 and $(33,091) in
      2007.
 (2)
              Mr.
      Schoonover and Mr. Johnson also serve as members of the board of
      directors.  In 2008, for his services as a director, Mr.
      Schoonover received director fees of $30,696 for board and committee
      meetings, as well as other compensation totaling $6,432 which included
      $5,001 for consulting fees and the remainder for insurance premiums paid
      for the benefit of the director.  In 2007, Mr. Schoonover
      received director fees of $26,519 for board and committee meetings, as
      well as other compensation totaling $27,859. Mr. Johnson received $12,256
      and $9,219 in director fees for his services on the board for 2008 and
      2007, respectively.
 (3)
              In
      addition to the board fees described in the preceding footnote, this
      column includes the company’s contributions to the individual’s 401(k)
      retirement savings program to which the individual has a vested interest
      and taxable income resulting from participation in a bank sponsored
      executive and director supplemental retirement plan.  The bank's
      group life and health insurance program, which is paid for by the bank, is
      made available to all full-time employees and does not discriminate in
      favor of directors or officers; however, in accordance with IRS Code
      Section 79, the cost of group term life insurance coverage for an
      individual in excess of $50,000 is added to the individual's earnings and
      is also included in this figure.  Since Mr. Schoonover is
      retired from the bank his figure also includes, $9,061 received from the
      executive supplemental income plan, $20,424 received from the executive
      and director supplemental retirement plan for each of the years
      presented.
 
 Retirement
Plans:Citizens Financial Corp., having no employees,
has no retirement program, but Citizens National Bank has a pension program for
its eligible employees.  This pension plan is a qualified retirement
plan and is available to all employees, including officers, who meet the
eligibility requirements.  Directors do not participate in this plan.
The bank’s defined benefit
pension plan covers all employees who meet the eligibility
requirements.  To be eligible, an employee must be 21 years of age and
have completed one year/1,000 hours of continuous service.  Our
funding policy is to make annual contributions as permitted or required by
applicable regulations.Pensions for all participants are
based on five-year average final compensation.  Credits are received
for each year of participation at the following rates: 1 percent of the first
$9,600 of the 5-year average final compensation and 1.5 percent of such average
final compensation in excess of $9,600, all multiplied by years of service up to
a 25-year maximum.  The pension benefits are payable to participants
on a monthly basis in the form of a joint and 50 percent survivor annuity for
all married participants who do not elect otherwise, or in the form of a single
life annuity for all other participants or survivors.  Joint and 100
percent survivorship, single life annuity or 120 payments guaranteed are other
optional forms of distribution.  Under the plan, the normal retirement
age is 65.  However, an employee can retire beginning at age 60 and
received full benefits based on the same formula described above using their
current years of service and last five years of compensation.  Mr.
Schoonover, who is retired from the bank, is currently receiving an annual
benefit of $30,467 under this plan.  Mr. Johnson is eligible to retire
under the early retirement provisions of this plan.  Additional
information regarding the plan is contained in Note 10 to the accompanying
consolidated financial statements.
  58
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The bank
has established a 401(k) plan for the benefit of all employees who meet
eligibility requirements.  A description of the Plan, the eligibility
requirements and the contributions made to the Plan by the bank for the years
ended December 31, 2008 and 2007 may be found in Note 10 to the accompanying
consolidated financial statements.
 
 The bank entered into a nonqualified
supplemental income plan with certain senior officers as described in Note 10 to
the accompanying consolidated financial statements.  A copy of the
plan, and the amendments thereto, are incorporated herein by reference to the
exhibits contained in the company’s Forms 10-K dated December 31, 1997 and
1996.  The plan was originally established for certain key officers
after the employee pension plan benefit calculations were revised and benefits
were reduced.  This plan was purchased to replace the lost retirement
income the officers had suffered through the pension
modification.  Normal retirement age under the plan is
65.  However, executives can receive 100% of their retirement benefit
if they retire early after age 62 and have completed 30 years of
service.  This deferred compensation plan calls for 180 equal monthly
payments to be paid beginning after retirement.  The monthly
retirement benefit for Mr. Schoonover, Mr. Johnson, and Mr. Derbyshire is $755,
$669, and $1,069, respectively.  These payment amounts were determined
at plan inception as a direct result of the benefits lost in the pension
modification.  Mr. Schoonover is currently receiving benefits under
the plan, and Mr. Johnson is currently qualified to retire under the early
retirement provisions.
 
 Also as
explained in Note 10, effective January 1, 2003, the bank entered into another
nonqualified executive and director supplemental retirement plan with its
directors and those officers who qualified.  A copy of the plan is
incorporated herein by reference to Exhibit 10 contained in the company’s Form
10-K dated December 31, 2003.  This plan was designed to reward
directors and key officers for their service on a basis consistent with that of
many of our competitors.  Benefits paid under the plan (if any) are
the result of excess after-tax earnings of certain life insurance contracts
purchased by the bank over a defined opportunity cost.  The
opportunity cost is defined as a rolling five-year average of the three-year
Treasury bill.  The excess earnings are used to compute a retirement
benefit that is recorded in a pre-retirement account as a liability on books of
the registrant for each plan year.  The change in the pre-retirement
benefit is included in the summary compensation table above under the caption
Nonqualified Deferred
Compensation Earnings.  Upon retirement of an executive, the
balance in the pre-retirement account is paid to the executive in 120 monthly
installments or until the executive’s death.  In addition to these
payments, the retiree also receives the additional excess earnings for each plan
year subsequent to his retirement until death.  These excess earnings
are calculated using the same formula as described in this
paragraph.  The plan defines normal retirement age as 65, but an
executive can retire with 100% of his benefits at age 62 if he has 30 years of
service with the company. If the executive retires or leaves employment before
he is age 65 and does not have 30 years of service, he will receive no benefit
from the plan.  Mr. Schoonover receives benefits from this plan, and
Mr. Johnson is currently qualified to retire under this plan with full
benefits.  The plan also includes a death benefit for each
executive.  If an executive dies before retirement, his designee will
receive a death benefit of two and one half times the executive’s final pre-tax
gross salary.  If the executive dies after retirement, his designee
will receive a $100,000 death benefit.  In either case, the
executive’s designee also receives any remaining retirement benefit as
well.
 
 Other
Benefits:  Senior management also participates in the bank’s
other benefit plans on the same terms as other employees.  These plans
include medical insurance, life insurance, and discounts on bank
products.
 
 Change in
Control:No employment contracts exist between any executive
officer and the registrant, or its subsidiary.  However, the executive
supplemental income plan and the executive and director supplemental retirement
plan described above both contain a change in control clause.
 
 Under the
executive supplemental income plan, if a change in control occurs and the
executive voluntarily terminates his position, is permanently disabled, or is
discharged without just cause he is entitled to receive full benefits under this
plan beginning at the early retirement age (62) without satisfying any minimum
years of service requirement. The monthly retirement benefit for Mr. Schoonover,
Mr. Johnson, and Mr. Derbyshire is $755, $669, and $1,069,
respectively.
 
 Under the
executive and director supplemental retirement plan, if there is a change in
control and the executive is subsequently terminated without cause, the benefits
to be received under the plan vest as if the executive had worked for the
company until normal retirement age.  The executive will continue to
accrue benefits based on the original benefit formula and will receive benefits
upon attaining normal retirement age.
  59
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Director
Compensation:  The following table presents the compensation of
the directors of the company for the year ended December 31, 2008:
 
 DIRECTOR
COMPENSATION
 
 Name
                      
                      Fees
      Earned or Paid in Cash
                      
                      
                      Nonqualified
      Deferred Compensation Earnings
                      
                      
                      All
      Other Compensation (1)
                      
                      
                      TotalRobert
      N. Alday
                      
                      $
                      600
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      600Max
      L. Armentrout
                      
                      
                      24,216
                      
                      
                      
                      -
                      
                      
                      
                      27,510
                      
                      
                      
                      51,726William
      J. Brown
                      
                      
                      23,906
                      
                      
                      
                      1,950
                      
                      
                      
                      12,792
                      
                      
                      
                      38,648Edward
      L. Campbell
                      
                      
                      15,646
                      
                      
                      
                      11,933
                      
                      
                      
                      556
                      
                      
                      
                      28,135Cyrus
      K. Kump
                      
                      
                      25,256
                      
                      
                      
                      1,631
                      
                      
                      
                      12,792
                      
                      
                      
                      39,679L.T.
      Williams
                      
                      
                      25,256
                      
                      
                      
                      3,679
                      
                      
                      
                      252
                      
                      
                      
                      29,187John
      A. Yeager
                      
                      
                      23,746
                      
                      
                      
                      -
                      
                      
                      
                      594
                      
                      
                      
                      24,340
 
 (1)
              For
      his service as chairman of the board, Mr. Armentrout received consulting
      fees of $26,784.  The bank paid health insurance premiums for Mr
      Brown and Mr. Kump in the amount of $12,030 per
  person.
 
 The table
above includes all directors of Citizens Financial Corp, except for Robert J.
Schoonover and William T. Johnson, Jr. who also serve as executive
officers.  With the exception of Mr. Alday, each director also serves
on the board for Citizens National Bank.  The table includes
compensation from the company and the subsidiary bank.  There are four
additional directors excluded from the table above that only serve on the board
for Citizens National Bank.  The bank directors, Dickson W. Kidwell,
Franklin M. Santmyer, Jr., Thomas A. Wamsley, and C. Curtis Woodford earned
total compensation of $31,283, $16,551, $28,603, and $13,355,
respectively.
 
 Directors
of the registrant are compensated for meetings attended in the amount of $100
per meeting. Directors of the bank receive $1,063 per meeting.  Under
normal circumstances, the Board of Citizens Financial Corp. meets quarterly
while the Citizens National Bank Board meets monthly. Directors also receive
monthly fees for serving on and attending the meetings of various committees
such as the loan committee, audit committee, or compliance
committee.  Directors do not participate in the bank’s pension
plan.  However, they do participate in the executive and director
supplemental retirement plan.  Benefits earned under this plan are
included in “Nonqualified Deferred Compensation Earnings” column in the table
above.  The benefit calculation of the plan for the directors is
substantially the same as the officers, except their vesting period to receive
benefits is 15 years, normal retirement age is 70 and their death benefit is
$100,000 regardless of retirement status.  The amount of earnings
allocated to each director under this plan is included in the above
table.
 
 Also
included in the Other Compensation column above are insurance premiums paid by
the bank for benefit of the directors, as well as a consulting fee paid to the
chairman of Citizens Financial Corp., Max L. Armentrout in the amount of
$26,784.
 
 Item12.  Security Ownership of Certain Beneficial Owners and
Management
 
 The company does not have any plan that
provides for the issuance of any securities under equity compensation
plans.
 
 The
company has one shareholder, Max L. Armentrout, who is the beneficial owner of
more than 5% of the company's common stock, the only class of stock outstanding,
as of February 28, 2008.  Mr. Armentrout, who is chairman of the board
of directors of the company, beneficially owns 94,975 shares or 5.19% of the
outstanding stock.  His direct and indirect ownership is disclosed in
the table below.
  60
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 The
following table sets forth the amount and percentage of stock
of  Citizens Financial Corp. beneficially owned by each director and
executive officer of the company, and by all directors and executive officers as
a group, as of February 28, 2009.
 
 Shares of Stock Beneficially
      Owned
                        
                        
                        Percent
      ofName
                        
                        Direct
                        
                        
                        Indirect
                        
                        
                        Total
                        
                        
                        OwnershipMax
      L. Armentrout
                        
                        
                        79,550
                        
                        
                        
                        15,425
                        (1)
                        
                        
                        94,975
                        
                        
                        
                        5.19
                        %PO
      Box 1758Elkins,
      WV  26241Robert
      N. Alday
                        
                        
                        1,500
                        
                        
                        
                        60,600
                        (2)
                        
                        
                        62,100
                        
                        
                        
                        3.39
                        %William
      J. Brown
                        
                        
                        2,250
                        
                        
                        
                        3,250
                        (3)
                        
                        
                        5,500
                        
                        
                        
                        0.30
                        %Edward
      L. Campbell
                        
                        
                        1,500
                        
                        
                        
                        450
                        (4)
                        
                        
                        1,950
                        
                        
                        
                        0.11
                        %William
      T. Johnson, Jr.
                        
                        
                        1,500
                        
                        
                        
                        9,104
                        (5)
                        
                        
                        10,604
                        
                        
                        
                        0.58
                        %Cyrus
      K. Kump
                        
                        
                        1,500
                        
                        
                        
                        11,550
                        (6)
                        
                        
                        13,050
                        
                        
                        
                        0.71
                        %Robert
      J. Schoonover
                        
                        
                        1,500
                        
                        
                        
                        300
                        (7)
                        
                        
                        1,800
                        
                        
                        
                        0.10
                        %L.
      T. Williams
                        
                        
                        5,250
                        
                        
                        
                        0
                        
                        
                        
                        5,250
                        
                        
                        
                        0.29
                        %John
      A. Yeager
                        
                        
                        5,025
                        
                        
                        
                        475
                        (8)
                        
                        
                        5,500
                        
                        
                        
                        0.30
                        %Thomas
      K. Derbyshire
                        
                        
                        210
                        
                        
                        
                        0
                        
                        
                        
                        210
                        
                        
                        
                        0.01
                        %Directors
      and executive officers of the Bank
                        
                        
                        11,420
                        
                        
                        
                        11,455
                        
                        
                        
                        22,875
                        (9)
                        
                        
                        1.25
                        %All
      Directors and executive officers as a group
                        
                        
                        111,205
                        
                        
                        
                        112,609
                        
                        
                        
                        223,814
                        
                        
                        
                        12.12
                        %
 
 (1)
              These
      15,425 shares are owned by Mr. Armentrout's
  wife.
 
 (2)
              Mr.
      Alday's  indirect  ownership  includes
      20,400 shares owned by his wife and 40,200 shares which he votes for the
      Phil Williams Coal Company.  The 40,200 shares he votes for the
      Phil Williams Coal Company are also pledged as collateral for a loan made
      in the normal course of business by the subsidiary
  bank.
 
 (3)
              Includes
      1,750 shares owned jointly with his wife and 1500 shares held in custody
      for their children.
 
 (4)
              Includes
      300 shares owned jointly with his wife and 150 shares owned by his
      wife.
 
 (5)
              Includes
      6,284 shares owned jointly with his wife and 2,820 shares owned by his
      wife.
 
 (6)
              Includes
      6,050 shares owned by his wife and 5,500 shares owned by their
      children.
 
 (7)
              These
      300 shares are owned jointly with his
wife.
 
 (8)
              These
      475 shares are owned jointly with his
wife.
 
 (9)
              This
      figure represents the ownership of persons who are directors or executive
      officers of the subsidiary bank but not of the company.  Such
      persons number five.
 
 Item13.  Certain Relationships and Related Transactions and Director
Independence
 
 Management
personnel of Citizens Financial Corp. have had and expect to continue to have
banking transactions with Citizens National Bank in the ordinary course of
business. Extensions of credit to such persons are made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons.  It is the opinion of management that these
transactions do not involve more than a normal risk of collectibility or present
other unfavorable features.
 
 As of
December 31, 2008, outstanding loan balances to related parties totaled
$6,394,403 or 30.7% of equity capital with unused lines of credit of $1,305,247
or 6.3% of the equity capital of Citizens Financial Corp. outstanding to these
parties.
  61
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Other
than loans originated in the normal course of business by the Bank, none of the
directors, executive officers, five percent or more beneficial stockholders or
their immediate family members have an interest or are involved in any
transactions with Citizens Financial Corp. or Citizens National Bank in which
the amount involved exceeds $120,000, or was not subject to the usual terms or
conditions, or was not determined by competitive bids.  Information
related to loans granted to related parties in excess of $120,000 is contained
in Note 4 to the accompanying consolidated financial
statements.  Similarly, no director, executive officer or five percent
or more beneficial stockholder has an equity interest in excess of 10 percent in
a business or professional entity that has made payments to or received payments
from Citizens Financial Corp. or Citizens National Bank in 2008 which exceeds
five percent of either party's gross revenue.
 
 Item14.  Principal Accounting Fees and Services
 
 Fees for
services provided by our principal accountants are provided below:
 
 2008
                        
                        
                        2007Audit
      Fees
                        
                        $
                        63,580
                        
                        
                        $
                        58,900Audit-Related
      Fees
                        
                        
                        12,723
                        
                        
                        
                        22,277Tax
      Fees
                        
                        
                        6,200
                        
                        
                        
                        5,100All
      Other Fees
                        
                        
                        -
                        
                        
                        
                        -
 
 Audit fees consist of fees for
professional services rendered for the audit of the Company’s financial
statements and review of financial statements included in the Company’s
quarterly reports.  Audit-related fees are primarily related to
consultations concerning financial accounting and reporting
standards.  The increase in 2007 audit-related fees is primarily
attributable to assurance services on the methodology used in developing the
company’s allowance for loan losses.  Tax fees consist of compliance
fees for the preparation of original tax returns and fees for tax consulting
services.
 
 The Audit Committee Charter requires
that the audit committee pre-approve all audit and non-audit services to be
provided to Citizens by the independent accountants; provided, however, that the
audit committee may specifically authorize its chairman to pre-approve the
provision of any non-audit service to the company.  Further, the
foregoing pre-approved policies may be waived, with respect to the provision of
any non-audit services consistent with the exceptions for federal securities
law.  All of the audit, audit related, and tax services described
above were pre-approved by the audit committee.
 
 PartIV
 
 Item 15.  Exhibits
and Financial Statements Schedules
 
 (a)
              (1)
      and (2) Financial Statements and Financial Statement Schedules.All
      financial statements and financial statement schedules required to be
      filed by Item 8 of this Form or by Regulation S-X which are applicable to
      the registrant have been presented in the financial statements, notes
      thereto, in management's discussion and analysis of financial condition
      and results of operations or elsewhere where
    appropriate.
 
 (3)
              The
      following is a list of all exhibits filed as part of this
      report:
  62
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 INDEX TO
EXHIBITS
 
 3
      (i)
              The
      company’s Articles of Incorporation, which were previously filed as
      amended on pages 23-35 of it’s Form 10-Q dated March 31, 2006, are
      incorporated herein by reference.
 
 3
      (ii)
              The
      company’s Bylaws, which were previously filed as amended on pages 36-41 of
      it’s Form 10-Q datedMarch 31, 2006, are incorporated herein by
      reference.
 
 4
              The
      rights of security holders are defined in the Articles of Incorporation
      which were previously filed as amended on pages 66-70 of our Form 10-K
      dated December 31, 1999 which is incorporated herein by
      reference.
 
 10           The
following material contracts are incorporated by reference into this
filing:
 
 1)
                The
      bank’s Executive Supplemental Income Agreement as previously filed on
      pages 74-80 of the company’s Form 10-K dated December 31, 1995 and
      thereafter amended and filed on page 62 of the company’s Form 10-K dated
      December 31, 1996.
 
 2)
                The
      bank’s Purchase and Assumption Agreement with South Branch Valley National
      Bank for the purchase of it’s banking facilities, assets and liabilities
      located in Petersburg, West Virginia dated December 17, 1999 and filed on
      pages 71-113 of the company’s Form 10-K dated December 31,
      1999.
 
 3)
              The
      bank’s Supplemental Retirement and Split Dollar Life Insurance plans for
      executives and directors dated January 1, 2003 and previously filed on
      pages 75-110 of it’s Form 10-K dated December 31,
  2003.
  4)
              The
      bank’s Purchase and Assumption Agreement with Pendleton Community Bank for
      the sale of certain assets and transfer certain deposits and other
      liabilities of its branch offices located in Petersburg and Marlinton,
      West Virginia dated January 13,
2009
 
 11
              The
      computation of per share earnings may be clearly determined by the
      material contained in this filing.
 
 12
              The
      computation of minimum standard capital ratios, as contained in this
      report, was done as specified in applicable regulatory
      guidelines.  All other ratios presented may be clearly
      determined from the material contained in this
  filing.
 
 14
              The
      company’s Code of Ethics, which is applicable to all employees of the
      company and it’s subsidiary, including the principal executive officer and
      principal accounting officer, has been made available on the company’s
      website, www.citizensnationalbank.com,
      and is, therefore, not filed as part of this Form
  10-K.
 
 21
              List
      of subsidiaries of the registrant (filed
  herewith).
 
 23
              Consent
      of Yount, Hyde and Barbour, P.C. (filed
  herewith).
 
 31.01
              Certification
      of the Principal Executive Officer pursuant to Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed
herewith).
 
 31.02
              Certification
      of the Principal Financial Officer pursuant to Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed
herewith).
 
 32.01
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350 (filed herewith).
 
 32.02
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350 (filed herewith).
 
 99
              Notice
      of Annual Meeting of Stockholders and
Proxy
 
 (b)
              Exhibits
      required by item 601 of Regulation S-K-all applicable exhibits have been
      filed as detailed in the Index to Exhibits.  Exhibits contained
      in item 601 of Regulation S-K but not contained in the Index are not
      applicable or are not required in Form
10-K.
  63
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 Signatures
 
 Pursuant
to the requirements of Section 15(d) of the Securities  Exchange Act
of 1934, the registrant has duly  caused this  report to
be  signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Citizens
      Financial Corp.By  /s/ Robert J.
      SchoonoverRobert
      J. SchoonoverPresident
      and Chief Executive OfficerDate:
                                            3/11/09By  /s/ Thomas K.
      DerbyshireThomas
      K. DerbyshireTreasurer
      and Principal Financial OfficerDate:
                                            3/11/09
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
 
 Signature
                                          
                                          Title
                                          
                                          Date/s/   Max L.
      Armentrout
                                          
                                          Chairman
      of the Board
                                          
                                          3/11/09Max
      L. Armentrout
                                          
                                          and
      DirectorDirectorRobert
      N. Alday/s/   William J.
      Brown
                                          
                                          Director
                                          
                                          3/11/09William
      J. Brown/s/   Edward L.
      Campbell
                                          
                                          Director
                                          
                                          3/11/09Edward
      L. Campbell/s/   William T. Johnson,
      Jr.
                                          
                                          Director
                                          
                                          3/11/09William
      T. Johnson, Jr./s/   Cyrus K.
    Kump
                                          
                                          Director
                                          
                                          3/11/09Cyrus
      K. Kump/s/   Robert J.
      Schoonover
                                          
                                          Director
                                          
                                          3/11/09Robert
      J. Schoonover/s/   L. T.
    Williams
                                          
                                          Director
                                          
                                          3/11/09L.
      T. Williams/s/   John A.
    Yeager
                                          
                                          Director
                                          
                                          3/11/09John
      A. Yeager
  64
 Index
  CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY
 
 
 SUPPLEMENTAL
INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
 SECTION
15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES
 PURSUANT TO SECTION 12 OF
THE ACT
 
 The
entire annual report and proxy materials will be mailed to the company's
stockholders and will be furnished to the Commission for its information under
separate cover, in paper format, concurrent with submission to stockholders
on  March 23, 2009.
   65