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, 2007





or





o 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) 636-4095Including
      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 if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.




Yes o                                                      No
x





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act.





Yes o                                                      No
x





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
o





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
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated
filer,”  “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check One):




Large Accelerated
      Filer o
            Accelerated Filer
      o
            Non-Accelerated
      Filer o
            Smaller Reporting
      Company x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).





Yes o                                                      No
x







1





The
aggregate market value of Citizens Financial Corp. common stock, representing
all of its voting stock that was held by nonaffiliates as of the last business
day of Citizens most recently completed second fiscal quarter, approximated
$27,354,000.





As of March 12, 2008 Citizens Financial
Corp. had 1,829,504 shares of common stock outstanding with a par value of
$2.00.





Documents
incorporated by reference:  None





2





CITIZENS FINANCIAL CORP.


FORM
10-K INDEX


PagePart I
            
            Item 1
            
            Business
            4-9Item 1A
            
            Risk Factors
            9-10Item 2
            
            Properties
            10Item 3
            
            Legal Proceedings
            10-11Item 4
            
            Submission of Matters to a Vote of Security
      Holders
            11Part II
            
            Item 5
            
            Market for the Registrant’s Common Equity and Related
      Shareholders Matters
            11-18Item 6
            
            Selected
      Financial Data
            Not applicableItem 7
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            18-25Item 7A
            
            Quantitative
      and Qualitative Disclosures Amount Market Risk
            Not applicableItem 8
            
            Financial Statements and Supplementary Data
            26-51Item 9
            
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            52Item 9A
            
            Controls and Procedures
            52Item 9B
            
            Other Information
            52Part III
            
            Item 10
            
            Directors, Executive Officers, and Corporate
      Governance
            53-54Item 11
            
            Executive Compensation
            54-57Item 12
            
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            57-58Item 13
            
            Certain Relationships and Related Transactions and Director
      Independence
            58Item 14
            
            Principal Accountant Fees and Services
            58-59Part IV
            
            Item 15
            
            Exhibits and Financial Statement
    Schedules
            59-70




3
 Index





Citizens
Financial Corp.


Form 10-K, Part
I





Item
1.  Business








Organizational History and
Subsidiaries





Citizens
Financial Corp., ("Citizens" or the “company"), is a $247 million bank holding
company providing retail and commercial banking services primarily in central
and eastern West Virginia.  Citizens was incorporated in the State of
Delaware in 1986 and is the parent company and sole owner of Citizens National
Bank of Elkins (the “bank”).





The bank
was organized in West Virginia in 1923, received approval of the Comptroller of
the Currency in 1924, and has continuously operated as a national bank
headquartered in Elkins, West Virginia since that time.  In 1987 the
stockholders of the bank approved an Agreement and Plan of Reorganization
whereby the bank became a wholly-owned subsidiary of Citizens Financial
Corp.  Since its formation, the bank has expanded to a six branch
network by acquiring the Tucker County Bank in Parsons, West Virginia in 1984
and the Petersburg, West Virginia office of South Branch Valley National Bank in
2000.  It also opened branch offices in Beverly, West Virginia in
1992, in Slatyfork, West Virginia in 2000, and in Marlinton, West Virginia in
2002.





Business of Citizens and
Subsidiary





As a bank
holding company, Citizens’ operations have been limited to the ownership of its
subsidiary.  To date, it has not sought to conduct any other form of
permitted business activity, nor are there any current plans to do
so.





Citizens
National Bank, however, provides a wide range of retail and commercial banking
services including demand, savings and time deposits; residential, consumer and
commercial loans; letters of credit; safe deposit and wire transfer services;
and ATM, telebanking and internet banking services.  In addition, the
bank operates a trust department and has formed relationships which allow it to
provide brokerage and financial planning services as well as fixed rate
residential mortgages.





In
competing with other financial service providers, the bank utilizes selective
pricing and marketing strategies but primarily relies on developing personal
relationships with customers and providing superior customer service. The bank
is heavily involved in local charitable, civic, educational and community
development efforts and prides itself on being a responsible corporate
citizen.





Lending
Activities





One of
the objectives held by the bank’s founders is the granting of loans to
creditworthy individuals and businesses, and the bank now provides such services
from each of its six offices.  In this regard, the bank has developed
three primary loan portfolios:  real estate, commercial, and consumer.
The real estate loan portfolio can be further segmented into four distinct
categories:  construction, home equity, residential mortgage, and
commercial mortgage.  Construction loans are typically made for the
construction of residential or commercial properties and have short maturity
intervals of one year or less.  These loans are often times converted
to permanent financing and transferred to either the residential or commercial
real estate categories.  Home equity loans are generally lines of
credit issued on residential properties that allow customers to access funds
through check writing privileges.  Residential mortgage loans are
typically made for the purchase or refinancing of single family homes and are
usually secured by a first lien deed of trust.  In general, these
loans do not exceed an 80% loan to value ratio as determined by the use of
independent appraisals or evaluations and carry a variable interest
rate.  Nearly all residential real estate loans are made within the
bank’s primary market area, and they tend to be in amounts of under
$100,000.  Loans, be they for residential real estate or other
purposes, which exceed the established lending limit of the loan officer require
approval of a superior officer or the directors loan
committee.  Historically, we have not experienced significant losses
in this area, and these loans are viewed among the least risky made by the
bank.  Nonetheless, these loans, particularly those with larger
balances, are subject to periodic review by the bank’s loan review
function.





Commercial
real estate loans consist of commercial mortgages which are generally secured by
nonresidential and multifamily (five or more) residential
properties.  These loans are typically made to local businesses and
are subject to many of the same criteria and controls as residential real estate
loans.  These loans do tend to be larger than residential real estate
loans and usually require approval of the directors’ loan committee as a
result.  Because of their size and higher degree of risk, these loans
are usually subject to more extensive credit analysis prior to being made,
require the appraisal of the real property collateral, and are subject to
periodic reviews by the bank’s loan review function.




4
 Index





The commercial loan portfolio consists
of loans to local businesses and are secured by liens on accounts





Due to the limited size of our market
area as well as the increased competition for home mortgage and auto loans, we
also participate in commercial loans in surrounding markets through other
community banks similar to ourselves.  These loans may be secured by
commercial real estate or other business property although the primary source of
repayment is from business operations.  Because these loans may be
outside our primary market area they are subject to extensive analysis including
the business and credit history of the borrowers and any guarantors, cash flow
and payment abilities, collateral valuations and other pertinent
factors.  Additional security such as the assignment of life insurance
and various loan covenants designed to limit risk are also obtained when
necessary.  As of December 31, 2007, these loans totaled $25.6
million, or 14.8% of our total loan portfolio.





Consumer loans are made to individuals
for the financing of household and personal needs, often the purchase of a
car.  In such cases, the car is typically held as collateral although
the bank does grant unsecured consumer loans usually for small amounts and with
significantly higher interest rates than otherwise offered.  Cash flow
analysis and knowledge of the financial strength and character traits of the
borrower are important considerations in granting many consumer
loans.  When securing consumer loans with cars, the value of the car
relative to the loan is a key factor and is determined by auto industry guides.
Loan terms on consumer loans are typically three to six years, depending on the
type of collateral.  Unlike real estate and commercial loans, few
consumer loans require loan committee approval or are subject to review by the
loan review function.  As a result, risk is closely tied to adherence
to proper underwriting procedures and the condition of the local
economy.





Our credit policies and procedures are
updated periodically and approved by the board of directors
annually.  These policies and procedures are applied uniformly
throughout Citizens’ banking network and are designed to ensure credit quality
is maintained while meeting the legitimate credit needs of the communities we
serve. Adherence to policies is ensured through testing performed by both the
internal audit function and compliance officer.  Further information
on our lending activities may be found in the Management’s Discussion and
Analysis portion of this report as well as in the Notes to the accompanying
consolidated financial statements.





Investment
Activities





Funds not needed to satisfy loan demand
or other operational needs are invested in a portfolio of securities designed to
improve earnings, provide liquidity, and balance interest sensitivity
concerns.  Our investment policy is updated periodically and approved
by the board of directors annually.  This policy limits securities
which may be held to those of the U.S. government or its agencies having
maturities of less than ten years; bank qualified, investment grade municipal
obligations maturing in less than twenty years; investment grade corporate bonds
with maturities of five years or less; and mortgage backed obligations of the
federal government having a weighted average life of under 10
years.  All purchases, sales and calls of securities, together with
municipal and corporate holdings of any single issuer which exceed 10% of
capital and any holdings with a credit quality below investment grade, are
reported to the board of directors monthly.





The investment portfolio is managed by
the bank’s chief financial officer who meets with the president on a quarterly
basis to discuss investment strategies and related liquidity and interest
sensitivity issues.  Additional information about the company’s
investing activities is contained in the Management’s Discussion and Analysis
and in the Notes to the accompanying consolidated financial
statements.





Deposit
Functions





Our primary source of funding is
provided by our deposit base.  We offer a variety of deposit products
including demand deposits, savings, and time deposits to customers in our market
area to satisfy their saving, investing, and retirement needs.  We do
not solicit or accept out of market or wholesale deposits, nor do we utilize the
services of any deposit brokers.  As is the case with our lending
activities, some selective pricing and marketing strategies are utilized in an
effort to attract and retain deposits, but developing strong customer
relationships and providing superior customer service remain central to the
bank’s success.





5
 Index





Banking
Operations





Operationally, we have centralized
administrative and support functions in an attempt to achieve consistency and
efficiency.  The bank’s main office provides services such as
bookkeeping, accounting, loan processing and administration, compliance,
marketing, training and development, human resources, and information technology
support.  Data processing, internal audit, and loan review, while
administered through the main office, are provided through third parties who are
experts in their fields.





Employees





As of February 29, 2008, Citizens
National Bank had a staff of 88 full-time equivalent employees.  The
bank’s employees are not represented by any union or other collective bargaining
agreement and employee relations are believed to be good.  Citizens
Financial Corp. does not have any paid employees.





Competition





Despite having a generally rural
marketplace, Citizens faces a high degree of competition for its services from
other banks, savings institutions, credit unions, insurance companies, mutual
funds, securities brokers, financial planners, mortgage brokers, credit card
companies, and some governmental agencies.  We  believe our
focus on providing superior, personalized services, as well as the ability to
offer trust, brokerage, and fixed rate mortgage products, help us prosper within
this environment.





We maintain offices in Randolph,
Tucker, Grant and Pocahontas Counties, West Virginia where a total of 27 banking
offices representing 12 banks are located.  As of June 30, 2007, the
most recent date data is available, Citizens held a 23.2% share of the $852
million deposit base in those counties.





Technological advances have created new
ways to serve customers and new forms of competition.  In 2004 we
began offering internet banking as a way of reaching customers and meeting
competitive demands.  Internet banking thus joins our other delivery
channels which include telebanking, ATMs and in-person branch
delivery.





Economic Characteristics of
Citizens’ Marketplace





Citizens serves an area of West
Virginia including the counties of Randolph, Tucker, Grant and
Pocahontas.  This market is a largely rural, mountainous region
covering approximately 2,876 square miles with a civilian labor force of
25,520.





The economy of this area typically does
not experience highs or lows to the same degree as the national economy and is
generally less prosperous than the nation as a whole.  Major
industries in the area include lumber and wood products, tourism, and poultry
operations.  Other major sources of employment include public schools,
hospitals and other health care providers and various forms of local and state
governmental services.  As of December, 2007, the unemployment rate in
this market was 5.9% compared to 4.4% for West Virginia and 4.8%
nationwide.  Average annual wages in the area approximate $28,869
which is below both state and national levels.  Ongoing roadway
improvements are helping to improve access to and transportation within the area
and are expected to provide long-term economic benefits.  However, the
local economy is not expected to undergo significant changes in the
short-term.





Supervision and
Regulation





The following is a summary of certain
statutes and regulations affecting Citizens and its subsidiary and is qualified
in its entirety by reference to such statutes and regulations:





Bank Holding Company
Regulation





Citizens
is a bank holding company under the Bank Holding Company Act of 1956 (“BHCA”),
which restricts its activities as well as any acquisition by it of voting stock
or assets of any bank, savings association or other
company.   The holding company is subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve
Board.   The subsidiary bank is subject to restrictions imposed
by the Federal Reserve Act on transactions with affiliates, including any loans
or extensions of credit to the holding company or its subsidiaries, investments
in the stock or other securities thereof and the taking of such stock or
securities as collateral for loans to any borrower; the issuance of guarantees,
acceptances or letters of credit on behalf of the holding company and its
subsidiaries; purchases or sales of securities or other assets; and the payment
of money or furnishing of services to the holding company and other
subsidiaries.   The bank is prohibited from acquiring direct or
indirect control of more than 5% of any class of voting stock or substantially
all of the assets of any bank holding company without the prior approval of the
Federal Reserve Board.  Citizens and its subsidiary is prohibited from
engaging in certain tying arrangements in connection with extensions of credit
and/or the provision of other property or services to a customer by the holding
company or its subsidiaries.





6
 Index




The BHCA also permits Citizens to
purchase or redeem its own securities.  However, Regulation Y provides
that prior notice must be given to the Federal Reserve Board if the gross
consideration for such purchase or consideration, when aggregated with the net
consideration paid by the company for all such purchases or redemptions during
the preceding 12 months, is equal to 10 percent or more of the company’s
consolidated net worth.  Prior notice is not required if (i) both
before and immediately after the redemption, the bank holding company is
well-capitalized; (ii) the financial holding company is well-managed and (iii)
the bank holding company is not the subject of any unresolved supervisory
issues.





The Gramm-Leach-Bliley Act (also known
as the Financial Services Modernization Act of 1999) permits bank holding
companies to become financial holding companies.   This allows
them to affiliate with securities firms and insurance companies and to engage in
other activities that are financial in nature.   A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized, is well managed and has at least a satisfactory rating
under the Community Reinvestment Act.   No regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.





The Financial Services Modernization
Act defines "financial in nature" to include: securities underwriting, dealing
and market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; and activities that the
Federal Reserve Board has determined to be closely related to
banking.   A bank also may engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment, through a financial subsidiary of the bank, if the
bank is well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating.





Bank Subsidiary
Regulation





Citizens
National Bank, as a national banking association, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency
(“OCC”).  It is also a member of the Federal Reserve System, and as
such is subject to applicable provisions of the Federal Reserve Act and
regulations issued thereunder.





The deposits of the bank are insured by
the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by
law.  Accordingly, the bank is also subject to regulation by the
FDIC.  The FDIC may terminate a bank’s deposit insurance upon finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the bank’s regulatory
agency.





Capital
Requirements





As a bank holding company, Citizens is
subject to the Federal Reserve Board’s risk-based capital
guidelines.  The guidelines establish a systematic framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
account and minimizes disincentives to holding liquid, low-risk
assets.  Under the guidelines, bank holding companies must maintain
capital sufficient to meet both a risk-based asset ratio test and leverage ratio
test on a consolidated basis.  The risk-based ratio is determined by
allocating assets and specified off-balance-sheet commitments into four weighted
categories, with higher levels of capital being required for categories
perceived as representing greater risk.





Citizens
National Bank is subject to substantially similar capital requirements adopted
by its applicable regulatory agencies.  In addition, the Federal
Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a
regulatory framework which ties the level of supervisory intervention by bank
regulatory authorities primarily to a depository institution’s capital
category.  Among other things, FDICIA authorized regulatory
authorities to take “prompt corrective action” with respect to depository
institutions that do not meet minimum capital requirements.  FDICIA
established five capital tiers:  well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.  Citizens is well capitalized as detailed in Note 14
to the accompanying consolidated financial statements.





Federal and State
Laws





Citizens National Bank is subject to
regulatory oversight under various consumer protection and fair lending
laws.   These laws govern, among other things, truth-in-lending
disclosure, equal credit opportunity, fair credit reporting and community
reinvestment.  Failure to abide by federal laws and regulations
governing community reinvestment could limit the
ability of a bank to open a new branch or engage in a merger
transaction.   Community reinvestment regulations evaluate how
well and to what extent a bank lends and invests in its designated service area,
with particular emphasis on low-to-moderate income communities and borrowers in
such areas.





7
 Index




Monetary Policy and Economic
Conditions





The business of financial institutions
is affected not only by general economic conditions, but also by the policies of
various governmental regulatory agencies, including the Federal Reserve
Board.   The Federal Reserve Board regulates money and credit
conditions and interest rates to influence general economic conditions primarily
through open market operations in U.S. government securities, changes in the
discount rate on bank borrowings and changes in the reserve requirements against
depository institutions' deposits.   These policies and
regulations significantly affect the overall growth and distribution of loans,
investments and deposits, and the interest rates charged on loans, as well as
the interest rates paid on deposits.





The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of
financial institutions in the past and are expected to continue to have
significant effects in the future.   In view of the changing
conditions in the economy and the money markets and the activities of monetary
and fiscal authorities, we cannot definitely predict future changes in interest
rates, credit availability or deposit levels.





Effect of Environmental
Regulation





Citizens National Bank’s primary
exposure to environmental risk is through its lending
activities.   In cases when management believes environmental
risk potentially exists, the bank mitigates its environmental risk exposures by
requiring environmental site assessments at the time of loan origination to
confirm collateral quality as to commercial real estate parcels posing higher
than normal potential for environmental impact, as determined by reference to
present and past uses of the subject property and adjacent
sites.   Environmental assessments are typically required prior
to any foreclosure activity involving non-residential real estate
collateral.





With regard to residential real estate
lending, management reviews those loans with inherent environmental risk on an
individual basis and makes decisions based on the dollar amount of the loan and
the materiality of the specific credit.





We anticipate no material effect on
capital expenditures, earnings or competitive position as a result of compliance
with federal, state or local environmental protection laws or
regulations.





International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot
Act)





The International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001 (the “Patriot Act”) was
adopted in response to the September 11, 2001 terrorist
attacks.   The Patriot Act provides law enforcement with greater
powers to investigate terrorism and prevent future terrorist
acts.   Among the broad-reaching provisions contained in the
Patriot Act are several designed to deter terrorists’ ability to launder money
in the United States and provide law enforcement with additional powers to
investigate how terrorists and terrorist organizations are
financed.   The Patriot Act creates additional requirements for
banks, which were already subject to similar regulations.   The
Patriot Act authorizes the Secretary of the Treasury to require financial
institutions to take certain “special measures” when the Secretary suspects that
certain transactions or accounts are related to money
laundering.   These special measures may be ordered when the
Secretary suspects that a jurisdiction outside of the United States, a financial
institution operating outside of the United States, a class of transactions
involving a jurisdiction outside of the United States or certain types of
accounts are of “primary money laundering concern.”  The special
measures include the following:  (a) require financial
institutions to keep records and report on the transactions or accounts at
issue; (b) require financial institutions to obtain and retain information
related to the beneficial ownership of any account opened or maintained by
foreign persons; (c) require financial institutions to identify each customer
who is permitted to use a payable-through or correspondent account and obtain
certain information from each customer permitted to use the account; and (d)
prohibit or impose conditions on the opening or maintaining of correspondent or
payable-through accounts.





Sarbanes-Oxley





On July 30, 2002, the Senate and the
House of Representatives of the United States enacted the Sarbanes-Oxley Act of
2002, a law that addresses, among other issues, corporate governance, auditing
and accounting, executive compensation, and enhanced and timely disclosure of
corporate information.




8
 Index





Effective
August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, Citizens’
chief executive officer and chief financial officer are each required to certify
that Citizens’ Quarterly and Annual Reports do not contain any untruestatement
of a material fact.  The rules have several requirements, including
having these officers certify that:  they are responsible for
establishing, maintaining and regularly evaluating the effectiveness of
Citizens’ internal controls; they have made certain disclosures to Citizens’
auditors and the audit committee of the Board of Directors about Citizens’
internal controls; and they have included information in Citizens’ Quarterly and
Annual Reports about their evaluation and whether there have been significant
changes in Citizens’ internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation.  In 2007 additional regulations under Section 404 of
Sarbanes-Oxley became applicable to Citizens.  In response to Section
404, management assesses the company’s system of internal control over financial
reporting in order to determine whether the system is effective and that it
meets the criteria of the Internal Control-Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on current information, we expect that in 2008 or 2009,
Section 404 will require that our independent auditors also provide an
attestation on management’s assertion of internal control over financial
reporting.





Item 1.A.
Risk Factors





You should consider the risks described
below as well as the other information included or incorporated by reference in
this Annual Report on Form 10-K, before making an investment in Citizens common
stock.  The risks described below are not the only ones we face in our
business.  Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also impair our business
operations.  If any of the following risks occur, our business,
financial condition or operation results could be materially
harmed.  In such an event, our common stock could decline in price,
and you may lose all or part of your investment.





The
Banking Business is Very Competitive





As explained under Item 1 of this
report, Citizens faces a high degree of competition for its
services.





In particular, our competitors include
national and regional financial and banking companies whose greater resources
may afford them a marketplace advantage by enabling them to mount extensive
promotional and advertising campaigns.  Additionally, other banks and
other financial institutions may have products and services not offered by
Citizens, or may have greater lending capabilities due to their larger legal
lending limits, which may cause current and potential customers to choose those
institutions.  Areas of competition include interest rates for loans
and deposits, efforts to obtain deposits and range and quality of services
provided.  If we are unable to attract new and retain current
customers, loan and deposit growth could decrease causing our results of
operations and financial condition to be negatively impacted.





A
Deterioration in Economic Conditions Could Negatively Impact
Earnings





A downturn in local, regional or
national economic conditions could negatively impact our
earnings.  The markets we serve in West Virginia do not have a large
or diverse economic base and many customers rely on the lumber, tourism and
poultry industries.  A general economic slowdown, or one involving
these specific industries, could have the following consequences.





·
            Loan
      delinquencies may increase;


·
            Problem
      assets and foreclosures may
increase;


·
            Loan
      charge-offs and provisions for loan losses may
  increase;


·
            Demand
      for the products and services of the company may
  decline;


·
            Collateral
      (including real estate) for loans made by the company may decline in
      value, in turn reducing customers’ borrowing power and making existing
      loans less secure; and


·
            Customers
      may need to withdraw existing deposits to satisfy current living expenses
      causing reduced liquidity.





Customers
May Default on the Repayment of Loans





Our customers may default on the
repayment of loans, which may negatively impact our earnings due to loss of
principal and interest income.  Increased operating expenses may
result from the allocation of management time and resources to the collection
and work-out of the loan.  Collection efforts may or may not be
successful causing us to write off the loan or repossess the collateral securing
the loan, which may or may not exceed the balance of the loan.





Management evaluates the adequacy of
the allowance for loan losses at least quarterly, which includes testing certain
individual loans as well as collective pools of loans for
impairment.  This evaluation includes an assessment of actual loss
experience within each category of the portfolio, individual commercial and
commercial real estate loans that exhibit credit weakness; current economic
events, including employment statistics, trends in bankruptcy filings, and other
pertinent factors; industry or geographic concentrations, and regulatory
guidance.  Additions to the allowance for loan loss result in an
expense for the period.





9
 Index





Our regulatory agencies periodically
review the allowance for loan losses.  Based on their assessment the
regulatory agencies could require us to adjust the allowance for loan
losses.  Any such adjustments could negatively impact the results of
operations or financial position.





Increased
Commercial Lending Could Result in Increased Risk





Much of our loan growth has centered on
commercial loans including those in the lumber, tourism and lodging
industries.  Commercial loans are typically larger and more complex
than residential and consumer lending and now represent our largest type of
loan.  Our ability to properly identify, measure and manage the risks
involved in commercial lending, including our ability to attract and retain
qualified staff, may impact the degree to which loans are realized.





Current
Market Interest Rates and Cost of Funds may Negatively Impact
Earnings





Fluctuations in interest rates may
negatively impact the business of the bank.  The bank’s main source of
income from operations is net interest income, which is equal to the difference
between the interest income received on interest-bearing assets and the interest
expense incurred in connection with interest-bearing
liabilities.  These rates are highly sensitive to many factors beyond
our control, including general economic conditions, both domestic and foreign
and the monetary and fiscal policies of various governmental and regulatory
authorities.  The bank’s net interest income can be affected
significantly by changes in market interest rates.  Changes in
relative interest rates may reduce the bank’s net interest income as the
difference between interest income and interest expense decreases.  As
a result, the bank has adopted asset and liability management policies to
minimize the potential adverse effects of changes in interest rates on net
interest income, primarily by altering the mix and maturity of loans,
investments and funding sources.  However, even with these policies in
place, we cannot assure you that a decrease in interest rates will not
negatively impact its results from operations or financial
position.





There
is an Illiquid Market for the Company’s Shares.





Because a very limited market exists
for the company’s common stock, a shareholder may have difficulty selling his or
her shares in the secondary market.  We cannot predict when, if ever,
we could meet the listing qualifications of the Nasdaq Stock Market’s National
Tier or any exchange.  We cannot assure you that there will be a more
active public market for the shares in the near future.





Item
2.  Properties





We
provide services from offices owned by the bank including its approximately
16,940 square foot main office located at 213 Third Street, Elkins, West
Virginia.  In addition, the bank owns a drive-in facility directly
across from its main office on Third Street and it has owned and operated a
5,000 square foot full service branch in Parsons, West Virginia since
1984.  In 1992 a branch facility was opened in Beverly, West Virginia
which contains approximately 1,840 square feet.  This facility, which
is also owned, provides drive-in and ATM service in addition to traditional
deposit and teller services.  Loan services were recently established
at this location in November 2007.  During 2000 the bank acquired and
opened a full service facility in Petersburg, West Virginia.  That
facility was expanded in 2004 to 2,980 square feet.  We also
constructed a full service facility in Slatyfork, West Virginia containing 3,200
square feet in 2000.  All of these facilities are fully utilized for
banking purposes except the Parsons branch which leases approximately 800 square
feet to a cable television company.





In
January 2002, the bank opened a full-service branch located in leased space
within a supermarket in Marlinton, West Virginia.  In 2004, we
completed the construction of a 3,500 square foot free-standing branch in
Marlinton and which allowed us to exit the supermarket facility.





The bank
also owns two properties which adjoin its main office for future
expansion.  In 2006 a parking lot was constructed on one such
property.  The other property was leased by a tenant until April,
2006.  Since the tenants vacated the property, we began using a
section of the building for storage and office space.  In 2004 we
purchased a property adjacent to our Beverly branch as a means of both
maintaining our own property value and providing for expansion needs. This
facility is currently occupied by a tenant under a lease agreement which expires
in 2008.





Citizens
Financial Corp. does not own or lease any property.  To date Citizens
has utilized the bank's facilities and has not occupied more than a minimal
amount of space.  No compensation is paid to the bank in any way for
such usage as it is deemed to be insignificant.





Item
3.  Legal Proceedings





As of
December 31, 2007 Citizens Financial Corp. was not involved in any material
legal proceedings.  The bank is
involved in various legal proceedings which occur in the normal course of
business, however.  After consultation with legal counsel, we believe
that all such litigation will be resolved without materially affecting the
company’s financial position or results of operations.  In addition,
there are no material proceedings known to be threatened or contemplated against
the company or its subsidiaries.





10
 Index




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
2007.








Part II


Item
5.  Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities





Historically,
the stock of Citizens Financial Corp. has traded only sporadically. The stock is
traded on the over the counter bulletin board system, and a number of brokerage
firms provide an efficient and orderly market for transactions involving its
shares. There are no further plans, understandings, arrangements or agreements
to list the stock on any larger exchanges at this time.





Citizens
has only one class of stock, that being common stock, and all voting rights are
vested in its holders.  The shareholders of Citizens are entitled to
one vote for each share of common stock owned on all matters subject to a vote
of shareholders.  At February 29, 2008 shareholders of record numbered
approximately 458.  The company has no plans to issue any other forms
of capital.





On March 7, 2006 Citizens board of
directors declared a stock split which was paid on April 14, 2006 in the form of
a 200% stock dividend to shareholders of record April 3, 2006.  The
primary reason for doing so was to reduce the share price of the stock in an
effort to improve its liquidity.  Citizens stock, which is neither
widely held nor widely traded, is an over the counter bulletin board stock with
the symbol CIWV.OB.  Distribution of this stock dividend required the
use of all authorized shares.  On April 22, 2006 the shareholders
authorized an additional 2,250,000 shares for future use.





Citizens
maintains a policy under which it may repurchase shares of its own stock,
subject to certain limitations, when the Board of Directors determines it is in
the best interest of the company to do so.  Such shares are purchased
on the open market through independent brokers.  At both December 31,
2007 and 2006 the company had repurchased 420,496 shares.  The
purchase of these shares has not had a material impact on either capital or
liquidity.  No plans currently exist regarding their use and there are
no plans regarding future purchases.





The
following table presents the high and low market prices for Citizens' common
stock for the periods indicated.  Prices listed below that were prior
to the stock split on April 14, 2006 have been restated to reflect the
split.





High
            
            
            LowFirst
      Quarter throughFebruary
      29, 2008
            
            $
            11.25
            
            
            $
            10.452007First
      Quarter
            
            $
            19.89
            
            
            $
            18.92Second
      Quarter$19.28
            
            $
            17.19Third
      Quarter
            
            $
            17.68
            
            
            $
            13.28Fourth
      Quarter
            
            $
            14.85
            
            
            $
            11.252006First
      Quarter
            
            $
            19.50
            
            
            $
            16.47Second
      Quarter
            
            $
            20.47
            
            
            $
            16.90Third
      Quarter
            
            $
            17.67
            
            
            $
            16.83Fourth
      Quarter
            
            $
            19.50
            
            
            $
            17.35





The
prices listed above are based upon information available to management through
those brokers which deal in the company’s stock as well as through certain
internet quotation services and are believed to accurately represent the amount
at which its stock was traded during the periods indicated. Prices reflect
amounts paid by purchasers of the stock and, therefore, may include commissions
or fees paid to brokers.  The amounts of such commissions or fees, if
any, are not known to management.  No attempt was made by management
to ascertain the prices for every sale made during these periods.





11
 Index





Citizens
shareholders are entitled to receive dividends when and as declared by its Board
of Directors.  Dividends are typically paid
quarterly.  Aggregate dividends were $0.48 per share in 2007 and $0.57
per share in 2006.  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 14 to the accompanying consolidated financial
statements.





No shares
of Citizens stock have been authorized for issuance under any type of equity
compensation plan.  In addition, at no time during the last three
years have we sold any Citizens stock which was not registered under the
Securities Act of 1933.





The
following table provides information with respect to Citizens’ purchases of its
own common stock during the fourth quarter of the fiscal year.  All
such purchases were made under a general policy, noted earlier, permitting the
Board of Directors to make such purchases when it is believed to be in the best
interest of the company to do so and not as part of any publicly announced plan
or program.





ISSUER
PURCHASES OF EQUITY SECURITIES





Total
      Number
            
            
            Maximum
      Numberof
      shares
            
            
            of
      shares thatpurchased
      as
            
            
            may
      yet beTotal
      Number
            
            
            Average
            
            
            part
      of publicly
            
            
            purchased
      underof
      shares
            
            
            price
      paid
            
            
            announced
      plans
            
            
            the
      plans orPeriod
            
            purchased
            
            
            per share
            
            
            or programs
            
            
            programsOctober
      1-31, 2007
            
            
            -
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ANovember
      1-30, 2007
            
            
            -
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ADecember
      1-31, 2007
            
            
            -
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A








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





12
 Index




Distribution
of Assets, Liabilities & Shareholders' Equity;


Interest
Rates and Interest Differential





2007
            
            
            
            
            
            
            
            
            2006
            
            
            
            
            
            
            
            
            2005Avg 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)Interest
      Earning Assets:Federal
      funds sold and interest bearing deposits with other banks
            
            $
            2,166
            
            
            $
            110
            
            
            
            5.08
            %
            
            $
            1,377
            
            
            $
            68
            
            
            
            4.94
            %
            
            $
            3,807
            
            
            $
            123
            
            
            
            3.23
            %Securities:Taxable
            
            
            43,295
            
            
            
            1,844
            
            
            
            4.26
            
            
            
            53,267
            
            
            
            2,046
            
            
            
            3.84
            
            
            
            51,340
            
            
            
            1,781
            
            
            
            3.47Tax-exempt
      (1)
            
            
            15,835
            
            
            
            883
            
            
            
            5.58
            
            
            
            8,555
            
            
            
            459
            
            
            
            5.37
            
            
            
            8,825
            
            
            
            496
            
            
            
            5.62Loans
      (net of unearned interest) (1) (2)
            
            
            170,263
            
            
            
            13,474
            
            
            
            7.91
            
            
            
            162,252
            
            
            
            13,004
            
            
            
            8.01
            
            
            
            149,177
            
            
            
            10,799
            
            
            
            7.24Total
      interest earning assets  (1)
            
            
            231,559
            
            
            
            16,311
            
            
            
            7.04
            
            
            
            225,451
            
            
            
            15,577
            
            
            
            6.91
            
            
            
            213,149
            
            
            
            13,199
            
            
            
            6.19Nonearning
      assets:Cash
      and due from banks
            
            
            4,951
            
            
            
            
            
            
            
            
            
            
            
            6,258
            
            
            
            
            
            
            
            
            
            
            
            5,981Bank
      premises and equipment, net
            
            
            4,260
            
            
            
            
            
            
            
            
            
            
            
            4,194
            
            
            
            
            
            
            
            
            
            
            
            4,205Other
      assets
            
            
            6,677
            
            
            
            
            
            
            
            
            
            
            
            5,311
            
            
            
            
            
            
            
            
            
            
            
            4,642Allowance
      for loan losses
            
            
            (1,920
            )
            
            
            
            
            
            
            
            
            
            
            (1,750
            )
            
            
            
            
            
            
            
            
            
            
            (1,512
            )Total
      assets
            
            $
            245,527
            
            
            
            
            
            
            
            
            
            
            $
            239,464
            
            
            
            
            
            
            
            
            
            
            $
            226,465Interest
      Bearing Liabilities:Savings
      deposits
            
            $
            21,867
            
            
            
            121
            
            
            
            0.55
            
            
            $
            23,608
            
            
            
            121
            
            
            
            0.51
            
            
            $
            26,077
            
            
            
            130
            
            
            
            0.50Time
      deposits
            
            
            99,855
            
            
            
            4,536
            
            
            
            4.54
            
            
            
            89,731
            
            
            
            3,566
            
            
            
            3.97
            
            
            
            82,768
            
            
            
            2,583
            
            
            
            3.12NOW
      accounts
            
            
            44,999
            
            
            
            1,277
            
            
            
            2.84
            
            
            
            44,495
            
            
            
            1,161
            
            
            
            2.61
            
            
            
            37,057
            
            
            
            613
            
            
            
            1.65Money
      market accounts
            
            
            5,603
            
            
            
            28
            
            
            
            0.50
            
            
            
            6,538
            
            
            
            33
            
            
            
            0.50
            
            
            
            7,165
            
            
            
            50
            
            
            
            0.69Borrowings
            
            
            22,294
            
            
            
            819
            
            
            
            3.67
            
            
            
            26,215
            
            
            
            975
            
            
            
            2.72
            
            
            
            26,933
            
            
            
            680
            
            
            
            2.52Total
      interest bearing liabilities
            
            
            194,618
            
            
            
            6,781
            
            
            
            3.48
            
            
            
            190,587
            
            
            
            5,856
            
            
            
            3.07
            
            
            
            180,000
            
            
            
            4,056
            
            
            
            2.25Noninterest
      bearing liabilities:Demand
      deposits
            
            
            26,623
            
            
            
            
            
            
            
            
            
            
            
            26,019
            
            
            
            
            
            
            
            
            
            
            
            24,696Other
      liabilities
            
            
            3,373
            
            
            
            
            
            
            
            
            
            
            
            2,574
            
            
            
            
            
            
            
            
            
            
            
            1,348Shareholders'
      equity
            
            
            20,913
            
            
            
            
            
            
            
            
            
            
            
            20,284
            
            
            
            
            
            
            
            
            
            
            
            20,421Total
      liabilities and shareholder's equity
            
            $
            245,527
            
            
            
            
            
            
            
            
            
            
            $
            239,464
            
            
            
            
            
            
            
            
            
            
            $
            226,465Net
      interest income (1)
            
            
            
            
            
            $
            9,530
            
            
            
            
            
            
            
            
            
            
            $
            9,721
            
            
            
            
            
            
            
            
            
            
            $
            9,143Net
      interest income to average earning assets  (1)
            
            
            
            
            
            
            4.12
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4.31
            %
            
            
            
            
            
            
            
            
            
            
            4.29
            %








(1)
Yields on tax-exempt holdings are expressed on a tax equivalent basis using a
34% tax rate.





(2)
For the purpose of these computations, nonaccruing loans are included in the
amounts of average loans outstanding.





13
 Index





Rate
Volume Analysis





The
following table sets forth a summary on the changes in interest earned and
interest expense  detailing the amounts attributable to (i) changes in
volume (change in the average volume times the prior year's average rate), (ii)
changes in rate (change in the average rate times the prior year's average
volume).  The changes in rate/volume (change in the average volume
times the change in the average rate), has been allocated to the changes in
volume and  changes in rate in proportion to the relationship of the
absolute dollar amounts of the change in each.








2007
      Compared to 2006
            
            
            2006
      Compared to 2005Increase
            
            
            (Decrease)
            
            
            Due to
            
            
            Increase
            
            
            (Decrease)
            
            
            Due to(in
      thousands of dollars)Volume
            
            
            Rate
            
            
            Total
            
            
            Volume
            
            
            Rate
            
            
            TotalInterest
      earned on:Federal
      funds sold and interest bearing deposits with other banks
            
            $
            40
            
            
            $
            1
            
            
            $
            41
            
            
            $
            (102
            )
            
            $
            48
            
            
            $
            (54
            )Taxable
      securities
            
            
            (410
            )
            
            
            208
            
            
            
            (202
            )
            
            
            69
            
            
            
            196
            
            
            
            265Tax-exempt
      securities
            
            
            405
            
            
            
            18
            
            
            
            423
            
            
            
            (15
            )
            
            
            (22
            )
            
            
            (37
            )Loans
            
            
            635
            
            
            
            (164
            )
            
            
            471
            
            
            
            996
            
            
            
            1,208
            
            
            
            2,204Total
      interest earned
            
            
            670
            
            
            
            63
            
            
            
            733
            
            
            
            948
            
            
            
            1,430
            
            
            
            2,378Interest
      expense on:Savings
      deposits
            
            
            (9
            )
            
            
            9
            
            
            
            0
            
            
            
            (12
            )
            
            
            3
            
            
            
            (9
            )Time
      deposits
            
            
            427
            
            
            
            543
            
            
            
            970
            
            
            
            232
            
            
            
            750
            
            
            
            982NOW
      accounts
            
            
            13
            
            
            
            103
            
            
            
            116
            
            
            
            141
            
            
            
            407
            
            
            
            548Money
      market accounts
            
            
            (5
            )
            
            
            (1
            )
            
            
            (6
            )
            
            
            (4
            )
            
            
            (12
            )
            
            
            (16
            )Other
      borrowing
            
            
            (143
            )
            
            
            (13
            )
            
            
            (156
            )
            
            
            (19
            )
            
            
            314
            
            
            
            295Total
      interest expense
            
            
            283
            
            
            
            641
            
            
            
            924
            
            
            
            338
            
            
            
            1,462
            
            
            
            1,800Net
      interest income
            
            $
            387
            
            
            $
            (578
            )
            
            $
            (191
            )
            
            $
            610
            
            
            $
            (32
            )
            
            $
            578








14
 Index





Securities
Portfolio





Presentation of the amortized cost of
securities as of December 31, 2007 and 2006 may be found in Note 4 to the
accompanying consolidated financial statements.





The
following table sets forth the maturities of securities as of December 31, 2007
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).





Within One
              Year
            
            
            After One but
              Within Five Years
            
            
            After Five but
              Within Ten Years
            
            
            After Ten
              Years
            
            
            TotalAmount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield(in
      thousands of dollars)U.S.
      Treasury and other U.S. government agencies and
    corporations
            
            $
            15,258
            
            
            
            4.05
            %
            
            $
            19,413
            
            
            
            4.88
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            -
            
            
            
            -
            %
            
            $
            34,671
            
            
            
            4.51
            %State
      and political subdivisions (1)
            
            
            1,701
            
            
            
            5.27
            
            
            
            6,612
            
            
            
            5.20
            
            
            
            14,404
            
            
            
            5.47
            
            
            
            -
            
            
            
            -
            
            
            
            22,717
            
            
            
            5.38Other
      securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,113
            
            
            
            3.29
            
            
            
            1,113
            
            
            
            3.29Total
            
            $
            16,959
            
            
            
            4.17
            %
            
            $
            26,025
            
            
            
            4.96
            %
            
            $
            14,404
            
            
            
            5.47
            %
            
            $
            1,113
            
            
            
            3.29
            %
            
            $
            58,501
            
            
            
            4.82
            %





The
portfolio contains no securities of any single issuer in which the aggregate
amortized cost of such securities exceeds ten percent of shareholders'
equity.





(1)
Tax-equivalent adjustments, using a rate of 34%, have been made in calculating
yields on obligations of state and political subdivisions.





15
 Index





Loan
Portfolio





Types of
Loans





The distribution of loans by major
category for each of the last five fiscal year ends are provided
below.  All loans in the portfolio are domestic in
nature.


December 312007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands of dollars)Commercial,
      financial and agricultural
            
            $
            21,016
            
            
            $
            26,969
            
            
            $
            26,589
            
            
            $
            23,831
            
            
            $
            25,417Real
      estate-construction
            
            
            12,497
            
            
            
            13,964
            
            
            
            10,559
            
            
            
            8,759
            
            
            
            5,963Real
      estate-mortgage
            
            
            126,445
            
            
            
            114,966
            
            
            
            104,868
            
            
            
            101,083
            
            
            
            89,111Installment
      loans
            
            
            10,903
            
            
            
            10,635
            
            
            
            9,726
            
            
            
            10,734
            
            
            
            12,396Other
            
            
            2,012
            
            
            
            1,611
            
            
            
            2,051
            
            
            
            1,636
            
            
            
            2,868Total
      loans
            
            $
            172,873
            
            
            $
            168,145
            
            
            $
            153,793
            
            
            $
            146,043
            
            
            $
            135,755





Loan Maturities and Interest
Rate Sensitivity





Note 5 to the accompanying consolidated
financial statements also provides data concerning the contractual maturities of
loans, including commercial, financial and agricultural loans as well as real
estate construction loans, as of December 31, 2007.  Also provided are
the amounts due after one year classified as fixed rate and variable rate
loans.





Risk
Elements





Nonperforming
Loans





The table
below presents our nonperforming loan data for each of the last five fiscal year
ends:


December 312007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands of dollars)Nonaccrual
      loans
            
            $
            4,487
            
            
            $
            2,208
            
            
            
            58
            
            
            $
            -
            
            
            $
            16Loans
      past due 90 days or more still accruing interest
            
            
            206
            
            
            
            -
            
            
            
            538
            
            
            
            559
            
            
            
            352Troubled
      debt restructurings
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            4,693
            
            
            $
            2,208
            
            
            $
            596
            
            
            $
            559
            
            
            $
            368





Potential Problem
Loans





As stated in Note 6 to the accompanying
consolidated financial statements, impaired loans totaled $4,037,521 and
$5,147,663 at December 31, 2007 and 2006.  These loans were classified
as impaired due to doubts about the borrower’s ability to repay as called for in
the loan documents.  Additional information regarding these loans may
also be found in Note 6.





Loan
Concentrations





Information
concerning loan concentrations is provided in Note 5 to the accompanying
consolidated financial statements.





Summary of Loan Loss
Experience





The following table provides an
analysis of our allowance for loan losses for each of the last five fiscal year
ends.





December 312007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands of dollars)Balance,
      beginning of year
            
            $
            1,873
            
            
            $
            1,597
            
            
            $
            1,378
            
            
            $
            1,396
            
            
            $
            1,386Charge
      offs:Commercial,
      financial and agricultural
            
            
            1,538
            
            
            
            123
            
            
            
            -
            
            
            
            1,031
            
            
            
            129Real
      estate-mortgage
            
            
            348
            
            
            
            -
            
            
            
            -
            
            
            
            36
            
            
            
            24Installment
            
            
            49
            
            
            
            39
            
            
            
            90
            
            
            
            98
            
            
            
            190Total
            
            
            1,935
            
            
            
            162
            
            
            
            90
            
            
            
            1,165
            
            
            
            343Recoveries:Commercial,
      financial and agricultural
            
            
            8
            
            
            
            4
            
            
            
            5
            
            
            
            192
            
            
            
            21Real
      estate-mortgage
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            -Installment
            
            
            34
            
            
            
            11
            
            
            
            28
            
            
            
            20
            
            
            
            8Total
            
            
            42
            
            
            
            15
            
            
            
            34
            
            
            
            212
            
            
            
            29Net
      charge offs
            
            
            1,893
            
            
            
            147
            
            
            
            56
            
            
            
            953
            
            
            
            314Provisions
      for loan losses
            
            
            1,783
            
            
            
            423
            
            
            
            275
            
            
            
            935
            
            
            
            324Balance,
      end of year
            
            $
            1,763
            
            
            $
            1,873
            
            
            $
            1,597
            
            
            $
            1,378
            
            
            $
            1,396Ratio
      of net charge-offs during the period to average loans outstanding during
      the period
            
            
            1.11
            %
            
            
            0.09
            %
            
            
            0.04
            %
            
            
            0.67
            %
            
            
            0.25
            %




16
 Index





The amount charged to the provision for
loan losses and the related balance in the allowance for loan losses is based
upon periodic evaluations of the loan portfolio by management.  These
evaluations consider several factors including, but not limited to, its analysis
of overall loan quality, changes in the mix and size of the loan portfolio,
previous loss experience, general economic conditions and information about
specific borrowers.





The
following tables provide an allocation of the allowance for loan losses for each
of the last five year ends as well as the percent of loans in each category to
total loans.








Allocation of Allowance For Loan
      LossesDecember 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Commercial,
      financial and agricultural
            
            $
            552
            
            
            $
            1,077
            
            
            $
            901
            
            
            $
            717
            
            
            $
            810Real
      estate-construction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Real
      estate-mortgage
            
            
            879
            
            
            
            589
            
            
            
            320
            
            
            
            282
            
            
            
            103Installment
      and other
            
            
            132
            
            
            
            65
            
            
            
            151
            
            
            
            173
            
            
            
            185Unallocated
            
            
            200
            
            
            
            142
            
            
            
            225
            
            
            
            206
            
            
            
            298Total
            
            $
            1,763
            
            
            $
            1,873
            
            
            $
            1,597
            
            
            $
            1,378
            
            
            $
            1,396Percent of Loans in Each Category to Total
      LoansDecember 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Commercial,
      financial and agricultural
            
            
            12
            %
            
            
            16
            %
            
            
            17
            %
            
            
            16
            %
            
            
            19
            %Real
      estate-construction
            
            
            7
            
            
            
            8
            
            
            
            7
            
            
            
            6
            
            
            
            4Real
      estate-mortgage
            
            
            73
            
            
            
            68
            
            
            
            68
            
            
            
            69
            
            
            
            66Installment
      and other
            
            
            8
            
            
            
            8
            
            
            
            8
            
            
            
            9
            
            
            
            11Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Deposits





The average daily amount of deposits
and the rates paid on those deposits for the years ended December 31, 2007, 2006
and 2005 were previously presented in the Distribution of Assets, Liabilities
and Shareholders’ Equity; Interest Rates and Interest Differential.





A table summarizing the maturities of
time certificates of deposit, including individual retirement accounts, of
$100,000 or more as of December 31, 2007 may be found in Note 8 to the
accompanying consolidated financial statements.  There were no other
time deposits of $100,000 or more at that date.




17
 Index




Return on Equity and
Assets


The
following table shows consolidated operating and capital ratios for the periods
indicated.


Year Ended December 312007
            
            
            2006
            
            
            2005Return
      on average assets
            
            
            0.42
            %
            
            
            0.87
            %
            
            
            0.90
            %Return
      on average equity
            
            
            4.94
            
            
            
            10.29
            
            
            
            10.02Dividend
      payout ratio
            
            
            84.94
            
            
            
            50.24
            
            
            
            48.49Average
      equity to assets ratio
            
            
            8.52
            
            
            
            8.47
            
            
            
            9.02





Short-term
Borrowing





Information
concerning the company's short-term borrowings is presented in Note 12 to the
accompanying consolidated financial statements.





Disclosure of Contractual
Obligations





The following table provides
information regarding the contractual obligations of Citizens Financial Corp. at
December 31, 2007:





Payments
      Due By Period(in thousands of dollars)Less
      than
            
            
            1 –
      3
            
            
            3
      -5
            
            
            More
      thanTotal
            
            
            1 year
            
            
            years
            
            
            years
            
            
            5 yearsContractual
      obligationsLong-term
      debt
            
            $
            2,719
            
            
            $
            375
            
            
            $
            804
            
            
            $
            768
            
            
            $
            772Capital
      leases
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      leases
            
            
            115
            
            
            
            43
            
            
            
            64
            
            
            
            8
            
            
            
            -Purchase
      obligations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      long-term liabilities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            2,834
            
            
            $
            418
            
            
            $
            868
            
            
            $
            776
            
            
            $
            772





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





INTRODUCTION





The following discussion and analysis
present the significant changes in financial condition and results of operations
of Citizens Financial Corp. and our subsidiary, Citizens National Bank of
Elkins, for the periods indicated.  It should be read in conjunction
with the consolidated financial statements and accompanying notes thereto, which
are included elsewhere in this report.





Description of
Business





Citizens Financial Corp. is a $247
million Delaware corporation headquartered in Elkins, West
Virginia.  From there our wholly-owned subsidiary, Citizens National
Bank of Elkins, provides loan, deposit, trust, brokerage and other banking and
related services to customers in northcentral and eastern West Virginia and
nearby areas through six branch offices.  We conduct no business other
than the ownership of our bank subsidiary.





FORWARD LOOKING
STATEMENTS





This report contains forward looking
statements which reflect our current expectations based on information available
to us.  These forward looking statements involve uncertainties related
to the general economic conditions in our nation and other broad based issues
such as interest rates and regulations, as well as to other factors which may be
more specific to our own operations.  Examples of such factors may
include our ability to attract and retain key personnel, implementing new
technological systems, providing new products to meet changing customer and
competitive demands, our ability to successfully manage growth strategies,
controlling costs, maintaining our net interest margin, maintaining good credit
quality, and others including those set forth in the risk factor section of this
report.  Forward looking statements can be identified by words such as
“may”, “will”, “expect”, “anticipate”, “believe”, “estimate”, “plans”,
“intends”, or similar words.  We do not attempt to update any forward
looking statements.  When provided, we intend forward looking
information to assist readers in understanding anticipated future operations and
we include them pursuant to applicable safe harbor provisions of the Private
Securities
Litigation Reform Act of 1995.  Although we believe the expectations
reflected in our forward looking statements are reasonable, actual results could
differ materially.





18
 Index




CRITICAL ACCOUNTING
POLICIES





Our consolidated financial statements
are prepared in accordance with U.S. generally accepted accounting principles
and follow general practices within the financial services
industry.  Application of these principles requires us to make
estimates, assumptions, and judgments that affect the amounts reported in our
financial statements and accompanying notes.  These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements and could change as new information becomes
available.  Consequently, later financial statements could reflect
different estimates, assumptions, and judgments.





Some policies rely more heavily on the
use of estimates, assumptions, and judgments than others and, therefore, have a
greater possibility of producing results that could be materially different than
originally reported.  Our most significant accounting policies,
including an explanation of how assets and liabilities are valued, may be found
in Note 1 to the consolidated financial statements in our 2007 Annual Report to
Shareholders and Form 10-K.





The allowance for loan losses
represents our estimate of probable credit losses inherent in the loan
portfolio.  Determining the amount of the allowance requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, the estimated amount of losses
in pools of homogeneous loans, and the effect of various economic and business
factors, all of which may be subject to significant change.  Due to
these uncertainties, as well as the sensitivity of our financial statements to
the assumptions and estimates needed to determine the allowance, we have
identified the determination of the allowance for loan losses as a critical
accounting estimate. As such, it could be subject to revision as new information
becomes available.  Should this occur, changes to the provision for
loan losses, which may increase or decrease future earnings, may be
necessary.  A discussion of the methods we use to determine our
allowance for loan losses is presented later in this report.





OVERVIEW





In 2007
Citizens faced many difficult challenges.  We had the failure of one
large commercial customer resulting in a loan charge-off of $1.2 million, while
total net charge-offs approximated $1.9 million.  We were also faced
with $1.3 million in foreclosures, mostly of a commercial
nature.  These foreclosures resulted in $441,000 of additional costs
associated with the valuation, operation, and disposition of the associated real
estate.  Fortunately, these credit issues centered on specific
conditions associated with each borrower, rather than a reflection of a
broad-based weakening in our credit portfolio which many financial institutions
are facing in the wake of the sub-prime exposures from recent
years.  Citizens has not participated in sub-prime lending and does
not expect this activity to have a material impact on our loan
portfolio.





The
company earned $1,034,000 in 2007 compared to $2,087,000 in 2006.  As
mentioned previously, the depressed earnings we experienced were mainly the
result of a commercial business failure, as well as certain commercial
foreclosures.  Likewise, earnings per share declined from $1.13 in
2006 to $0.57 in 2007.  Management has taken prudent steps to improve
our infrastructure with regard to management of the risk in our loan portfolio
over the last eighteen months.  We expect that these changes will
improve our ability to identify and systematically reduce our risk in the
future.  More information regarding those improvements is contained
within this report.





The
national economy continues to struggle with the slowdown in the housing market,
rising foreclosures, and credit tightening.  Consumers have become
apprehensive with talk of a recession and have begun to modify spending patterns
as a result.  In our local economy we have experienced neither the
same level of contraction in the local housing market nor an increasing level of
foreclosures on residential mortgages. However, we remain cognizant of the
economic conditions surrounding our borrowers.  The national housing
slowdown and rising fuel prices have impacted our local lumber, trucking, and
tourism industries.  These economic trends have also contributed to
lower than expected loan demand and increasing liquidity for the majority of
2007.  Total loans grew by a modest 2.8% or $4.7 million to $172.9
million in 2007, while total assets grew by $3.6 million or 1.5% to $246.6
million.





The
relatively flat yield curve present in most of 2007 combined with increasing
liquidity prompted Citizens to reduce our competitive stance on deposit products
in order to limit the influx of additional liquidity in the form of certificates
of deposit.  This helped Citizens to limit the margin compression we
experienced in 2007 as we maintained a net interest margin of 4.12% for the
year.  Total deposits grew by $4.8 million or 2.4% to $201.3 million
during 2007.  As we entered 2008, we have seen some dramatic downward
shifts in short-term interest rates. We expect that these will help to steepen
the yield curve to our benefit; however, we must continue to employ strategies
to limit further margin compression as we move forward in this somewhat
uncertain environment.





19
 Index





A more
detailed discussion of the factors impacting our results of operations and
financial condition follows.  Amounts and percentages used in that
discussion, as well as in this overview, have been rounded.





RESULTS OF
OPERATIONS





Net Interest
Income





Net interest income represents the
primary component of our earnings. It is the difference between interest and fee
income generated by interest earning assets and interest expense incurred to
carry interest bearing liabilities.  Net interest income is affected
by changes in balance sheet composition and interest rates.  We
attempt to maximize net interest income by determining the optimal product mix
in light of current and expected yields on assets, cost of funds and economic
conditions while maintaining an acceptable degree of risk.





In 2007 net interest income decreased
by $309,000 to $9,186,000 mainly as a result of competitive pressure to price
certificate of deposit products higher.  On a tax equivalent basis,
net interest income decreased by only $191,000 to $9,530,000 as the bank
invested excess funding in tax exempt municipal bonds to garner higher yields
and combat further margin compression.  Despite the decrease in net
interest income, our net interest margin of 4.12% for 2007 remains comparable to
our peer banks’ average of 4.15%.





On a tax equivalent basis interest
income rose $733,000 to $16,311,000.  Our average loan volume
increased $8.0 million resulting in additional interest income, while maturing
taxable agency investments were reinvested in higher-yielding tax-exempt
municipal bonds.  These investments increased our average tax-exempt
portfolio by $7.3 million to $15.8 million.  Overall, increased
volumes of earning assets accounted for $670,000 of the total increase in
interest income, while our yield on these assets increased by 13 basis points to
7.04% and accounted for the remaining $63,000.





Interest expense also increased in
2007, rising $925,000 to $6,781,000 on a tax equivalent basis.  Higher
rates on certificates of deposit (CDs) and interest bearing checking accounts
contributed $646,000 to the increase.  Overall, the cost of our
liabilities increased 41 basis points to 3.48%.  The remainder of the
increase is primarily attributable to a $10.1 million increase in average
certificate of deposit volume between 2006 and 2007.  With loan demand
lower than expected in 2007, the bank worked to minimize the effect of
increasing CD costs by reducing some of our CD interest rates, thereby limiting
the influx of excess funding.  From December 31, 2006 through December
31, 2007 total CDs increased only $1.7 million to $100.7
million.  This strategy helped manage both liquidity needs and net
interest margin compression.





By contrast, in 2006 tax-equivalent net
interest income increased by $578,000 with interest income rising $2,378,000 but
interest expense also rising $1,800,000.  The increase in interest
income was largely the result of changes in our loan portfolio with $13.1
million more volume and a 77 basis point improvement in yield accounting for
$2.2 million of the overall increase.  The higher interest expense was
primarily the result of a 82 basis point increase in cost.





Provision for Loan
Losses





The provision for loan losses is our
estimate of the amount which must be charged against current earnings in order
to maintain the allowance for loan losses at a level considered adequate to
provide for losses which are inherent in the loan portfolio.  This
amount is determined through quarterly evaluations of the loan
portfolio.  Our provision for loan losses totaled $1,783,000 in 2007
compared to $423,000 in 2006 and $275,000 in 2005.  The dramatic
increase in 2007 is largely related to one particular commercial
credit.  Additional information related to this credit can be found in
the “Credit Quality and Allowance for Loan Loss” section of this
report.





Because the amount of the provision for
loan losses is a function of our overall assessment of loan quality and the
adequacy of the allowance for loan losses, which itself relies on significant
use of judgment and estimates, the provision for loan loss expense may increase
or decrease in the future.  Please refer to the Credit Quality and
Allowance for Loan Losses section of this report where we further discuss the
estimation methods and assumptions we use in analyzing the allowance and the
quality of our loan portfolio as these are critical factors in the determination
of our provision for loan losses.





Noninterest
Income





Noninterest
income, which includes all revenues other than interest and fees on earning
assets, is an important factor in our overall profitability.  Total
noninterest income in 2007 of $1,839,000 compares to $1,630,000 in 2006 and
$1,468,000 in 2005.  Annual increases were $209,000 in 2007 and
$162,000 in 2006.




20
 Index





This
positive trend is the result of several factors, most notably rising levels of
service fees and brokerage fees.  Service fees are the largest single
component of noninterest income and increased $166,000 in 2007 due to higher





Trust income increased by $24,000 in
2007 and $6,000 in 2006, as we continue to increase the funds under management
in this area.  Insurance commissions and secondary market loan fees
did not change significantly in 2007 or 2006.  Other noninterest
income decreased by $33,000 in 2007 due mainly to a $32,000 gain on the sale of
real estate we received in 2006.





We recorded a gain on the call of an
agency bond of $2,000 in 2007, while in 2006 we recognized an $18,000 loss on
the sale of securities.  There were no gains or losses on securities
in 2005.  Securities are typically held until maturity, unless they
are called.  However, we may sell certain securities from time to time
in order to satisfy asset/liability management needs.





We plan to perform a review of our
noninterest income in 2008 to identify areas which might produce increased
revenue. We believe we may be able to improve performance in several areas and
that our diverse services, such as trust, brokerage and secondary market
mortgages, provide us with a competitive advantage in several of our
markets.





Noninterest
Expense





Noninterest
expense includes all items of expense other than interest expense, the provision
for loan losses, and income taxes.  Historically, our level of
noninterest expense has been higher than average, partly due to the relatively
smaller branch facilities our market area can support.





In 2007, noninterest expense increased
$314,000 or 4.1% to $7,973,000.  This increase was primarily related
to costs associated with the valuation, operation, and disposition of real
estate acquired in satisfaction of loans.  These costs increased
$237,000 to $441,000 in 2007 and were largely the result of commercial real
estate loan foreclosures.  The bank acquired $1.3 million in real
estate in satisfaction of loans in 2007.  All such real estate was
sold in 2007 with three particular properties being sold at auction in the third
quarter resulting in a $269,000 loss on the sale.





Legal and
professional fees increased $72,000 to $421,000 in 2007.  As we
continue to outsource our internal audit function and loan review function,
these fees will remain higher than we previously experienced.  Much of
the increase can be attributed to service fees incurred to help us comply with
the Sarbanes-Oxley Act as we became subject to more provisions of the Act in
2007.  The remainder of the increase is related to professionals we
hired to help implement some of the organizational and workflow changes we made
in 2007.





In
addition to these costs, net occupancy costs increased by $42,000 when compared
to 2006 due to increased depreciation expenses and lower rental income as a
commercial tenant vacated one of our properties in mid 2006.  Other
noninterest expense also increased by $75,000 mainly due to additional franchise
tax and increased expenses due to regulatory requirements.





Personnel costs, which are the largest
component of noninterest expense, decreased by $43,000 or 1.1% to $3,883,000 in
2007.  Throughout 2007 management continued to realign the workflow in
an effort to improve the use of technology, as well as control increases in
salary and benefit costs.  At December 31, the bank employed 85.5
full-time equivalent employees, which is 7.5 less than year-end
2006.  This improved efficiency helped the bank limit its increase in
salary expense to $110,000 or 4.0% as total salaries for 2007 were
$2,866,000.  The increase was due to the addition of a chief credit
officer, retail banking manager, and credit analyst to our staff in the second
half of 2006, as well as the need to reward employees who accepted additional
responsibilities as part of our staff reduction.  Benefit costs were
reduced by $153,000 as the bank experienced lower health insurance and
retirement costs.





Aside from the savings in personnel
costs, the bank also experienced a decrease of $53,000 in equipment costs due
mainly to decreased depreciation expense.  Data processing costs were
$7,000 lower than 2006 despite the implementation of several new software
modules.  These modules were designed to improve our efficiency with
respect to image statements, wire transfers, and regulatory
compliance.  In 2006, we had incurred $43,000 of data processing costs
related to our conversion to a new third party core processor that were not
present in 2007.





In 2006, noninterest expense increased
by $520,000 or 7.3% to $7,659,000 due to several of the same items discussed
above.  For example, the bank had increased expenses related to
foreclosed properties of $195,000 and increased personnel costs of
$203,000.  Legal and professional fees increased $104,000 as we
outsourced our loan review and internal audit functions and hired professionals
to help with our core processing conversion.  Other noninterest
expense increased as we incurred recruitment costs of $40,000 to bring new
members of management to our team, and we incurred $25,000 paid to settle legal
claims.





21
 Index




Income
Taxes





Our
provision for income taxes includes both federal and state income
taxes.  Total taxes were $235,000 in 2007, $956,000 in 2006, and
$927,000 in 2005.  The drop in our 2007 tax is primarily related to
the high level of loan charge-offs we experienced.  Our increasing
investments in tax-exempt municipal bonds also contributed to the lower
rate.  With the exception of income earned on loans to and bonds
issued by municipalities, and income from certain life insurance policies, all
of our income is taxable.  We have not been subject to the alternative
minimum tax during any of the periods covered by this report.  Note 10
of the accompanying consolidated financial statements provides additional
information concerning our income tax expense.





FINANCIAL
CONDITION





Loan
Portfolio





As noted previously, the housing
slowdown and sub-prime lending exposures are having a significant impact on the
financial services industry.  Many financial institutions that were
invested in the sub-prime area have incurred significant losses and have an
increasing number of residential foreclosures.  Citizens has not
participated in sub-prime lending.  We offer our clients traditional
mortgage options to fit their current income levels comfortably and focus on
adding quality consumer credits to our portfolio.  As such, we do not
expect the sub-prime lending crisis to have a material impact on our
institution.  The demand for our products was modest in 2007 and our
loan portfolio grew by $4,728,000 or 2.8% to $172,873,000, as we experienced a
somewhat subdued economic climate.  Although our loan demand and loan
growth has been slower than what we normally experience, we have been careful
not to accept loans of lower quality in exchange for increasing our portfolio
size.  Instead, we remain committed to increasing our loan portfolio
with proper attention to credit quality.





As has
been the case in recent years, we experienced significant growth in our
commercial real estate portfolio, which grew by $12.3 million to $57.9 million
in 2007.  This included a $5 million transfer from construction to
permanent financing, as well as our partnering with another community bank
outside our market area in order to provide funding for two separate commercial
real estate projects.  Other commercial loans not secured by real
estate decreased by $6.0 million to $21.0 million.  The majority of
our commercial loans are secured by real estate, regardless of whether repayment
is linked to cash generated by the use or sale of the real estate.  In
cases where repayment of a loan is linked to such use, the timing and stability
of the cash flow, secondary sources of repayment, loan guarantees, and
collateral valuations are all important considerations in granting the loan. We
believe using real property as collateral on the majority of our loans
contributes to reducing the inherent risk in the portfolio as the values
associated with most of the real estate in the markets in which we operate do
not experience the same degree of appreciation or depreciation that a more urban
area may experience.





Retail
lending or lending to consumers for autos, homes, or other purposes has been
difficult for Citizens over the past several years.  Auto
manufacturers and specialized mortgage lenders have become very aggressive in
attracting consumers away from traditional banking institutions.  Our
residential mortgage portfolio has remained relatively level since December 2006
increasing only $325,000 to $61.7 million, while our home equity portfolio
declined by $1.2 million to $6.8 million.  Similarly, our installment
loan portfolio has remained steady for 2007, increasing only $268,000 to $10.9
million.  This stability in installment loans has not been a
characteristic of our portfolio in recent years, however, in the latter part of
2006 management introduced a new auto lending promotion to improve our standing
in this area.  The promotion proved successful and in 2007 we made
this promotion part of our regular product offering.  As we move into
2008 management will continue to evaluate strategies to increase retail
lending.  These efforts aimed at portfolio diversification will
enhance our loan opportunities, as well as contribute to reducing our overall
loan risk.





Credit Quality and Allowance
for Loan Losses





As many financial institutions are
facing major losses from sub-prime exposure and there is more uncertainty in the
economy, Citizens has taken aggressive action over the last eighteen months to
improve our ability to manage the risk in our loan portfolio.  Those
actions included hiring a chief credit officer and credit analyst, assigning our
most crucial credits to one of our senior lenders, developing detailed action
plans for problem loans and closely monitoring credits with the greatest risk,
adopting a new loan policy and loan grading system, improving exception tracking
and reporting, and outsourcing our loan review function. We centralized our loan
processing to improve efficiency and maintain underwriting consistency in all of
our branches.  We believe that each of these actions will help us to
manage the quality of our portfolio and reduce the systematic risk.





22
 Index





Despite the major steps we have
implemented, in 2007 the bank had net charge-offs totaling $1,893,000, mainly of
a commercial nature with $1,205,000 being related to one particular commercial
enterprise.  We maintained a large specific reserve on this credit
throughout 2007 and monitored the business risk associated with the
firm.  Despite a record of timely payments, management of the firm
decided to cease operations, and Citizens recorded a charge-off on the loan as
of December 31, 2007.  As we move into 2008 we will begin the
liquidation process for assets of this borrower.  However, based on
the information we currently possess, we believe the estimate of loss associated
with this borrower to be included within the charge-off we recorded in
December.





Also in
2007 we acquired certain pieces of real estate in satisfaction of loans through
the foreclosure process in order to improve our position with regard to such
loans.  Most of these foreclosures were of a commercial nature and
approximated $1.3 million.  During the year, all such properties were
sold; the net cost associated with the valuation, operation, and disposition of
these properties totaled $441,000 in 2007.  Despite the additional
expenses we have incurred by engaging in the foreclosure process, we believe
that gaining control of these assets was ultimately the most financially sound
process for seeking a return of our investment and securing our interest in
these assets.





Aside
from the large charge-offs and foreclosure information presented above, our
portfolio has seen an improvement in several factors since December 31,
2006.  Impaired loans at December 31, 2007 totaled $4,038,000 which is
$1,110,000 or 21.6% less than 2006.  Our level of nonaccrual loans,
excluding impaired loans previously mentioned, was $450,000 in December, 2007
compared to $506,000 in December, 2006, indicating a decrease of 11.1%. Past due
loan trends have improved with the level of loans past due 30 days or more
declining $2.4 million or 45.3% to $2.9 million.  More specifically,
loans past due more than 90 days have declined by $572,000 or 52.7% to
$514,000.  These trends indicate that we are reducing the risk in the
portfolio.  We believe that the some of this improvement is a direct
result of the improvements we have made to our infrastructure, and we should
continue to see benefits from these improvements into the future.





The
inherent risk of loss in our portfolio is addressed through the allowance for
loan losses.  We maintain our allowance for loan losses at a level we
consider adequate to provide for losses that we believe are inherent in the loan
portfolio.  This determination is based on quarterly evaluations in
which a specific analysis and a pooled analysis are computed.  The
specific analysis is used to individually assign an allowance to larger balance,
nonhomogenous loans—typically commercial loans.  The pooled analysis
is used to quantify the loss on pools of smaller balance, homogenous loans such
as residential mortgages and consumer loans.  The pooled analysis
considers such factors as historical loss experience, changes in lending
policies and staff, current and anticipated economic conditions, changes in the
nature and volume of the portfolio, past due loan trends, changes in our loan
review system, and levels of concentrations of credit.  Because these
analyses determine the adequacy of the allowance for loan losses, they also
determine the provision for loans losses that must be charged to
earnings.





Despite the $1.9 million of net
charge-offs in 2007, our allowance for loan losses decreased by only $110,000 to
$1,763,000, or 1.02% of gross loans compared to $1,873,000 or 1.11% at year-end
2006.  Within our analysis we specifically analyzed approximately $9.4
million of loans finding that $2,570,000 required the establishment of specific
reserves totaling $624,000.  Estimated losses on our smaller pools of
loans totaled $308,000.  Further adjustments to the allowance of
$631,000 were made after analyzing the various adjustment factors cited in the
previous paragraph.  Due to the increasing uncertainty in the economy
and many economic indicators pointing toward a recession, we felt it necessary
to also include an unallocated reserve of $200,000 or 11.3% of the total
allowance for loan losses.





Based on information available to us we
believe our analysis is comprehensive and our allowance is adequate as of the
report date.  However, there can be no assurance that additional
provisions for loan losses will not be required in the future as a result of
changes in the assumptions which underlie our estimates and judgments or changes
in economic conditions or the conditions of individual borrowers.





Securities Portfolio and
Federal Funds Sold





Funds
which are not needed to satisfy loan demand or operating needs are invested in
securities as a means of improving earnings while also providing liquidity and
balancing interest sensitivity concerns.  The securities we purchase
are limited to U.S. government agency issues, including mortgage backed issues
of U.S. agencies, obligations of state and political subdivisions and investment
grade corporate debt.  However, at year-end we held no corporate
securities.  All of our securities are classified as available for
sale.  The Board of Directors is informed of all securities
transactions each month, and a series of policy statements limit the amount of
credit and interest rate risk we may take.





Due to
softened loan demand, maturing securities were generally reinvested in 2007 with
our portfolio totaling $58,559,000 at year end.  During the year,
$19.3 million in securities matured or were called; of this amount, $18.3
million were government agency issues.  The relatively flat yield
curve we experienced in 2007, combined with the expectation of decreasing rates
in the latter part of the year, prompted Citizens to reinvest much of these
funds in municipal instruments with
higher yields and longer maturities.  This strategy has helped to
extend the duration of the portfolio, improve the overall yield, and provide
protection against the declining interest rates we have experienced in recent
months.  Of the $19.7 million in security purchases, $14.7 million
were municipal instruments.  We have successfully extended the
duration of the portfolio from 1.9 years at the end of 2006 to 2.7 years at the
end of 2007.  We have also increased our tax equivalent yield by 56
basis points to 4.61% since December 31, 2006.





23
 Index




Generally,
the municipal bonds in which we invest carry good to exceptional credit ratings
and are generally insured by one of the major municipal bond insurance
companies.  These insurers provide an important service to the
municipal bond market by enhancing the credit of the underlying bond, which in
turn increases the liquidity of the bond in the marketplace.  Recent
media reports have indicated that there is concern regarding credit ratings of
the major municipal bond insurers because many of these companies have exposure
to the sub-prime market.  We will continue to monitor the situation
with the municipal insurers, as well as the credit ratings of our municipal
bonds, in order to respond appropriately to any changes.





Because
our securities portfolio is classified as available for sale, it is carried at
fair value.  Unrealized losses that are temporary in nature are
recognized as an adjustment to equity.  Losses determined to be other
than temporary are recognized in income.  With interest rates
beginning to decline in the latter part of 2007, unrealized losses have
decreased from $632,000 to $274,000 at year end.  The majority of our
unrealized losses have been carried for less than twelve months as shown in Note
4.  We do not consider these investments to be other than temporarily
impaired at December 31, 2007.  Further, we monitor credit ratings on
our investments on a monthly basis and currently do not have any credit concerns
with any particular obligation.  With the exception of one local
municipal obligation which is not rated, all of the issuers carry credit ratings
of good to exceptional.  Securities are typically held until maturity
in order for us to fully recover our investment.  However, we may sell
certain securities from time to time in order to satisfy asset/liability
management needs.





Our
short-term investments include federal funds sold and an interest bearing demand
account with the Federal Home Loan Bank of Pittsburgh.  These accounts
are used for overnight investing in cases when excess liquidity
exists.  We attempt to limit the amount of these excess funds by
staying fully invested in loans or securities.  For 2007 our average
balance in overnight funds was $419,000 and produced a yield of
4.85%.





Deposits and Other Funding
Sources





Total deposits increased $4,753,000 to
$201,296,000 in 2007.  The level of loan demand we experienced in 2007
relaxed our need to generate funding through deposits; therefore, we offered
interest rates on our certificates of deposits that were sometimes lower than
our competitors in an effort to control our net interest margin and maintain an
acceptable level of liquidity.  Since the Fed’s first rate decrease in
August 2007, we have seen competitive pricing pressures lessen.  For
the year, certificates of deposit increased $1,736,000 to
$100,684,000.  We expect to adjust our pricing strategy in the future
in order to respond to liquidity needs, and manage our net interest margin
expectations.





Similarly, we continue to maintain a
moderate approach to our interest bearing checking pricing.  However,
the majority of the increase in deposits is centered in these accounts which
increased $3,930,000 to $45,698,000.  This is largely the result of
one local businessperson who continues to maintain a significant group of
accounts with us.





We have
utilized short-term borrowings in the form of repurchase agreements to fund
operations for a number of years.  These agreements typically involve
local governmental units, such as school districts or area businesses, seeking
higher yields.  They are usually put out for bid annually and local
banks compete aggressively for them.  We feel that we maintain a
competitive advantage by meeting the operational requirements that the
agreements frequently contain; nonetheless, risk of losing these funds does
exist.  At year-end repurchase agreements were $14,258,000 compared to
$15,970,000 at the end of 2006.





We expect
to continue to fund our activities through internal sources.  However,
in the event internal sources were to be reduced we have several other funding
options including a line of credit with the Federal Home Loan Bank of Pittsburgh
and federal funds purchased through our other correspondent
banks.  For most of the year we maintained a minimal balance on these
types of borrowings averaging $407,000 for 2007; however at year end our
borrowings peaked at $5,398,000.  As a member of the FHLB we have
access to a variety of other funding products as well.  For example,
on occasion we match fund certain loans with FHLB products.  Although
we did not acquire any such long-term match funding in 2007, we do have
long-term FHLB borrowings in the amount of $2,719,000.  Our total
borrowing capacity with the FHLB exceeds $100 million.





Capital
Resources





Our total
capital of $21.1 million, or 8.5% of assets increased $803,000 in
2007.  For the year, we reduced our annual dividend from $0.57 per
share in 2006 to $0.48.  We felt this was a prudent measure in
response to the increasing level of uncertainty we experienced with regard to
one particular commercial credit in the fourth quarter.  We believe
this level of capital, as well as our capital structure, is adequate to support
current and anticipated future operations.  A complete analysis of our
capital accounts is provided in the accompanying Statement of Changes in
Shareholders’ Equity.





24
 Index




Banks and bank holding companies are
subject to several risk-weighted capital measures.  As detailed in
Note 14, we continue to maintain capital levels well in excess of the amount
needed to be considered well capitalized under the regulations.  This
should continue to be the case throughout the foreseeable future, and we are not
aware of any trends or uncertainties which are expected to materially impair our
capital position.





Trading activity in the stock continues
to be light with 27,200 shares trading in 2007, none of which were treasury
shares.  Similar to many other financial institutions across the
country that have experienced depressed earnings, our performance pushed our
stock value downward in 2007.  The price at year-end was $11.25, which
is $8.25 less than December 31, 2006.  The stock continues to trade on
the over the counter market under the symbol CIWV.OB.





Off-Balance-Sheet
Obligations





A discussion of our involvement in
off-balance-sheet obligations is presented in Note 13 to the consolidated
financial statements contained in this report.





Liquidity





The
objective of our liquidity management program is to ensure the continuous
availability of funds to meet the withdrawal demands of customers, the credit
needs of borrowers, and to provide for other operational
needs.  Liquidity is provided by various sources including unpledged
investment securities, federal funds sold, loan repayments, a stable and growing
deposit base and, when necessary, external borrowings.





We
monitor liquidity on a regular basis by preparing projected balance sheets and
analyzing our sources and uses of funds.  Historically, we have
satisfied our liquidity needs through internal sources of funds with the
exception of certain loans which have been funded by borrowing funds from the
Federal Home Loan Bank of Pittsburgh.  As noted previously, we have
access to approximately $100,000,000 through various FHLB
programs.  In the current economic environment, loan demand has fallen
and liquidity needs have lessened as a result.  We are not aware of
any other trends, commitments, events or uncertainties which may impair our
ability to satisfy our operating cash needs.





Impact of
Inflation





Our
financial statements and related data in this report are prepared in conformity
with U.S. generally accepted accounting principles which require our financial
position and results of operations to be measured in terms of historical dollars
except for the available for sale securities portfolio.  Consequently,
the relative value of money generally is not considered.  Nearly all
of our assets and liabilities are monetary in nature and, as a result, interest
rates and competition in the market area tend to have a more significant impact
on performance than the effect of inflation.





However,
inflation does affect noninterest expenses such as personnel costs and the cost
of services and supplies we use. We attempt to offset such increases by
controlling the level of noninterest expenditures and increasing levels of
noninterest income.  Because inflation has generally been low during
the time covered by these financial statements, the impact of inflation on our
earnings has not been significant.  Although inflation could become a
more significant factor, current Federal Reserve policy does not appear to
indicate that it will be in the foreseeable future.





25
 Index




Item 8.
Financial Statements and Supplementary Data




CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


December
31, 2007 and 2006





ASSETS
            
            2007
            
            
            2006Cash
      and due from banks
            
            $
            7,049,699
            
            
            $
            6,064,890Interest
      bearing deposits with other banks
            
            
            12,421
            
            
            
            29,858Securities
      available for sale, at fair value
            
            
            58,559,453
            
            
            
            59,745,539Loans,
      less allowance for loan losses of $1,763,300 and $1,873,038,
      respectively
            
            
            170,939,264
            
            
            
            166,217,889Bank
      premises and equipment, net
            
            
            4,259,664
            
            
            
            4,331,313Accrued
      interest receivable
            
            
            1,384,943
            
            
            
            1,393,468Other
      assets
            
            
            4,389,441
            
            
            
            5,197,515Total
      assets
            
            $
            246,594,885
            
            
            $
            242,980,472LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilitiesDeposits:Noninterest
      bearing
            
            $
            27,919,859
            
            
            $
            27,103,487Interest
      bearing
            
            
            173,376,611
            
            
            
            169,439,728Total
      deposits
            
            
            201,296,470
            
            
            
            196,543,215Short-term
      borrowings
            
            
            19,655,942
            
            
            
            19,833,434Long-term
      borrowings
            
            
            2,718,865
            
            
            
            3,511,770Other
      liabilities
            
            
            1,842,680
            
            
            
            2,814,034Total
      liabilities
            
            
            225,513,957
            
            
            
            222,702,453Commitments
      and contingencies
            
            
            -
            
            
            
            -Shareholders'
      equityCommon
      stock, $2.00 par value, authorized 4,500,000 shares,issued 2,250,000
      shares
            
            
            4,500,000
            
            
            
            4,500,000Retained
      earnings
            
            
            20,998,645
            
            
            
            20,842,981Accumulated
      other comprehensive income/(loss)
            
            
            (586,154
            )
            
            
            (1,233,399
            )Treasury
      stock at cost, 420,496 shares
            
            
            (3,831,563
            )
            
            
            (3,831,563
            )Total
      shareholders' equity
            
            
            21,080,928
            
            
            
            20,278,019Total
      liabilities and shareholders' equity
            
            $
            246,594,885
            
            
            $
            242,980,472








See
Notes to Consolidated Financial Statements





26
 Index




CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME


For
The Years Ended December 31, 2007, 2006 and 2005





2007
            
            
            2006
            
            
            2005Interest
      and dividend incomeInterest
      and fees on loans
            
            $
            13,430,613
            
            
            $
            12,933,850
            
            
            $
            10,744,643Interest
      and dividends on securities:Taxable
            
            
            1,844,104
            
            
            
            2,045,639
            
            
            
            1,780,716Tax-exempt
            
            
            582,457
            
            
            
            303,154
            
            
            
            327,325Interest
      on interest bearing deposits with other banks
            
            
            95,655
            
            
            
            48,150
            
            
            
            59,679Interest
      on federal funds sold
            
            
            13,888
            
            
            
            20,514
            
            
            
            63,493Total
      interest and dividend income
            
            
            15,966,717
            
            
            
            15,351,307
            
            
            
            12,975,856Interest
      expenseInterest
      on deposits
            
            
            5,961,553
            
            
            
            4,881,518
            
            
            
            3,376,537Interest
      on short-term borrowings
            
            
            683,957
            
            
            
            801,402
            
            
            
            501,698Interest
      on long-term borrowings
            
            
            135,263
            
            
            
            173,397
            
            
            
            178,078Total
      interest expense
            
            
            6,780,773
            
            
            
            5,856,317
            
            
            
            4,056,313Net
      interest income
            
            
            9,185,944
            
            
            
            9,494,990
            
            
            
            8,919,543Provision
      for loan losses
            
            
            1,783,155
            
            
            
            423,385
            
            
            
            274,667Net
      interest income after provision for loan losses
            
            
            7,402,789
            
            
            
            9,071,605
            
            
            
            8,644,876Noninterest
      incomeTrust
      income
            
            
            230,683
            
            
            
            207,178
            
            
            
            201,402Service
      fees
            
            
            1,017,516
            
            
            
            851,526
            
            
            
            771,831Insurance
      commissions
            
            
            34,275
            
            
            
            37,069
            
            
            
            42,810Securities
      gains/(losses), net
            
            
            2,399
            
            
            
            (17,694
            )
            
            
            -Brokerage
      fees
            
            
            159,927
            
            
            
            117,207
            
            
            
            79,117Secondary
      market loan fees
            
            
            100,379
            
            
            
            108,382
            
            
            
            101,523Other
            
            
            293,562
            
            
            
            326,338
            
            
            
            271,639Total
      noninterest income
            
            
            1,838,741
            
            
            
            1,630,006
            
            
            
            1,468,322Noninterest
      expenseSalaries
      and employee benefits
            
            
            3,883,356
            
            
            
            3,925,985
            
            
            
            3,723,480Net
      occupancy expense
            
            
            426,039
            
            
            
            383,900
            
            
            
            332,748Equipment
      expense
            
            
            386,476
            
            
            
            439,193
            
            
            
            484,001Data
      processing
            
            
            517,265
            
            
            
            524,304
            
            
            
            598,824Director
      fees
            
            
            256,220
            
            
            
            272,880
            
            
            
            252,483Postage
      expense
            
            
            170,812
            
            
            
            182,136
            
            
            
            170,653Professional
      service fees
            
            
            421,406
            
            
            
            349,574
            
            
            
            245,714Stationery
            
            
            149,128
            
            
            
            152,549
            
            
            
            155,923Software
      expense
            
            
            204,418
            
            
            
            182,608
            
            
            
            208,231Net
      cost of operation of other real estate
            
            
            440,881
            
            
            
            204,280
            
            
            
            9,778Other
            
            
            1,116,616
            
            
            
            1,041,665
            
            
            
            956,819Total
      noninterest expense
            
            
            7,972,617
            
            
            
            7,659,074
            
            
            
            7,138,654Income
      before income taxes
            
            
            1,268,913
            
            
            
            3,042,537
            
            
            
            2,974,544Income
      tax expense
            
            
            235,087
            
            
            
            955,646
            
            
            
            927,358Net
      income
            
            $
            1,033,826
            
            
            $
            2,086,891
            
            
            $
            2,047,186Basic and fully diluted
      earnings per common share*
            
            $
            0.57
            
            
            $
            1.13
            
            
            $
            1.10Basic
      and fully diluted average common shares outstanding*
            
            
            1,829,504
            
            
            
            1,842,662
            
            
            
            1,864,215


*Restated
to reflect stock split in the form of a 200% stock dividend declared in March
2006.








See
Notes to Consolidated Financial Statements





27
 Index




CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


For
The Years Ended December 31, 2007, 2006 and 2005





2007
            
            
            2006
            
            
            2005Net
      Income
            
            $
            1,033,826
            
            
            $
            2,086,891
            
            
            $
            2,047,186Other
      comprehensive income/(loss):Gross
      unrealized gains/(losses) arising during the period
            
            
            671,673
            
            
            
            338,294
            
            
            
            (1,060,150
            )Adjustment
      for income tax (benefit)/expense
            
            
            (255,237
            )
            
            
            (128,552
            )
            
            
            402,857416,436
            
            
            
            209,742
            
            
            
            (657,293
            )Reclassification
      adjustment for (gains)/losses included in net income
            
            
            (2,399
            )
            
            
            17,694
            
            
            
            -Adjustment
      for income tax (benefit)/expense
            
            
            913
            
            
            
            (6,724
            )
            
            
            -(1,486
            )
            
            
            10,970
            
            
            
            -Increase
      in minimum pension liability
            
            
            -
            
            
            
            -
            
            
            
            (1,155,756
            )Adjustment
      for income tax benefit
            
            
            -
            
            
            
            -
            
            
            
            439,187-
            
            
            
            -
            
            
            
            (716,569
            )Change
      in pension and other post-retirement plan assets and benefit
      obligations
            
            
            374,670
            
            
            
            -
            
            
            
            -Adjustment
      for income tax benefit
            
            
            (142,375
            )
            
            
            -
            
            
            
            -232,295
            
            
            
            -
            
            
            
            -Other
      comprehensive income/(loss), net of tax
            
            
            647,245
            
            
            
            220,712
            
            
            
            (1,373,862
            )Comprehensive
      Income
            
            $
            1,681,071
            
            
            $
            2,307,603
            
            
            $
            673,324








See
Notes to Consolidated Financial Statements





28
 Index




CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


For
the Years Ended December 31, 2007, 2006 and 2005


AccumulatedAdditional
            
            
            
            
            
            Other
            
            
            
            
            
            TotalCommon Stock
            
            
            Paid-In
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasury
            
            
            Shareholders’Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income/(Loss)
            
            
            Stock
            
            
            EquityBalance,
      December 31, 2004
            
            
            750,000
            
            
            $
            1,500,000
            
            
            $
            2,100,000
            
            
            $
            19,650,112
            
            
            $
            57,987
            
            
            $
            (3,085,318
            )
            
            $
            20,222,781Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,047,186
            
            
            
            -
            
            
            
            -
            
            
            
            2,047,186Cost
      of 5,925 shares acquired as treasury stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (290,074
            )
            
            
            (290,074
            )Cash
      dividends declared ($0.53 per
      share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (992,726
            )
            
            
            -
            
            
            
            -
            
            
            
            (992,726
            )Other
      comprehensive income/(loss), net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,373,862
            )
            
            
            -
            
            
            
            (1,373,862
            )Balance,
      December 31, 2005
            
            
            750,000
            
            
            
            1,500,000
            
            
            
            2,100,000
            
            
            
            20,704,572
            
            
            
            (1,315,875
            )
            
            
            (3,375,392
            )
            
            
            19,613,305Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,086,891
            
            
            
            -
            
            
            
            -
            
            
            
            2,086,891Cost
      of 24,460 shares acquired as treasury stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (456,171
            )
            
            
            (456,171
            )Cash
      dividends declared ($0.57 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,048,482
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,048,482
            )Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            220,712
            
            
            
            -
            
            
            
            220,712Adjustment
      to initially apply statement of financial accounting standard no. 158,net
      of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (138,236
            )
            
            
            -
            
            
            
            (138,236
            )Stock
      split effected in the form of a 200% stock dividend
            
            
            1,500,000
            
            
            
            3,000,000
            
            
            
            (2,100,000
            )
            
            
            (900,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2006
            
            
            2,250,000
            
            
            
            4,500,000
            
            
            
            -
            
            
            
            20,842,981
            
            
            
            (1,233,399
            )
            
            
            (3,831,563
            )
            
            
            20,278,019Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,033,826
            
            
            
            -
            
            
            
            -
            
            
            
            1,033,826Cash
      dividends declared ($0.48 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (878,162
            )
            
            
            -
            
            
            
            -
            
            
            
            (878,162
            )Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            647,245
            
            
            
            -
            
            
            
            647,245Balance,
      December 31, 2007
            
            
            2,250,000
            
            
            $
            4,500,000
            
            
            $
            -
            
            
            $
            20,998,645
            
            
            $
            (586,154
            )
            
            $
            (3,831,563
            )
            
            $
            21,080,928




29
 Index




CITIZENS
FINANCIAL CORP.
 AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Years Ended December 31, 2007, 2006 and 2005





2007
            
            
            2006
            
            
            2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
            
            $
            1,033,826
            
            
            $
            2,086,891
            
            
            $
            2,047,186Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
            
            
            320,082
            
            
            
            351,942
            
            
            
            414,395Provision
      for loan losses
            
            
            1,783,155
            
            
            
            423,385
            
            
            
            274,667Deferred
      income tax expense/(benefit)
            
            
            59,753
            
            
            
            (174,946
            )
            
            
            (202,424
            )Amortization
      of security premiums, net of accretion of security
    discounts
            
            
            24,057
            
            
            
            68,272
            
            
            
            196,484Securities
      (gains)/losses, net
            
            
            (2,399
            )
            
            
            17,694
            
            
            
            -Provision
      for loss on other real estate owned
            
            
            112,493
            
            
            
            -
            
            
            
            -Loss
      on sale of other real estate
            
            
            273,140
            
            
            
            80,184
            
            
            
            -Gain
      on sale of bank premises
            
            
            -
            
            
            
            (31,877
            )Gain
      on sale of equipment and other assets
            
            
            (11,917
            )
            
            
            -
            
            
            
            (16,787
            )(Increase)/decrease
      in accrued interest receivable
            
            
            8,525
            
            
            
            (72,348
            )
            
            
            (202,621
            )(Increase)/decrease
      in other assets
            
            
            51,532
            
            
            
            49,527
            
            
            
            (257,428
            )Increase/(decrease)
      in other liabilities
            
            
            (596,684
            )
            
            
            156,863
            
            
            
            874,896Net
      cash provided by operating activities
            
            
            3,055,563
            
            
            
            2,955,587
            
            
            
            3,128,368CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sales of securities available for sale
            
            
            345,900
            
            
            
            3,800,409
            
            
            
            522,200Proceeds
      from maturities and calls of securities available for sale
            
            
            19,365,000
            
            
            
            14,461,000
            
            
            
            9,190,545Principal
      payments received on securities available for sale
            
            
            1,854,838
            
            
            
            1,963,218
            
            
            
            2,388,713Purchases
      of securities available for sale
            
            
            (19,732,036
            )
            
            
            (12,845,805
            )
            
            
            (26,338,022
            )Loans
      made to customers, net
            
            
            (7,761,908
            )
            
            
            (15,434,051
            )
            
            
            (8,290,615
            )Purchases
      of bank premises and equipment
            
            
            (235,331
            )
            
            
            (483,919
            )
            
            
            (380,311
            )Proceeds
      from sale of bank premises
            
            
            -
            
            
            
            38,000
            
            
            
            -Proceeds
      from sale of other real estate
            
            
            1,170,650
            
            
            
            626,263
            
            
            
            173,443Net
      cash used in investing activities
            
            
            (4,992,887
            )
            
            
            (7,874,885
            )
            
            
            (22,734,047
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase in demand deposit, NOW, money market andsavings
      accounts
            
            
            3,016,517
            
            
            
            (8,052,575
            )
            
            
            17,294,294Net
      increase in time deposits
            
            
            1,736,738
            
            
            
            14,110,061
            
            
            
            7,890,783Net
      decrease in short-term borrowings
            
            
            (177,492
            )
            
            
            (677,965
            )
            
            
            (1,998,756
            )Proceeds
      from long-term borrowings
            
            
            -
            
            
            
            -
            
            
            
            3,500,000Repayments
      of long-term borrowings
            
            
            (792,905
            )
            
            
            (1,633,558
            )
            
            
            (2,500,904
            )Dividends
      paid
            
            
            (878,162
            )
            
            
            (1,048,482
            )
            
            
            (992,726
            )Acquisition
      of treasury stock
            
            
            -
            
            
            
            (456,171
            )
            
            
            (290,074
            )Net
      cash provided by financing activities
            
            
            2,904,696
            
            
            
            2,241,310
            
            
            
            22,902,617Increase/(decrease)
      in cash and cash equivalents
            
            
            967,372
            
            
            
            (2,677,988
            )
            
            
            3,296,938Cash
      and cash equivalents:Beginning
            
            
            6,094,748
            
            
            
            8,772,736
            
            
            
            5,475,798Ending
            
            $
            7,062,120
            
            
            $
            6,094,748
            
            
            $
            8,772,736








See
Notes to Consolidated Financial Statements


(Continued)





30
 Index





CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued


For
the Years Ended December 31, 2007, 2006 and 2005





2007
            
            
            2006
            
            
            2005SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      payments for:Interest
      on deposits and on other borrowings
            
            $
            6,768,464
            
            
            $
            5,678,421
            
            
            $
            3,967,023Income
      taxes
            
            $
            924,352
            
            
            $
            1,311,957
            
            
            $
            940,784SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING AND
      FINANCING ACTIVITIESOther
      real estate and other assets acquired in settlement of
    loans
            
            $
            1,257,378
            
            
            $
            929,104
            
            
            $
            466,445Unrealized
      gain/(loss) on securities available for sale
            
            $
            669,274
            
            
            $
            355,988
            
            
            $
            (1,060,150
            )





See Notes
to Consolidated Financial Statements





31
 Index





Notes
to Consolidated Financial Statements





Note
1.  Significant Accounting Policies





Nature of
Business:  Citizens Financial Corp. (“Citizens” or “the
company” or “we”) was incorporated as a bank holding company in
1987.  Our wholly-owned bank subsidiary, Citizens National Bank of
Elkins (“the bank”) provides retail and commercial loan, deposit, trust and
brokerage services to customers in Randolph, Tucker, Grant and Pocahontas
Counties of West Virginia and nearby areas.





Basis of Financial Statement
Presentation:Our accounting and reporting policies conform to
U.S. generally accepted accounting principles and to general practices within
the banking industry.





Use of
Estimates:In preparing consolidated financial statements in
conformity with U.S. generally accepted accounting principles, we are required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheets and reported
amounts of revenues and expenses during the reporting period.  Actual
results could differ from those estimates.  Material estimates that
are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses and the valuation of deferred
tax assets.





Principles of
Consolidation:  The accompanying consolidated financial
statements include the accounts of Citizens Financial Corp. and its wholly-owned
subsidiary.  All significant intercompany accounts and transactions
have been eliminated in consolidation.





Presentation of Cash
Flows:  For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, balances due from banks (including cash items
in process of clearing) and federal funds sold.  Cash flows from
demand deposits, NOW accounts and savings accounts are reported net since their
original maturities are less than three months.  Cash flows from loans
and certificates of deposit and other time deposits are also reported
net.





Securities:  All of
our debt and equity investment securities are classified as available-for-sale
and carried at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of comprehensive income until
realized.  Gains and losses on the sale of available-for-sale
securities are determined using the specific identification
method.  Premiums and discounts are recognized as interest income
using the interest method over the period to maturity. Declines in the fair
value of available for sale securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses.  In
estimating other-than-temporary impairment losses, we consider (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) our ability
to retain our investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.





Loans and Allowance for Loan
Losses:  The bank makes mortgage, commercial and consumer loans
to customers.  Loans which management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are generally
reported at their outstanding principal balance reduced by unearned income and
the allowance for loan losses.  Interest income is accrued daily on
the outstanding principal balance.  Loan origination fees and certain
direct loan origination costs are deferred and amortized as adjustments to the
related loan’s yield over its contractual life.





The accrual of interest on loans is
discontinued when they are 90 days delinquent unless the loan is well secured
and in the process of collection.  However, loans may be placed on
nonaccrual, or charged-off, at an earlier date if the collection of principal
and interest is doubtful.  When loans are placed on nonaccrual all
interest which has accrued but not been collected is reversed against interest
income, unless the income was recognized in prior years in which case it is
charged to the allowance for loan losses.  Interest income during the
period when a loan is on nonaccrual is recorded on a cash basis after recovery
of principal is reasonably assured.  If recovery of principal is not
reasonably assured, payments received on nonaccrual loans are typically applied
directly against the outstanding principal balance until the loan is fully
repaid.  Loans are generally restored to an accrual status when the
obligation is brought current, has performed in accordance with the terms of the
note for a reasonable period of time, and interest is no longer in
doubt.





The allowance for loan losses is
maintained at a level considered adequate to provide for losses that are
inherent in the loan portfolio.  The allowance is established by
provisions charged to operating expense and reduced when loans are
charged-off.  Subsequent recoveries, if any, are credited to the
allowance.





Management’s evaluation of the adequacy
of the allowance for loan losses is based upon quarterly assessments of the loan
portfolio.  This assessment is inherently subjective and requires
significant estimates that are subject to revisions as more information becomes
available.  Among the factors we consider are the borrower’s ability
to repay, the value of the
collateral securing the loan, historical charge-off and delinquency trends,
current economic and business conditions, lending policies and procedures,
concentrations of credit, and various other factors.





32
 Index




A loan is considered impaired when,
based on current information and events, it is probable that the company will be
unable to collect the scheduled payments when due according to the contractual
terms of the loan agreement.  Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired.  Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed.  Impairment is measured on a loan-by-loan basis for larger,
nonhomogeneous loans including commercial and construction
loans.  Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment.  Accordingly, the bank does not
separately identify individual consumer and residential loans for impairment
disclosures.





The allowance consists of a specific
component which relates to larger loans classified as special mention,
substandard or doubtful and are specifically evaluated for impairment, as well
as a general component for the smaller homogeneous loans not specifically
evaluated.  For specifically evaluated loans considered impaired an
allowance is established when the loans’ discounted cash flows, collateral value
or observable market price is less than its carrying value.  For loans
which are evaluated but not considered impaired, as well as smaller homogeneous
loans, an allowance is established by grouping the loans into pools having
similar risk characteristics and applying historical loan factors, adjusted for
current conditions, to each pool.





Bank Premises and
Equipment:  Land is carried at cost.  Bank premises
and equipment are stated at cost less accumulated
depreciation.  Depreciation is computed primarily by the straight-line
method over the estimated useful lives of the assets.  Premises and
equipment typically have useful lives ranging from 5 to 39
years.  Repairs and maintenance expenditures are charged to operating
expense as incurred.  Major improvements and additions to premises and
equipment are capitalized.





Other Real
Estate:  Other real estate consists of real estate held for
resale which is acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at fair value
with any writedown charged to the allowance for loan losses.  After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell.  Expenses incurred in connection with operating these properties
are charged to operating expenses as incurred; depreciation is not recorded on
property held for sale.  Gains and losses on the sales of these
properties are credited or charged to operating income in the year of the
transaction.





Intangible
Assets:Intangible assets represent purchased assets that lack
physical substance but can be distinguished from goodwill because of contractual
or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in a combination with a related contract, asset, or
liability.  Intangible assets are tested at least annually for
impairment.





Securities Sold Under Agreements to
Repurchase:  We generally account for securities sold under
agreements to repurchase as collateralized financing
transactions.  Securities pledged as collateral under these financing
arrangements cannot be sold or repledged by the secured party.





Pension and Other Postretirement
Benefits:The bank has a noncontributory, defined benefit
pension plan covering substantially all employees.  The plan provides
benefits that are based on employees’ five year average final compensation and
years of service.  Our funding policy is to make annual contributions
as permitted or required by regulation.  Pension costs are actuarially
determined and charged to expense.





The bank also provides certain health
care and life insurance benefits for all retired employees that meet certain
eligibility requirements.  The bank's share of the estimated costs
that will be paid after retirement is generally being accrued by charges to
expense over the employees' active service periods to the dates they are fully
eligible for benefits.





The company adopted Statement of
Financial Accounting Standard No. 158 Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS 158) as of December 31,
2006.  The company had previously reported the adjustment to initially
apply SFAS 158 as a component of comprehensive income on the Consolidated
Statements of Comprehensive Income and Consolidated Statements of Changes in
Shareholders’ Equity on our Form 10-K filed for the year ended December 31,
2006.  The reporting of this adjustment has been subsequently changed
to conform to the implementation guidance in SFAS 158 and is separately
presented herein as an adjustment to the ending balance of accumulated other
comprehensive income, net of tax, on our Consolidated Statement of Changes in
Shareholders’ Equity for the year ended December 31, 2006.





33
 Index





Income
Taxes:Deferred tax assets and liabilities are determined
based on differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.  Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Valuation
allowances are established when deemed necessary to reduce deferred tax assets
to the amount expected to be realized.





When tax returns are filed, it is
highly certain that some positions taken would be sustained upon examination by
the taxing authorities, while others are subject to uncertainty about the merits
of the position taken or the amount of the position that would be ultimately
sustained.  The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any.  Tax positions taken are not offset or aggregated
with other positions.  Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheets along with any associated interest and
penalties that would be payable to the taxing authorities upon
examination.  Interest and penalties associated with unrecognized tax
benefits are classified as additional income taxes in the consolidated
statements of income.





Basic and Fully Diluted Earnings per
Share:  Basic and fully diluted earnings per common share is
computed based upon the weighted average shares outstanding.  The
weighted average shares outstanding were 1,829,504, 1,842,662 and 1,864,215 for
the years ended December 31, 2007, 2006 and 2005, respectively, after
considering the stock split outlined in Note 2.  We did not have any
potentially dilutive securities during that time.





Trust
Department:  Assets held in an agency or fiduciary capacity by
the bank's trust department are not assets of the bank and are not included in
the accompanying consolidated balance sheets.





Off-Balance-Sheet Credit Related
Financial Instruments.  In the ordinary course of business, we
may enter into commitments to extend credit, including commercial letters of
credit, and standby letters of credit.  These financial instruments
are recorded when they are funded.





Derivative Instruments and Hedging
Activities:The bank recognizes all derivatives on the balance
sheet at fair value.  Derivatives that are not hedges must be adjusted
to fair value through income.  If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.  The ineffective
portion of a derivative’s change in fair value is immediately recognized in
earnings.





Advertising:Advertising
costs are expensed as they are incurred.





Reclassifications:Certain
accounts in the consolidated financial statements for 2006 and 2005, as
previously presented, have been reclassified to conform to current year
classifications.





Significant
New Accounting Pronouncements:In September 2006, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (SFAS
157).  SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements.  SFAS 157 does not require
any new fair value measurements, but rather, provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value.  This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those years.  As of December 1, 2007, the FASB has proposed a
one-year deferral for the implementation of the Statement for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis.  The
company does not expect the implementation of SFAS 157 to have a material impact
on its consolidated financial statements.





In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (SFAS 158).  This Statement
requires that employers measure plan assets and obligations as of the balance
sheet date.  This requirement is effective for fiscal years ending
after December 15, 2008.  The other provisions of SFAS 158 were
implemented by the company as of December 31, 2006.  The company does
not expect the implementation of the measurement date provisions of SFAS 158 to
have a material impact on its consolidated financial statements.





34
 Index





In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159).  This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of this Statement is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by this Statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument
and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007, with early adoption
available in certain circumstances.  The company does not expect the
implementation of SFAS 159 to have a material impact on its consolidated
financial statements.





In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(R), “Business Combinations”
(SFAS 141(R)). The Standard will significantly change the financial accounting
and reporting of business combination transactions.  SFAS 141(R)
establishes principles for how an acquirer recognizes and measures the
identifiable assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  SFAS
141(R) is effective for acquisition dates on or after the beginning of an
entity’s first year that begins after December 15, 2008.  The company
does not expect the implementation of SFAS 141(R) to have a material impact on
its consolidated financial statements.





In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS
160).  The Standard will significantly change the financial accounting
and reporting of noncontrolling (or minority) interests in consolidated
financial statements.  SFAS 160 is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008, with early
adoption prohibited.  The company does not expect the implementation
of SFAS 160 to have a material impact on its consolidated financial
statements.





In September 2006, the Emerging Issues
Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.”  This consensus concludes that for a split-dollar life
insurance arrangement within the scope of this Issue, an employer should
recognize a liability for future benefits in accordance with SFAS 106 (if, in
substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract)
based on the substantive agreement with the employee.  The consensus
is effective for fiscal years beginning after December 15, 2007, with early
application permitted.  The company is evaluating the effect that EITF
06-4 will have on its consolidated financial statements when
implemented.





In November 2006, the EITF issued
“Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements”
(EITF 06-10).  In this Issue, a consensus was reached that an employer
should recognize a liability for the postretirement benefit related to a
collateral assignment split-dollar life insurance arrangement in accordance with
either SFAS 106 or APB Opinion No. 12, as appropriate, if the employer has
agreed to maintain a life insurance policy during the employee's retirement or
provide the employee with a death benefit based on the substantive agreement
with the employee.  A consensus also was reached that an employer
should recognize and measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement.  The
consensuses are effective for fiscal years beginning after December 15, 2007,
including interim periods within those fiscal years, with early application
permitted.  The company is evaluating the effect that EITF 06-10 will
have on its consolidated financial statements when implemented.





In February 2007, the FASB issued FSP
No. FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements
No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides.” This
FSP provides conforming amendments to the illustrations in SFAS 87, 88, and 106
and to related staff implementation guides as a result of the issuance of SFAS
158.  The conforming amendments made by this FSP are effective as of
the effective dates of SFAS 158.  The unaffected guidance that this
FSP codifies into SFAS 87, 88, and 106 does not contain new requirements and
therefore does not require a separate effective date or transition
method.  The company does not expect the implementation of FSP No. FAS
158-1 to have a material impact on its consolidated financial
statements.





In November 2007, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written
Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109
expresses the current view of the staff that the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SEC registrants are expected to apply the views in Question 1
of SAB 109 on a prospective basis to derivative loan commitments issued or modified
in fiscal quarters beginning after December 15, 2007.  The company
does not expect the implementation of SAB 109 to have a material impact on its
consolidated financial statements.





35
 Index




In December 2007, the SEC issued Staff
Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected
Term of Share Options” (SAB 110).   SAB 110 expresses the current
view of the staff that it will accept a company’s election to use the simplified
method discussed in SAB 107 for estimating the expected term of “plain vanilla”
share options regardless of whether the company has sufficient information to
make more refined estimates.  The staff noted that it understands that
detailed information about employee exercise patterns may not be widely
available by December 31, 2007.  Accordingly, the staff will continue
to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007.  The company does not expect the implementation of
SAB 110 to have a material impact on its consolidated financial statements as
the company does not have a stock option plan.





Note
2.  Declaration of Stock Split





On March 7, 2006 Citizens’ board of
directors declared a stock split which was paid on April 14, 2006 in the form of
a 200% stock dividend to shareholders of record April 3, 2006.  The
primary reason for doing so was to reduce the share price of the stock in an
effort to improve its liquidity.  Citizens stock, which is neither
widely held nor widely traded, is an over-the-counter bulletin board stock with
the symbol CIWV.OB.





Distribution of this stock dividend
required the use of all authorized shares.  On April 22, 2006 the
shareholders authorized an additional 2,250,000 shares for future
use.





Note
3.  Restrictions on Cash and Amounts Due from Banks





At December 31, 2007 we had cash
concentrations totaling $4,151,285 with the Federal Reserve Bank of
Richmond.  These funds, as well as deposits with other correspondent
banks, are generally unsecured and have limited insurance under current banking
insurance regulations.





Note
4.  Securities





The amortized cost, unrealized gains,
unrealized losses and estimated fair values of securities at December 31, 2007
and 2006, are summarized below.  All such securities are available for
sale.





2007CarryingValue(EstimatedAmortized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value)U.S.
      Government agencies and corporations
            
            $
            28,083,464
            
            
            $
            227,154
            
            
            $
            19,073
            
            
            $
            28,291,545Mortgage
      backed securities - U.S. Government agencies and
    corporations
            
            
            6,587,411
            
            
            
            14,238
            
            
            
            40,667
            
            
            
            6,560,982Federal
      Reserve Bank stock, restricted
            
            
            108,000
            
            
            
            -
            
            
            
            -
            
            
            
            108,000Federal
      Home Loan Bank stock, restricted
            
            
            842,400
            
            
            
            -
            
            
            
            -
            
            
            
            842,400Community
      Financial Services Inc. stock
            
            
            162,714
            
            
            
            -
            
            
            
            -
            
            
            
            162,714Tax
      exempt state and political subdivisions
            
            
            22,716,824
            
            
            
            91,692
            
            
            
            214,704
            
            
            
            22,593,812Total
      securities available for sale
            
            $
            58,500,813
            
            
            $
            333,084
            
            
            $
            274,444
            
            
            $
            58,559,4532006CarryingValue(EstimatedAmortized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value)U.S.
      Government agencies and corporations
            
            $
            41,920,556
            
            
            $
            5,227
            
            
            $
            414,829
            
            
            $
            41,510,954Mortgage
      backed securities - U.S. Government agencies and
    corporations
            
            
            8,374,473
            
            
            
            299
            
            
            
            148,911
            
            
            
            8,225,861Federal
      Reserve Bank stock, restricted
            
            
            108,000
            
            
            
            -
            
            
            
            -
            
            
            
            108,000Federal
      Home Loan Bank stock, restricted
            
            
            770,200
            
            
            
            -
            
            
            
            -
            
            
            
            770,200Tax
      exempt state and political subdivisions
            
            
            9,182,944
            
            
            
            16,081
            
            
            
            68,501
            
            
            
            9,130,524Total
      securities available for sale
            
            $
            60,356,173
            
            
            $
            21,607
            
            
            $
            632,241
            
            
            $
            59,745,539




36
 Index





The tables which follow provide
summaries of securities which were in an unrealized loss position at December
31, 2007 and 2006, all of which are available for sale.  As of
December 31, 2007, these securities had a total fair value of $29,020,029 and
carried unrealized losses of $274,444 or 0.95%.  Securities which have
been in a continuous loss position for the past twelve months total
$17,776,631.  The unrealized loss pertaining to these securities is
$82,499 or 0.46%.  The majority of these losses are on municipal
instruments.  With the exception of one municipal which is not rated,
all of these instruments carry A ratings from the major credit rating
agencies.  The remaining losses are on securities issued by U.S.
government agencies and corporations which carry the implied faith and credit of
the U.S. Government.    With the excellent credit quality in
our portfolio, we believe these unrealized losses are the result of changing
interest rates, and we will be able to fully recover our
investment.  In addition, no losses have been recognized on the
$55,092,401 of securities that carried unrealized losses at December 31,
2006.





2007Less Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government agencies and corporations
            
            $
            -
            
            
            $
            -
            
            
            $
            10,973,400
            
            
            $
            19,073
            
            
            $
            10,973,400
            
            
            $
            19,073Mortgage
      backed securities – U.S.Government
      agencies and corporations
            
            
            -
            
            
            
            -
            
            
            
            4,886,591
            
            
            
            40,667
            
            
            
            4,886,591
            
            
            
            40,667Tax-exempt
      state and political subdivisions
            
            
            11,243,398
            
            
            
            191,945
            
            
            
            1,916,640
            
            
            
            22,759
            
            
            
            13,160,038
            
            
            
            214,704Total
            
            $
            11,248,398
            
            
            $
            191,945
            
            
            $
            17,776,631
            
            
            $
            82,499
            
            
            $
            29,020,029
            
            
            $
            274,4442006Less Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government agencies and corporations
            
            $
            5,332,240
            
            
            $
            13,677
            
            
            $
            33,264,044
            
            
            $
            401,152
            
            
            $
            38,596,284
            
            
            $
            414,829Mortgage
      backed securities – U.S.Government
      agencies and corporations
            
            
            2,782,873
            
            
            
            9,857
            
            
            
            5,327,723
            
            
            
            139,054
            
            
            
            8,110,596
            
            
            
            148,911Tax-exempt
      state and political subdivisions
            
            
            3,440,626
            
            
            
            17,958
            
            
            
            3,944,895
            
            
            
            50,543
            
            
            
            7,385,521
            
            
            
            68,501Total
            
            $
            11,555,739
            
            
            $
            41,492
            
            
            $
            42,536,662
            
            
            $
            590,749
            
            
            $
            55,092,401
            
            
            $
            632,241





The maturities, amortized cost and
estimated fair values of securities at December 31, 2007 are summarized as
follows:





CarryingValue(EstimatedAmortized
            
            
            FairCost
            
            
            Value)Due
      within one year
            
            $
            16,959,364
            
            
            $
            16,953,101Due
      after one through five years
            
            
            26,024,601
            
            
            
            26,268,237Due
      after five through ten years
            
            
            14,403,734
            
            
            
            14,225,000Equity
      securities
            
            
            1,113,114
            
            
            
            1,113,114Total
            
            $
            58,500,813
            
            
            $
            58,559,453








Mortgage backed securities have
remaining contractual maturities ranging from 2 months to 14.17 years and are
reflected in the maturity distribution schedule based on their anticipated
average life to maturity, which ranges from 0.20 to 4.55 years. Accordingly,
discounts are accreted and premiums are amortized over the anticipated life to
maturity of the specific obligation.





37
 Index




The proceeds from sales, calls and
maturities of securities, including principal payments received on mortgage
backed  securities, and the related gross gains and losses realized
are as follows:











Proceeds From
            
            
            Gross RealizedYears
      Ended
            
            
            
            
            Calls
      and
            
            
            PrincipalDecember 31,
            
            Sales
            
            
            Maturities
            
            
            Payments
            
            
            Gains
            
            
            Losses2007
            
            $
            345,900
            
            
            $
            19,365,000
            
            
            $
            1,854,838
            
            
            $
            2,399
            
            
            $
            -2006
            
            $
            3,800,409
            
            
            $
            14,461,000
            
            
            $
            1,963,218
            
            
            $
            -
            
            
            $
            17,6942005
            
            $
            522,200
            
            
            $
            9,190,545
            
            
            $
            2,388,713
            
            
            $
            -
            
            
            $
            -





At December 31, 2007 and 2006
securities with amortized costs of $32,207,744 and $30,807,634, respectively,
and estimated fair values of $32,357,657 and $30,448,915, respectively, were
pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes required or permitted by law.





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





Note
5.  Loans





Loans are summarized as
follows:


December 31,2007
            
            
            2006Commercial,
      financial and agricultural
            
            $
            21,015,554
            
            
            $
            26,968,995Real
      estate – construction
            
            
            12,497,098
            
            
            
            13,964,500Real
      estate – home equity
            
            
            6,797,712
            
            
            
            7,985,253Real
      estate – residential mortgage
            
            
            61,726,209
            
            
            
            61,401,473Real
      estate – commercial mortgage
            
            
            57,921,473
            
            
            
            45,578,979Installment
      loans
            
            
            10,902,926
            
            
            
            10,634,857Other
            
            
            2,011,614
            
            
            
            1,611,149Total
      loans
            
            
            172,872,576
            
            
            
            168,145,206Less:Allowance
      for loan losses
            
            
            1,763,300
            
            
            
            1,873,038Net
      deferred loan origination fees and costs
            
            
            170,012
            
            
            
            54,279Loans,
      net
            
            $
            170,939,264
            
            
            $
            166,217,889





Included in the above balance of net
loans are nonaccrual loans of $4,487,291 and $2,208,400 at December 31,
2007 and 2006, respectively.  If interest on those nonaccrual loans
had been accrued, such income would have approximated $233,744, $63,341 and
$5,662 for the years ended December 31, 2007, 2006 and 2005,
respectively.





The bank makes loans to its directors,
executive officers and their related interests in the normal course of
business.  The activity with respect to these loans for the years
ended December 31, 2007 and 2006 follows:





2007
            
            
            2006Balance,
      beginning
            
            $
            6,111,725
            
            
            $
            5,892,713Additions
            
            
            1,095,224
            
            
            
            3,801,609Amounts
      collected
            
            
            (895,513
            )
            
            
            (3,582,597
            )Balance,
      ending
            
            $
            6,311,436
            
            
            $
            6,111,725





The following represents the maturities
and sensitivities of loans to changes in interest rates at December 31, 2007,
without regard to scheduled periodic principal repayments on amortizing
loans:





Due After 1Due
            
            
            But
      Within
            
            
            DueWithin 1 Yr
            
            
            5 Yrs
            
            
            After 5 Yrs
            
            
            TotalCommercial,
      financial and agricultural
            
            $
            4,660,233
            
            
            $
            5,274,029
            
            
            $
            11,081,282
            
            
            $
            21,015,554Real
      estate – construction
            
            
            7,418,959
            
            
            
            4,815,597
            
            
            
            262,542
            
            
            
            12,497,098Real
      estate – home equity
            
            
            4,517
            
            
            
            1,730,362
            
            
            
            5,062,833
            
            
            
            6,797,712Real
      estate – residential mortgage
            
            
            837,145
            
            
            
            4,176,214
            
            
            
            56,712,850
            
            
            
            61,726,209Real
      estate – commercial mortgage
            
            
            4,546,009
            
            
            
            13,026,493
            
            
            
            40,348,971
            
            
            
            57,921,473Installment
      loans
            
            
            696,450
            
            
            
            8,090,003
            
            
            
            2,116,473
            
            
            
            10,902,926Other
            
            
            621,654
            
            
            
            642,574
            
            
            
            747,386
            
            
            
            2,011,614Total
            
            $
            18,784,967
            
            
            $
            37,755,272
            
            
            $
            116,332,337
            
            
            $
            172,872,576Loans
      due after one year with:Variable
      rates
            
            $
            124,768,403Fixed
      rates
            
            
            29,319,206Total
            
            $
            154,087,609





38
 Index





Concentrations of Credit
Risk:  The bank grants installment, commercial and residential
loans to customers in central and eastern West Virginia in striving to maintain
a diversified loan portfolio.  Nonetheless, concentrations of credit,
defined as loans to a customer, the customers’ related parties, or to a number
of customers operating in the same industry, which in the aggregate total 25% or
more of capital can occur.  At December 31, 2007, we had seven such
concentrations.





Direct and indirect extensions of
credit to automobile dealers, consisting of floor plan loans and other
commercial loans which are generally secured by liens on the subject inventories
or equipment, totaled $6,963,526.  Extensions of credit to companies
in the lodging, restaurant and bar industry totaled
$12,159,763.  These loans are usually made to finance the purchase,
operation or improvement of these establishments and are generally secured by
liens on the subject property.  Extensions of credit for the purchase
of rental real estate totaled $16,746,410.  These loans are usually
made to purchase or improve the subject property and are secured by the rental
unit(s).  Retail stores and wholesalers have extensions of credit
totaling $6,184,262 and $7,800,260, respectively.  Credit is extended
to these entities primarily to finance the purchase, make capital improvements,
or satisfy working capital needs.  These loans are generally secured
by the company’s real estate, equipment, inventory, and/or accounts
receivable.  Also, extensions of credit for ski resort related loans
totaled $12,960,995.  These loans are extended to business and
residential properties in and around various West Virginia ski
resorts.  Additional collateral such as pledges of accounts
receivable, real estate, or personal guarantees may also be required when
granting any of these credits.  The bank evaluates each such
customer’s credit worthiness on a case-by-case basis.  The amount of
collateral obtained is based upon these credit evaluations.





Note
6.  Allowance for Loan Losses





An analysis of the allowance for loan
losses for the years ended December 31, 2007, 2006 and 2005, is as
follows:








2007
            
            
            2006
            
            
            2005Balance,
      beginning of year
            
            $
            1,873,038
            
            
            $
            1,597,006
            
            
            $
            1,378,106Charge
      offs:Commercial,
      financial and agricultural
            
            
            1,538,565
            
            
            
            123,400
            
            
            
            -Real
      estate – commercial mortgage
            
            
            347,695
            
            
            
            -
            
            
            
            -Real
      estate – residential mortgage
            
            
            78
            
            
            
            -
            
            
            
            -Installment
            
            
            48,839
            
            
            
            39,130
            
            
            
            90,212Total
            
            
            1,935,177
            
            
            
            162,530
            
            
            
            90,212Recoveries:Commercial,
      financial and agricultural
            
            
            8,055
            
            
            
            4,100
            
            
            
            5,660Real
      estate – residential mortgage
            
            
            -
            
            
            
            -
            
            
            
            1,022Installment
            
            
            34,229
            
            
            
            11,077
            
            
            
            27,763Total
            
            
            42,284
            
            
            
            15,177
            
            
            
            34,445Net
      charge-offs
            
            
            1,892,893
            
            
            
            147,353
            
            
            
            55,767Provision
      for loan losses
            
            
            1,783,155
            
            
            
            423,385
            
            
            
            274,667Balance,
      end of year
            
            $
            1,763,300
            
            
            $
            1,873,038
            
            
            $
            1,597,006





39
 Index





The following summary provides
additional information regarding impaired, nonaccrual and past due
loans:





December 31,2007
            
            
            2006Impaired
      loans without a valuation allowance
            
            $
            1,467,156
            
            
            $
            155,849Impaired
      loans with a valuation allowance
            
            
            2,570,365
            
            
            
            4,991,814Total
      impaired loans
            
            $
            4,037,521
            
            
            $
            5,147,663Valuation
      allowance related to impaired loans
            
            $
            623,839
            
            
            $
            990,482Total
      nonaccrual loans excluded from impaired loan disclosure
            
            $
            449,770
            
            
            $
            506,468Total
      loans past due ninety days or more still accruing
            
            
            206,230
            
            
            
            -








Year Ended December 31,2007
            
            
            2006
            
            
            2005Average
      investment in impaired loans
            
            $
            4,244,525
            
            
            $
            3,846,072
            
            
            $
            3,974,629Interest
      income recognized on impaired loans
            
            
            351,874
            
            
            
            331,872
            
            
            
            292,013Interest
      income recognized on a cash basis on impaired loans
            
            
            124,985
            
            
            
            276,007
            
            
            
            278,334Interest
      income recognized on nonaccrual loans excluded from impaired loan
      disclosure
            
            $
            34,206
            
            
            $
            4,626
            
            
            $
            386





No additional funds are committed to
be advanced in connection with impaired loans.





Note
7.  Bank Premises and Equipment





The major categories of bank premises
and equipment and accumulated depreciation and amortization at December 31, 2007
and 2006, are summarized as follows:








2007
            
            
            2006Land
            
            $
            950,403
            
            
            $
            950,403Buildings
      and improvements
            
            
            5,280,882
            
            
            
            4,870,355Furniture
      and equipment
            
            
            2,552,090
            
            
            
            2,977,312Total
      bank premises and equipment
            
            
            8,783,375
            
            
            
            8,798,070Less
      accumulated depreciation
            
            
            4,523,711
            
            
            
            4,466,757Bank
      premises and equipment, net
            
            $
            4,259,664
            
            
            $
            4,331,313





Depreciation expense for the years
ended December 31, 2007, 2006 and 2005, totaled $306,684, $338,543 and $400,996
respectively.





Note
8.  Deposits





The following is a summary of interest
bearing deposits by type as of December 31, 2007 and 2006:





2007
            
            
            2006Interest
      bearing checking accounts
            
            $
            45,697,691
            
            
            $
            41,767,746Money
      market accounts
            
            
            5,405,844
            
            
            
            5,979,073Savings
      accounts
            
            
            21,589,320
            
            
            
            22,745,891Certificates
      of deposit under $100,000
            
            
            59,984,442
            
            
            
            59,949,884Certificates
      of deposit of $100,000 or more
            
            
            40,699,314
            
            
            
            38,997,134Total
            
            $
            173,376,611
            
            
            $
            169,439,728





Interest
expense on deposits is summarized below:


2007
            
            
            2006
            
            
            2005Interest
      bearing checking accounts
            
            $
            1,277,151
            
            
            $
            1,161,291
            
            
            $
            613,132Money
      market accounts
            
            
            27,625
            
            
            
            33,159
            
            
            
            49,703Savings
      accounts
            
            
            120,762
            
            
            
            120,996
            
            
            
            129,933Certificates
      of deposit under $100,000
            
            
            2,636,307
            
            
            
            2,072,523
            
            
            
            1,490,864Certificates
      of deposit of $100,000 or more
            
            
            1,899,708
            
            
            
            1,493,549
            
            
            
            1,092,905Total
            
            $
            5,961,553
            
            
            $
            4,881,518
            
            
            $
            3,376,537




40
 Index





The following is a summary of the
maturity distribution of certificates of deposit in amounts of $100,000 or more
as of December 31, 2007 and 2006:








2007
            
            
            2006Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentThree
      months or less
            
            $
            3,588,278
            
            
            
            8.82
            %
            
            $
            2,350,997
            
            
            
            6.03
            %Three
      through six months
            
            
            6,447,653
            
            
            
            15.84
            
            
            
            4,370,990
            
            
            
            11.21Six
      through twelve months
            
            
            14,167,482
            
            
            
            34.81
            
            
            
            10,680,396
            
            
            
            27.39Over
      twelve months
            
            
            16,495,901
            
            
            
            40.53
            
            
            
            21,594,751
            
            
            
            55.37Total
            
            $
            40,699,314
            
            
            
            100.00
            %
            
            $
            38,997,134
            
            
            
            100.00
            %











A summary
of the maturities for all time deposits as of December 31, 2007,
follows:





Year
            
            Amount2008
            
            $
            60,633,3902009
            
            
            10,801,7952010
            
            
            7,899,9792011
            
            
            14,190,1132012
            
            
            7,013,574After
      2012
            
            
            144,905Total
            
            $
            100,683,756





At December 31, 2007 and 2006, deposits
of related parties including directors, executive officers, and their related
interests of Citizens Financial Corp. and subsidiary approximated $7,190,207 and
2,748,807, respectively.





Note
9.  Derivative Instruments





From 2001 to 2004, the bank offered a
product known as the Index Powered CD to its customers.  This is a
five year certificate of deposit which, if held to maturity, provides the
customer with guaranteed return of principal and interest which is linked to the
performance of the Standard and Poor’s 500 Index over the term of the
certificate of deposit.  As of December 31, 2007 and 2006 the notional
value of these deposits was $203,373 and $894,278, respectively.





The
linkage of the interest earned on the certificate of deposit and the return of
the index is considered an equity option and is accounted for as an embedded
derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”).  As required
by SFAS 133, the fair value of the embedded derivative is deducted from the
certificate of deposit creating a discount that is amortized to interest expense
using the effective interest method over the term of the certificate of
deposit.  The corresponding equity option is carried as a liability at
fair value with changes in the value recognized in current
earnings.





To manage
the market risk associated with this product, the bank entered into interest
rate swap agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”) for
the notional amount of the certificate of deposit.  Under these
agreements the bank pays either fixed or variable interest to the FHLB quarterly
over the term of the certificate of deposit and the FHLB pays the bank the
amount of interest due the customer at maturity.





This
interest rate swap also represents a derivative contract and is accounted for as
a fair value hedge under SFAS 133.  As such, it is carried as an asset
at fair value with changes in value being recognized in current
earnings.  The impact of our derivative activities on pretax income
was $(19,639) in 2007, $(43,501) in 2006 and $(37,865) in 2005.





Note
10.  Income Taxes





The
company files income tax returns in the U.S. federal jurisdiction and the state
of West Virginia.  With few exceptions, the company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2004.  The company adopted the
provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1,
2007 with no impact on the financial statements.





The components of applicable income tax
expense/(benefit) for the years ended December 31, 2007, 2006 and 2005, are as
follows:





2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            135,605
            
            
            $
            986,391
            
            
            $
            982,912State
            
            
            39,729
            
            
            
            144,201
            
            
            
            146,870175,334
            
            
            
            1,130,592
            
            
            
            1,129,782Deferred:Federal
            
            
            53,463
            
            
            
            (162,754
            )
            
            
            (181,117
            )State
            
            
            6,290
            
            
            
            (12,192
            )
            
            
            (21,307
            )59,753
            
            
            
            (174,946
            )
            
            
            (202,424
            )Total
            
            $
            235,087
            
            
            $
            955,646
            
            
            $
            927,358




41
 Index




Deferred income taxes reflect the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes.  Deferred tax assets and liabilities represent the future
tax return consequences of temporary differences, which will either be taxable
or deductible when the related assets and liabilities are recovered or
settled.





The tax effects of temporary
differences which give rise to the company's deferred tax assets and liabilities
as of December 31, 2007 and 2006, are as follows:





2007
            
            
            2006Deferred
      tax assets:Allowance
      for loan losses
            
            $
            404,264
            
            
            $
            562,127Accrued
      income and expenses
            
            
            18,060
            
            
            
            18,553Employee
      benefit plans
            
            
            733,905
            
            
            
            832,401Net
      loan origination fees and costs
            
            
            64,652
            
            
            
            20,624Interest
      on nonaccrual loans
            
            
            8,422
            
            
            
            -Deferred
      gain on sale of other real estate
            
            
            18,303
            
            
            
            -Net
      unrealized loss on securities
            
            
            -
            
            
            
            232,0411,247,606
            
            
            
            1,665,746Deferred
      tax liabilities:Accretion
      on securities
            
            
            (31,895
            )
            
            
            (26,265
            )Net
      unrealized gains on securities
            
            
            (22,283
            )
            
            
            -Depreciation
            
            
            (207,536
            )
            
            
            (197,141
            )(261,714
            )
            
            
            (223,406
            )Net
      deferred tax asset
            
            $
            985,892
            
            
            $
            1,442,340





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,
2007, 2006 and 2005, is as follows:








2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentComputed
      tax at applicable statutory rate
            
            $
            431,430
            
            
            
            34.0
            %
            
            $
            1,034,463
            
            
            
            34.0
            %
            
            $
            1,011,345
            
            
            
            34.0
            %Increase/(decrease)
      in taxes resulting from:Tax-exempt
      interest
            
            
            (226,911
            )
            
            
            (17.9
            )
            
            
            (149,248
            )
            
            
            (4.9
            )
            
            
            (147,527
            )
            
            
            (5.0
            )State
      income taxes, net of federal tax benefit
            
            
            30,373
            
            
            
            2.4
            
            
            
            87,126
            
            
            
            2.8
            
            
            
            82,872
            
            
            
            2.8Tax
      exempt income on retirement plans
            
            
            (28,485
            )
            
            
            (2.2
            )
            
            
            (27,772
            )
            
            
            (0.9
            )
            
            
            (27,755
            )
            
            
            (0.9
            )Other
            
            
            28,680
            
            
            
            2.2
            
            
            
            11,077
            
            
            
            0.4
            
            
            
            8,423
            
            
            
            0.3Applicable
      income taxes
            
            $
            235,087
            
            
            
            18.5
            %
            
            $
            955,646
            
            
            
            31.4
            %
            
            $
            927,358
            
            
            
            31.2
            %








Note
11.  Employee Benefit Plans





The bank offers a number of benefit
plans to its employees and directors.  Among them are pension and
other postretirement benefit plans which are described below.





Pension Plan:The
bank has a defined benefit pension plan covering all employees who meet the
eligibility requirements.  To be eligible, an employee must be 21
years of age and have completed one year/1,000 hours of continuous
service.  The plan provides benefits based on the participant’s years
of service and five year average final compensation.  Our funding
policy is to make annual contributions as permitted or required by applicable
regulations.





42
 Index





401(k) Plan:A
401(k) profit sharing plan is provided for the benefit of all employees who have
attained the age of 21 and completed one year/1,000 hours of continuous
service.  The plan allows participating employees to contribute
amounts up to the limits set by the Internal Revenue Service and permits the
bank to make discretionary contributions to the plan in such amount as the Board
may determine to be appropriate.  Contributions made to the plan by
the bank for the years ended December 31, 2007, 2006 and 2005, were $49,000,
$81,000 and $77,000, respectively.





Executive Supplemental Income
Plan:  Subsequent to an amendment to the bank’s pension benefit
formula in 1995, it offered a nonqualified executive supplemental income plan to
certain senior officers, some of whom are now retired, as a means of overcoming
the reduced pension benefit.  The plan provides predetermined fixed
monthly income for a period of 180 months to the participants upon
retirement.  It is funded by life insurance contracts which the bank
purchased.  The bank has been named the beneficiary of those
contracts.  The liability accrued under this plan at December 31, 2007
and 2006 was $247,417 and $253,292, respectively.  The cash surrender
values of the underlying insurance contracts at those same dates were $561,602
and $516,130.  Expenses associated with the plan were $10,566 in 2007,
$8,549 in 2006, and $11,217 in 2005.





Executive and Director Supplemental
Retirement Plan:Effective January 1, 2003, the bank entered
into a non-qualified supplemental executive and director retirement plan with
various officers and directors of the bank which provides them with income
benefits payable at retirement age or death.  In connection with this
plan, the bank purchased life insurance contracts in 2002 for
$2,000,000.  These contracts are not assets of the plan but are
instead owned by the bank and had cash surrender values of $2,273,638 at
December 31, 2007 and $2,189,860 at December 31, 2006.  Liabilities
under the plan were $742,566 at December 31, 2007 and $653,097 at December 31,
2006.  Expenses of the plan, net of income for the increase in the
cash surrender value, were $40,081 in 2007, $66,936 in 2006 and $51,992 in
2005.





Postretirement Healthcare and Life
Insurance Plan:  The bank sponsors a postretirement healthcare
plan and a postretirement life insurance plan for all retired employees that
meet certain eligibility requirements.  Both plans are contributory
with retiree contributions that are adjustable based on various factors, some of
which are discretionary.  These factors are intended to hold constant
the maximum monthly benefit of $100 payable per eligible retiree for
postretirement health care.  Accordingly, an assumed 1 percentage
point increase or decrease in healthcare cost trend rates would not impact the
healthcare plan’s accumulated postretirement benefit obligation or the aggregate
of the plans service and interest costs.  Both the healthcare plan and
life insurance plan are unfunded.





43
 Index





In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (SFAS 158).  The company
adopted SFAS 158 on a prospective basis beginning with the year ended December
31, 2006.  Additional information regarding the company’s pension and
other postretirement benefits is presented below in accordance with SFAS 158 for
2007 and 2006.  Previous year information for 2005 is presented in
accordance with the previous FASB Statements.  The measurement date
used for the pension disclosures is October 31 for all years
presented.





Obligations
and Funded Status





Pension Benefits
            
            
            Other Benefits2007
            
            
            2006
            
            
            2007
            
            
            2006Change
      in benefit obligationBenefit
      obligation at beginning of year
            
            $
            4,811,427
            
            
            $
            4,734,599
            
            
            $
            522,934
            
            
            $
            613,217Service
      cost
            
            
            116,060
            
            
            
            112,312
            
            
            
            20,070
            
            
            
            24,242Interest
      cost
            
            
            288,608
            
            
            
            271,181
            
            
            
            27,945
            
            
            
            31,769Actuarial
      (gain)/loss
            
            
            (46,451
            )
            
            
            (68,016
            )
            
            
            30,421
            
            
            
            (119,255
            )Benefits
      paid
            
            
            (269,319
            )
            
            
            (238,649
            )
            
            
            (41,486
            )
            
            
            (27,039
            )Benefit
      obligation at end of year
            
            $
            4,900,325
            
            
            $
            4,811,427
            
            
            $
            559,884
            
            
            $
            522,934Change
      in plan assetsFair
      value of plan assets at beginning of year
            
            $
            4,059,169
            
            
            $
            3,755,700
            
            
            $
            -
            
            
            $
            -Actual
      return on plan assets
            
            
            601,238
            
            
            
            471,946
            
            
            
            -
            
            
            
            -Employer
      contribution
            
            
            111,802
            
            
            
            70,172
            
            
            
            41,486
            
            
            
            27,039Benefits
      paid
            
            
            (269,319
            )
            
            
            (238,649
            )
            
            
            (41,486
            )
            
            
            (27,039
            )Fair
      value of plan assets at end of year
            
            $
            4,502,890
            
            
            $
            4,059,169
            
            
            $
            -
            
            
            $
            -Funded
      status
            
            $
            (397,435
            )
            
            $
            (752,258
            )
            
            $
            (559,884
            )
            
            $
            (522,934
            )Amounts
      recognized on consolidated balance sheets as:Accrued
      benefit liability
            
            $
            (397,435
            )
            
            $
            (752,258
            )
            
            $
            (559,884
            )
            
            $
            (522,934
            )Amounts
      recognized in accumulated other comprehensive income consist
      of:Net
      (loss)/gain
            
            $
            (1,120,633
            )
            
            $
            (1,533,873
            )
            
            $
            208,745
            
            
            $
            251,293Prior
      service (cost)/credit
            
            
            12,555
            
            
            
            29,523
            
            
            
            -
            
            
            
            -Net
      obligation at transition
            
            
            -
            
            
            
            -
            
            
            
            (104,717
            )
            
            
            (125,663
            )Deferred
      tax benefit/(expense)
            
            
            421,070
            
            
            
            571,653
            
            
            
            (39,531
            )
            
            
            (47,739
            )$
            (687,008
            )
            
            $
            (932,697
            )
            
            $
            64,497
            
            
            $
            77,891








The
accumulated benefit obligation of our pension plan was $4,315,444 at October 31,
2007 and $4,213,134 at October 31, 2006.





44
 Index





Components
of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income





Pension Benefits
            
            
            Other Benefits2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005Net
      periodic benefit cost:Service
      cost
            
            $
            116,060
            
            
            $
            112,312
            
            
            $
            98,730
            
            
            $
            20,070
            
            
            $
            24,242
            
            
            $
            23,575Interest
      cost
            
            
            288,608
            
            
            
            271,181
            
            
            
            267,484
            
            
            
            27,945
            
            
            
            31,769
            
            
            
            31,084Expected
      return on plan assets
            
            
            (330,584
            )
            
            
            (329,317
            )
            
            
            (341,241
            )
            
            
            -
            
            
            
            -
            
            
            
            -Net
      amortization and deferral
            
            
            (16,968
            )
            
            
            (16,968
            )
            
            
            (16,968
            )
            
            
            8,819
            
            
            
            16,318
            
            
            
            15,664Recognized
      net actuarial loss
            
            
            96,135
            
            
            
            95,680
            
            
            
            47,051
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      periodic benefit cost
            
            
            153,251
            
            
            
            132,888
            
            
            
            55,056
            
            
            
            56,834
            
            
            
            72,329
            
            
            
            70,323Other
      changes in plan assets and benefit obligations recognized in other
      comprehensive income:Net
      (gain)/loss for period
            
            $
            (317,105
            )
            
            $
            N/A
            
            
            $
            N/A
            
            
            $
            30,421
            
            
            $
            N/A
            
            
            $
            N/AAmortization
      of prior service cost
            
            
            16,968
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            -
            
            
            
            N/A
            
            
            
            N/AAmortization
      of transition obligation
            
            
            -
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            (20,946
            )
            
            
            N/A
            
            
            
            N/AAmortization
      of net loss/(gain)
            
            
            (96,135
            )
            
            
            N/A
            
            
            
            N/A
            
            
            
            12,127
            
            
            
            N/A
            
            
            
            N/ATotal
      recognized in other comprehensive income
            
            
            (396,272
            )
            
            
            N/A
            
            
            
            N/A
            
            
            
            21,602
            
            
            
            N/A
            
            
            
            N/ATotal
      recognized in net periodic benefit cost and other comprehensive
      income
            
            $
            (243,021
            )
            
            $
            132,888
            
            
            $
            55,056
            
            
            $
            78,436
            
            
            $
            72,329
            
            
            $
            70,323





Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the plan.





The estimated net loss and prior
service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year are $70,123 and $(12,555), respectively.  The
estimated transition obligation for the other defined benefit postretirement
plans that will be amortized from accumulated other comprehensive income into
net periodic benefit cost over the next fiscal year is $20,946.





Assumptions





Pension Benefits
            
            
            Other Benefits2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005Weighted-average
      assumptions used to determine net periodic benefit cost:Discount
      rate
            
            
            6.00
            %
            
            
            5.75
            %
            
            
            6.50
            %
            
            
            6.00
            %
            
            
            5.75
            %
            
            
            5.75
            %Expected
      long-term return on plan assets
            
            
            8.50
            %
            
            
            8.50
            %
            
            
            8.50
            %
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ARate
      of compensation increase
            
            
            3.00
            %
            
            
            3.00
            %
            
            
            3.50
            %
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/AWeighted-average
      assumptions used to determine benefit obligationsDiscount
      rate
            
            
            6.25
            %
            
            
            6.00
            %
            
            
            
            
            
            
            6.00
            %
            
            
            5.75
            %Rate
      of compensation increase
            
            
            3.00
            %
            
            
            3.00
            %
            
            
            
            
            
            
            N/A
            
            
            
            N/A





The expected long-term rate of return
for the pension plan is based on the expected return of each of the plan’s asset
categories (detailed below), weighted based on the median of the target
allocation of each category.





Plan
Assets





Pension BenefitsTarget
            
            
            
            
            
            Percentage
      of PlanAllocation
            
            
            Allowable
            
            
            Assets at October 31,2008
            
            
            Range
            
            
            2007
            
            
            2006Asset
      category:Equity
      securities
            
            
            70
            %
            
            
            40-80
            %
            
            
            68
            %
            
            
            74
            %Debt
      securities
            
            
            25
            %
            
            
            20-40
            %
            
            
            27
            %
            
            
            20
            %Real
      estate
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Other
            
            
            5
            %
            
            
            3-10
            %
            
            
            5
            %
            
            
            6
            %Total
            
            
            100
            %
            
            
            
            
            
            
            100
            %
            
            
            100
            %





45
 Index





Investment
Policy and Strategy





The
policy, as established by the Pension Committee, is to invest assets per the
target allocations stated above.  The assets will be reallocated
periodically to meet the above target allocations.  The investment
policy will be reviewed periodically, under the advisement of a certified
investment advisor, to determine if the policy should be changed.





The
overall investment return goal is to achieve a return greater than a blended mix
of stated indices tailored to the same asset mix of the plan assets by 0.5%
after fees over a rolling 5-year moving average basis.





Allowable
assets include cash equivalents, fixed income securities, equity securities,
exchange traded index funds and GICs.  Prohibited investments include,
but are not limited to, commodities and future contracts, private placements,
options, limited partnerships, venture capital investments, real estate and IO,
PO, and residual tranche CMOs.  Unless a specific derivative security
is allowed per the plan document, permission must be sought from the Pension
Committee to include such investments.





In order
to achieve a prudent level of portfolio diversification, the securities of any
one company should not exceed more that 10% of the total plan assets, and no
more that the 25% of total plan assets should be invested in any one industry
(other than securities of U.S. Government or Agencies).  Additionally,
no more than 20% of the plan assets shall be invested in foreign securities
(both equity and fixed).





Cash
Flows





Contributions:Our
pension plan calls for a minimum contribution of approximately $216,082 in
2008.  No contributions are expected to be made to our other
postretirement plans, however.





Estimated Future Benefits
Payments: The following benefit payments, which reflect future service,
are expected to be paid:





Pension Benefits
            
            
            Other Benefits2008
            
            $
            278,047
            
            
            $
            38,8852009
            
            
            280,573
            
            
            
            37,4102010
            
            
            292,125
            
            
            
            37,7912011
            
            
            293,673
            
            
            
            39,8232012
            
            
            296,795
            
            
            
            38,2252013
      - 2017
            
            
            1,566,090
            
            
            
            195,989





Note
12.  Other Borrowings





Short-Term
Borrowings:  During 2007 and 2006, our short-term borrowings
consisted of securities sold under agreements to repurchase (repurchase
agreements), advances under a line of credit with the Federal Home Loan Bank of
Pittsburgh (FHLB) and federal funds purchased.  Interest is paid on
the repurchase agreements based on either fixed or variable rates as determined
upon origination.  At December 31, 2007 and 2006, securities with an
amortized cost of $14,611,458 and $14,095,926, respectively, and estimated fair
values of $14,750,799 and $13,900,030, respectively, were pledged to secure the
repurchase agreements.





As a member of the FHLB, the bank has
access to various lines of credit under programs administered by the
FHLB.  Borrowings under these arrangements bear interest at the
interest rate posted by the FHLB on the day of the borrowing and are subject to
change daily.  The lines of credit are secured by a blanket lien on
all unpledged and unencumbered assets.





The following information is provided
relative to our short-term borrowing obligations:





Repurchase
            
            
            Line
      of
            
            
            Federal
      FundsAgreement
            
            
            Credit
            
            
            Purchased2007Amount
      outstanding at December 31
            
            $
            14,258,042
            
            
            $
            3,997,900
            
            
            $
            1,400,000Weighted
      average interest rate at December 31
            
            
            3.51
            %
            
            
            4.32
            %
            
            
            4.25
            %Maximum
      month-end amount outstanding
            
            $
            21,888,322
            
            
            $
            3,997,900
            
            
            $
            1,400,000Average
      daily amount outstanding
            
            $
            18,868,254
            
            
            $
            406,537
            
            
            $
            618Weighted
      average interest rate for the year
            
            
            3.52
            %
            
            
            4.85
            %
            
            
            4.78
            %2006Amount
      outstanding at December 31
            
            $
            15,970,434
            
            
            $
            3,438,000
            
            
            $
            425,000Weighted
      average interest rate at December 31
            
            
            3.99
            %
            
            
            5.40
            %
            
            
            5.56
            %Maximum
      month-end amount outstanding
            
            $
            25,052,293
            
            
            $
            9,630,000
            
            
            $
            2,800,000Average
      daily amount outstanding
            
            $
            19,204,359
            
            
            $
            2,699,222
            
            
            $
            69,521Weighted
      average interest rate for the year
            
            
            3.43
            %
            
            
            5.20
            %
            
            
            4.79
            %2005Amount
      outstanding at December 31
            
            $
            20,511,399
            
            
            $
            -
            
            
            $
            -Weighted
      average interest rate at December 31
            
            
            2.50
            %
            
            
            -
            
            
            
            -Maximum
      month-end amount outstanding
            
            $
            24,983,307
            
            
            $
            1,389,500
            
            
            $
            -Average
      daily amount outstanding
            
            $
            21,635,619
            
            
            $
            108,678
            
            
            $
            14,178Weighted
      average interest rate for the year
            
            
            2.30
            %
            
            
            3.60
            %
            
            
            3.55
            %





46
 Index





Long-Term
Borrowings:Long-term borrowings of $2,718,865 and $3,511,770
at December 31, 2007 and 2006, respectively, consist of advances from the
FHLB which are used to finance specific lending activities.  These
advances carry fixed interest rates ranging from 4.46% to 5.00% while the
weighted average interest rate at December 31, 2007 was 4.56%.  The
weighted average interest rate for the year ending December 31, 2007 was
4.50%.





A summary of the maturities of the
long-term borrowings for the next five years is as follows:





Year
            
            Amount2008
            
            $
            375,5182009
            
            
            392,9152010
            
            
            411,1192011
            
            
            430,1672012
            
            
            337,5902013
      and thereafter
            
            
            771,556Total
            
            $
            2,718,865








Note
13.  Commitments and Contingencies





At December 31, 2007 and 2006, the
bank maintained required reserve balances with the Federal Reserve Bank of
Richmond approximating $338,000 and $123,000, respectively.  The bank
does not earn interest on such reserve balances.





Litigation:  We are
involved in various legal actions arising in the ordinary course of
business.  In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on our financial condition or results
of operations.





Financial Instruments With
Off-Balance-Sheet Risk:  The bank is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers.  These financial instruments
include commitments to extend credit and standby letters of
credit.  These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.  The contract amounts of these
instruments reflect the extent of involvement the bank has in particular classes
of financial instruments.





Contract AmountFinancial instruments
      whose contract amounts
      represent credit risk
            
            2007
            
            
            2006Commitments
      to extend credit
            
            $
            24,602,947
            
            
            $
            22,054,312Standby
      letters of credit
            
            
            301,223
            
            
            
            461,689Total
            
            $
            24,904,170
            
            
            $
            22,516,001




The
bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these
instruments.  The bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.





47
 Index





Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract.  Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee.  The bank evaluates each customer's credit worthiness on a
case-by-case basis.  The amount of collateral obtained, if deemed
necessary by the bank upon extension of credit, is based on management's credit
evaluation.  Collateral held varies but may include accounts
receivable, inventory, equipment or real estate.





Standby letters of credit are
conditional commitments issued by the bank to guarantee the performance of a
customer to a third party.  Those guarantees are primarily issued to
support private borrowing arrangements.  The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans.  These letters of credit are generally
uncollateralized.





Note
14.  Shareholders’ Equity and Restrictions on Dividends





The primary source of funds for the
dividends paid by Citizens Financial Corp. is dividends received from Citizens
National Bank.  Dividends paid by the bank are subject to restrictions
by banking regulations.  The most restrictive provision requires
approval by the Office of the Comptroller of the Currency if dividends declared
in any year exceed the year's net income, as defined, plus the retained net
profits of the two preceding years.  At December 31, 2007, the net
retained profits available for distribution to Citizens Financial Corp. as
dividends without regulatory approval approximate $1,875,098 or 8.8% of
consolidated net assets.





The company and bank are subject to
various regulatory capital requirements administered by the federal banking
agencies.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the company and bank must meet specific
capital guidelines that involve quantitative measures of the company’s and
bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices.  The company and bank’s capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other
factors.  Prompt corrective action provisions are not applicable to
bank holding companies.





Quantitative measures established by
regulation to ensure capital adequacy require the company and bank to maintain
minimum amounts and ratios of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets.  We believe, as of
December 31, 2007, that the company and bank meet all capital adequacy
requirements to which they are subject.





The most recent notification from the
Office of the Comptroller of the Currency categorized the bank as well
capitalized under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized the bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below.  There are no conditions or events since
that notification that we believe have changed the bank's category.





The bank’s actual capital amounts and
ratios, which are the same as those for the holding company on a consolidated
basis, are presented in the following table (in thousands).








Actual
            
            
            For CapitalAdequacy Purposes
            
            
            To Be Well CapitalizedUnder Prompt CorrectiveAction ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2007:Total
      Capital:Risk Weighted Assets
            
            $
            23,328
            
            
            
            12.52
            %
            
            $
            14,906
            
            
            
            8.00
            %
            
            $
            18,633
            
            
            
            10.00
            %Tier
      I Capital:Risk Weighted Assets
            
            
            21,565
            
            
            
            11.57
            
            
            
            7,455
            
            
            
            4.00
            
            
            
            11,183
            
            
            
            6.00Tier
      I Capital:Average Assets
            
            
            21,565
            
            
            
            8.75
            
            
            
            9,858
            
            
            
            4.00
            
            
            
            12,323
            
            
            
            5.00As
      of December 31, 2006:Total
      Capital:Risk Weighted Assets
            
            $
            22,413
            
            
            
            12.95
            %
            
            $
            13,846
            
            
            
            8.00
            %
            
            $
            17,307
            
            
            
            10.00
            %Tier
      I Capital:Risk Weighted Assets
            
            
            20,540
            
            
            
            11.87
            
            
            
            6,922
            
            
            
            4.00
            
            
            
            10,382
            
            
            
            6.00Tier
      I Capital:Average Assets
            
            
            20,540
            
            
            
            8.49
            
            
            
            9,677
            
            
            
            4.00
            
            
            
            12,097
            
            
            
            5.00








Note
15.  Fair Value of Financial Instruments and Interest Rate
Risk





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





48
 Index





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 and interest
bearing checking), money market, savings and other variable rate deposits
approximate their carrying values.  Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities.  Any
intangible value of long-term relationships with depositors is not considered in
estimating the fair values disclosed.





Short-Term
Borrowings:  The carrying values of short-term borrowings
approximate their estimated fair values.





Long-Term
Borrowings:  The fair values of long-term borrowings are
estimated by discounting scheduled future payments of principal and interest at
current rates available on borrowings with similar terms.





Off-Balance-Sheet
Instruments:  The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counterparties.  The
amounts of fees currently charged on commitments and standby letters of credit
are deemed insignificant, and therefore, the estimated fair values and carrying
values are not shown below.





Derivative Financial
Instruments:  The fair values of the interest rate swaps are
based on quoted market prices of like products.





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





December 31, 2007
            
            
            December 31, 2006Estimated
            
            
            
            
            
            EstimatedCarrying
            
            
            Fair
            
            
            Carrying
            
            
            FairValue
            
            
            Value
            
            
            Value
            
            
            ValueFinancial
      assets:Cash
      and due from banks
            
            $
            7,049,699
            
            
            $
            7,049,699
            
            
            $
            6,064,890
            
            
            $
            6,064,890Interest
      bearing deposits with other banks
            
            
            12,421
            
            
            
            12,421
            
            
            
            29,858
            
            
            
            28,858Federal
      funds sold
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Securities
      available for sale
            
            
            58,559,453
            
            
            
            58,559,453
            
            
            
            59,745,539
            
            
            
            59,745,539Loans,
      net
            
            
            170,939,264
            
            
            
            166,266,520
            
            
            
            166,217,889
            
            
            
            158,001,485Accrued
      interest receivable
            
            
            1,384,943
            
            
            
            1,384,943
            
            
            
            1,393,468
            
            
            
            1,393,468Financial
      liabilities:Deposits
            
            $
            201,296,470
            
            
            $
            202,239,030
            
            
            $
            196,543,215
            
            
            $
            197,344,439Short-term
      borrowings
            
            
            19,655,942
            
            
            
            19,655,942
            
            
            
            19,833,434
            
            
            
            19,833,434Long-term
      borrowings
            
            
            2,718,865
            
            
            
            2,720,621
            
            
            
            3,511,770
            
            
            
            3,426,840Accrued
      interest payable
            
            
            523,403
            
            
            
            523,403
            
            
            
            511,094
            
            
            
            511,094Financial
      instruments:Interest
      rate swaps and call options
            
            $
            2,957
            
            
            $
            2,957
            
            
            $
            21,054
            
            
            $
            21,054




The
company assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations.  As a result, the
fair values of the company’s financial instruments will change when interest
rate levels change and that change may be either favorable or unfavorable to the
company.  Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate
risk.  However, borrowers with fixed rate obligations
are less likely to prepay in a rising rate environment and more likely to prepay
in a falling rate environment.  Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate
environment.  Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the company’s overall interest rate risk.





49
 Index





Note
16.  Condensed Financial Statements of Parent Company





Information relative to the parent
company's balance sheets at December 31, 2007 and 2006, and the related
statements of income and cash flows for the years ended December 31, 2007, 2006
and 2005, are presented below.





December 31,Balance
      Sheets
            
            
            
            
            2007
            
            
            2006AssetsCash
            
            
            
            
            $
            2,992
            
            
            $
            2,853Investment
      in subsidiary
            
            
            
            
            
            21,077,936
            
            
            
            20,275,166Total
      assets
            
            
            
            
            $
            21,080,928
            
            
            $
            20,278,019Shareholders'
      equityCommon
      stock, $2.00 par value, 4,500,000 shares authorized, issued 2,250,000
      shares
            
            
            
            
            $
            4,500,000
            
            
            $
            4,500,000Retained
      earnings
            
            
            
            
            
            20,998,645
            
            
            
            20,842,981Accumulated
      other comprehensive income/(loss)
            
            
            
            
            
            ( 586,154
            )
            
            
            (1,233,399
            )Treasury
      stock at cost, 420,496 shares
            
            
            
            
            
            (3,831,563
            )
            
            
            (3,831,563
            )Total
      shareholders' equity
            
            
            
            
            $
            21,080,928
            
            
            $
            20,278,019For the Years Ended December
      31,Statements of
      Income
            
            2007
            
            
            2006
            
            
            2005Income
      - dividends from subsidiary bank
            
            $
            883,801
            
            
            $
            1,512,770
            
            
            $
            1,288,485Expenses
      - operating
            
            
            5,500
            
            
            
            7,400
            
            
            
            6,203Income
      before equity in undistributed income of subsidiary
            
            
            878,301
            
            
            
            1,505,370
            
            
            
            1,282,282Equity
      in undistributed income of subsidiary
            
            
            155,525
            
            
            
            581,521
            
            
            
            764,904Net
      income
            
            $
            1,033,826
            
            
            $
            2,086,891
            
            
            $
            2,047,186For the Years Ended December
      31,Statements of Cash
      Flows
            
            2007
            
            
            2006
            
            
            2005Cash
      flows from operating activitiesNet
      income
            
            $
            1,033,826
            
            
            $
            2,086,891
            
            
            $
            2,047,186Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed income of subsidiary
            
            
            (155,525
            )
            
            
            (581,521
            )
            
            
            (764,904
            )Cash
      provided by operating activities
            
            
            878,301
            
            
            
            1,505,370
            
            
            
            1,282,282Cash
      flows from investing activities
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      flows from financing activitiesDividends
      paid to shareholders
            
            
            (878,162
            )
            
            
            (1,048,482
            )
            
            
            (992,726
            )Acquisition
      of treasury stock
            
            
            -
            
            
            
            (456,171
            )
            
            
            (290,074
            )Cash
      used in financing activities
            
            
            (878,162
            )
            
            
            (1,504,653
            )
            
            
            (1,282,800
            )Increase/(decrease)
      in cash
            
            
            139
            
            
            
            717
            
            
            
            (518
            )Cash:Beginning
            
            
            2,853
            
            
            
            2,136
            
            
            
            2,654Ending
            
            $
            2,992
            
            
            $
            2,853
            
            
            $
            2,136




50
 Index





Report
of Independent Registered Public Accounting Firm








To the
Board of Directors


Citizens
Financial Corp. and Subsidiary


Elkins,
West Virginia








We have
audited the consolidated balance sheets of Citizens Financial Corp. and
Subsidiary as of December 31, 2007 and 2006, and the related consolidated
statements of income, changes in shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2007.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Citizens Financial Corp. and
Subsidiary as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2007, in conformity with U.S. generally accepted accounting
principles.





We were
not engaged to examine management's assertion about the effectiveness of
Citizens Financial Corp. and Subsidiary’s internal control over financial
reporting as of December 31, 2007 included in the accompanying Report of
Management’s Assessment of Internal Control Over Financial Reporting and,
accordingly, we do not express an opinion thereon.





Yount,
      Hyde & Barbour, P.C.





Winchester,
Virginia


March 12,
2008





51
 Index





Item
9.  Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





No
reportable items.





Item
9A(T).  Controls and Procedures





As of the end of the period covered by
this Annual Report on Form 10-K, the company, under the supervision and with the
participation of management, including the chief executive officer and principal
financial officer, carried out an evaluation of the effectiveness of the design
and operation of the company’s disclosure controls and procedures pursuant to
Exchange Act Rules 13a-14 and 15d-4.  Based upon that evaluation, the
chief executive officer and principal financial officer concluded that the
company’s disclosure controls and procedures are effective in timely alerting
them to material information relating to the company which is required to be
included in the company’s periodic SEC filings.  The company did not
have any changes in internal control over financial reporting during its fourth
quarter for the year ending December 31, 2007, that materially effected, or were
reasonably likely to effect the company’s internal control over financial
reporting.





Report of Management’s
Assessment of Internal Control Over Financial Reporting





Citizens
Financial Corp. is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this annual
report.  The consolidated financial statements and notes included in
this annual report have been prepared in conformity with United States generally
accepted accounting principles and necessarily include some amounts that are
based on management’s estimates and judgments.





The
management of Citizens Financial Corp. is responsible for establishing and
maintaining effective internal control over financial reporting that is designed
to produce reliable financial statements in conformity with United States
generally accepted accounting principles.  The system of internal
control over financial reporting as it relates to the financial statements is
evaluated for effectiveness by management and tested for reliability through a
program of internal audits.  Actions are taken to correct potential
deficiencies as they are identified.  Any system of internal control,
no matter how well designed, has inherent limitations, including the possibility
that a control can be circumvented or overridden and misstatements due to error
or fraud may occur and not be detected.  Also, because of changes in
conditions, internal control effectiveness may vary over
time.  Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial statement
preparation.





The Audit
Committee, consisting entirely of independent directors, meets regularly with
management, internal auditors and the independent registered public accounting
firm, and reviews audit plans and results, as well as management’s actions taken
in discharging responsibilities for accounting, financial reporting, and
internal control.  Yount, Hyde & Barbour, P.C., independent
registered public accounting firm, and the internal auditors have direct and
confidential access to the Audit Committee at all times to discuss the results
of their examinations.





Management
assessed the company’s system of internal control over financial reporting as of
December 31, 2007.  In making this assessment, we used the criteria
for effective internal control over financial reporting set forth in Internal
Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Based on this
assessment, management concludes that, as of December 31, 2007, its system of
internal control over financial reporting is effective and meets the criteria of
the Internal Control-Integrated Framework.  This annual report does
not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting.  Management’s
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual
report.











Item
9B.  Other Information





No reportable items.





52
 Index





PART III





Item
10.  Directors, Executive Officers, and Corporate
Governance





The
number of directors of the company may consist of not less than five nor more
than 25 persons in accordance with the company’s Articles of
Incorporation.  The number of directors is fixed by resolution of a
majority vote of shareholders and currently stands at ten.  Among
them, Mr. John A. Yeager, CPA, serves as an independent director and as the
company’s audit committee financial expert.  Mr. Yeager received his
bachelor’s degree in accounting from West Virginia University in 1980 and has
six years experience in public accounting.  During that time Mr.
Yeager gained experience in the audit of banks whose characteristics and
complexity are similar to Citizens.  Mr. Yeager also has served as
controller for two nonbanking companies for approximately nineteen
years.  He has served on the board of directors of Citizens National
Bank since April, 1999 and of Citizens Financial Corp. since April,
2003.  His current term on the holding company board expires in April,
2009. The following table sets forth the names of all of the persons who have
served as directors of Citizens Financial Corp. for the year ended December 31,
2007, their ages and principal occupations, their length of service to the
company and the expiration of their present terms.





Name and Age
              
              Principal
      Occupation During PastFive  Years
              
              DirectorSince (1)
              
              Present
      TermExpiresRobert
      N. Alday
                92
              
              President,
      Phil Williams Coal Company
              
              September,
      1986
              
              April,
      2009Max
      L. Armentrout
                70
              
              President,
      and Chairman of the Board, Laurel Lands Corp.; Chairman of the Board,
      Citizens Financial Corp.
              
              September,
      1986
              
              April,
      2008 (2)William
      J. Brown
                61
              
              President,
      Hess Oil Co., Inc.
              
              February,
      2000
              
              April,
      2010Edward
      L. Campbell
                68
              
              Co-Owner,
      Retired, Campbell’s Market
              
              February,
      2000
              
              April,
      2010William
      T. Johnson, Jr.
                64
              
              President
      and Chief Executive Officer and Executive Vice President, Citizens
      National Bank
              
              April,
      2005
              
              April,
      2008 (2)Cyrus
      K. Kump
                61
              
              President,
      Kump Enterprises; Kerr Real Estate
              
              June,
      1992
              
              April,
      2009Robert
      J. Schoonover
                68
              
              President
      and Chief Executive Officer, Citizens Financial Corp. and Citizens
      National Bank
              
              April,
      1998
              
              April,
      2010L.
      T. Williams
                77
              
              Consultant,
      Retired, Elkins Builders Supply
              
              September,
      1986
              
              April,
      2008 (2)John
      A. Yeager, CPA
                49
              
              Controller,
      Newlons International Sales, LLC
              
              April,
      2003
              
              April,
      2009





(1)
            All
      of the above named directors, with the exception of Mr. Alday, have also
      served as directors of Citizens National Bank for the past five years on a
      continuous basis.  Mr. Alday has not served Citizens National
      Bank in any official capacity.





(2)
            Mr.
      Armentrout, Mr. Johnson, and Mr. Williams have been nominated to stand for
      reelection to an additional 3 year term expiring in April,
      2011.





53
 Index





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





Name and Age
              
              PresentPosition
              
              Principal
      Occupation and Banking Experience Duringthe
      Last Five YearsRobert
      J. Schoonover
                68
              
              President
      & CEO, Citizens Financial Corp.
              
              President
      and Chief Executive Officer, Citizens Financial Corp. and Citizens
      National BankWilliam
      T. Johnson, Jr.
                64
              
              Vice
      President, Citizens Financial Corp. President &CEO, Citizens National
      Bank
              
              President
      and Chief Executive Officer and Executive Vice President, Citizens
      National BankThomas
      K. Derbyshire
                49
              
              Vice
      President & Treasurer, Citizens Financial Corp. Executive Vice
      President, Citizens National Bank
              
              Executive
      Vice President, Senior Vice President and Chief Financial Officer,
      Citizens National BankRudy
      F. Torjak, Jr.
                59
              
              Senior
      Vice President and Chief Credit Officer, Citizens National
      Bank
              
              Senior
      Vice President and Chief Credit Officer, Citizens National Bank; Senior
      Vice President-Commercial Loans, Wesbanco, Inc.Nathaniel
      S. Bonnell
                26
              
              Vice
      President and Chief Financial Officer, Citizens National
    Bank
              
              Vice
      President and Chief Financial Officer, and Financial Reporting Manager
      Citizens National Bank





Citizens has adopted a Code of Ethics
that applies to all employees, including its executive officers.  In
the event that Citizens makes any amendment to, or grants any waivers of, a
provision of the Code of Ethics that applies to the principal executive officer,
principal financial officer or principal accounting officer that requires
disclosure under applicable SEC rules, the company intends to disclose such
amendment or waiver and the reasons therefore, and Citizens will disclose the
nature of such amendment or waiver in a report on Form 8-K.  Citizens’
Code of Ethics may be viewed by accessing our website at
www.cnbelkins.com.





Item
11.  Executive Compensation





Executive
Compensation:The executive officers of Citizens Financial
Corp. serve without compensation from the company.  Those serving as
officers of the subsidiary bank are compensated by the bank for that service,
however.  The principal executive officer of the corporation serves
without compensation from the bank or the company.  He is currently
retired from the bank and receives fees for his role as a director of the
company, as well as from retirement plan distributions.  None of the
company’s executive officers serve under an employment agreement with the
company.  Compensation is primarily comprised of a base salary that is
adjusted by the Board’s personnel committee annually.  The company
currently does not provide equity or incentive based compensation to executive
officers.





The
following table sets forth the compensation of the company's Principal Executive
Officer (PEO), as well as the two most highly compensated executive officers,
other than the PEO, who were serving as executive officers at the end of the
last completed fiscal and have total annual compensation exceeding
$100,000.





SUMMARY
COMPENSATION TABLE





Name
      and
                Principal
      Position
              Year
              
              Salary
      ($)
              
              
              Nonqualified
                Deferred
                Compensation
                Earnings
      (1)
              
              
              All
      Other
                Compensation
                (2)
      (3)
              
              
              TotalRobert
      J. Schoonover,President
      & CEO
              2007
              
              $
              -
              
              
              
              N/A
              
              
              $
              83,991
              
              
              $
              83,991Citizens
      Financial Corp
              2006
              
              
              -
              
              
              
              N/A
              
              
              
              79,992
              
              
              
              79,992(Principal
      Executive Officer)William
      T. Johnson, Jr.VP,
      Citizens Financial Corp.
              2007
              
              
              145,906
              
              
              $
              12,753
              
              
              
              17,113
              
              
              
              175,772President
      & CEO,
              2006
              
              
              126,356
              
              
              
              21,572
              
              
              
              16,927
              
              
              
              164,855Citizens
      National BankThomas
      K. DerbyshireVP
      & Treasurer,
              2007
              
              
              136,090
              
              
              
              4,533
              
              
              
              3,880
              
              
              
              144,503Citizens
      Financial Corp.
              2006
              
              
              120,113
              
              
              
              5,664
              
              
              
              5,851
              
              
              
              131,628Executive
      Vice President,
                Citizens
      National Bank




54
 Index




(1)
            Mr.
      Schoonover is retired from the bank and receives payments from
      supplemental retirement plans.  The payment of such benefits
      results in a decrease in the value of each nonqualified deferred
      compensation plan, therefore these have been excluded from the table
      above.  He participates in the executive supplemental income
      plan and the executive and director supplemental retirement plan; the
      change in the values of those plans was $(33,091) in 2007 and $(42,227) in
      2006.


(2)
            Mr.
      Schoonover and Mr. Johnson also serve as members of the board of
      directors.  In 2007, for his services as a director, Mr.
      Schoonover received director fees of $26,519 for board and committee
      meetings, as well as other compensation totaling $27,859 which included
      $20,004 for consulting fees and the remainder for insurance premiums paid
      for the benefit of the director.  In 2006, Mr. Schoonover
      received director fees of $22,279 for board and committee meetings, as
      well as other compensation totaling $28,228. Mr. Johnson received $9,219
      and $9,319 in director fees for his services on the board for 2007 and
      2006, respectively.


(3)
            In
      addition to the board fees described in the preceding footnote, this
      column includes the company’s contributions to the individual’s 401(k)
      retirement savings program to which the individual has a vested interest
      and taxable income resulting from participation in a bank sponsored
      executive and director supplemental retirement plan.  The bank's
      group life and health insurance program, which is paid for by the bank, is
      made available to all full-time employees and does not discriminate in
      favor of directors or officers; however, in accordance with IRS Code
      Section 79, the cost of group term life insurance coverage for an
      individual in excess of $50,000 is added to the individual's earnings and
      is also included in this figure.  Since Mr. Schoonover is
      retired from the bank his figure also includes, $9,061 received from the
      executive supplemental income plan, $20,424 received from the executive
      and director supplemental retirement plan for each of the years
      presented.





Retirement
Plans:Citizens Financial Corp., having no employees,
has no retirement program, but Citizens National Bank has a pension program for
its eligible employees.  This pension plan is a qualified retirement
plan and is available to all employees, including officers, who meet the
eligibility requirements.  Directors do not participate in this plan.
The bank’s defined benefit pension plan covers all employees who meet the
eligibility requirements.  To be eligible, an employee must be 21
years of age and have completed one year/1,000 hours of continuous
service.  Our funding policy is to make annual contributions as
permitted or required by applicable regulations.  Pensions for all
participants are based on five-year average final
compensation.  Credits are received for each year of participation at
the following rates: 1 percent of the first $9,600 of the 5-year average final
compensation and 1.5 percent of such average final compensation in excess of
$9,600, all multiplied by years of service up to a 25-year
maximum.  The pension benefits are payable to participants on a
monthly basis in the form of a joint and 50 percent survivor annuity for all
married participants who do not elect otherwise, or in the form of a single life
annuity for all other participants or survivors.  Joint and 100
percent survivorship, single life annuity or 120 payments guaranteed are other
optional forms of distribution.  Under the plan, the normal retirement
age is 65.  However, an employee can retire beginning at age 60 and
received full benefits based on the same formula described above using their
current years of service and last five years of compensation.  Mr.
Schoonover, who is retired from the bank, is currently receiving an annual
benefit of $30,467 under this plan.  Mr. Johnson is eligible to retire
under the early retirement provisions of this plan.  Additional
information regarding the plan is contained in Note 11 to the accompanying
consolidated financial statements.





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, 2007, 2006 and 2005 may be found in Note 11 to the
accompanying consolidated financial statements.





The bank entered into a nonqualified
supplemental income plan with certain senior officers as described in Note 11 to
the accompanying consolidated financial statements.  A copy of the
plan, and the amendments thereto, are incorporated herein by reference to the
exhibits contained in the company’s Forms 10-K dated December 31, 1997 and
1996.  The plan was originally established for certain key officers
after the employee pension plan benefit calculations were revised and benefits
were reduced.  This plan was purchased to replace the lost retirement
income the officers had suffered through the pension
modification.  Normal retirement age under the plan is
65.  However, executives can receive 100% of
their retirement benefit if they retire early after age 62 and have completed 30
years of service.  This deferred compensation plan calls for 180 equal
monthly payments to be paid beginning after retirement.  The monthly
retirement benefit for Mr. Schoonover, Mr. Johnson, and Mr. Derbyshire is $755,
$669, and $1,069, respectively.  These payment amounts were determined
at plan inception as a direct result of the benefits lost in the pension
modification.  Mr. Schoonover is currently receiving benefits under
the plan, and Mr. Johnson is currently qualified to retire under the early
retirement provisions.





55
 Index




Also as
explained in Note 11, effective January 1, 2003, the bank entered into another
nonqualified executive and director supplemental retirement plan with its
directors and those officers who qualified.  A copy of the plan is
incorporated herein by reference to Exhibit 10 contained in the company’s Form
10-K dated December 31, 2003.  This plan was designed to reward
directors and key officers for their service on a basis consistent with that of
many of our competitors.  Benefits paid under the plan (if any) are
the result of excess after-tax earnings of certain life insurance contracts
purchased by the bank over a defined opportunity cost.  The
opportunity cost is defined as a rolling 5 year average of the 3 year Treasury
bill.  The excess earnings are used to compute a retirement benefit
that is recorded in a pre-retirement account as a liability on books of the
registrant for each plan year.  The change in the pre-retirement
benefit is included in the summary compensation table above under the caption
Nonqualified Deferred
Compensation Earnings.  Upon retirement of an executive, the
balance in the pre-retirement account is paid to the executive in 120 monthly
installments or until the executive’s death.  In addition to these
payments, the retiree also receives the additional excess earnings for each plan
year subsequent to his retirement until death.  These excess earnings
are calculated using the same formula as described in this
paragraph.  The plan defines normal retirement age as 65, but an
executive can retire with 100% of his benefits at age 62 if he has 30 years of
service with the company. If the executive retires or leaves employment before
he is age 65 and does not have 30 years of service, he will receive no benefit
from the plan.  Mr. Schoonover receives benefits from this plan, and
Mr. Johnson is currently qualified to retire under this plan with full
benefits.  The plan also includes a death benefit for each
executive.  If an executive dies before retirement, his designee will
receive a death benefit of two and one half times the executive’s final pre-tax
gross salary.  If the executive dies after retirement, his designee
will receive a $100,000 death benefit.  In either case, the
executive’s designee also receives any remaining retirement benefit as
well.





Other
Benefits:  Senior management also participates in the bank’s
other benefit plans on the same terms as other employees.  These plans
include medical insurance, life insurance, and discounts on bank
products.





Change in
Control:No employment contracts exist between any executive
officer and the registrant, or its subsidiary.  However, the executive
supplemental income plan and the executive and director supplemental retirement
plan described above both contain a change in control clause.





Under the
executive supplemental income plan, if a change in control occurs and the
executive voluntarily terminates his position, is permanently disabled, or is
discharged without just cause he is entitled to receive full benefits under this
plan up beginning at the early retirement age (62) without satisfying any
minimum years of service requirement. The monthly retirement benefit for Mr.
Schoonover, Mr. Johnson, and Mr. Derbyshire is $755, $669, and $1,069,
respectively.





Under the
executive and director supplemental retirement plan, if there is a change in
control and the executive is subsequently terminated without cause, the benefits
to be received under the plan vest as if the executive had worked for the
company until normal retirement age.  The executive will continue to
accrue benefits based on the original benefit formula and will receive benefits
upon attaining normal retirement age.





Director
Compensation:  The following table presents the compensation of
the directors of the company for the year ended December 31, 2007:





DIRECTOR
COMPENSATION





Name
            
            Fees
      Earned or Paid in Cash
            
            
            Nonqualified
      Deferred Compensation Earnings
            
            
            All
      Other Compensation (1)
            
            
            TotalRobert
      N. Alday
            
            $
            600
            
            
            $
            -
            
            
            $
            -
            
            
            $
            600Max
      L. Armentrout
            
            
            20,859
            
            
            
            20,511
            
            
            
            37,751
            
            
            
            79,121William
      J. Brown
            
            
            20,359
            
            
            
            7,837
            
            
            
            11,017
            
            
            
            39,213Edward
      L. Campbell
            
            
            14,209
            
            
            
            11,985
            
            
            
            10,812
            
            
            
            37,006John
      F. Harris (2)
            
            
            11,434
            
            
            
            3,937
            
            
            
            252
            
            
            
            15,623Cyrus
      K. Kump
            
            
            24,219
            
            
            
            8,308
            
            
            
            11,017
            
            
            
            43,544L.T.
      Williams
            
            
            21,319
            
            
            
            15,626
            
            
            
            252
            
            
            
            37,197John
      A. Yeager
            
            
            18,569
            
            
            
            -
            
            
            
            594
            
            
            
            19,163




56
 Index





(1)
            For
      his service as chairman of the board, Mr. Armentrout received consulting
      fees of $26,784.  The bank paid health insurance premiums for
      Mr. Armentrout, Mr Brown, Mr. Campbell, and Mr. Kump in the amount of
      $10,255 per person.


(2)
            Mr.
      Harris retired from the board of directors July 20, 2007 at age
      79.  Mr. Harris’ retirement was not the result of any
      disagreement or conflict with the company’s directors or executive
      officers.  Mr. Harris had served as a director of Citizens
      Financial Corp. since its inception in
1986.





The table
above includes all directors of Citizens Financial Corp, except for Robert J.
Schoonover and William T. Johnson, Jr. who also serve as executive
officers.  With the exception of Mr. Alday, each director also serves
on the board for Citizens National Bank.  The table includes
compensation from the company and the subsidiary bank.  There are four
additional directors excluded from the table above that only serve on the board
for Citizens National Bank.  The bank directors, Dickson W. Kidwell,
Franklin M. Santmyer, Jr., Thomas A. Wamsley, and C. Curtis Woodford earned
total compensation of $34,886, $13,291, $23,859, and $10,171,
respectively.





Directors
of the registrant are compensated for meetings attended in the amount of $100
per meeting. Directors of the bank receive $663 per meeting.  Under
normal circumstances, the Board of Citizens Financial Corp. meets quarterly
while the Citizens National Bank Board meets monthly. Directors also receive
monthly fees for serving on and attending the meetings of various committees
such as the loan committee, audit committee, or compliance
committee.  Directors do not participate in the bank’s pension
plan.  However, they do participate in the executive and director
supplemental retirement plan.  The benefit calculation of the plan for
the directors is substantially the same as the officers, except their vesting
period to receive benefits is 15 years, normal retirement age is 70 and their
death benefit is $100,000 regardless of retirement status.  The amount
of earnings allocated to each director under this plan is included in the above
table.





Also
included in the Other Compensation column above are insurance premiums paid by
the bank for benefit of the directors, as well as a consulting fee paid to
chairman of Citizens Financial Corp., Max L. Armentrout in the amount of
$26,784.








Item
12.  Security Ownership of Certain Beneficial Owners and
Management





The company does not have any plan that
provides for the issuance of any securities under equity compensation
plans.





The
company has one shareholder, Max L. Armentrout, who is the beneficial owner of
more than 5% of the company's common stock, the only class of stock outstanding,
as of February 28, 2008.  Mr. Armentrout, who is chairman of the board
of directors of the company, beneficially owns 94,220 shares or 5.15% of the
outstanding stock.  His direct and indirect ownership is disclosed in
the table below.





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, 2008.





Shares of Stock Beneficially
      Owned
            
            
            Percent
      ofName
            
            Direct
            
            
            Indirect
            
            
            Total
            
            
            OwnershipMax
      L. Armentrout
            
            
            79,005
            
            
            
            15,215
            (1)
            
            
            94,220
            
            
            
            5.15
            %PO
      Box 1758Elkins,
      WV  26241Robert
      N. Alday
            
            
            1,500
            
            
            
            60,600
            (2)
            
            
            62,100
            
            
            
            3.39
            %William
      J. Brown
            
            
            2,250
            
            
            
            3,250
            (3)
            
            
            5,500
            
            
            
            0.30
            %Edward
      L. Campbell
            
            
            1,500
            
            
            
            450
            (4)
            
            
            1,950
            
            
            
            0.11
            %William
      T. Johnson, Jr.
            
            
            1,500
            
            
            
            8,554
            (5)
            
            
            10,054
            
            
            
            0.55
            %Cyrus
      K. Kump
            
            
            1,500
            
            
            
            11,550
            (6)
            
            
            13,050
            
            
            
            0.71
            %Robert
      J. Schoonover
            
            
            1,500
            
            
            
            300
            (7)
            
            
            1,800
            
            
            
            0.10
            %L.
      T. Williams
            
            
            5,250
            
            
            
            0
            
            
            
            5,250
            
            
            
            0.29
            %John
      A. Yeager
            
            
            5,025
            
            
            
            475
            (8)
            
            
            5,500
            
            
            
            0.30
            %Thomas
      K. Derbyshire
            
            
            210
            
            
            
            0
            
            
            
            210
            
            
            
            0.01
            %Directors
      and executive officers of the Bank
            
            
            11,420
            
            
            
            10,740
            
            
            
            22,160
            (9)
            
            
            1.21
            %All
      Directors and executive officers as a group
            
            
            110,660
            
            
            
            111,134
            
            
            
            221,794
            
            
            
            12.12
            %




57
 Index





(1)
            These
      15,215 shares are owned by Mr. Armentrout's
  wife.





(2)
            Mr.
      Alday's  indirect  ownership  includes
      20,400 shares owned by his wife and 40,200 shares which he votes for the
      Phil Williams Coal Company.  The 40,200 shares he votes for the
      Phil Williams Coal Company are also pledged as collateral for a loan made
      in the normal course of business by the subsidiary
  bank.





(3)
            Includes
      1,750 shares owned jointly with his wife and 1500 shares held in custody
      for their children.





(4)
            Includes
      300 shares owned jointly with his wife and 150 shares owned by his
      wife.





(5)
            Includes
      5,734 shares owned jointly with his wife and 2,820 shares owned by his
      wife.





(6)
            Includes
      6,050 shares owned by his wife and 5,500 shares held in custody for their
      children.





(7)
            These
      300 shares are owned jointly with his
wife.





(8)
            These
      475 shares are owned jointly with his
wife.





(9)
            This
      figure represents the ownership of persons who are directors of the
      subsidiary bank but not of the company.  Such persons number
      four.








Item
13.  Certain Relationships and Related Transactions and Director
Independence





Management
personnel of Citizens Financial Corp. have had and expect to continue to have
banking transactions with Citizens National Bank in the ordinary course of
business. Extensions of credit to such persons are made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons.  It is the opinion of management that these
transactions do not involve more than a normal risk of collectibility or present
other unfavorable features.





As of
December 31, 2007, outstanding loan balances to related parties totaled
$6,311,436 or 29.9% of equity capital with unused lines of credit of $1,427,620
or 6.8% 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 $120,000, or was not subject to the usual terms or
conditions, or was not determined by competitive bids.  Information
related to loans granted to related parties in excess of $120,000 is contained
in Note 5 to the accompanying consolidated financial
statements.  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 2007 which exceeds 5
percent of either party's gross revenue.





Item
14.  Principal Accounting Fees and Services





Fees for
services provided by our principal accountants are provided below:





2007
            
            
            2006Audit
      Fees
            
            $
            58,900
            
            
            $
            39,050Audit-Related
      Fees
            
            
            22,277
            
            
            
            7,647Tax
      Fees
            
            
            5,100
            
            
            
            5,600All
      Other Fees
            
            
            -
            
            
            
            -





Audit fees consist of fees for
professional services rendered for the audit of the Company’s financial
statements and review of financial statements included in the Company’s
quarterly reports.  Audit-related fees are primarily related to
consultations concerning financial accounting and reporting
standards.  The increase in 2007 audit-related fees is primarily
attributable to assurance services on the methodology used in developing the
company’s allowance for loan losses.  Tax fees
consist of compliance fees for the preparation of original tax returns and fees
for tax consulting services.





58
 Index




The Audit Committee Charter requires
that the audit committee pre-approve all audit and non-audit services to be
provided to Citizens by the independent accountants; provided, however, that the
audit committee may specifically authorize its chairman to pre-approve the
provision of any non-audit service to the company.  Further, the
foregoing pre-approved policies may be waived, with respect to the provision of
any non-audit services consistent with the exceptions for federal securities
law.  All of the audit, audit related, and tax services described
above were pre-approved by the audit committee.





Part IV





Item
15.  Exhibits and Financial Statements Schedules





(a)
            (1)
      and (2) Financial Statements and Financial Statement
      Schedules.


All
financial statements and financial statement schedules required to be filed by
Item 8 of this Form or by Regulation S-X which are applicable to the registrant
have been presented in the financial statements, notes thereto, in management's
discussion and analysis of financial condition and results of operations or
elsewhere where appropriate.





(3)           The
following is a list of all exhibits filed as part of this report:





59
 Index





INDEX TO
EXHIBITS





3
      (i)
            
            The
      company’s Articles of Incorporation, which were previously filed as
      amended on pages 23-35 of it’s Form 10-Q dated March 31, 2006, are
      incorporated herein by reference.3
      (ii)
            
            The
      company’s Bylaws, which were previously filed as amended on pages 36-41 of
      it’s Form 10-Q dated March 31, 2006, are incorporated herein by
      reference.4
            
            The
      rights of security holders are defined in the Articles of Incorporation
      which were previously filed as amended on
      pages 66-70 of our Form 10-K dated December 31, 1999 which is incorporated
      herein by reference.10
            
            The
      following material contracts are incorporated by reference into this
      filing:1)  The
      bank’s Executive Supplemental Income Agreement as previously filed on
      pages 74-80 of the company’s Form 10-K dated December 31, 1995 and
      thereafter amended and filed on page 62 of the company’s Form 10-K dated
      December 31, 1996.2)  The
      bank’s Purchase and Assumption Agreement with South Branch Valley National
      Bank for the purchase of it’s banking facilities, assets and liabilities
      located in Petersburg, West Virginia dated December 17, 1999 and filed on
      pages 71-113 of the company’s Form 10-K dated December 31,
      1999.3)  The
      bank’s Supplemental Retirement and Split Dollar Life Insurance plans for
      executives and directors dated January 1, 2003 and previously filed on
      pages 75-110 of it’s Form 10-K dated December 31, 2003.11
            
            The
      computation of per share earnings may be clearly determined by the
      material contained in this filing.12
            
            The
      computation of minimum standard capital ratios, as contained in this
      report, was done as specified in applicable regulatory
      guidelines.  All other ratios presented may be clearly
      determined from the material contained in this filing14
            
            The
      company’s Code of Ethics, which is applicable to all employees of the
      company and it’s subsidiary, including the principal executive officer and
      principal accounting officer, has been made available on the company’s
      website, www.cnbelkins.com, and is,
      therefore, not filed as part of this Form 10-K.21
            
            List
      of subsidiaries of the registrant (filed herewith).23
            
            Consent
      of Yount, Hyde and Barbour, P.C. (filed herewith).31.01
            
            Certification
      of the Principal Executive Officer pursuant to Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed herewith).31.02
            
            Certification
      of the Principal Financial Officer pursuant to Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed herewith).32.01
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350 (filed herewith).32.02
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350 (filed herewith).99
            
            Notice
      of Annual Meeting of Stockholders and Proxy(b)
            
            Exhibits
      required by item 601 of Regulation S-K-all applicable exhibits have been
      filed as detailed in the Index to Exhibits.  Exhibits contained
      in item 601 of Regulation S-K but not contained in the Index are not
      applicable or are not required in Form
10-K.




60
 Index





Signatures





Pursuant
to the requirements of Section 15(d) of the Securities  Exchange Act
of 1934, the registrant has duly  caused this  report to
be  signed on its behalf by the undersigned, thereunto duly
authorized.





Citizens
      Financial Corp.By  /s/ Robert J.
      SchoonoverRobert
      J. SchoonoverPresident
      and Chief Executive OfficerDate:
            3/12/08By  /s/ Thomas K.
      DerbyshireThomas
      K. DerbyshireTreasurer
      and Principal Financial OfficerDate:
            3/12/08





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
            
            3/12/08Max
      L. Armentrout
            
            and
      DirectorDirectorRobert
      N. Alday/s/ William J. Brown
            
            Director
            
            3/12/08William
      J. Brown/s/ Edward L. Campbell
            
            Director
            
            3/12/08Edward
      L. Campbell/s/ William T. Johnson, Jr.
            
            Director
            
            3/12/08William
      T. Johnson, Jr./s/ Cyrus K. Kump
            
            Director
            
            3/12/08Cyrus
      K. Kump/s/ Robert J. Schoonover
            
            Director
            
            3/12/08Robert
      J. Schoonover/s/ L. T. Williams
            
            Director
            
            3/12/08L.
      T. WilliamsDirectorJohn A. Yeager




61
 Index





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
has been furnished to the Commission for its information under separate cover,
in paper format, concurrent with submission to stockholders on  March
21, 2008.






62