<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
                                   FORM 10-K
                      ----------------------------------
                                        

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
          ACT OF 1934 for the fiscal year ended     DECEMBER 31, 1998
                                                ------------------------

                                      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                                   (Zip Code)
 Executive Offices)
 
Registrant's Telephone Number,                        (304) 636-4095
                                                 ------------------------
          Including Area Code:

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 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    X           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    X           No _______
                   -------                  


     The aggregate market value of Citizens Financial Corp. common stock,
representing all of its voting stock that was held by nonaffiliates on February
28, 1999, was approximately $24,817,000.

     As of February 28, 1999, Citizens Financial Corp. had 750,000 shares of
common stock outstanding with a par value of $2.00.

                        This report contains 80 pages.

                                       1
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                                        
(1)  The Company's Form S-4, dated February 19, 1987, is incorporated by
reference in Item 1 of Part I and Item 14(c) of Part IV of this report to the
extent stated herein.

(2)  The Company's Articles of Incorporation which was filed as an Exhibit to
the Company's Form 10-K dated December 31, 1995, is incorporated by reference in
Item 14 of Part IV of this report.

(3)  The Bank's Executive Supplemental Income Agreement, previously filed as an
Exhibit to the Company's Form 10-K dated December 31, 1996, and amended as filed
in the December 31, 1997 Form 10-K, is also incorporated by reference in Item 11
of Part IV of this report.

                           CITIZENS FINANCIAL CORP.
                                FORM 10-K INDEX
                                        
<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C> 
Part I    Item 1    Business.............................................      3
          Item 2    Properties...........................................      3
          Item 3    Legal Proceedings....................................      6
          Item 4    Submission of Matters to a Vote of Security Holders..      6

Part II   Item 5    Market for the Registrant's Common Stock and Related 
                      Shareholders Matters...............................      7
          Item 6    Selected Financial Data..............................      9
          Item 7    Management's Discussion and Analysis of Financial 
                      Condition and Results of Operations................     15
          Item 8    Financial Statements and Supplementary Data..........     27
          Item 9    Changes in and Disagreements with Accountants on 
                      Accounting and Financial Disclosure................     53

Part III  Item 10   Directors and Executive Officers of the Registrant...     53
          Item 11   Executive Compensation...............................     55
          Item 12   Security Ownership of Certain Beneficial Owners and 
                      Management.........................................     57
          Item 13   Certain Relationships and Related Transactions.......     58

Part IV   Item 14   Exhibits, Financial Statement Schedules and Reports 
                      on Form 8-K........................................     60
</TABLE> 

                                       2
<PAGE>
 
CITIZENS FINANCIAL CORP.

Form 10-K, Part I
-----------------

Item 1.  Business
-----------------
Item 2.  Properties
-------------------

     The following discussion satisfies the reporting requirements of Items
1 and 2.


                            DESCRIPTION OF CITIZENS
                            -----------------------

Organizational History and Subsidiaries
---------------------------------------

     Citizens Financial Corp., ("Citizens" or "the Company"), was organized as a
Delaware business corporation on September 29, 1986, and its Certificate of
Incorporation was filed with the Delaware Secretary of State on October 2, 1986.
Citizens Financial Corp. was formed at the request of the Board of Directors of
Citizens National Bank of Elkins, Randolph County, West Virginia, for the
purpose of becoming a bank holding company within the meaning of applicable
statutory and regulatory authority.

     Citizens National Bank, ("the Bank"), the sole subsidiary of Citizens
Financial Corp., was organized on November 19, 1923 and has operated in Elkins,
Randolph County, West Virginia, as a national banking association continuously
since that time. On March 21, 1987, the stockholders of Citizens National Bank
approved an Agreement and Plan of Reorganization whereby Citizens National Bank
would become the wholly-owned subsidiary of Citizens Financial Corp. This
reorganization became effective on April 30, 1987. To date, Citizens National
Bank is the sole subsidiary of Citizens Financial Corp.

Employees
---------

     As of December 31, 1998 Citizens Financial Corp. had no employees. Citizens
National Bank employed 75 full-time equivalent employees at that date. The
Bank's employees are not represented by any union or other collective bargaining
agreement and the Bank believes its employee relations are good.

Business of Citizens and Citizens National Bank
-----------------------------------------------

     As a bank holding company registered under the Bank Holding Company Act of
1956, as amended, Citizens' present business is the operation of its bank
subsidiary. As of December 31, 1998 Citizens' consolidated assets approximated
$136,701,000 and total shareholders' equity approximated $16,649,000.

     Citizens National Bank is a full-service commercial bank and, as such,
engages in most types of business permitted by law or regulation. Among these
services are the acceptance of time, demand and savings deposits including NOW
accounts, regular savings accounts, money market deposit accounts, fixed-rate
certificates of deposit and club accounts. In addition safe deposit box rentals,
wire transfer services and 24-hour Automated Teller Machine (ATM) services
through a regional network known as MPACT are provided. MPACT is a participant
in the nationwide Cirrus and Plus networks.

     The Bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and

                                       3
<PAGE>
 
personal loans are generally secured, often by first liens on automobiles,
consumer goods or depository accounts. A special effort is made to keep loan
products as flexible as possible within the guidelines of prudent banking
practices in terms of interest rate risk and credit risk. Bank lending personnel
adhere to established lending limits and authorities based on each individual's
lending expertise and experience.

     When considering loan requests, the primary factors taken into
consideration by the Bank are the cash flow and financial condition of the
borrower, the value of the underlying collateral, if any, and the character and
integrity of the borrower. These factors are evaluated in a number of ways
including an analysis of financial statements, credit reviews and visits to the
borrower's place of business.

     The Bank also maintains a trust department which acts as trustee under
wills, as executor and administrator of estates, as guardian for estates of
minors and incompetents and serves in various corporate trust capacities.

     As a bank holding company Citizens is permitted to engage in
certain nonbanking activities which are closely related to banking under the
provisions of the Bank Holding Company Act and the Federal Reserve Boards'
Regulation Y. In addition, the Bank may engage, directly or indirectly, in
certain nonbanking activities as permitted by its regulatory authorities. As of
December 31, 1998, neither the Bank or the Holding Company has engaged in such
activities. However, beginning in January, 1999, the Bank will provide brokerage
services through a contractual agreement with PrimeVest Financial Services, Inc.
Products and services offered through PrimeVest includes stocks, bonds, mutual
funds and annuities. These services are not bank deposits and do not carry FDIC
insurance. As such, they do carry a risk of loss and are intended only for those
customers who understand and accept such risk. In addition to this venture,
management is also evaluating other nonbanking opportunities.

Statistical Information
-----------------------

     The disclosures required by Securities Act Guide 3 - "Statistical
Disclosure by Bank Holding Companies", are included in Item 6 - Selected
Financial Data, on pages 9 through 15 of this report.

Properties
----------

     The services described above are offered from offices owned by the Bank
including its main offices located at 213 Third Street, Elkins, West Virginia.
In addition the Bank owns a drive-in facility directly across from its main
offices on Third Street and it has owned and operated a full service branch bank
in Parsons, West Virginia since 1984. In 1992 an additional branch facility was
opened in Beverly, West Virginia. This newest facility, which is also owned,
provides drive-in and ATM service in addition to traditional deposit and teller
services. Loan services, however, are not provided at the Beverly branch.

     Citizens Financial Corp. does not own or lease any property.  To date it
has utilized the Bank's facilities and has not occupied more than a minimal
amount of space. Citizens does not compensate the Bank in any way for such usage
as it is deemed to be insignificant. Management believes the existing facilities
are adequate to conduct the Company's and Bank's business.

Competition
-----------

     Citizens faces a high degree of competition for all of its services from
local banks. Within its market area of Randolph and Tucker counties in West
Virginia there exists seven competing commercial banks operating numerous
branches. As of June 30, 1998, the most recent date for which data are
available,

                                       4
<PAGE>
 
the Bank had deposits representing approximately 28.7% of total deposits of the
commercial banks serving its primary market area, which is comparable to its
market share at June 30, 1997.

     Nonbank competition has increased in recent years locally by the
establishment of brokerage companies and the expansion of insurance operations
and credit unions as well as from mutual funds located throughout the country.
The Company expects its brokerage unit will help it better meet this
competition.

     West Virginia banks are allowed unlimited branch banking throughout the
State. The Interstate Banking and Branch Efficiency Act of 1994 also authorizes
interstate branching by acquisition and consolidation nationwide. These and
similar provisions impacting both the banking and thrift industries may serve to
intensify future competition within Citizens' market.

Supervision and Regulation
--------------------------

     Citizens, as a bank holding company, is subject to the restrictions of the
Bank Holding Company Act of 1956, as amended, and is registered pursuant to its
provisions. As such, Citizens is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
Governors").

     The Bank Holding Company Act prohibits the acquisition by a bank holding
company of direct or indirect ownership of more than five percent of the voting
shares of any bank within the United States without prior approval of the Board
of Governors. With certain exceptions, a bank holding company also is prohibited
from acquiring direct or indirect ownership or control of more than five percent
of the voting shares of any company which is not a bank, and from engaging
directly or indirectly in business unrelated to the business of banking, or
managing or controlling banks.

     As a bank holding company doing business in West Virginia, Citizens is also
subject to regulation and examination by the West Virginia Department of Banking
and must submit annual reports to the Department. Further, any acquisition
application which Citizens must submit to the Board of Governors must also be
submitted to the West Virginia Banking Board for approval.

     In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states 
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by Interstate Bill. The Interstate
Bill will permit consolidation of banking institutions across state lines and,
perhaps, de novo entry. As its provisions become effective, it is likely that
the resulting restructurings and interstate activities will result in the
realization of economies of scale within those institutions with entities in
more than one state. One result could be increased competitiveness, due to the
realization of economies of scale and/or, where permitted, due to de novo market
entrants.

     Under West Virginia banking law, an acquisition or merger is not permitted
if the resulting depository institution or its holding company, including any
depository institutions affiliated therewith, would assume additional deposits
to cause it to control deposits in the State of West Virginia in excess of
twenty five percent(25%) of such total amount of all deposits held by insured
depository institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking for good cause shown.

                                       5
<PAGE>
 
     Citizens National Bank, as a national banking association, is subject to
supervision, examination and regulation by the Office of the Comptroller of the
Currency. 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.

     Under the Community Reinvestment Act of 1977, the Comptroller of the
Currency is required to assess the record of all financial institutions
regulated by it to determine if such institutions meet the credit needs of the
community (including low-to-moderate income neighborhoods) served by them and to
take this record into account in its evaluation of any application made by any
such institution for, among other things, approval of a branch or other deposit
facility, office relocation, or the merger with or acquisition of assets of
another bank.  The state of West Virginia has a similar statutory regulation.
In its most recent examination the Bank received a satisfactory CRA rating.

     The Bank is subject to various capital requirements under federal banking
regulations including the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA). Quantitative measures established by those regulations ensure
minimum capital levels are maintained.  Those measures are summarized in Note 12
to the Consolidated Financial Statements which begins on page 48 of this report.
Also contained in that Note are the Bank's regulatory capital ratios at December
31, 1998.  Those ratios show that the Bank satisfied the requirements necessary
to be categorized as well capitalized which is the highest category established
under the regulations.  As a well capitalized institution Citizens is permitted
to engage in a wider range of banking activities than may be permitted
otherwise.

     Another requirement of FDICIA is that federal banking agencies must
prescribe regulations relating to various operational areas of banks and bank
holding companies.  These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, and such other standards as
the agency deems appropriate.

     As a subsidiary bank of a bank holding company, Citizens National Bank is
also subject to certain restrictions imposed by the Federal Reserve Act upon any
extensions of credit to Citizens Financial Corp. or, if such existed, any of its
other subsidiaries, on investments in the stock or other securities of that bank
holding company or its subsidiaries, and on the taking of such stock or
securities as collateral for loans to any borrower.

Item 3.  Legal Proceedings
--------------------------

     As of December 31, 1998 Citizens Financial Corp. was not involved in any
material legal proceedings.  The Bank is currently involved, in the normal
course of business, in various legal proceedings.  After consultation with legal
counsel, management believes that all such litigation will be resolved without
materially affecting financial position or results of operations.  In addition,
there are no material proceedings known to be threatened or contemplated against
the Company or the Bank.


Item 4.  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 1998.

                                       6
<PAGE>
 
Part II
-------

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters
-----------------------------------------------------------------------------

     Historically, the stock of Citizens Financial Corp. and, prior to its
formation, the stock of Citizens National Bank, has traded only sporadically.
The stock is not listed on any security exchange, however, regional 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 exchange 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, 1998 shareholders of record numbered
476.  The Company has no plans to issue senior securities.

     At the annual meeting of shareholders on April 17, 1998, a resolution to
increase the number of authorized shares of stock from 1,250,000 to 2,250,000
was approved.  The authorization of these additional shares is intended to
support general corporate activities although currently no plans exist for their
use.

     Citizens maintains a policy under which it may purchase shares of its' own
stock for treasury, subject to certain limitations, when it is deemed to be in
the best interest of the Company to do so. Such shares are purchased on the open
market through independent brokers. At December 31, 1997 and 1998 the number of
treasury shares was 68,047 and 88,433, respectively. These shares are included
in the total number of shares issued, as disclosed above, and no plans currently
exist regarding their use and there are no plans regarding future purchases. No
treasury shares were purchased subsequent to year-end 1998 through the date of
this filing.

     The following table presents the high and low market prices for Citizens'
common stock for the periods indicated.

<TABLE>
<CAPTION>
                           High    Low
                           ----    ---
 <S>                      <C>     <C>
 First Quarter through
 February 28, 1999        $54.00  $45.00
 
 1998
 ----
 First Quarter            $33.00  $27.75
 Second Quarter           $37.50  $33.00
 Third Quarter            $38.12  $36.75
 Fourth Quarter           $54.00  $38.00
 
 1997
 ----
 First Quarter            $26.00  $25.00
 Second Quarter           $27.00  $25.50
 Third Quarter            $28.00  $25.50
 Fourth Quarter           $30.00  $26.00
</TABLE>

     The prices listed above are based upon information available to Citizens'
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.  However, an
attempt to determine the reason for the price increase observed during the
fourth 

                                       7
<PAGE>
 
quarter was made. As discussed in the management's discussion and analysis
section of this report, neither management or the board of directors can offer
any reason for the price increase.

     Citizens shareholders are entitled to receive dividends when and as
declared by its Board of Directors. Dividends are typically paid quarterly.
Aggregate dividends were $1.00 per share in 1998 and $.90 per share in 1997.
Dividends are paid out of funds legally available for the payment of dividends
as set forth in the West Virginia Corporation Act.

     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 12
to the Consolidated Financial Statements on page 48 of this report.

                                       8
<PAGE>
 
Item 6.  Selected Financial Data
--------------------------------

     Selected financial data for the five years ended December 31, 1998 is
presented in the following table.  This summary should be read in conjunction
with the consolidated financial statements and related notes included in Item 8
of this report.


Citizens Financial Corp.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Selected Financial Data Five Year Summary
(in thousands of dollars, except per share data)
-----------------------------------------------------------------------------------------------------
                                           1998          1997       1996         1995        1994
-----------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>        <C>           <C>          <C>
BALANCE SHEET DATA:
Total assets..........................   $ 136,701    $ 132,132  $ 128,760     $ 126,350    $ 126,927
Securities............................      43,812       38,519     34,134        34,374       49,548
Loans, net............................      85,709       86,400     88,235        82,781       67,716
Deposits..............................     113,464      110,401    109,570       109,671      108,063
Short-term borrowings.................       4,627        3,597      2,965         1,590        2,131
Long-term borrowings..................       1,013        1,078        330           334          203
Total shareholders' equity............      16,649       16,095     14,943        13,952       12,976

SUMMARY OF OPERATIONS:
Total interest income.................   $  10,336    $  10,314  $  10,145     $   9,475    $   8,486
Total interest expense................       4,108        4,014      3,880         3,530        3,130
                                         ---------    ---------  ---------     ---------    ---------

Net interest income...................       6,228        6,300      6,265         5,945        5,356
Provision for loan losses.............         120          236        168            60           49
                                         ---------    ---------  ---------     ---------    ---------

Net interest income after
 provision for loan losses............       6,108        6,064      6,097         5,885        5,307
Noninterest income....................         555          563        546           476          418
Noninterest expense...................       4,242        4,052      4,178         3,912        4,016
                                         ---------    ---------  ---------     ---------    ---------

 Income before income taxes...........       2,421        2,575      2,465         2,449        1,709
Income taxes..........................         821          934        834           823          599
                                         ---------    ---------  ---------     ---------    ---------

Net income............................   $   1,600    $   1,641  $   1,631     $   1,626    $   1,110
                                         =========    =========  =========     =========    =========

PER SHARE DATA:

Net income:
 Basic................................       $2.41        $2.40      $2.39         $2.36        $1.60
                                             =====        =====      =====         =====        =====
 Diluted..............................       $2.41        $2.40      $2.39         $2.36        $1.60
                                             =====        =====      =====         =====        =====

Cash dividends........................       $1.00        $ .90      $ .80         $ .70          .60
                                             =====        =====      =====         =====        =====
</TABLE>

     Additional information required under Securities Act Industry Guide 3 for
Bank Holding Companies follows:

                                       9
<PAGE>
 
          Distribution of Assets, Liabilities & Shareholders' Equity;
                   Interest Rates and Interest Differential

<TABLE>
<CAPTION>
                                           1998                               1997                              1996               
                             --------------------------------  ---------------------------------  --------------------------------- 
                              Avg Bal   Interest  Yield/Rate    Avg Bal    Interest  Yield/Rate    Avg Bal    Interest  Yield/Rate 
                             --------------------------------  ---------------------------------  --------------------------------- 
                                (in thousands of dollars)          (in thousands of dollars)          (in thousands of dollars)
<S>                          <C>        <C>       <C>          <C>         <C>       <C>          <C>         <C>       <C>
Interest Earning Assets:
Federal funds sold           $  1,261    $    69        5.47%   $  1,336    $    74        5.54%   $  1,836    $    98        5.34%
Securities:
  Taxable                      33,545      2,061        6.14      29,686      1,859        6.26      26,675      1,792        6.04
  Tax-exempt (1)                7,474        559        7.48       5,381        426        7.92       5,245        427        8.14
Loans (net of unearned
 interest) (2)                 85,670      7,837        9.15      87,980      8,109        9.22      86,738      7,973        9.19
                             --------------------------------  ---------------------------------  --------------------------------- 

 Total interest earning
  assets  (1)                 127,950     10,526        8.23     124,383     10,468        8.42     123,494     10,290        8.33

 Nonearning assets:
   Cash and due from banks      2,914                              3,131                              3,266
   Bank premises and
    equipment, net              1,530                              1,595                              1,605
   Other assets                 2,309                              1,901                              1,784
   Allowance for loan
    losses                     (1,101)                            (1,026)                            (1,055)
                             --------                           --------                           --------
 Total assets                $133,602                           $129,984                           $129,054
                             ========                           ========                           ========

 Interest Bearing
  Liabilities:
   Savings deposits          $ 26,096        756        2.90    $ 27,083        780        2.88    $ 28,171        784        2.78
   Time deposits               51,796      2,622        5.06      50,502      2,600        5.15      50,370      2,564        5.09
   NOW accounts                13,561        282        2.08      11,583        255        2.20      10,651        239        2.24
   Money market accounts        5,984        145        2.42       6,159        152        2.47       6,891        172        2.50
   Borrowings                   5,426        303        5.58       4,075        227        5.57       2,265        121        5.34
                             --------------------------------  ---------------------------------  ---------------------------------
   Total interest bearing
    liabilities               102,863      4,108        3.99      99,402      4,014        4.04      98,348      3,880        3.95

 Noninterest bearing
  liabilities:
   Demand deposits             13,424                             13,922                             15,180
   Other liabilities            1,029                              1,006                              1,003
   Shareholders' equity        16,286                             15,654                             14,523
                             --------                           --------                           --------
 Total liabilities and
   shareholder's equity      $133,602                           $129,984                           $129,054
                             ========                           ========                           ========

 Net interest income (1)                 $ 6,418                           $  6,454                           $  6,410
                                         =======                           ========                           ========

 Net interest income to average earning 
  assets  (1)                                           5.02%                              5.19%                              5.19%
                                                        ====                               ====                               ====
</TABLE>

(1)  Yields 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.

                                       10
<PAGE>
 
                             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.

<TABLE> 
<CAPTION> 
                                               1998 Compared to 1997                1997 Compared to 1996
                                            Increase  (Decrease) Due to          Increase  (Decrease) Due to
                                            ---------------------------          ---------------------------
                                                               (in thousands of dollars)
                                            Volume      Rate      Total          Volume      Rate      Total
                                            ---------------------------          ---------------------------
 <S>                                        <C>        <C>        <C>            <C>        <C>        <C> 
 Interest earned on:
   Federal funds sold                       $  (4)     $  (1)     $  (5)         $ (28)     $   4      $ (24)
   Taxable securities                         235        (33)       202             -          67         67
   Tax-exempt securities                      157        (23)       134             11        (12)        (1)
   Loans                                     (211)       (62)      (273)           112         24        136
                                            ----------------------------         ---------------------------
 Total interest earned                        177       (119)        58             95         83        178 
                                            ----------------------------         ----------------------------

 Interest expense on:
   Savings deposits                           (29)         5        (24)           (31)        27         (4)
   Time deposits                               67        (45)        22              7         29         36
   NOW accounts                                42        (14)        28             20         (4)        16
   Money market accounts                       (4)        (3)        (7)           (18)        (2)       (20)
   Other borrowing                             75         (1)        74            100          6        106  
                                            ----------------------------         ----------------------------
 Total interest expense                       151        (58)        93             78         56        134
                                            ----------------------------         ----------------------------
 Net interest income                        $  26     $  (61)    $  (35)         $  17      $  27      $  44 
                                            ============================         ============================
</TABLE> 

                                       11
<PAGE>
 
                             Securities Portfolio

 Presentation of the amortized cost of securities as of December 31, 1998 and
1997 may be found in Note 3 to the Consolidated Financial Statements which
begins on page 35 of this report.

 The following table sets forth the maturities of securities as of December 31,
1998 and the weighted average yields of such securities (calculated on the basis
of the amortized cost and effective yields weighted for the scheduled maturity
of each security).

<TABLE> 
<CAPTION> 

                               Within One         After One but        After Five but       After Ten          Total       
                                  Year          Within Five Years     Within Ten Years        Years                         
                             ---------------------------------------------------------------------------------------------- 
                             Amount   Yield     Amount      Yield     Amount     Yield   Amount   Yield     Amount   Yield  
                             ---------------------------------------------------------------------------------------------- 
                                                             (in thousands of dollars)
 <S>                         <C>      <C>       <C>         <C>       <C>        <C>     <C>      <C>       <C>      <C> 
 U.S. Treasury and other
   U.S. government  
   agencies and
   corporations              $5,027    5.96%    $ 8,814      5.91%    $2,319     5.90%   $  -        -  %   $16,160  5.92%
 State and political                                                                                                      
   subdivisions (1)             587    8.61       6,096      7.56      1,689     7.05       -        -        8,372  7.53 
 Other securities             2,483    5.96      14,767      6.24        -        -       1,588     7.32     18,838  6.29 
                             ------   -----     -------    ------     ------    -----    ------   ------    -------  -----
                                                                                                                          
   Total                     $8,097    6.15%    $29,677      6.41%    $4,008     6.38%   $1,588     7.32%   $43,370  6.39%
                             ======             =======               ======             ======             =======        
</TABLE> 

 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.

                                       12
<PAGE>
 
Loan Portfolio
--------------

Types of Loans
--------------

     The distribution of loans by major category as of December 31, 1998 and
1997 may be found in Note 4 to the Consolidated Financial Statements which
begins on page 38 of this report.  All loans in the portfolio are domestic in
nature.

Loan Maturities and Interest Rate Sensitivity
---------------------------------------------

     Note 4 to the 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, 1998.  Also provided are the amounts due after one year classified as fixed
rate and variable rate loans.

Risk Elements
-------------

Nonperforming Loans
-------------------

     Nonperforming loans consist of loans in nonaccrual status, loans which are
past due 90 days or more and still accruing interest and restructured loans.
The following table sets forth the amounts of such loans as of the dates
indicated:

<TABLE>
<CAPTION>
                                          December 31
                                   -------------------------
                                    1998               1997
                                   -------------------------
                                   (in thousands of dollars)
<S>                                <C>                 <C>
 Nonaccrual loans                    $  53             $  2
 Loans past due 90 days or more                 
   still accruing interest              21                9
 Restructured loans                     -                -
                                     -----             -----
   Total                             $  74             $ 11
                                     =====             =====
</TABLE>

     Loans are generally placed on nonaccrual status when they are past due 90
days as to principal or interest unless they are both well secured and in the
process of collection.  The following table provides a summary of information
pertaining to nonaccrual loans as of December 31, 1998:

<TABLE>
<CAPTION>
 
                                             (in thousands)
<S>                                          <C>
 Total nonaccrual loans                            $53    
 Interest income which would have been                    
   recorded under original terms                     5    
 Interest income recorded during the year            3     
</TABLE>

Potential Problem Loans
-----------------------

     As of December 31, 1998, the Company identified two loans which it
classified as impaired due to doubts about the borrowers ability to repay as
called for in the loan documents.  These loans are further discussed in Note 5
to the Consolidated Financial Statements found on page 39 of this report.

                                       13
<PAGE>
 
Loan Concentrations
-------------------

     Information concerning loan concentrations is provided in Note 4 to the
Consolidated Financial Statements which begins on page 38 of this report.

Summary of Loan Loss Experience
-------------------------------

     Note 5 to the Consolidated Financial Statements, which begins on page 39 of
this report, presents an analysis of the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996.

     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 ratio of net losses to average loans outstanding was .12% in 1998, .15%
in 1997 and .25% in 1996.

     The following table shows an allocation of the allowance for loan losses
for the two years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
 
                                                December 31
                               ----------------------------------------------
                                       1998                       1997
                               ----------------------------------------------
                                        Percent of               Percent of
                                       Loans in Each           Loans in Each
                                        Category to             Category to
                               Amount   Total Loans    Amount   Total Loans
                               ----------------------------------------------
                                         (in thousands of dollars)
<S>                            <C>     <C>             <C>     <C>
 Commercial, financial and
   agricultural                $  732       15%        $  273         15%    
 Real estate - construction         1        2              7          2     
 Real estate - mortgage            24       68            246         64     
 Installment and other            100       15            137         19     
 Unallocated                      253      N/A            431        N/A     
                               ------      -----       ------       -----    
   Total                       $1,110      100%        $1,094        100%    
                               ======      =====       ======       =====     
</TABLE>

Deposits
--------

     The average daily amount of deposits and the rates paid on those deposits
for the years ended December 31, 1998, 1997 and 1996 were previously presented
in the Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential.  That table may be found on page 10 of this
report.

     A table summarizing the maturities of time certificates of deposit,
including individual retirement accounts, of $100,000 or more as of December 31,
1998 may be found in Note 7 to the Consolidated Financial Statements which
begins on page 40 of this report.  There were no other time deposits of $100,000
or more at that date.

                                       14
<PAGE>
 
Return on Equity and Assets
---------------------------
 
  The following table shows consolidated operating and capital ratios for the
periods indicated.

<TABLE> 
<CAPTION> 

                                                  Year Ended December 31
                                                 -------------------------
                                                   1998    1997    1996
                                                 ------------------------
<S>                                              <C>      <C>     <C>  
 Return on average assets                          1.20%   1.27%   1.26%
 Return on average equity                          9.86   10.51   11.23
 Dividend payout ratio                            41.49   37.50   33.47
 Average equity to assets ratio                   12.19   12.04   11.25
</TABLE> 
 

Short-term Borrowing
--------------------

     Information concerning the Company's short-term borrowing is presented in
Note 10 to the Consolidated Financial Statements which begins on page 46 of this
report.


Item 7.  Management's  Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
         Results of Operations
         ---------------------

     The following discussion and analysis presents the significant changes in
financial condition and results of operations of Citizens Financial Corp., and
its wholly-owned subsidiary Citizens National Bank of Elkins, for the periods
covered by the audited financial statements contained in this report.  This
discussion and analysis should be read in conjunction with such financial
statements and the accompanying notes thereto.  Since the primary business
activities of Citizens Financial Corp. are conducted through the Bank, this
discussion focuses primarily on the financial condition and operations of the
Bank.  This discussion may include forward looking statements based upon
management's expectations; actual results may differ.  Amounts and percentages
used in this discussion have been rounded.

Earnings Summary
----------------

     Net income for the year 1998 of $1,600,000 was approximately 2.5% less than
1997's total of $1,641,000 and 1.9% less than 1996's total of $1,631,000.  This
stability in income provided earnings per share of $2.41 in 1998, $2.40 in 1997
and $2.39 in 1996.  The return on average assets during those three years was
1.20%, 1,27% and 1.26%, respectively. Return on average equity decreased during
the period from 11.23% in 1996 to 10.51% in 1997 and 9.86% in 1998 due to
increasing capital levels resulting from the retention of earnings.  The
significant factors influencing the Company's results of operations are
addressed in the following sections of this report.

Net Interest Income
-------------------

     Net interest income represents the primary component of Citizens' earnings.
It is the difference between interest and fee income related to earning assets
and interest expense incurred to carry interest bearing liabilities.  Net
interest income is impacted by changes in the volume and mix of interest earning
assets and interest bearing liabilities, as well as

                                       15
<PAGE>
 
by changing interest rates. In order to manage these changes, their impact on
net interest income and the risk associated with them, the Company utilizes an
ongoing asset/liability management program. This program includes analysis of
the Company's gap, earnings sensitivity to rate changes, and sources and uses of
funds. A discussion of net interest income and the factors impacting it is
presented below.

     Net interest income of $6,228,000 in 1998 was approximately 1.1% less than
the 1997 total of $6,299,000.  On a tax-equivalent basis, the decrease was only
 .5% to $6,418,000.

     Throughout 1998 the Company's earning assets, which averaged $127,950,000,
were typical of the broader investment landscape as they generated somewhat
lower yields.  A shift in the mix of earning assets from loans to investment
securities also caused yield to decrease.  In total, the yield on earning assets
during the year of 8.23% was 19 basis points lower than in 1997.  This drop in
yield had the effect of reducing tax-equivalent interest income by approximately
$119,000.  This was more than offset, however, by the growth in the Company's
earning asset base.  At $127,950,000 the earning asset base exceeded the 1997
average by $3,567,000 and had the effect of increasing tax-equivalent interest
income by $177,000.  The combined effect of lower yields and higher volumes
shows the Bank experienced a net increase in tax-equivalent interest income of
approximately $58,000.

     In computing net interest income, however, interest income must be reduced
by interest expense.  Like the earning asset base, the Company's interest
bearing liabilities carried a lower yield, or cost to the Bank. This lower cost
resulted in a 5 basis point decrease in the overall cost of interest bearing
liabilities from 4.04% to 3.99%.  This decrease is less than the drop in the
yield on earning assets due partly to the need to maintain competitiveness.  In
addition, the most significant changes in the cost of funds occurred during the
fourth quarter of 1998 when, in response to three rate cuts by the Federal
Reserve, the Bank reduced the rates it pays on savings, money market and
interest bearing checking accounts by 50 basis points.  While these rate cuts
will help control costs in 1999, they also helped lower the 1998 cost of funds.
Overall, the lower cost of funds reduced interest expense by nearly $58,000 in
1998.

     The increase in earning assets referred to earlier was primarily funded by
a $3,462,000 increase in the level of interest bearing liabilities.  This higher
funding base increased the Bank's interest expense by approximately $151,000.
When combined with the $58,000 benefit provided by lower rates a net increase in
interest expense of $93,000 is realized.  Details concerning the increase in
interest bearing liabilities, as well as the increase in earning assets, are
provided later in this report.

     One convenient measure of the effectiveness of the Company's
asset/liability management program is the tax-equivalent net interest margin.
For 1998, this measure was 5.02%.  While this is lower than 1997's 5.19%, it
still ranks very high in relation to similar banking organizations and
management is pleased with this performance.

                                       16
<PAGE>
 
     In 1997 net interest income of $6,299,000 was marginally higher than the
previous year's $6,265,000.  On a tax-equivalent basis the increase was $44,000
to $6,454,000.  This reflects an increase in tax-equivalent interest income of
$178,000 again due mostly to an $889,000 increase in the level of earning
assets, particularly loans.  However, unlike 1998, a 9 basis point increase in
the yield on earning assets also contributed to higher levels of interest
income.

     Partially offsetting the 1997 improvement in interest income was a $135,000
rise in interest expense.  This was the result of both higher levels of interest
bearing liabilities and a higher cost of funds.  On average, interest bearing
liabilities increased by $1,054,000 resulting in a $78,000 increase in interest
expense while a 9 basis point increase in the cost of funds added another
$56,000 in interest expense.

     The combined effect of these changes produced a tax-equivalent net interest
margin of 5.19%, which equaled the 1996 margin.

Noninterest Income
------------------

     Noninterest income includes all revenues not included in interest and fee
income related to earning assets.  For 1998, total noninterest income of
$555,000 was approximately $7,000 less than in 1997.  However, two items of an
unusual nature were included in the 1997 total.  First was the recovery of
$60,000 from a loss originally recognized in 1996.  Second was an unusually
large $10,000 loss resulting from the sale of two securities. Absent these
items, the 1997 total would have been just $513,000.  At this level the 1998
increase would have been $42,000, or approximately 8.2%.

     This improvement may be traced to several items.  First, trust income
increased by nearly $21,000 due largely to the settlement of several large
estates.  An increase of more than $17,000 in service fees was also significant.
This is the result of higher overdraft and ATM fees.  In the case of overdrafts,
no change in the fee structure was made although an increase in the number of
overdrafts did occur.  ATM fees were changed in 1998 with the addition of a
noncustomer useage charge.  After adjusting for the above mentioned recovery,
other noninterest income increased by slightly more than $13,000 reflecting
higher safe deposit box and credit card merchant fees.

     Of the recurring items, only insurance commission fell during 1998. These
revenues are generated by the sale of credit life and health insurance to loan
customers, mostly consumer loan customers.  The decrease in insurance revenues
follows the decrease in consumer loans originated in 1998.  To date, the Company
has no other insurance operations.

     As noted earlier, absent the $60,000 recovery and $10,000 security loss,
1997's noninterest income would have totaled $513,000.  This would have been
$33,000, or 6%, lower than in 1996.  This is largely due to a $24,000 decrease
in service fees following the introduction of the Bank's Select Checking product
as well as lower commercial account charges. Select Checking offers customers
several advantages including lower fees for minimum balances, checkbook orders
and overdrafts.

                                       17
<PAGE>
 
     Beginning in January, 1999, the Bank will provide brokerage services to its
customers through a contractual agreement with PrimeVest Financial Services,
Inc.  Through PrimeVest the Bank's on-site broker will offer a variety of
products and services including stocks, bonds, mutual funds, annuities and
financial planning.  Management anticipates first year brokerage revenues to
approximate $60,000 - $90,000.  Net contributions to income, however, are not
expected to be material.

Noninterest Expenses
--------------------

     Noninterest expense includes all items of expense other than interest
expense, the provision for loan losses, and income taxes.  For 1998, total
noninterest expense of $4,242,000 was $190,000, or 4.7%, greater than in 1997.

     Salaries and employee benefits is the largest component of noninterest
expense comprising approximately one-half of the total.  In 1998 this item
totaled $2,144,000, up nearly $94,000 or 4.6%.  Salaries increased by $110,000,
or 6.9%, to $1,703,000.  Included in this increase is $28,000 in outplacement
benefits to two former officers.  Also contributing to the increase was the
retention of several new employees to improve the Bank's sales efforts.
Offsetting these increases were decreases in the cost of the Bank's executive
supplemental income plan and group insurance.  The executive supplemental income
plan, which is a nonqualified plan, experienced a reduction in the number of
participants generating a savings of nearly $15,000.  The cost of the group
insurance programs fell by nearly $14,000 as, for the second consecutive year,
improved health claims experience reduced the Bank's self-funded health care
costs.

     Net occupancy expense decreased by more than $46,000, or 15.8%, in 1998
primarily as a result of lower depreciation expense from a major building
addition which became fully depreciated. In contrast, equipment costs increased
by $41,000, or 16.5%.  Much of this increase is due to higher levels of
depreciation on furniture and equipment as tellers machines and an ATM purchased
in late 1997 carried a full year's depreciation in 1998.  The purchase of
approximately $117,000 of computer equipment in 1998 further added to the year's
depreciation.

     Data processing continues to be a major expense item for the Bank despite
efforts to more efficiently utilize third party processors.  In 1998 data
processing costs totaled nearly $412,000, up almost $68,000, or 19.6%, from
1997.  Included in this increase was a one-time fee for testing related to the
Year 2000 issue totaling over $28,000.  Another phase of testing, with an
expected cost of approximately $13,000, is scheduled for the first half of 1999.
Further details on the Year 2000 issue are provided later in this report.

     Absent the Year 2000 expense of $28,000, data processing costs increased
$40,000, or 11.6% in 1998.  This reflects higher fees from the Bank's primary
external processor, increased trust processing fees following the installation
of a new processing system, higher credit card processing fees and somewhat
higher fees for the processing of ATM transactions.  Also during 1998, the Bank
began offering telebanking services which resulted in approximately $12,000 in
increased processing

                                       18
<PAGE>
 
fees.

     The category of other noninterest expense, which includes a variety of
operating expenses, increased approximately $55,000, or 5.5%, to $1,053,000 in
1998. Legal and professional expense increased by more than $33,000 in 1998 due
to approximately $9,000 in consulting fees related to the Year 2000 issue,
$19,000 for audit services related to the Bank's trust operations, and $10,000
in connection with a review of the Company's bylaws, articles of incorporation
and other matters. Other increases, all of a lesser amount, included costs to
license software products, credit card merchant expenses, and director fees. A
reduction in mass marketing in favor of a more targeted approach resulted in a
$38,000 reduction in advertising costs while FDIC insurance costs were nearly
unchanged as the Bank continues to enjoy the lowest FDIC insurance rates
permissible.

     Unlike 1998, noninterest expense decreased $127,000 in 1997. Of
significance was a $77,000 drop in salaries and benefits including a $46,000
decrease in the cost of the executive supplemental income plan, a $15,000
reduction in pension costs and a $17,000 drop in employee incentives. Other
noninterest expense also fell by $101,000, or 9.2%. For the most part this
reflects an $85,000 loss which was recorded in 1996 as a result of customer
fraud. Of this amount $60,000 was recovered in 1997 and recorded as noninterest
income. Among the other expense items little change was noted with the exception
of data processing which increased by 4.4%, or just under $15,000.

Year 2000 Compliance
--------------------

     Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using 00 as the year 1900 rather than the year 2000. This could result in
failures or miscalculations and is generally referred to as the Year 2000 issue.

     Because the Bank, as well as some of its suppliers, customers and service
providers, is heavily dependent on computers to conduct its business operations
it recognizes and seeks to responsibly address the Year 2000 issue.  Failure to
address Year 2000 issues could result in business disruption that could
materially affect the Company's operations, liquidity or capital resources.  A
Year 2000 Task Team has been assembled to study, test and remedy Year 2000
issues.  This team includes members of senior management and reports regularly
to the Board of Directors.  The team has inventoried all computer related or
dependent hardware and software, identified those which are critical, and
assessed the Year 2000 compliance of each component.  Testing of all critical
items, all of which involve third party processors, has been successfully
completed.  Backup systems for noncritical functions have also been identified
and are also subject to testing.  The Bank has also developed a contingency plan
which is to be implemented in the event of a Year 2000 failure.  In addition,
the Bank has contacted those customers and vendors, who, if unable to cope with
the Year 2000 issue, may negatively impact the Bank, to attempt to determine
their degree of readiness.

     Through year-end 1998, the Bank has incurred expenditures in excess of

                                       19
<PAGE>
 
$132,000 in preparation for the Year 2000.  Included in this amount are the
consulting and testing fees noted earlier.  Capital expenditures have
approximated $80,000 as the replacement of certain computer hardware devices was
deemed necessary.  It is not expected that additional capital expenditures of a
significant amount will be needed.  As noted previously, additional testing with
the Bank's primary third party processor is scheduled for the first half of
1999.

     While the Bank believes the tests and procedures in place should minimize
the Year 200 risks and enable it to meet the needs of it's customers in the Year
2000, the Bank cannot quantify the potential impact of any unforeseen Year 2000
failures that might occur either internally or from external third parties.

Income Taxes
------------

     The Company's provision for income taxes, which totaled $821,000 in 1998,
$934,000 in 1997 and $834,000 in 1996, includes both federal and state income
taxes.  Included in these amounts are deferred tax benefits of $22,000, $42,000
and $6,000, respectively.  The effective tax rates for the years 1998, 1997 and
1996 were 33.9%, 36.2% and 33.8%, respectively. Additional information regarding
the Company's income taxes is contained in Note 8 to the consolidated financial
statements.

Financial Condition
-------------------

     Total assets at December 31, 1998 of $136,701,000 are $4,569,000, or 3.5%,
more than the December 31, 1997 total of $132,132,000.  This growth primarily
reflects an increase in the level of deposit funding.  A further discussion of
the Company's major balance sheet categories follows.

Loan Portfolio
--------------

     The loan portfolio remains Citizens' largest earning asset with gross loans
totaling $86,876,000 at December 31, 1998.

     Throughout 1998 the Bank attempted to further develop its commercial
lending base.  For the year, these loans increased by approximately 3.4% to
$13,366,000.  This growth was suppressed by the payoff of one existing
commercial loan which carried a balance of approximately $1.6 million. Despite
this, management believes the effort was, and will continue to be, successful
and realizes that a considerable amount of time and resources will be needed to
fully develop the portfolio.  However, local economic conditions do appear
favorable for such development.

     Some loans to commercial enterprises may be secured by real estate and, as
such, are considered to be mortgage loans secured by nonfarm, nonresidential
property.  This category of loans increased by $2,960,000 in 1998 to
$17,952,000.  Other forms of real estate lending, primarily consisting of
residential mortgage lending, did not experience similar growth in 1998,
however.  Although residential mortgage lending is the Bank's largest loan
portfolio totaling $39,014,000, it experienced a $580,000, or 1.5%, decrease
during 1998.  The majority of these loans are one year, adjustable rate
mortgages.  This is unlike some lenders who 

                                       20
<PAGE>
 
experienced significant growth in 1998 due to low interest rates and the
resultant high numbers of homes being built or refinanced. The Bank began
offering similar fixed rate loans during the third quarter of 1998. However,
those loans are designed for the secondary market rather than for the Bank's own
loan portfolio. As such, this program will primarily provide a source of fee
income rather than portfolio growth.

     During 1998 management reacted to declining margins in automobile loans by
reducing the volumes booked and accordingly repayments exceeded originations to
the installment loan portfolio.  As a result this portfolio fell by $3,788,000,
or 24.6% during the year.  This rate of decrease is greater than management had
anticipated partly due to the incentives offered by some auto manufactures on
the purchase of new cars.  Not only have these incentives made it difficult for
the Bank to compete for new cars loans but they have also encouraged consumers
who would typically purchase used cars to look toward new car purchases.  In
order to counteract this, the Bank lowered its new and used car interest rates
during the fourth quarter of 1998.  Nonetheless, the number of autos financed
dropped by 28% for the year.

     The Bank's remaining loan portfolios, including construction and credit
cards, are relatively small and have not exhibited changes which are material to
the overall portfolio.  The credit card portfolio, which was established in 1995
carried a balance of $904,000 at year-end, down $114,000 from the previous year.
Management is currently assessing its ability to maintain this portfolio.

     Additional information on the composition of the loan portfolio, including
concentrations of credit risk, may be found in Note 4 to the financial
statements.

     Loans are closely monitored to avoid losses.  Those loans which are past
due 90 days or more are placed on nonaccrual status unless they are both well
secured and in the process of collection.  Such loans approximated $53,000 at
December 31, 1998 and $2,000 at December 31, 1997. Loans past due more than 90
days which were still accruing interest were also minor totaling $21,000 and
$12,000, respectively.

     In the event collection of a loan in accordance with its terms becomes
doubtful the loan is classified as impaired.  These loans totaled $1,897,000 at
December 31, 1998.  An allowance for loan losses of $457,000 has been
established for these loans.  All losses which may reasonably be anticipated are
accounted for in the allowance for loan losses.  Management makes this
determination quarterly by its analysis of overall loan quality, changes in the
mix and size of the portfolio, previous loss experience, general economic
conditions, information about specific borrowers and other factors.  Actual net
losses have decreased from $214,000 in 1996 to $132,000 in 1997 and $105,000 in
1998.  The allowance for loan losses, however, has increased from $990,000 to
$1,094,000 and $1,110,000 in the three years, respectively.  These levels
represent 1.11%, 1.25% and 1.28% of gross loans at December 31, 1996, 1997 and
1998, respectively.

     In order to keep the allowance for loan losses at an adequate level a
charge to earnings known as the provision for loan losses is made.  This

                                       21
<PAGE>
 
provision totaled $120,000 in 1998, $236,000 in 1997 and $168,000 in 1996.
Having made these provisions, management believes the allowance for loan losses
is adequate and is not aware of any information relating to the loan portfolio
which it expects will materially impact future operating results, liquidity or
capital.

Securities Portfolio and Federal Funds Sold
-------------------------------------------

     The Bank's securities portfolio consists of both available for sale and
held to maturity securities while no securities are maintained in a trading
account.  At December 31, 1998, the held to maturity portfolio totaled
$8,373,000 consisting solely of tax-exempt municipal securities which are
expected to be held until they mature in order to benefit from their tax
advantaged status.  Management is attempting to take full advantage of such tax
saving opportunities when available.  Since year end 1997 the tax exempt
portfolio has increased in size by approximately 50%, or $2.8 million.

     Management also attempts to emphasize the available for sale portfolio due
to the flexibility it allows in managing the balance sheet structure and
addressing asset/liability issues.  At December 31, 1998 this portfolio had an
estimated fair value of $35,439,000, $441,000 in excess of the amortized cost.
Such excess represents an unrealized gain and reflects the recent decreases in
interest rates.  This portfolio, which represents nearly 81% of the total
securities portfolio, is invested primarily in U.S. Treasury and agency
obligations and investment grade corporate debt instruments.  At year-end the
U.S. Treasury and agency component of the portfolio totaled $14,531,000, or
41.0%, while the corporate component totaled $17,504,000 or 49.4%.  The
remainder of the portfolio, $3,404,000, consists of mortgage backed securities,
taxable municipal obligations, and stock which the Bank is required to hold for
membership in the Federal Reserve Bank and the Federal Home Loan Bank.

     The Bank has typically favored investments with maturities of five years or
less which have known cash flow patterns.  Such instruments typically provide
greater safety, less market value fluctuation and more simplified
asset/liability issues.  Future investments, however, may include increased
holdings of callable and mortgage backed securities in order to improve yield.
Currently, callable securities total $4,875,000 while mortgage backed securities
total just $1,813,000 all of which were purchased in 1998.  Still this attempt
to improve yield will not change the Bank's traditional emphasis on U.S.
Treasury and agency obligations and high quality corporate issues.

     The Bank generally tries to minimize its involvement in the overnight
federal funds sold market, instead relying on the continually maturing
securities portfolio to provide the liquidity needed to fund loans or meet
deposit withdraw demands.  Nonetheless, at any given time the execution of
specific investing or funding strategies, or normal fluctuations in deposit and
loan balances, may require the bank to sell, or buy, funds on an overnight
basis.

     At December 31, 1998 and December 31, 1997 the balances of federal funds
sold were zero and $200,000, respectively.  The average federal funds 

                                       22
<PAGE>
 
sold balance during 1998 was $1,261,000.

Deposits and Other Funding Sources
----------------------------------

     As noted earlier the Bank's funding base grew during 1998 with average
deposits for the year of $110,861,000 compared to $109,249,000 in 1997.  Total
deposits at year-end of $113,464,000 are somewhat higher than typical, however,
as noninterest bearing deposits of $15,341,000 are higher than the more typical
levels which approximate $13.5 million.

     Interest bearing deposits, which averaged $97,437,000 in 1998, also grew to
$98,122,000, an $883,000 increase over the December 31, 1997 total. Much of this
growth occurred during the third and fourth quarters of 1998 apparently from
persons seeking relief form the more volatile equity markets.  The most popular
product among such persons seems to be a twelve month, $100,000 certificate of
deposit.  The majority of such depositors were existing customers as the Bank
does not actively seek to attract $100,000 certificates.  It does, however,
attempt to remain competitive and in so doing monitors the rates paid for this
type of certificate on a local, regional and national basis weekly.  The
permanence of these funds will be known at their maturity dates.  As in the past
the Bank hopes to retain its competitive position for these deposits but does
not intend to overprice them.  In the event these funds are withdrawn the
maturity ladder of the investment portfolio provides ample liquidity.

     Also contributing to the Bank's holdings of $100,000 certificates was a
program designed to encourage depositors who held several certificates to
combine them into one instrument.  Doing so provided both the customer and the
Bank the greater convenience and efficiency.  This program transferred
approximately $1.2 million from regular certificates of deposit to $100,000
certificates.  In total, the Bank's holdings of $100,000 certificates increased
by $3,441,000, or 38.5%, in 1998.

     Among the Bank's other deposits an influx from the more volatile equity
market was not observed.  In fact, only interest bearing checking products
provided significant growth rising from $12,485,000 to $13,643,000.  Excluding
the certificate of deposit program noted earlier, certificates of less than
$100,000 fell by approximately $586,000, savings accounts decreased 4.1% to
$26,661,000 and money market deposits decreased $788,000 to $5,379,000.  The
rates paid on savings and money market deposits, which had not changed in
several years, were lowered in October, 1998.  This action did not contribute in
a material way to the decrease in balances.  Instead, it appears the ever-
increasing competitive nature of the financial services market continues to
erode the Bank's market share. The newly formed brokerage unit will help the
Bank better compete in this environment by providing additional ways to meet
customer needs.  While this could initially have some negative impact on deposit
balances, management is confident that over time this unit will not only prevent
the loss of customers to competitors, but will actually increase the deposit
base.

     In addition to deposits, the Bank generates funding by the use of
borrowings.  Short-term borrowings increased by more than $1,029,000, or 28.6%,
as the Bank's two customers with whom it has entered into repurchase 

                                       23
<PAGE>
 
agreements maintained higher balances. No additional long-term borrowings were
acquired during the year and the outstanding balance decreased by approximately
$66,000 due to scheduled repayments.

Capital Resources
-----------------

     The Company continues to maintain a strong capital base.  Total capital at
year-end 1998 of $16,649,000 approximates 12.2% of assets. This is relatively
unchanged from 1997 when capital of $16,095,000 was also 12.2% of assets.  The
net increase in capital during the year reflects both earnings and the increase
in unrealized gains on available for sale securities.  Conversely, dividends,
which increased for the seventh consecutive year to $1.00 per share, and the
purchase of treasury stock, reduced capital.  Purchases of treasury stock are
conducted on the open market under the Company's stock repurchase policy.
During 1998 20,386 shares of treasury stock were purchased bringing the total
number of treasury shares to 88,433.  In addition to the purchase of treasury
stock the Company increased its number of authorized shares of common stock in
1998 from 1,250,000 to 2,250,000 for general corporate purposes. Currently, no
specific plans exist either for the treasury stock or the additional authorized
shares.

     During 1998 the company expended $117,000 for capital expenditures relating
to premises and equipment.  This was down $141,000 from the $258,000 spent in
1997.  1997 expenditures were down $238,000 from the $496,000 spent in 1996.
During 1996 and 1997 the company conducted a major renovation of it's facilities
which resulted in higher than normal capital expenditures for both years.  1997
was also slightly higher than normal due to capital acquisitions relating to
Year 2000 compliance additions, as discussed further in that section of the
management's discussion and analysis.

     The Federal Reserve's risk-based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk.  The Company continues to exceed all regulatory capital
requirements as shown in Note 12 to the financial statements and is unaware of
any trends or uncertainties, nor do any plans exist, which may materially impair
or alter its capital position.

     Although volumes are light, the Company's shares are traded over the
counter.  During the first three quarters of 1998 the price of the stock
increased steadily from $27.75 to $38.12 representing a 37% improvement. During
the last quarter of the year, specifically in December, three trades pushed the
price to $54 per share.  These trades did not constitute a large volume and
neither management nor the board of directors can offer any reason for the
increase in price these particular trades commanded. Subsequent to year-end, no
trading activity occurred during the month of January, 1999.

Liquidity and Interest Rate Sensitivity
---------------------------------------

     The objective of the Company's liquidity management program is to ensure
the continuous availability of funds to meet the withdrawal demands of
depositors and the credit needs of borrowers.  The basis of Citizens' 

                                       24
<PAGE>
 
liquidity comes from the stability of its core deposits. Liquidity is also
available through unpledged available for sale securities, unpledged held to
maturity securities due within one year, and short-term funds such as federal
funds sold. At December 31, 1998 these sources totaled $24,514,000, or 17.9% of
total assets. In addition, liquidity may be generated through loan repayments
and over $52,000,000 of available borrowing arrangements with correspondent
banks. Each quarter management tests the banks ability to satisfy it's
anticipated liquidity needs over the next twelve months including in such
analysis the dividend requirements and limitations as well as the other
operational funding needs. Details on both the sources and uses of cash are
presented in the Statements of Cash Flows contained in the financial statements.

     The objective of the Company's interest rate sensitivity management
program, also known as asset/liability management, is to maximize net interest
income while minimizing the risk of adverse effects from changing interest
rates.  This is done by controlling the mix and maturities of interest sensitive
assets and liabilities.  The Bank has established an asset/liability committee
for this purpose.

     One common interest rate risk measure is the gap, or the difference between
rate sensitive assets and rate sensitive liabilities.  A positive gap occurs
when rate sensitive assets exceed rate sensitive liabilities. This tends to be
beneficial in rising interest rate environments.  A negative gap refers to the
opposite situation and tends to be beneficial in declining interest rate
environments.  However, the gap does not consider future changes in the volume
of rate sensitive assets or liabilities or the possibility that interest rates
of various products may not change by the same amount or at the same time.  In
addition, certain assumptions must be made in constructing the gap.  For
example, the Company considers administered rate deposits, such as savings
accounts, to be immediately rate sensitive although their rate sensitivity could
differ from this assumption.  The Company monitors its gap on a monthly basis
and the following table represents the gap analysis at December 31, 1998.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
GAP ANALYSIS
December 31, 1998
                                                                                        One to      Over
(in thousands of dollars)                         0-90         91-180       181-365     Five        Five
                                                  Days         Days         Days        Years       Years
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>         <C>         <C> 
Interest sensitive assets
Federal funds sold...........................     $       -    $       -    $       -   $       -   $       -
Securities...................................         2,002        2,394        3,761      30,061       5,594
Loans, net of unearned
  interest...................................        18,547       15,966       32,018      18,186       2,101
                                                  ---------    ---------    ---------   ---------   ---------
     Total interest
      sensitive assets.......................        20,549       18,360       35,779      48,247       7,695

Interest sensitive
  liabilities
Deposits.....................................        56,649        7,276       11,481      22,716           -
Other borrowings.............................         4,644           17           36         647         296
                                                  ---------    ---------    ---------   ---------   ---------
     Total interest
       sensitive
       liabilities...........................        61,293        7,293       11,517      23,363         296
                                                  ---------    ---------    ---------   ---------   ---------

GAP..........................................     $ (40,744)   $  11,067    $  24,262   $  24,884   $   7,399
                                                  =========    =========    =========   =========   =========
Cumulative GAP...............................     $ (40,744)   $ (29,677)   $  (5,415)  $  19,469   $  26,868
                                                  =========    =========    =========   =========   =========
</TABLE> 

                                       25
<PAGE>
 
<TABLE> 
<S>                                                  <C>          <C>           <C>         <C>         <C> 
GAP to sensitive
 assets ratio................................        (31.19)%       8.47%       18.57%      19.05%       5.66%
Cumulative GAP to
  sensitive assets ratio.....................        (31.19)%     (22.72)%      (4.15)%     14.90%      20.57%
</TABLE>

     As the table shows the Company's cumulative one year gap is a negative
4.15% of sensitive assets.  Thus, the Bank is considered to be negatively gapped
which traditional theory tells us is beneficial in falling interest rate
environments.

     The large negative gap in the 0-90 day category is due to the placement of
administered rate deposits, as mentioned earlier, in this timeframe.  Interest
rates on these deposits are determined by management and can be changed at any
time.  Management's ability to manage these rates in a beneficial manner has a
significant impact on net interest income.

     In addition to analyzing the gap the Bank also conducts several rate shock
tests on a regular basis to help manage interest rate risk.  These tests
forecast income under the assumption that rates may change, either up or down,
by as much as 200 basis points.  This helps define risk exposure and boundaries.
Like the gap, however, these tests do not consider the possibility that interest
rates on various products may change by different amounts and at different
times.  Therefore, tests are also done which forecast income over the next 12
months under what management considers realistic rate change assumptions.  This
projection indicates that income will be maintained at acceptable levels.  It is
believed that this test is a more accurate predicator of earnings than the gap
and rate shock tests discussed earlier.

Impact of Inflation
-------------------

     The results of operations and financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale.  Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of noninterest
expenses, such as salaries, benefits and other operating expenses.  Management
of the money supply by the Federal Reserve to control the rate of inflation may
have an impact on the earnings of the Company.  Further, changes in interest
rates to control inflation may have a corresponding impact on the ability of
certain borrowers to repay loans granted by the Company.

     As a financial intermediary, the Company holds a high percentage of
interest rate sensitive assets and liabilities.  Consequently, the estimated
fair value of a significant portion of the Company's assets and liabilities
change more frequently than those of nonbanking entities.  The Company's
policies attempt to structure its mix of financial instruments and manage its
interest rate sensitivity in order to minimize the potential adverse effects of
market forces on its net interest income, earnings and capital.  A comparison of
the carrying value of the Company's financial instruments to their estimated
fair value as of December 31, 1998 is disclosed in Note 13 to the accompanying
consolidated financial statements.

                                       26
<PAGE>
 
Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

     Financial statements required by this item are presented below.  The
Company does not meet the requirements for disclosure of supplementary quarterly
financial data.

                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
 
ASSETS                                                         1998           1997
                                                           ------------   ------------
<S>                                                        <C>            <C>  
Cash and due from banks                                    $  3,498,972   $  3,312,512
Federal funds sold                                                    -        200,000
Securities available for sale                                35,439,225     31,920,905
Securities held to maturity (estimated fair value
 $8,533,757 and $6,689,709, respectively)                     8,372,564      6,597,801
Loans, less allowance for loan losses of $1,109,595 and
 $1,094,185, respectively                                    85,708,661     86,399,618
Bank premises and equipment, net                              1,455,385      1,588,298
Accrued interest receivable                                   1,261,593      1,197,098
Other assets                                                    964,364        915,967
                                                           ------------   ------------

   TOTAL ASSETS                                            $136,700,764   $132,132,199
                                                           ============   ============
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
LIABILITIES
Deposits:
 Noninterest bearing                                       $ 15,341,441   $ 13,162,642
 Interest bearing                                            98,122,204     97,238,825
                                                           ------------   ------------
   Total deposits                                           113,463,645    110,401,467
Short-term borrowings                                         4,626,689      3,597,354
Long-term borrowings                                          1,012,741      1,078,290
Other liabilities                                               948,373        960,180
                                                           ------------   ------------

   TOTAL LIABILITIES                                        120,051,448    116,037,291
                                                           ------------   ------------
 
COMMITMENTS AND CONTINGENCIES
 
SHAREHOLDERS' EQUITY
Common stock, $2.00 par value, authorized 2,250,000 and
 1,250,000 shares, respectively, issued 750,000 shares        1,500,000      1,500,000
Additional paid-in capital                                    2,100,000      2,100,000
Retained earnings                                            14,345,301     13,406,973
Accumulated other comprehensive income                          286,909         92,890
Treasury stock at cost, 88,433 and
 68,047 shares, respectively                                 (1,582,894)    (1,004,955)
                                                           ------------   ------------
 
   TOTAL SHAREHOLDERS' EQUITY                                16,649,316     16,094,908
                                                           ------------   ------------
 
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $136,700,764   $132,132,199
                                                           ============   ============
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       27
<PAGE>
 
                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                            1998         1997         1996
                                                        -----------  -----------   ----------- 
INTEREST INCOME
<S>                                                     <C>          <C>           <C>  
 Interest and fees on loans                             $ 7,836,571  $ 8,099,914   $ 7,973,313
 Interest and dividends on securities:
   Taxable                                                2,061,442    1,859,467     1,791,607
   Tax-exempt                                               369,216      280,086       281,763
 Interest on federal funds sold                              69,008       74,403        98,206
                                                        -----------  -----------   -----------
   TOTAL INTEREST INCOME                                 10,336,237   10,313,870    10,144,889
                                                        -----------  -----------   -----------
 
INTEREST EXPENSE
 Interest on deposits                                     3,805,054    3,786,061     3,758,677
 Interest on short-term borrowings                          242,813      171,938       110,191
 Interest on long-term borrowings                            59,967       56,375        10,761
                                                        -----------  -----------   -----------
   TOTAL INTEREST EXPENSE                                 4,107,834    4,014,374     3,879,629
                                                        -----------  -----------   -----------
 
   NET INTEREST INCOME                                    6,228,403    6,299,496     6,265,260
 Provision for loan losses                                  120,000      236,000       168,000
                                                        -----------  -----------   -----------
   NET INTEREST INCOME AFTER PROVISION
      FOR LOAN LOSSES                                     6,108,403    6,063,496     6,097,260
                                                        -----------  -----------   -----------
 
NONINTEREST INCOME
 Trust income                                               136,995      116,134       103,021
 Service fees                                               264,447      247,144       271,305
 Insurance commissions                                       20,641       30,009        33,873
 Securities gains (losses)                                      900       (9,922)          -
 Other                                                      132,344      179,264       138,114
                                                        -----------  -----------   -----------
   TOTAL NONINTEREST INCOME                                 555,327      562,629       546,313
                                                        -----------  -----------   -----------
 
NONINTEREST EXPENSE
 Salaries and employee benefits                           2,144,275    2,050,297     2,127,154
 Net occupancy expense                                      247,279      293,769       289,722
 Equipment rentals, depreciation and maintenance            290,224      249,197       245,642
 Data processing                                            411,782      344,179       329,589
 Advertising                                                 82,637      102,679        84,770
 FDIC insurance                                              13,086       13,783         2,000
 Other                                                    1,052,757      997,878     1,099,485
                                                        -----------  -----------   -----------
   TOTAL NONINTEREST EXPENSE                              4,242,040    4,051,782     4,178,362
                                                        -----------  -----------   -----------
 
INCOME BEFORE INCOME TAXES                                2,421,690    2,574,343     2,465,211
 
 Income tax expense                                         821,284      933,602       833,934
                                                        -----------  -----------   -----------
 
   NET INCOME                                           $ 1,600,406  $ 1,640,741   $ 1,631,277
                                                        ===========  ===========   ===========
 
BASIC EARNINGS PER COMMON SHARE                         $      2.41  $      2.40   $      2.39
                                                        ===========  ===========   ===========
 
AVERAGE COMMON SHARES OUTSTANDING                           663,487      683,544       683,676
                                                        ===========  ===========   ===========
</TABLE> 
 

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       28
<PAGE>
 
                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, 1996

<TABLE>
<CAPTION>
                                                      1998          1997         1996
                                                    ----------   ----------   ----------   
<S>                                                 <C>          <C>          <C>          
NET INCOME                                          $1,600,406   $1,640,741   $1,631,277
                                                    ----------   ----------   ----------
 
Other comprehensive income, net of tax:
 Unrealized gains/(losses) arising during period       194,084      171,001      (86,754)
 Less:  Reclassification adjustment for gains
      included in net income                               (65)      (1,184)           -
                                                    ----------   ----------   ----------   
 Other comprehensive income, net of tax                194,019      169,817      (86,754)
                                                    ----------   ----------   ----------
 
COMPREHENSIVE INCOME                                $1,794,425   $1,810,558   $1,544,523
                                                    ==========   ==========   ==========
 
</TABLE> 

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       29
<PAGE>
 
                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY

 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                                                           ACCUMULATED
                                                                                              OTHER                     TOTAL
                                                                 ADDITIONAL                  COMPRE-                    SHARE-
                                               COMMON STOCK       PAID-IN      RETAINED      HENSIVE      TREASURY      HOLDERS'
                                            -------------------
                                             SHARES    AMOUNT     CAPITAL      EARNINGS      INCOME         STOCK        EQUITY
                                            -------- ----------  ----------  -----------   -----------   -----------   -----------
<S>                                         <C>      <C>         <C>         <C>           <C>           <C>           <C> 
BALANCE, DECEMBER 31, 1995                  750,000  $1,500,000  $2,100,000  $11,297,042      $  9,827   $  (955,363)  $13,951,506
 
 Net income                                       -           -           -    1,631,277             -             -     1,631,277
 
 Cost of 235 shares acquired
  as treasury stock                               -           -           -            -             -        (5,992)       (5,992)
 
 Cash dividends declared
  ($.80 per share)                                -           -           -     (546,889)            -             -      (546,889)
 
 Net change in unrealized
  gain (loss) on available
  for sale securities                             -           -           -            -       (86,754)            -       (86,754)
                                            -------  ----------  ----------  -----------   -----------   -----------   -----------
 
BALANCE, DECEMBER 31, 1996                  750,000   1,500,000   2,100,000   12,381,430       (76,927)     (961,355)   14,943,148
                                            -------  ----------  ----------  -----------   -----------   -----------   -----------
 
 Net income                                       -           -           -    1,640,741             -             -     1,640,741
 
 Cost of 1,600 shares acquired
  as treasury stock                               -           -           -            -             -       (43,600)      (43,600)
 
 Cash dividends declared
  ($.90 per share)                                -           -           -     (615,198)            -             -      (615,198)
 
 Net change in unrealized
  gain (loss) on available
  for sale securities                             -           -           -            -       169,817             -       169,817
                                            -------  ----------  ----------  -----------   -----------   -----------   -----------
 
BALANCE, DECEMBER 31, 1997                  750,000   1,500,000   2,100,000   13,406,973        92,890    (1,004,955)   16,094,908
                                            -------  ----------  ----------  -----------   -----------   -----------   -----------
 
 Net income                                       -           -           -    1,600,406             -             -     1,600,406
 
 Cost of 20,386 shares acquired
  as treasury stock                               -           -           -            -             -      (577,939)     (577,939)
 
 Cash dividends declared
  ($1.00 per share)                               -           -           -     (662,078)            -             -      (662,078)
 
 Net change in unrealized
  gain (loss) on available
  for sale securities                             -           -           -            -       194,019             -       194,019
                                            -------  ----------  ----------  -----------   -----------   -----------   -----------
 
BALANCE, DECEMBER 31, 1998                  750,000  $1,500,000  $2,100,000  $14,345,301      $286,909   $(1,582,894)  $16,649,316
                                            =======  ==========  ==========  ===========   ===========   ===========   ===========
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       30
<PAGE>
 
                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                     1998           1997           1996
                                                                 ------------   ------------   ------------ 
<S>                                                              <C>            <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                      $  1,600,406   $  1,640,741   $  1,631,277
 Adjustments to reconcile net income to net
   cash provided by operating activities:
 Depreciation                                                         246,664        250,325        224,368
 Provision for loan losses                                            120,000        236,000        168,000
 Deferred income tax benefits                                         (21,849)       (41,962)        (5,926)
 Amortization of security premiums, net
   of accretion of security discounts                                 184,139        131,891        256,588
 Amortization of organization costs                                    63,400         63,400         63,400
 Securities (gains) losses                                               (900)         9,922              -
 Other losses                                                           5,285         36,336          3,685
 (Increase) decrease in accrued interest receivable                   (64,495)       (92,580)        26,829
 Increase in other assets                                            (117,570)      (133,349)       (94,098)
 (Decrease) increase in other liabilities                             (11,807)         8,245        148,751
                                                                 ------------   ------------   ------------
 
 NET CASH PROVIDED BY OPERATING ACTIVITIES                          2,003,273      2,108,969      2,422,874
                                                                 ------------   ------------   ------------
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from maturities and calls of securities
   held to maturity                                                 1,045,000      4,040,000     18,425,000
 Principal payments received on securities
   held to maturity                                                         -        976,407        543,515
 Purchases of securities held to maturity                          (3,138,101)      (500,000)    (1,570,000)
 Proceeds from sales of securities available for sale                 502,225      2,059,392              -
 Proceeds from maturities and calls of securities
   available for sale                                               5,773,120      3,500,000      1,000,000
 Principal payments received on securities available for sale         406,439        172,216        394,073
 Purchases of securities available for sale                       (10,089,633)   (14,512,857)   (18,944,387)
 Loans made to customers, net                                         809,455      1,408,818     (5,855,203)
 Purchases of bank premises and equipment                            (117,375)      (257,793)      (495,656)
 Proceeds from sale of other real estate and other assets               6,110        190,086        189,393
                                                                 ------------   ------------   ------------
 
 NET CASH USED IN INVESTING ACTIVITIES                             (4,802,760)    (2,923,731)    (6,313,265)
                                                                 ------------   ------------   ------------
</TABLE>

                                  (CONTINUED)

                                       31
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                             1998          1997         1996
                                                          ----------    ----------   -----------
<S>                                                       <C>           <C>          <C> 
CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase (decrease) in demand deposit, NOW, money
  market and savings accounts                              2,178,799       636,866    (3,267,613)
 Net increase in time deposits                               883,379       194,661     3,166,878
 Net increase in short-term borrowings                     1,029,335       632,797     1,374,350
 Proceeds from long-term borrowings                                -       800,000             -
 Repayments of long-term borrowings                          (65,549)      (52,058)       (4,033)
 Dividends paid                                             (662,078)     (615,198)     (546,889)
 Acquisition of treasury stock                              (577,939)      (43,600)       (5,992)
                                                          ----------    ----------   -----------
 
 NET CASH PROVIDED BY FINANCING ACTIVITIES                 2,785,947     1,553,468       716,701
                                                          ----------    ----------   -----------
 
 (Decrease) increase in cash and cash equivalents            (13,540)      738,706    (3,173,690)
 
CASH AND CASH EQUIVALENTS:
 Beginning                                                 3,512,512     2,773,806     5,947,496
                                                          ----------    ----------   -----------
 
 Ending                                                   $3,498,972    $3,512,512   $ 2,773,806
                                                          ==========    ==========   ===========
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 Cash payments for:
  Interest on deposits and on other
   borrowings                                             $4,127,529    $4,025,381   $ 3,825,218
                                                          ==========    ==========   ===========
 
  Income taxes                                            $  835,183    $1,019,228   $   896,530
                                                          ==========    ==========   ===========
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES
 
 Other real estate and other assets acquired in
  settlement of loans                                     $   84,620    $  190,580   $   232,893
                                                          ==========    ==========   ===========
</TABLE> 

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       32
<PAGE>
 
                           CITIZENS FINANCIAL CORP.
                                AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS: Citizens Financial Corp. is a one bank holding company
which was incorporated on April 30, 1987. The wholly owned subsidiary, Citizens
National Bank, is a commercial bank with operations in Randolph and Tucker
Counties of West Virginia. The Bank provides retail and commercial loans,
deposit and trust services principally to customers in Randolph County, West
Virginia and the surrounding counties.

     BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of Citizens Financial Corp. and its wholly
owned subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

     PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of Citizens Financial Corp. and its wholly owned
subsidiary, Citizens National Bank. 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: Debt and equity securities are classified as "held to
maturity", "available for sale" or "trading" according to management's intent.
The appropriate classification is determined at the time of purchase of each
security and re-evaluated at each reporting date.

     Securities held to maturity - Debt securities for which the Company has the
     ---------------------------                                                
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts.

     Securities available for sale - Securities not classified as "held to
     -----------------------------                                        
maturity" or as "trading" are classified as "available for sale".  Securities
classified as "available for sale" are those securities the Company intends to
hold for an indefinite period of time, but not necessarily to maturity.
"Available for sale" securities are reported at fair value.  Unrealized gains or
losses, adjusted for applicable income taxes, are reported as a separate
component of shareholders' equity.

     Trading securities - There are no securities classified as "trading" in the
     ------------------                                                         
accompanying financial statements.

     Realized gains and losses on sales of securities are recognized on the
specific identification method.  Amortization of premiums and accretion of
discounts are computed using the interest method.

     LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are stated at the amount of
unpaid principal, reduced by unearned discount and an allowance for loan losses.
Interest is recognized on an amortized basis.

     The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net charge-
offs. The subsidiary bank makes continuous credit reviews of the loan portfolio
and considers current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining the adequacy
of the allowance for loan losses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely.

                                       33
<PAGE>
 
     A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due in
accordance with the contractual terms of the specific loan agreement. Impaired
loans, other than certain large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, are reported at the present value of
expected future cash flows discounted using the loan's original effective
interest rate or, alternatively, at the loan's observable market price, or at
the fair value of the loan's collateral if the loan is collateral dependent. The
method selected to measure impairment is made on a loan-by-loan basis, unless
foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.

     Interest is accrued daily on impaired loans unless the loan is placed on
non-accrual status. Impaired loans are placed on non-accrual status when the
payments of principal and interest are in default for a period of 90 days,
unless the loan is both well-secured and in the process of collection. Interest
on non-accrual loans is recognized primarily using the cost-recovery method.

     Loan origination fees and certain direct loan origination costs are
deferred and amortized as adjustments of the related loan yield over its
contractual life.

     BANK PREMISES AND EQUIPMENT: 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. 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 was acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at fair value
with any writedown being 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. Charging such expenses to income
rather than including them in loss on foreclosed real estate does not materially
affect financial statement reporting. Gains and losses on the sales of these
properties are credited or charged to operating income in the year of the
transaction.

     Sales of these properties which are financed by the subsidiary bank and
meet the criteria of covered transactions remain classified as other real estate
until such time as principal payments have been received to warrant
classification as a real estate loan.

     ORGANIZATION COSTS: Organization costs are being amortized on a straight-
line basis over a period of fifteen years. Unamortized organization costs
totaled $5,284 and $68,684 at December 31, 1998 and 1997.

     PENSION PLAN: The subsidiary bank has a defined benefit pension plan
covering substantially all employees. Pension costs are actuarially determined
and charged to expense. During 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132), which changed the
presentation in the footnote disclosures of these plans. Under SFAS No. 132, the
Company is required to present a reconciliation of the plans' assets in
conjunction with the components of the plans' expenses.

     POSTRETIREMENT BENEFITS: The subsidiary bank provides certain health care
and life insurance benefits for all retired employees that meet certain
eligibility requirements. The Company'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, except that the Company's unfunded cost at January 1, 1993 is being
accrued primarily on a straight-line basis through the year ending 2013. As
previously mentioned, the Company also adopted SFAS No. 132 for this plan during
1998.

     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.

                                       34
<PAGE>
 
     Valuation allowances are established when deemed necessary to reduce
deferred tax assets to the amount expected to be realized.

     The consolidated provision for income taxes includes federal and state
income taxes and is based on pretax income reported in the consolidated
financial statements, adjusted for transactions that may never enter into the
computation of income taxes payable.

     BASIC EARNINGS PER SHARE: Basic earnings per common share is computed based
upon the weighted average shares outstanding. The weighted average shares
outstanding were 663,487, 683,544, and 683,676 for the years ended December 31,
1998, 1997 and 1996, respectively. For the year ended December 31, 1997, the
Company adopted Financial Accounting Standards Board Statement No. 128, Earnings
per Share. During the years ended December 31, 1998, 1997 and 1996, the Company
did not have any potentially dilutive securities, thus, this pronouncement did
not have an impact on the Company's earnings per share computations.

     TRUST DEPARTMENT: Assets held in an agency or fiduciary capacity by the
subsidiary bank's trust department are not assets of the Bank and are not
included in the accompanying balance sheets. Trust department income is
recognized on the cash basis in accordance with customary banking practice.
Reporting such income on a cash basis rather than the accrual basis does not
affect net income materially.

     COMPREHENSIVE INCOME: During 1998, the Company adopted the Financial
Accounting Standards Board Statement No. 130, Reporting Comprehensive Income.
This Statement requires an entity to include a statement of comprehensive income
in their full set of general-purpose financial statements.

     EMERGING ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Bank expects to adopt the new Statement
effective December 31, 1999. The Statement will require the Bank to recognize
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 will be immediately
recognized in earnings. Since the subsidiary bank has not historically invested
in derivatives, as defined, management does not anticipate that the adoption of
the new Statement will have a significant impact on the Company's earnings or
financial position.

NOTE 2.   CASH CONCENTRATIONS

     At December 31, 1998 and 1997, the subsidiary bank had no cash
concentrations.

NOTE 3.   SECURITIES
 
     The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at December 31, 1998 and 1997, are summarized as follows:

                                       35
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                  1998
                                                      ---------------------------------------------------------
                                                       CARRYING
                                                         VALUE                                       ESTIMATED
                                                       (AMORTIZED             UNREALIZED               FAIR
                                                                       ------------------------
                                                         (COST)          GAINS        LOSSES            VALUE
                                                      -------------    --------     -----------     -----------
<S>                                                   <C>              <C>          <C>             <C> 
HELD TO MATURITY:
 Tax-exempt state and political subdivisions          $ 8,372,564      $161,193     $         -     $ 8,533,757
                                                      -----------      --------     -----------     -----------

     TOTAL SECURITIES HELD TO MATURITY                $ 8,372,564      $161,193     $         -     $ 8,533,757
                                                      ===========      ========     ===========     ===========

<CAPTION>  
                                                                                                     CARRYING
                                                                                                       VALUE
                                                                                                    (ESTIMATED
                                                       AMORTIZED             UNREALIZED                 FAIR
                                                                       ------------------------
                                                          COST          GAINS         LOSSES           VALUE)
                                                      -----------      --------     -----------     -----------
<S>                                                   <C>              <C>          <C>             <C> 
AVAILABLE FOR SALE:
 U.S. Treasury securities                             $ 3,027,754      $ 42,246               -     $ 3,070,000
 U.S. Government agencies and corporations             11,313,079       166,228          18,182      11,461,125
 Mortgage-backed securities - U.S. Government 
  agencies and corporations                             1,818,813           108           6,202       1,812,719
 Federal Reserve Bank stock                               108,000             -               -         108,000   
 Federal Home Loan Bank stock                             436,000             -               -         436,000
 Corporate debt securities                             17,250,192       253,649               -      17,503,841
 Taxable state and political subdivisions               1,043,988         3,552               -       1,047,540
                                                      -----------      --------     -----------     -----------
 
  TOTAL SECURITIES AVAILABLE FOR SALE                 $34,997,826      $465,783     $    24,384     $35,439,225
                                                      ===========      ========     ===========     ===========
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                 1997
                                                      ---------------------------------------------------------
                                                       CARRYING
                                                         VALUE                                      ESTIMATED
                                                       (AMORTIZED             UNREALIZED               FAIR
                                                                       -----------------------
                                                         (COST)          GAINS        LOSSES           VALUE
                                                      ------------     --------     ----------      -----------
<S>                                                   <C>              <C>          <C>             <C> 
HELD TO MATURITY:
 Taxable corporate debt securities                    $   998,619      $  1,881     $        -      $ 1,000,500
 Tax-exempt state and political subdivisions            5,599,182       102,462         12,435        5,689,209
                                                      -----------      --------     ----------      -----------
  TOTAL SECURITIES HELD TO MATURITY                   $ 6,597,801      $104,343     $   12,435      $ 6,689,709
                                                      ===========      ========     ==========      ===========
 
<CAPTION> 
                                                                                                     CARRYING
                                                                                                      VALUE
                                                                                                    (ESTIMATED
                                                       AMORTIZED             UNREALIZED                FAIR
                                                                       -----------------------
                                                          COST           GAINS        LOSSES           VALUE)
                                                      -----------      --------     ----------      -----------
<S>                                                   <C>              <C>          <C>             <C> 
AVAILABLE FOR SALE:
 U.S. Treasury securities                             $ 4,542,412      $ 38,526     $        -      $ 4,580,938
 U.S. Government agencies and corporations             11,805,437        60,185         14,520       11,851,102
 Mortgage-backed securities - U.S. Government
  agencies and corporations                               612,234             -          5,185          607,049
 Federal Reserve Bank stock                               108,000             -              -          108,000
</TABLE>

                                       36
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                                                <C>              <C>              <C>             <C>    
    Federal Home Loan Bank stock                                          436,000                -                          436,000
    Corporate debt securities                                          12,718,800           71,195          24,454       12,765,541
    Taxable state and political subdivisions                            1,555,569           16,892             186        1,572,275
                                                                        ---------   --------------   -------------   --------------

        TOTAL SECURITIES AVAILABLE FOR SALE                        $   31,778,452   $      186,798   $      44,345   $   31,920,905
                                                                   ==============   ==============   =============   ==============
</TABLE> 

    The maturities, amortized cost and estimated fair values of the Company's
securities at December 31, 1998 are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                        HELD TO MATURITY                  AVAILABLE FOR SALE
                                                                    ------------------------          ----------------------------  
                                                                                                                       CARRYING
                                                                         CARRYING                                       VALUE
                                                                          VALUE         ESTIMATED                    (ESTIMATED
                                                                        (AMORTIZED        FAIR        AMORTIZED          FAIR
                                                                            COST)        VALUE          COST            VALUE)
                                                                    --------------   ------------     ------------   -------------
        <S>                                                         <C>              <C>              <C>            <C>  
        Due within one year                                           $   587,590     $   592,210     $  7,509,229   $  7,569,394
        Due after one through five years                                6,096,078       6,222,103       23,581,165     23,964,790
        Due after five through ten years                                1,688,896       1,719,444        2,319,443      2,313,501
        Due after ten years                                                     -               -        1,043,989      1,047,540
        Equity securities                                                       -               -          544,000        544,000 
                                                                    --------------   ------------     ------------   -------------  

                  TOTAL                                               $ 8,372,564     $ 8,533,757     $ 34,997,826   $ 35,439,225
                                                                    ==============   ============     ============   =============
</TABLE> 

Mortgage backed securities have remaining contractual maturities ranging from 6
to 6.5 years and are reflected in the maturity distribution schedule based on
their anticipated average life to maturity, which ranges from 2 to 4 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:

<TABLE> 
<CAPTION> 
                                                         PROCEEDS FROM                              GROSS REALIZED
                                        ------------------------------------------        -------------------------------
           YEARS ENDED                                 CALLS AND         PRINCIPAL
          DECEMBER 31,                     SALES       MATURITIES        PAYMENTS            GAINS             LOSSES   
    ------------------------------      ----------     -----------      ----------        -----------      -------------- 
    <S>                                  <C>           <C>              <C>               <C>              <C>  
    1998
      Securities held to maturity       $        -     $ 1,045,000      $        -        $         -      $           -
      Securities available for sale        502,225       5,773,120         406,439                900                   -    
                                        ----------     -----------      ----------        -----------      --------------

                                        $  502,225     $ 6,818,120      $  406,439        $       900      $            -     
                                        ==========     ===========      ==========        ===========      ==============
    1997
      Securities held to maturity       $        -     $ 4,040,000      $  976,407                         $            -   
      Securities available for sale      2,059,392       3,500,000         172,216              9,921              19,843
                                        ----------    -------------    -----------        -----------      --------------

                                        $2,059,392     $ 7,540,000      $1,148,623        $     9,921      $       19,843
                                        ==========    =============    ===========        ===========      ==============
    1996
      Securities held to maturity       $       -      $18,425,000      $  543,515        $         -      $            -
      Securities available for sale             -        1,000,000         394,073                  -                   -
                                        ----------    -------------    -----------        -----------      -------------- 
                                        $       -      $19,425,000      $  937,588        $         -      $            -    
                                        ==========    ============     ===========        ============     ==============
</TABLE> 

    At December 31, 1998 and 1997, securities carried at $11,563,189 and
$9,542,789, respectively, with estimated fair values of $11,768,397 and
$9,592,650, respectively, were pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes required or
permitted by law.

                                       37
<PAGE>
 
    At December 31, 1998, the Company had a concentration within its corporate
debt securities classification which included obligations of financial services
industry companies with global operations having an approximate carrying value
of $7,570,555 and an estimated fair value of $7,667,200. There were no
concentrations with any one issuer.

    Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities which are included in securities available for sale in the
accompanying financial statements. Such securities are carried at cost, since
they may only be sold back to the respective Federal Home Loan Bank or Federal
Reserve Bank or another member at par value.

NOTE 4. LOANS

    Loans are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                               DECEMBER 31,                         
                                                                                     ------------------------------                 
                                                                                        1998              1997                      
                                                                                     ------------    --------------                 
               <S>                                                                <C>              <C>                              
               Commercial, financial and agricultural                             $   13,365,982   $    12,927,126                  
               Real estate - construction                                              1,680,649         1,715,231                  
               Real estate - mortgage                                                 59,302,908        56,381,685                  
               Installment loans                                                      11,598,732        15,386,879                  
               Credit card loans                                                         903,974         1,017,901                  
               Other                                                                      23,525            28,266                  
                                                                                  --------------   ---------------                  
                      Total loans                                                     86,875,770        87,457,088                  
                                                                                                                                    
               Net deferred loan origination fees and costs                              (20,364)           76,899                  
               Less unearned income                                                       37,150            40,184                  
                                                                                  --------------   ---------------                  
               Total loans net of unearned income and net                                                                           
                      deferred loan origination fees and costs                        86,818,256        87,493,803                  
               Less allowance for loan losses                                          1,109,595         1,094,185                  
                                                                                  --------------   ---------------                  
                                                                                                                                    
                      LOANS, NET                                                  $   85,708,661   $    86,399,618                  
                                                                                  ==============   ===============                  
</TABLE> 

    Included in the above balance of net loans are nonaccrual loans amounting to
$52,662 and $2,272 at December 31, 1998 and 1997, respectively. If interest on
nonaccrual loans had been accrued, such income would have approximated $5,107,
$120, and $16,460 for the years ended December 31, 1998, 1997 and 1996,
respectively.

    In the past, the subsidiary bank has made loans, in the normal course of
business, to its directors, executive officers and their related interests, and
will continue to make such loans in the future. At December 31, 1998 and 1997,
outstanding loans of this nature totaled $3,213,470 and $3,374,233,
respectively.

    The following presents the activity with respect to related party loans
aggregating $60,000 or more to directors, executive officers, and their related
interests of Citizens Financial Corp. and subsidiary during the years ended
December 31, 1998 and 1997:

<TABLE> 
<CAPTION>
                                                                                    1998           1997                 
                                                                                -------------  -------------             
           <S>                                                                  <C>            <C>                      
           BALANCE, BEGINNING                                                   $  3,274,761    $ 3,576,119             
               Additions                                                           3,320,439      3,671,796             
               Amounts collected                                                  (3,395,143)    (3,973,154)            
                                                                                --------------  ------------            
                                                                                                                        
           BALANCE, ENDING                                                      $  3,200,057    $ 3,274,761             
                                                                                ==============  ============            
</TABLE> 

    The following represents contractual loan maturities at December 31, 1998
without regard to scheduled periodic principal repayments on amortizing loans:

                                       38
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                  AFTER 1 BUT
                                                                               WITHIN 1 YR        WITHIN 5 YRS     AFTER 5 YRS
                                                                               --------------     -------------    -------------
<S>                                                                            <C>                <C>              <C>         
Commercial, financial and agricultural                                          $   7,104,729     $   5,844,574    $     416,679
Real estate - construction                                                          1,680,649                 -                -
Real estate - mortgage                                                             37,096,145         4,449,513       17,757,250
Installment                                                                         1,640,497         9,730,153          228,082
Credit cards                                                                          903,974                 -                -
Other                                                                                  14,632             8,893                -   
                                                                               --------------     --------------   --------------
    TOTAL                                                                       $  48,440,626     $  20,033,133    $  18,402,011
                                                                               ==============     ==============   ==============

        LOANS DUE AFTER ONE YEAR WITH:
           Variable rates                                                       $   2,321,345
           Fixed rates                                                             36,113,799
                                                                                   ----------

           TOTAL                                                                $  38,435,144
                                                                                =============
</TABLE> 

    CONCENTRATIONS OF CREDIT RISK: The Company's subsidiary, Citizens National
Bank, grants installment, commercial and residential loans to customers in
Randolph County, West Virginia, and surrounding counties in striving to maintain
a diversified loan portfolio.

    As of December 31, 1998, Citizens National Bank had direct and indirect
extensions of credit to automobile dealers totaling approximately $6,419,207.
These loans consist of automobile floor plan loans and commercial loans which
are generally secured by liens on the pledges of accounts receivable,
inventories or personal guarantees. The Bank evaluates each such customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained is
based upon management's credit evaluation.

NOTE 5. ALLOWANCE FOR LOAN LOSSES

    An analysis of the allowance for loan losses for the years ended December
31, 1998, 1997 and 1996, is as follows:

<TABLE> 
<CAPTION> 
                                                                                             1998            1997          1996
                                                                                        ------------   ------------   ------------
<S>                                                                                     <C>            <C>            <C>   
               BALANCE, BEGINNING OF YEAR                                               $  1,094,185   $    989,716    $ 1,035,797
                                                                                        ------------   ------------   ------------
               LOSSES:
                  Commercial, financial and agricultural                                       2,864              -              -
                  Real estate - mortgage                                                      12,204          2,851         93,703
                  Installment                                                                 81,502         86,542         72,358
                  Credit cards                                                                57,210         70,115         69,082
                                                                                        ------------   ------------   ------------
                      TOTAL                                                                  153,780        159,508        235,143
                                                                                        ------------   ------------   ------------

               RECOVERIES:
                  Commercial, financial and agricultural                                       3,731          2,510              -
                  Real estate - mortgage                                                      20,314         10,234              -
                  Installment                                                                 14,817         13,200         21,062
                  Credit cards                                                                10,328          2,033              - 
                                                                                        ------------   ------------   ------------

                      TOTAL                                                                   49,190         27,977         21,062
                                                                                        ------------   ------------   ------------

               Net losses                                                                    104,590        131,531        214,081
               Provision for loan losses                                                     120,000        236,000        168,000
                                                                                        ------------   ------------   ------------

               BALANCE, END OF YEAR                                                     $  1,109,595   $  1,094,185    $   989,716
                                                                                        ============   ============   ============
</TABLE> 

                                       39
<PAGE>
 
     The Company's total recorded investment in impaired loans at December 31,
1998, and 1997 approximated $1,897,430 and $0, for which the required allowance
for loan losses was $457,000 and $0 as determined in accordance with SFAS Nos.
114 and 118 as amended.  The Company's average investment in such loans was
$1,912,313 for the year ended December 31, 1998.  All impaired loans at December
31, 1998, were collateral dependent, and accordingly, the fair value of the
loan's collateral was used to measure the impairment of each.

     For purposes of SFAS Nos. 114 and 118, the Company considers groups of
smaller-balance, homogeneous loans to include:  mortgage loans secured by
residential property, other than those which significantly exceed the subsidiary
bank's typical residential mortgage loan amount (currently those in excess of
$100,000); small balance commercial loans (currently those less than $50,000);
and installment and credit card loans to individuals, exclusive of those loans
in excess of $50,000.

     For the years ended December 31, 1998, 1997, and 1996, the Company
recognized approximately $144,602, $0, and $40,881, respectively, in interest
income on impaired loans. Using the cash basis-method of accounting, the Company
would have recognized approximately the same amount of interest income on such
loans.

NOTE 6.  BANK PREMISES AND EQUIPMENT

     The major categories of bank premises and equipment and accumulated
depreciation at December 31, 1998 and 1997, are summarized as follows:

<TABLE>
<CAPTION>
                                               1998        1997
                                            ----------  ----------
        <S>                                 <C>         <C>
 
        Land                                $  309,029  $  309,029
        Buildings and improvements           2,658,299   2,658,299
        Furniture and equipment              1,570,055   1,501,554
                                            ----------  ----------
 
                                             4,537,383   4,468,882
        Less accumulated depreciation        3,081,998   2,880,584
                                            ----------  ----------
 
        Bank premises and equipment, net    $1,455,385  $1,588,298
                                            ==========  ==========
</TABLE>

  Depreciation expense for the years ended December 31, 1998, 1997 and 1996,
totaled $246,664, $250,325, and $224,368, respectively.

NOTE 7.    DEPOSITS

 The following is a summary of interest bearing deposits by type as of December
31, 1998 and 1997:

<TABLE>
<CAPTION>
 
                                                         1998         1997
                                                      -----------  -----------
    <S>                                               <C>          <C>  
 
    NOW and Super NOW accounts                        $13,642,641  $12,484,936
    Money market accounts                               5,378,755    6,166,460
    Savings accounts                                   26,661,128   27,803,017
    Certificates of deposit under $100,000             40,066,094   41,852,140
    Certificates of deposit of $100,000 or more        12,373,586    8,932,272
                                                      -----------  -----------
 
      Total                                           $98,122,204  $97,238,825
                                                      ===========  ===========
</TABLE> 
 
Interest expense on deposits is summarized below:

<TABLE> 
<CAPTION> 
                                                         1998          1997        1996
                                                      -----------  -----------  ----------
    <S>                                               <C>          <C>          <C>       
    NOW and Super NOW accounts                        $   281,897  $   254,658  $  244,221
    Money market accounts                                 145,026      151,992     171,895
    Savings accounts                                      760,135      783,367     780,917
    Certificates of deposit under $100,000              2,003,196    2,190,756   2,244,601
    Certificates of deposit of $100,000 or more           614,800      405,288     317,043
                                                      -----------  -----------  ----------
 
      Total                                           $ 3,805,054  $ 3,786,061  $3,758,677
                                                      ===========  ===========  ==========
</TABLE>

                                       40
<PAGE>
 
     The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1998:

<TABLE>
<CAPTION>
                                     AMOUNT      PERCENT
                                   -----------  ---------
      <S>                          <C>          <C>
 
      Three months or less         $ 2,847,128        23%
      Three through six months       1,031,514         9%
      Six through twelve months      4,250,520        34%
      Over twelve months             4,244,424        34%
                                   -----------  ---------     
 
        TOTAL                      $12,373,586       100%
                                   ===========  =========     
</TABLE>

A summary of the maturities for all time deposits as of December 31, 1998,
follows:

<TABLE>
<CAPTION>
 
          YEAR                               AMOUNT
          ----                               -----------
          <S>                                <C>
 
          1999                               $29,723,443 
          2000                                 9,912,670
          2001                                10,208,232
          2002                                 1,049,937
          2003                                 1,545,398
                                             -----------
                                                        
                                             $52,439,680
                                             ===========
</TABLE>

  At December 31, 1998, deposits of related parties including directors,
executive officers, and their related interests of Citizens Financial Corp. and
subsidiary approximated $1,816,000.

NOTE 8.  INCOME TAXES

  The components of applicable income tax expense (benefit) for the years ended
December 31, 1998, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
                                                   1998       1997       1996  
                                                 ---------  ---------  --------
        <S>                                      <C>        <C>        <C>     
        CURRENT:                                                               
          Federal                                $717,630   $835,600   $727,159
          State                                   125,503    139,964    112,701
                                                 ---------  ---------  --------
                                                                               
                                                  843,133    975,564    839,860
                                                 ---------  ---------  --------
                                                                               
        DEFERRED                                                               
          Federal                                 (20,834)   (37,057)    (5,233)
          State                                    (1,015)    (4,905)      (693)
                                                 --------   --------   --------
                                                                               
                                                  (21,849)   (41,962)    (5,926)
                                                 --------   --------   --------
                                                                               
               TOTAL                             $821,284   $933,602   $833,934
                                                 ========   ========   ======== 
</TABLE>

     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.

                                       41
<PAGE>
 
     The tax effects of temporary differences which give rise to the Company's
deferred tax assets and liabilities as of December 31, 1998 and 1997, are as
follows:

<TABLE>
<CAPTION>
                                                  1998        1997
                                               ----------  ----------
      <S>                                      <C>         <C>
      DEFERRED TAX ASSETS:
        Allowance for loan losses              $ 266,409   $ 269,666
        Employee benefit plans                    31,211      58,387
        Accrued income and expenses               21,970      22,636
        Depreciation                              29,064      22,204
        Net loan origination fees and costs        8,195           -
                                               ---------   ---------
                                                 356,849     372,893
                                               ---------   ---------
 
      DEFERRED TAX LIABILITIES:
        Net loan origination fees and costs            -     (29,606)
        Accretion on securities                  (49,752)    (58,037)
        Net unrealized gain on securities       (154,489)    (50,018)
                                               ---------   ---------
                                                (204,241)   (137,661)
                                               ---------   ---------
 
        NET DEFERRED TAX ASSET                 $ 152,608   $ 235,232
                                               =========   =========
</TABLE>

     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, 1998, 1997 and 1996, is as follows:

<TABLE>
<CAPTION>
                                                             1998                   1997                  1996
                                                    --------------------  ----------------------  --------------------
                                                      AMOUNT     PERCENT      AMOUNT     PERCENT     AMOUNT    PERCENT
                                                    ----------  --------  ------------  --------  ----------  --------
    <S>                                             <C>         <C>       <C>           <C>       <C>         <C>
    Computed tax at applicable statutory rate       $ 823,374      34.0    $  875,277      34.0   $ 838,172      34.0
    Increase (decrease) in taxes resulting from:                           
    Tax-exempt interest                              (132,395)     (5.5)     (101,553)     (3.9)   (131,357)     (5.3)
    Amortization of organization costs                 21,556       0.9        21,556       0.8      21,556       0.9
    State income taxes, net of Federal                                     
      tax benefit                                      82,832       3.4        87,501       3.4      74,383       3.0
    Postretirement benefit plan accruals               22,391       0.9        21,281       0.8      22,921       0.9
    Other, net                                          3,526       0.2        29,540       1.1       8,259       0.3
                                                    ---------      ----    ----------      ----   ---------      ----
                                                                           
    APPLICABLE INCOME TAXES                         $ 821,284      33.9    $  933,602      36.2   $ 833,934      33.8
                                                    =========      ====    ==========      ====   =========      ====
</TABLE>

NOTE 9.  EMPLOYEE BENEFIT PLANS

     PENSION PLAN:  Citizens National 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 of continuous
service.  The Plan provides benefits based on the participant's years of service
and highest consecutive five year average annual earnings.  The Bank's funding
policy is to make the minimum annual contribution that is required by applicable
regulations.  As described in Note 1, The Company changed its presentation of
this plan in 1998, accordingly, other information relative to this plan follows:

                                       42
<PAGE>
 
<TABLE>
<CAPTION>
                                                    Pension      Pension      Pension
                                                    BENEFIT      BENEFIT      BENEFIT
                                                     1998         1997        1996
                                                  ----------  -----------  -----------
<S>                                               <C>          <C>          <C>
CHANGE IN BENEFIT OBLIGATION
 
Benefit obligation at beginning of year           $2,654,130   $2,367,643   $2,288,439
Service cost                                          81,678       67,057       61,620
Interest cost                                        201,790      178,024      170,265
Change in discount rate                               98,203       42,771      (72,578)
Experience loss                                       96,399      121,759       42,556
Benefits paid                                       (140,934)    (123,124)    (122,659)
                                                  ----------   ----------   ----------
Benefit obligation at end of year                 $3,091,266   $2,654,130   $2,367,643
                                                  ==========   ==========   ==========
 
 
CHANGE IN PLAN ASSETS
 
Fair value of plan assets at beginning of year    $4,046,829   $3,504,113   $3,172,457
Actual return on plan assets                         335,969      292,380      264,492
Employer contribution                                      -            -            -
Plan participants' contributions                           -            -            -
Experience (loss) gain                               (91,860)     373,460      189,823
Benefits paid                                       (140,934)    (123,124)    (122,659)
                                                  ----------   ----------   ----------
Fair value of plan assets at end of year          $4,150,004   $4,046,829   $3,504,113
                                                  ==========   ==========   ==========
 
 
Funded status                                     $1,058,738   $1,392,699   $1,136,470
Unrecognized net actuarial gain                     (396,256)    (799,956)    (611,459)
Unrecognized prior service benefit                  (186,263)    (204,631)    (222,999)
Unrecognized net obligation at transition           (116,293)    (139,414)    (162,535)
                                                  ----------   ----------   ----------
Prepaid benefit cost                              $  359,926   $  248,698   $  139,477
                                                  ==========   ==========   ==========
 
 
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
 DECEMBER 31
 
Discount rate                                           7.00%        7.25%        7.50%
Expected return on plan assets                          8.50%        8.50%        8.50%
Rate of compensation increase                           5.00%        5.00%        6.00%
 
COMPONENTS OF NET PERIODIC BENEFIT COST
 
Service cost                                      $   81,678   $   67,057   $   61,620
Interest cost                                        201,790      178,024      170,265
Expected return on plan assets                      (335,969)    (292,380)    (264,492)
Net amortization and deferral                        (58,727)     (61,922)     (44,099)
                                                  ----------   ----------   ----------
Net periodic benefit cost                         $ (111,228)  $ (109,221)  $  (76,706)
                                                  ==========   ==========   ==========
</TABLE>

  401(K) PLAN:  The Bank has a 401(k) profit-sharing plan for the benefit of all
employees who have attained the age of 21 and completed one year of continuous
service.  For Plan years prior to January 1997, participating employees were
eligible to contribute up to 10% of their annual compensation to the Plan.  The
Bank was eligible to make discretionary matching contributions in an amount up
to 6% of each participant's annual compensation.  In addition, the Bank was also
eligible to make discretionary non-matching contributions to the Plan.  In
January 1997, the Plan was amended to allow participating employees to
contribute up to 15% of their annual compensation and to permit the Bank to make
discretionary non-matching 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, 1998, 1997 and 1996, were $39,139, $38,517 and
$24,436, respectively.

                                       43
<PAGE>
 
  Postretirement Benefit Plans:  Citizens National 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.  The plans are unfunded.  As described
in Note 1, the Company changed its presentation of these plans during 1998.
Other information relative to these plans follows:

<TABLE>
<CAPTION>
                                                  HEALTH CARE   HEALTH CARE   HEALTH CARE
                                                      PLAN          PLAN          PLAN
                                                      1998          1997         1996
                                                  ------------  ------------  ------------
<S>                                               <C>           <C>           <C>
CHANGE IN BENEFIT OBLIGATION
 
Benefit obligation at beginning of year             $ 371,424     $ 362,382     $ 386,303
Service cost                                           14,916        13,823        13,809
Interest cost                                          24,152        23,771        25,445
Change in discount rate                                     -             -             -
Experience loss (gain)                                 12,184        (8,152)      (43,975)
Net amortization and deferral                               -             -             -
Benefits paid                                         (22,800)      (20,400)      (19,200)
                                                    ---------     ---------     ---------
Benefit obligation at end of year                   $ 399,876     $ 371,424     $ 362,382
                                                    =========     =========     =========
 
CHANGE IN PLAN ASSETS
 
Fair value of plan assets at beginning of year      $       -     $       -     $       -
Actual return on plan assets                                -             -             -
Employer contribution                                       -             -             -
Plan participants' contributions                       22,800        20,400        19,200
Experience (loss)/gain                                      -             -             -
Benefits paid                                         (22,800)      (20,400)      (19,200)
                                                    ---------     ---------     ---------
Fair value of plan assets at end of year            $       -     $       -     $       -
                                                    =========     =========     =========
 
Funded status                                       $(399,876)    $(371,424)    $(362,382)
Unrecognized net actuarial gain                       (66,277)      (81,281)      (75,569)
Unrecognized prior service benefit                          -             -             -
Unrecognized net obligation at transition             239,549       256,660       273,771
                                                    ---------     ---------     ---------
Accrued benefit cost                                $(226,604)    $(196,045)    $(164,180)
                                                    =========     =========     =========
 
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
 DECEMBER 31
 
Discount rate                                            7.00%         7.00%         7.00%
Expected return on plan assets                           7.00%         7.00%         7.00%
Rate of compensation increase                               -             -             -
 
COMPONENTS OF NET PERIODIC BENEFIT COST
 
Service cost                                        $  14,916     $  13,823     $  13,809
Interest cost                                          24,152        23,771        25,445
Expected return on plan assets                         (2,820)       (2,440)            -
Net amortization and deferral                          17,111        17,111        17,111
Recognized net actuarial loss                               -             -             -
                                                    ---------     ---------     ---------
Net periodic benefit cost                           $  53,359     $  52,265     $  56,365
                                                    =========     =========     =========
</TABLE>

                                       44
<PAGE>
 
<TABLE>
<CAPTION>
   LIFE           LIFE            LIFE
INSURANCE      INSURANCE       INSURANCE
   PLAN           PLAN            PLAN          TOTAL         TOTAL        TOTAL
   1998           1997            1996          1998          1997         1996
----------     ---------      ----------     ----------     ---------    ---------
<S>            <C>            <C>            <C>            <C>          <C> 
  $ 84,724      $ 73,201       $ 75,822       $ 456,148     $ 435,583    $ 462,125
     3,373         2,510          2,649          18,289        16,333       16,458
     5,648         4,886          5,063          29,800        28,657       30,508
         -             -              -               -             -            -
     3,898         6,905         (6,879)         16,082        (1,247)     (50,854)
         -             -              -               -             -            -
    (3,946)       (2,778)        (3,454)        (26,746)      (23,178)     (22,654)
  --------      --------       --------       ---------     ---------    ---------
  $ 93,697      $ 84,724       $ 73,201       $ 493,573     $ 456,148    $ 435,583
  ========      ========       ========       =========     =========    =========
                                                         
  $      -      $      -       $      -       $       -     $       -    $       -
         -             -              -               -             -            -
         -             -              -               -             -            -
     3,946         2,778          3,454          26,746        23,178       22,654
         -             -              -               -             -            -       
    (3,946)       (2,778)        (3,454)        (26,746)      (23,178)     (22,654)
  --------      --------       --------       ---------     ---------    ---------
  $      -      $      -       $      -       $       -     $       -    $       -
  ========      ========       ========       =========     =========    =========
                                                         
  $(93,697)     $(84,724)      $(73,201)      $(493,573)    $(456,148)   $(435,583)
    (9,763)      (14,015)       (21,820)        (76,040)      (95,296)     (97,389)
         -             -              -               -             -            -       
    53,682        57,517         61,352         293,231       314,177      335,123
  --------      --------       --------       ---------     ---------    ---------
  $(49,778)     $(41,222)      $(33,669)      $(276,382)    $(237,267)   $(197,849)
  ========      ========       ========       =========     =========    =========
                          
      7.00%         7.00%          7.00%
      7.00%         7.00%          7.00%
      4.00%         4.00%          4.00%
  
  $  3,373      $  2,510       $  2,649       $  18,289     $  16,333    $  16,458
     5,648         4,886          5,063          29,800        28,657       30,508
      (354)         (900)          (498)         (3,174)       (3,340)        (498)
     3,835         3,835          3,835          20,946        20,946       20,946
         -             -              -               -             -            -
  --------      --------       --------       ---------     ---------    --------- 
  $ 12,502      $ 10,331       $ 11,049       $  65,861     $  62,596    $  67,414
  ========      ========       ========       =========     =========    =========
</TABLE>

                                       45
<PAGE>
 
     For measurement purposes, the maximum monthly benefit of $100 payable per
eligible retiree under the postretirement health care plan was assumed with no
future increases. Accordingly, an assumed 1 percentage point annual increase in
health care cost trend rates would not impact the health care plan's accumulated
postretirement benefit obligation at December 31, 1998 or the aggregate of the
service and interest cost components of the health care plan's net
postretirement benefit cost for the year ended December 31, 1998.

     EXECUTIVE SUPPLEMENTAL INCOME PLAN: During 1995, the Bank entered into a
non-qualified supplemental income plan with certain senior officers which
provides participating officers with an income benefit payable at retirement age
or death. The liability accrued for the Executive Supplemental Income Plan at
December 31, 1998 and 1997 was $173,147 and $161,538, respectively, which is
included in other liabilities. In addition, the Bank has purchased certain
insurance contracts to fund the liabilities arising under this plan. At December
31, 1998 and 1997, the cash surrender value of these insurance contracts was
$157,605 and $142,280. Expense associated with the Plan at December 31, 1998,
1997 and 1996 were $14,760, $28,103 and $74,006, respectively.

NOTE 10.  OTHER BORROWINGS

     SHORT-TERM BORROWINGS: During 1998 and 1997, the Company's short-term
borrowings consisted of securities sold under agreements to repurchase
(repurchase agreements) involving two customers and advances under a line of
credit with the Federal Home Loan Bank of Pittsburgh (FHLB). The repurchase
agreements have contractual terms of 12 and 24 months, expiring on June 30,
1999. Interest is paid on the 24 month agreement at 67.20% of the Wall Street
Journal prime rate and at a fixed rate of 5.28% for balances exceeding
$1,000,000 and 5.08% on balances below $1,000,000 on the 12 month agreement.
Securities with amortized costs of $6,557,000 and estimated fair values of
$6,673,000 at December 31, 1998 are pledged to secure the repurchase agreements.

     As a member of the FHLB, the subsidiary 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 these obligations:

<TABLE>
<CAPTION>
                                                               1998                      1997
                                                     ----------------------     ----------------------     
                                                     REPURCHASE     LINE OF     REPURCHASE     LINE OF
                                                     AGREEMENT      CREDIT      AGREEMENT      CREDIT
                                                     ----------     -------    ----------      -------
     <S>                                             <C>           <C>         <C>            <C>
     Amount outstanding at December 31               $ 4,387,689   $ 239,000   $ 3,597,354    $         -
 
     Weighted average interest rate at December 31          5.19%       5.05%         5.65%             -
 
     Maximum month-end amount outstanding            $ 5,724,649   $ 343,000   $ 4,437,461    $ 2,276,000
 
     Average daily amount outstanding                $ 4,236,611   $ 139,603   $ 2,587,128    $   436,814
 
     Weighted average interest rate for the year            5.55%       5.40%         5.78%          5.52%
</TABLE>

     LONG-TERM BORROWINGS: The Company's long-term borrowings of $1,012,741 and
$1,078,290 at December 31, 1998 and 1997, respectively, consist of advances from
the FHLB which are used to finance specific leading activities. The average
interest rate paid by the Company on its long-term borrowings is 5.85%. A
summary of the maturities of these borrowings for the next five years is as
follows:

                                       46
<PAGE>
 
<TABLE>
<CAPTION>
                    Year                               Amount
                    ----                               ------
                    <S>                                <C>
                     1999                              $   70,096
                     2000                                  74,960
                     2001                                  80,162
                     2002                                 486,093  
                     2003 and thereafter                  301,430
                                                       ----------
                                                       $1,012,741
                                                       ==========
</TABLE>

NOTE 11.  COMMITMENTS AND CONTINGENCIES

     At December 31, 1998 and 1997, the subsidiary bank maintained required
reserve balances with the Federal Reserve Bank of Richmond approximating
$789,000 and $709,000, respectively. The Bank does not earn interest on such
reserve balances.

     LITIGATION: The Company is 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 the Company.

     FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The subsidiary 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.
Those 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 those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments. 

<TABLE>
<CAPTION>
 
     FINANCIAL INSTRUMENTS WHOSE CONTRACT                         CONTRACT AMOUNT
                                                          --------------------------------
          AMOUNTS REPRESENT CREDIT RISK                        1998             1997
     ------------------------------------                 --------------------------------
     <S>                                                  <C>               <C> 
     Commitments to extend credit                         $   17,619,824    $  16,988,103
     Standby letters of credit                                   310,000          115,000
                                                          --------------    -------------
                                                          $   17,929,824    $  17,103,103
                                                          ==============    =============
</TABLE>

     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 those
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.

                                       47
<PAGE>
 
YEAR 2000 COMPLIANCE
--------------------

     A team was assembled to study, test and remedy Year 2000 issues, because
the subsidiary bank, as well as some of its suppliers, customers and service
providers is heavily dependent on computers in the conduct of business
activities. As a result, a remediation plan was developed and the subsidiary
bank has made expenditures in excess of $132,000 during 1998, of which
approximately $80,000 were capital expenditures for the replacement of certain
computer devices. Approximately $42,000 for consulting and testing fees was
charged to operations during the year ended December 31, 1998. To complete the
execution of the plan, additional testing with the Bank's primary third party
processor is scheduled for the first half of 1999. The anticipated costs of such
tests are not expected to be significant. Based on the actions taken to resolve
the Bank's Year 2000 issue, management believes it will be Year 2000 compliant
to meet the needs of its customers, however there may be unforeseen external or
internal issues which could impact the Bank's status.

NOTE 12.  SHAREHOLDERS' EQUITY AND RESTRICTIONS ON DIVIDENDS

     The primary source of funds for the dividends paid by Citizens Financial
Corp. is dividends received from its subsidiary, Citizens National Bank.
Dividends paid by the subsidiary 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. During 1999, the net retained profits available for
distribution to Citizens Financial Corp. as dividends without regulatory
approval approximate $1,341,900, plus net income of the subsidiary bank for the
interim periods through the date of declaration.

     The Bank is 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 Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is 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 management believes have changed the institution's
category.

     The Bank's actual capital amounts and ratios are presented in the following
table (in thousands).

<TABLE>
<CAPTION>
                                                               TO BE WELL CAPITALIZED
                                            FOR CAPITAL        UNDER PROMPT CORRECTIVE
                             ACTUAL       ADEQUACY PURPOSES      ACTION PROVISIONS
                         ---------------  -------------------  ------------------------
                         AMOUNT   RATIO     AMOUNT     RATIO     AMOUNT        RATIO
                         -------  ------  -----------  ------  -----------  -----------
<S>                      <C>      <C>     <C>          <C>     <C>          <C>
AS OF DECEMBER
     31, 1998:
Total Capital            $  17,463  18.44%   $ 7,575     8.0%    $  9,469      10.0%
  (to Risk Weighted
     Assets)
Tier I Capital              16,354  17.27%     3,788     4.0%       5,682       6.0%
  (to Risk Weighted
     Assets)
Tier I Capital              16,354  11.94%     4,008     3.0%       6,680       5.0%
  (to Average Assets)
</TABLE>

                                       48
<PAGE>
 
<TABLE>
<S>                      <C>         <C>      <C>         <C>     <C>           <C>
AS OF DECEMBER
     31, 1997:
Total Capital            $  17,024   18.65%   $ 7,301     8.0%    $  9,126      10.0%
  (to Risk Weighted
     Assets)
Tier I Capital              15,930   17.46%     3,651     4.0%       5,476       6.0%
  (to Risk Weighted
     Assets)
Tier I Capital              15,930   12.08%     3,956     3.0%       6,594       5.0%
  (to Average Assets)
</TABLE>


NOTE 13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following summarizes the methods and significant assumptions used by
the Company in estimating its fair value disclosures for financial instruments.

     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: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable securities.

     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 checking, NOW, Super NOW) 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.

     The carrying values and estimated fair values of the Company's financial
instruments are summarized below:

                                       49
<PAGE>
 
<TABLE>
<CAPTION>
                                               DECEMBER 31, 1998                    DECEMBER 31, 1997
                                     ------------------------------------       --------------------------
                                                            ESTIMATED                           ESTIMATED
                                         CARRYING             FAIR              CARRYING           FAIR
                                           VALUE              VALUE             VALUE              VALUE
                                     -----------------  -----------------       ------------    ------------
<S>                                  <C>                <C>                     <C>             <C>
 FINANCIAL ASSETS:
    Cash and due from banks               $  3,498,972       $  3,498,972       $  3,312,512     $  3,312,512       
    Federal funds sold                               -                  -            200,000          200,000    
    Securities available for sale           35,439,225         35,439,225         31,920,905       31,920,905    
    Securities held to maturity              8,372,564          8,533,757          6,597,801        6,689,709    
    Loans                                   85,708,661         84,676,743         86,399,618       85,732,487    
    Accrued interest receivable              1,261,593          1,261,593          1,197,098        1,197,098    
                                          ------------       ------------       ------------     ------------    
                                          $134,281,015       $133,410,290       $129,627,934     $129,052,711    
                                          ============       ============       ============     ============  
 
 FINANCIAL LIABILITIES:
    Deposits                              $113,463,645       $113,882,660       $110,401,467     $110,590,219 
    Short-term borrowings                    4,626,689          4,626,689          3,597,354        3,597,354 
    Long-term borrowings                     1,012,741          1,012,741          1,078,290        1,078,290 
    Accrued interest payable                   372,493            372,493            392,187          392,187 
                                          ------------       ------------       ------------     ------------ 
                                          $119,475,568       $119,894,583       $115,469,298     $115,658,050 
                                          ============       ============       ============     ============  
</TABLE>

NOTE 14.  CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

     Information relative to the Parent Company's balance sheets at December 31,
1998 and 1997, and the related statements of income and cash flows for the years
ended December 31, 1998, 1997 and 1996, are presented below.

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                 ---------------------------
                                                                                     1998           1997
                                                                                 ------------   ------------
         <S>                                                                     <C>            <C> 
         BALANCE SHEETS
         --------------
         ASSETS
         Cash                                                                    $     2,976    $     3,006                    
         Investment in subsidiary                                                 16,646,340     16,091,902                    
                                                                                 -----------    -----------                    
         TOTAL ASSETS                                                            $16,649,316    $16,094,908                    
                                                                                 ===========    ===========                    
         SHAREHOLDERS' EQUITY                                                                                           
         Common stock, $2.00 par value, authorized 2,250,000                                                         
            and 1,250,000 shares, respectively, issued 750,000 shares            $ 1,500,000    $ 1,500,000                    
         Additional paid-in capital                                                2,100,000      2,100,000                    
         Retained earnings                                                        14,345,301     13,406,973                    
         Accumulated other comprehensive income                                      286,909         92,890                    
         Treasury stock at cost, 88,433 and                                                                             
            68,047 shares, respectively                                           (1,582,894)    (1,004,955)                   
                                                                                 -----------    -----------                    
            TOTAL SHAREHOLDERS' EQUITY                                           $16,649,316    $16,094,908                    
                                                                                 ===========    ===========                     
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                    FOR THE YEARS ENDED DECEMBER 31,
                                                               -----------------------------------------
         STATEMENTS OF INCOME                                       1998         1997          1996
         --------------------                                   -----------  -----------   -----------
         <S>                                                    <C>          <C>           <C> 
         Income - dividends from subsidiary                     $ 1,244,881  $   664,000   $   556,200
         Expenses - operating                                         4,894        4,763         4,012
                                                                -----------  -----------   -----------
         Income before equity in undistributed
            income of subsidiary                                  1,239,987      659,237       552,188
         Equity in undistributed income of subsidiary               360,419      981,504     1,079,089
                                                                -----------  -----------   -----------
         NET INCOME                                             $ 1,600,406  $ 1,640,741   $ 1,631,277
                                                                ===========  ===========   ===========
</TABLE>

                                       50
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                       -------------------------------------------
STATEMENTS OF CASH FLOWS                                   1998         1997          1996
------------------------                               -----------  -----------   ------------
<S>                                                    <C>          <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                             $ 1,600,406   $ 1,640,741   $ 1,631,277
Adjustments to reconcile net income to net
     cash provided by operating activities:
Equity in undistributed income of subsidiary              (360,419)     (981,504)   (1,079,089)
                                                       -----------   -----------   -----------

CASH PROVIDED BY OPERATING ACTIVITIES                    1,239,987       659,237       552,188
                                                       -----------   -----------   -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders                            (662,078)     (615,198)     (546,889)
Acquisition of treasury stock                             (577,939)      (43,600)       (5,992)
                                                       -----------   -----------   -----------

CASH USED IN FINANCING ACTIVITIES                        1,240,017      (658,798)     (552,881)
                                                       -----------   -----------   -----------
 
(Decrease) increase in cash                                    (30)          439          (693)
 
CASH:
     Beginning                                               3,006         2,567         3,260
                                                       -----------   -----------   -----------

     Ending                                            $     2,976   $     3,006   $     2,567
                                                       ===========   ===========   ===========
</TABLE>

                                       51
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT



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 its subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996. 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 generally accepted auditing
standards. 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 its subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.



                                                  ARNETT & FOSTER, P.L.L.C.


Charleston, West Virginia
January 15, 1999

                                       52
<PAGE>
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
          Financial Disclosure
          --------------------

     No reportable items.

PART III
--------

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

     The number of directors of the Company may consist of not less than five
nor more than twenty-five persons in accordance with the Company's Articles of
Incorporation.  The number of directors is fixed by resolution of a majority
vote of the shareholders.  Currently, the number of directors of the Company is
fixed at nine.  Directors are divided into three classes and serve a staggered
three year term.  The following table sets forth the names of the nine persons
who have served as directors of Citizens Financial Corp. for the year ended
December 31, 1998, their ages and principal occupations, the length of their
service to Citizens Financial Corp. and the expiration of their present term.

<TABLE>
<CAPTION>
                              Principal
                              Occupation                                   Present
                              During Past              Director            Term
Name and Age                  Five  Years              Since (1)           Expires
------------                  -----------              ---------           -------         
<S>                           <C>                      <C>                 <C>
Robert N. Alday               President,               September, 1986     April, 2000
83                            Phil Williams       
                              Coal Company
 
Max L. Armentrout             President, and           September, 1986     April, 1999 (2)
61                            Chairman of the Board
                              Laurel Lands Corp.;
                              Chairman of the
                              Board, Citizens
                              Financial Corp.
 
Virginia C. Chabut            Retired,                 September, 1986     April, 2001
78                            Randolph-
                              Elkins Public
                              Health Nurse
 
Raymond L. Fair               Attorney-at-Law          September, 1986     April, 1999 (2)
71
 
John F. Harris                Retired,                 September, 1986     April, 1999 (2)
71                            Transportation
                              Industry; Senior
                              Vice President,
                              Citizens National Bank
 
Cyrus K. Kump                 President,               June, 1992          April, 2000
52                            Kump Enterprises
                              Broker, Kerr
                              Real Estate
</TABLE> 

                                       53
<PAGE>
 
<TABLE>
<CAPTION>
                              Principal
                              Occupation                                   Present
                              During Past              Director            Term
Name and Age                  Five  Years              Since (1)           Expires
------------                  -----------              ---------           -------         
<S>                           <C>                      <C>                 <C>
Robert J. Schoonover          President and            April, 1998         April 2001
59                            Chief Executive
                              Officer, Citizens
                              Financial Corp.
                              and Citizens
                              National Bank
 
Emery Thompson, Jr.           Retired,                 September, 1986     April, 2001
73                            President and
                              Chief Executive
                              Officer, Citizens
                              National Bank

L. T. Williams                President,               September, 1986    April, 1999 (2)
68                            Elkins Builders
                              Supply
</TABLE> 



(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)  Messrs. Armentrout, Fair, Harris and Williams have been nominated to stand
     for reelection to an additional 3 year term expiring in April, 2002.

     Set forth below are the executive officers of Citizens Financial Corp.,
their age, present position and relations that have existed with affiliates and
others during the past five years.

<TABLE>
<CAPTION>
                                             Principal Occupation and
                          Present            Banking Experience During
Name and Age              Position           the Last Five Years
------------              --------           -------------------------
<S>                       <C>                <C>
Max L. Armentrout         Chairman of        President and Chairman of
61                        the Board          the Board, Laurel Lands Corp.;
                                             Chairman of the Board,
                                             Citizens Financial Corp.
 
Robert J. Schoonover      President and      President and Chief Executive
59                        Chief Executive    Officer, Citizens National Bank
                          Officer
 
Raymond L. Fair           Vice President     Attorney-at-Law; Director,
71                        and Secretary      Citizens Financial Corp.

</TABLE>

                                       54
<PAGE>
 
                                         Principal Occupation and
                       Present           Banking Experience During
Name and Age           Position          the Last Five Years
------------           --------          -------------------------

Thomas K. Derbyshire   Vice President    Vice President and Chief Financial
40                      and Treasurer    Officer, Citizens National Bank
                                         (April 1995 - present) Vice President,
                                         Comptroller, Citizens National Bank
                                         (June 1991 -April 1995)


Item 11.  Executive Compensation
--------------------------------

     The executive officers of Citizens Financial Corp. serve without
compensation from the Company.  They are, however, compensated by Citizens
National Bank for serving as Bank officers with the exception of Messrs.
Armentrout and Fair who are not employed by the Bank. The following table sets
forth the compensation of the Company's CEO for the years 1998, 1997 and 1996.
No executive officers received total annual salary and bonus exceeding $100,000.
 
                          SUMMARY COMPENSATION TABLE

                                                           Other Annual
       Name and                            Salary          Compensation
  Principal Position               Year      $      Bonus    $
---------------------------------  ------  -------  -----  --------------
 
Robert J. Schoonover,                1998   81,308      -   10,766 (1) (2)
President & CEO (1)                  1997   76,269      -    9,217 (1) (2)
                                     1996   66,198      -    7,414 (1) (2)


(1)  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 included in this figure. Also included in this figure are board fees
     earned and the Company's contributions to the individuals 401(k) retirement
     savings program to which the individual has a vested interest.

(2)  The Bank's contributions to the pension plan, a defined benefit plan, are
     not and cannot be calculated separately for specific participants.  No
     contributions were made by the Bank in the years presented.  The Bank's
     executive supplemental income plan provides retirement benefits conditioned
     upon continued employment until retirement or the satisfaction of early
     retirement criteria.  Participants are deemed to receive no compensation
     until such conditions are satisfied.

     Neither the Company nor the Bank maintain any form of stock option, stock
appreciation rights, or other long-term compensation plans. Directors of the
registrant are compensated for meetings attended in the amount of $100 per
meeting. Directors of the Bank receive $400 per meeting. Under normal
circumstances, the Board of Citizens Financial Corp. meets quarterly while the
Citizens National Bank Board meets monthly. Directors who are members of the
Bank's loan committee, which meets weekly, receive $400 per month. In addition,
the chairman of Citizens Financial Corp. receives $1,350 per month for service
in that capacity, while the vice-president receives $550. The senior vice-
president of the Bank receives $1,100 monthly for his services. No employment
contracts or change in control arrangements exist between any executive officer
and the

                                       55
<PAGE>
 
registrant, or it's subsidiary.

     Compensation of the bank's executive officers, including its president, is
determined by the personnel committee.  The committee is comprised of five
outside directors.  Compensation levels are determined after consideration is
given to net income objectives and cost of living factors.  This process is
consistent with that used to determine the compensation levels of all other
employees.  No specific criteria exist which relates executive compensation to
corporate performance and executives receive no preferential consideration in
the establishment of compensation.

Pension Benefits
----------------

     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 full-
time employees, including officers, who meet the eligibility requirements.
Directors do not participate in this plan.  Pensions for all participants are
based on five-year average final compensation.  Annual compensation for the
pension plan includes overtime pay and bonuses.  Credits are received for each
year of participation at the following rates:  1 percent of the first $9,600.00
of the 5-year average final compensation and 1.5 percent of such average final
compensation in excess of $9,600.00, all multiplied by years of service up to a
25-year maximum.

     The annual pension payable on retirement is the total of the pension
credits for each year of service after age twenty-one and the completion of one
year of service.  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.  Contributions made to the pension plan are on an actuarial basis,
with the plan year ending October 31.  Pension benefits are not subject to a
deduction for Social Security.

     An amendment to the pension plan was adopted by the Citizens National Bank
Board of Directors on July 20, 1988.  This amendment modified the existing plan
by the addition of two early retirement options.  The options provide a change
from actuarial method to straight 4 percent per year below normal retirement
age, and retirement at age sixty-two with 30 years of service with no reduction
in benefits.  A subsequent amendment was adopted by the directors on October 31,
1994.  This amendment changed the plan from a contributory plan to a
noncontributory plan and reduced the credit formula from 1.5 percent of the
first $9,600 of the 5-year average final compensation and 2 percent of such
final average compensation in excess of $9,600 to the current 1 percent and 1.5
percent.  Concurrent with this amendment the Bank established a 401(k) profit-
sharing plan.

                                       56
<PAGE>
 
     The following table represents the normal pension, beginning at age  sixty-
five based upon assumed final pay and years of credited services:

                              Annual Benefits
                ------------------------------------------
                15 yrs.          20 yrs.          25 yrs.
Assumed         Credited         Credited         Credited
Remuneration    Service          Service          Service
--------------  --------         --------         --------
 $20,000         $ 3,780         $ 5,040         $ 6,300
  40,000           8,280          11,040          13,800
  60,000          12,780          17,040          21,300
  80,000          17,280          23,040          28,800
 100,000          21,780          29,040          36,300
 120,000          26,280          35,040          43,800
 

     The estimated credited years of service for the executive officers of
Citizens Financial Corp. in the pension plan of Citizens National Bank are as
follows:

                          Years of Credited Service*
                          --------------------------

     Robert J. Schoonover                   25
     Thomas K. Derbyshire                    7

     * Max L. Armentrout and Raymond L. Fair are not participants in the pension
plan of Citizens National Bank.

401-(k) Plan
------------

     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, 1998, 1997 and 1996 may be found in Note 9 to the
Consolidated Financial Statements which begins on page 42 of this report.

Executive Supplemental Income Plan
----------------------------------

     The Bank has entered into a nonqualified supplemental income plan with
certain senior officers as described in Note 9 to the Consolidated Financial
Statements which begins on page 42 of this report.  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, 1996 and 1997.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

     The following table lists each shareholder 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, 1999.
 
Name and Address          Amount and Nature of   Percent
of Beneficial Owner       Beneficial Ownership  of Class
-------------------       --------------------  ---------

Cede & Co.                       87,976          11.73%  
P. O. Box 20
Bowling Green Station
New York, NY  10004

                                       57
<PAGE>
 
     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, 1999.

<TABLE> 
<CAPTION> 
                        Shares of Stock Beneficially Owned      Percent of
                        ----------------------------------                
Name                    Direct       Indirect        Total      Ownership
----                    ------       --------        -----      ---------
<S>                     <C>          <C>            <C>         <C>      
Robert N. Alday            500        25,000 (1)    25,500         3.86
Max L. Armentrout       21,125         4,000 (2)    25,125         3.80
Virginia C. Chabut       6,500           -           6,500          .98
Raymond L. Fair          3,800         4,200 (3)     8,000         1.21
John F. Harris             500         5,500 (4)     6,000          .91
Cyrus K. Kump              750         1,750 (5)     2,500          .38
Robert J. Schoonover       500           100 (6)       600          .09
Emery Thompson, Jr.        500        18,580 (7)    19,080         2.88
L. T. Williams           1,750           -           1,750          .26
Thomas K. Derbyshire        70           -              70          .01
Other directors and
executive officers of
the Bank                 5,825         9,135        14,960 (8)     2.26
All Directors and
executive officers
as a group              41,820        68,265       110,085        16.64
</TABLE> 


(1)  Mr. Alday's indirect ownership includes 11,600 shares owned by his wife and
     13,400 shares which he votes for the Phil Williams Coal Company.

(2)  These 4,000 shares are owned by Mr. Armentrout's wife.

(3)  These 4,200 shares are owned by Mr. Fair's wife.

(4)  These 5,500 shares are jointly owned by Mr. Harris and his wife.

(5)  Mr. Kump's indirect ownership includes 750 shares owned by his wife and
     1,000 held by his wife as custodian for their children.

(6)  These 100 shares are owned jointly by Mr. Schoonover and his wife.

(7)  Mr. Thompson's indirect ownership includes 13,580 shares which are jointly
     owned with his wife, 4,500 owned solely by his wife and 500 shares jointly
     owned by his wife and brother-in-law.

(8)  This figure represents the ownership of persons who are directors or
     officers of the subsidiary bank but not of the Company. Such persons number
     thirteen.

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

     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.

                                       58
<PAGE>
 
     During the year 1998, the highest aggregate indebtedness of all executive
officers and directors of the holding company, its subsidiary, and their related
interest was $5,550,000 or 33.33 percent of the equity capital of Citizens
Financial Corp.  As of December 31, 1998, outstanding loan balances to related
parties totaled $4,917,000 or 29.53 percent of equity capital with unused lines
of credit of $1,354,000 or 8.13 percent of the equity capital of Citizens
Financial Corp. outstanding to these parties.

     Other than loans originated in the normal course of business by the Bank,
none of the directors, executive officers, 5 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 $60,000, 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 $60,000 is contained in Note 4
to the Consolidated Financial Statements, which begins on page 38 of this
report.  Similarly, no director, executive officer or 5 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 1998 which exceeds 5
percent of either party's gross revenue.

                                       59
<PAGE>
 
Part IV
-------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------

(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) Listing of Exhibits - see Index to Exhibits on page 60.

(b)  Reports on Form 8-K - No reports on Form 8-K were filed during the fourth
     quarter of 1998.

(c)  Exhibits - see index to Exhibits on page 60 of this Form 10-K.

(d)  Consolidated Financial Statement Schedules - All other schedules for which
     provision is made in the applicable accounting regulation of the Securities
     and Exchange Commission are not required under the related instructions or
     are inapplicable or pertain to items as to which the required disclosures
     have been made elsewhere in the financial statements and notes thereto, and
     therefore have been omitted.
 
Item 14(c)  Index to Exhibits
-----------------------------

<TABLE> 
<CAPTION> 
                                               S-K 601                Sequential
Description                                Table Reference            Page Number
-----------                                ---------------            -----------
<S>                                        <C>                        <C>                               
 
Plan of acquisition, reorganization,
 arrangement, liquidation or succession          2                         N/A
Articles or incorporation and bylaws:            3                         N/A
 (a) Articles of Incorporation                                             (c)
 (b) Bylaws                                                               64-71
Instruments defining the rights of security
  holders including indentures                   4                         N/A
Voting trust agreements                          9                         N/A
Material contracts                              10                         (d)
Statement Re: Computation of per
 share earnings                                 11                         (a)
Statements Re: Computation of ratios            12                         (a)
Letter re: change in certifying accountant      16                         N/A
Letter re: change in accounting principles      18                         N/A
Subsidiaries of the registrant                  21                         72
Published report regarding matters 
 submitted to vote of security holders          22                        73-76
Consents of experts and counsel                 23                         77
Power of attorney                               24                         N/A
Financial data schedules                        27                        78-80
Additional exhibits                             99                         (b)
</TABLE> 

 
(a)  The computation of minimum standard capital ratios, which are shown on page
     48 of this filing, was done as specified in applicable regulatory
     guidelines. All other ratios presented may clearly determined from the
     material contained in this filing.

(b)  List of permitted nonbanking activities previously filed on pages 47-49 of
     Form S-4 Registration Statement of Citizens Financial Corp., SEC File No.
     33-11423, dated February 19, 1987 is incorporated by reference into this
     filing.

(c)  The Company's Articles of Incorporation, which were previously filed on
     pages 54-63 of its Form 10-K dated December 31, 1995 are incorporated by
     reference into 

                                       60
<PAGE>
 
this filing.

(d)  The Bank's Executive Supplemental Income Agreement as previously filed on
     pages 74 -80 of its 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, is incorporated by reference into this filing.

                                       61
<PAGE>
 
                                  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. Schoonover
                            -----------------------------------------
                            Robert J. Schoonover
                            President and Chief Executive Officer

                         By /s/ Thomas K. Derbyshire
                            -----------------------------------------
                            Thomas K. Derbyshire
                            Treasurer and Principal Financial Officer

     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           3/10/99
--------------------------                                                
     Max L. Armentrout        and Director


                              Director                      __________
--------------------------                                               
     Robert N. Alday


                              Director                      ___________
--------------------------                                                
     Virginia C. Chabut


/s/  Raymond L. Fair          Director                        3/10/99
--------------------------                                                
     Raymond L. Fair


/s/  John F. Harris           Director                        3/10/99
--------------------------                                                
     John F. Harris


/s/  Cyrus K. Kump            Director                        3/10/99
--------------------------                                                
     Cyrus K. Kump


/s/  Robert J. Schoonover     Director                        3/10/99
--------------------------                                                
     Robert J. Schoonover


/s/  Emery Thompson, Jr.      Director                        3/10/99
--------------------------                                                
     Emery Thompson, Jr.


/s/  L. T. Williams           Director                        3/10/99
--------------------------                                                
     L. T. Williams

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<PAGE>
 
    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 mailed to the Company's
stockholders will be furnished to the Commission for its information under
separate cover, in paper format, concurrent with submission to stockholders on
or about March 17, 1999.

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