UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





QUARTERLY  REPORT  PURSUANT  TO
SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF
1934





For
      the quarterly period ended
            September 30,
  2009





Commission
file number 2-96144





CITIZENS
      FINANCIAL CORP.(Exact
      name of registrant as specified in its charter)Delaware
            55-0666598(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)213 Third Street, Elkins, West
      Virginia
            26241(Address
      of principal executive offices)
            (Zip
      Code)(304) 636-4095(Registrant's
      telephone number, including area code)Not Applicable(Former
      name, former address and former fiscal year, if changed since last
      report.)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 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.           Yesx No o





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).   Yeso Noo





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 filero
            Accelerated
      fileroNon-accelerated
      filero
            Smaller
      reporting companyx





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





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.




Outstanding
      atClass
            November 12, 2009Common
      Stock ($2 par value)
            1,829,504







1


FORM10-Q


CITIZENS
FINANCIAL CORP.


Quarter
Ended September 30, 2009





INDEX





Page No.Part
      I.
            Financial
      InformationItem 1.  Financial StatementsCondensed Consolidated Balance Sheets September 30, 2009 and
      December 31, 2008
            3Condensed Consolidated Statements of Income Three Months Ended
      September 30, 2009 and September 30, 2008 and Nine Months Ended September
      30, 2009 and September 30, 2008
            4Consolidated Statements of Comprehensive Income/Loss Three
      Months Ended September 30, 2009 and September 30, 2008 and Nine Months
      Ended September 30, 2009 and September 30, 2008
            5Condensed Consolidated Statements of Changes in Shareholders'
      Equity Nine Months Ended September 30, 2009 and September 30,
      2008
            6Condensed Consolidated Statements of Cash Flows Nine Months
      Ended September 30, 2009 and September 30, 2008
            7Notes to Condensed Consolidated Financial
      Statements
            8-19Item 2.  Management's Discussion and Analysis of
      Financial Condition and Results of Operatons
            19-27Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            Not
      ApplicableItem 4.  Controls and Procedures
            27Part
      II.
            Other
      Information and Index to ExhibitsItems 1 through 6
            27Signatures
            28Certification
      by Executive Officers Pursuant to Sections 302 and 906 of the
      Sarbanes-Oxley Act of 2002
            29-32


2
 Index


PARTI ITEM I - FINANCIAL INFORMATION


CITIZENS
FINANCIAL CORP.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands of dollars)





September
      30,
            
            
            December
      31,2009
            
            
            2008(Unaudited)
            
            
            *ASSETSCash
      and due from banks
            
            $
            3,216
            
            
            $
            3,943Interest
      bearing deposits with other banks
            
            
            1,821
            
            
            
            9,438Securities
      available for sale, at fair value
            
            
            62,741
            
            
            
            80,859Restricted
      Investments
            
            
            1,653
            
            
            
            1,192Loans,
      less allowance for loan losses of $2,353 and $2,232,
      respectively
            
            
            161,631
            
            
            
            175,721Premises
      and equipment, net
            
            
            2,658
            
            
            
            4,106Accrued
      interest receivable
            
            
            1,072
            
            
            
            1,410Other
      assets
            
            
            4,827
            
            
            
            5,865Total
      Assets
            
            $
            239,619
            
            
            $
            282,534LIABILITIES AND SHAREHOLDERS'
      EQUITYDeposits:Noninterest
      bearing
            
            $
            26,563
            
            
            $
            29,553Interest
      bearing
            
            
            153,469
            
            
            
            187,876Total
      deposits
            
            
            180,032
            
            
            
            217,429Short-term
      borrowings
            
            
            25,724
            
            
            
            31,526Long-term
      borrowings
            
            
            7,560
            
            
            
            7,865Other
      liabilities
            
            
            3,952
            
            
            
            4,873Total
      liabilities
            
            
            217,268
            
            
            
            261,693Commitments
      and contingencies
            
            
            -
            
            
            
            -SHAREHOLDERS' EQUITYCommon
      stock, $2.00 par value, authorized 4,500,000 issued
    2,250,000
            
            
            4,500
            
            
            
            4,500Retained
      earnings
            
            
            22,153
            
            
            
            21,110Accumulated
      other comprehensive loss
            
            
            (470
            )
            
            
            (937
            )Treasury
      stock at cost, 420,496 shares
            
            
            (3,832
            )
            
            
            (3,832
            )Total
      shareholders' equity
            
            
            22,351
            
            
            
            20,841Total
      Liabilities and Shareholders' Equity
            
            $
            239,619
            
            
            $
            282,534





*From
audited financial statements.





The
accompanying notes are an integral part of these financial
statements.


3
 Index


CITIZENSFINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(In
thousands of dollars, except per share data)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008INTEREST INCOME
            
            (Unaudited)
            
            
            (Unaudited)Interest
      and fees on loans
            
            $
            2,415
            
            
            $
            2,946
            
            
            $
            7,536
            
            
            $
            9,070Interest
      and dividends on securities:Taxable
            
            
            469
            
            
            
            665
            
            
            
            1,579
            
            
            
            1,567Tax-exempt
            
            
            193
            
            
            
            213
            
            
            
            601
            
            
            
            626Interest
      on interest bearing deposits with other banks
            
            
            1
            
            
            
            44
            
            
            
            41
            
            
            
            75Interest
      on federal funds sold
            
            
            -
            
            
            
            17
            
            
            
            -
            
            
            
            28Total
      interest income
            
            
            3,078
            
            
            
            3,885
            
            
            
            9,757
            
            
            
            11,366INTEREST EXPENSEInterest
      on deposits
            
            
            862
            
            
            
            1,421
            
            
            
            2,805
            
            
            
            4,424Interest
      on short-term borrowings
            
            
            116
            
            
            
            104
            
            
            
            351
            
            
            
            323Interest
      on long-term borrowings
            
            
            72
            
            
            
            77
            
            
            
            218
            
            
            
            171Total
      interest expense
            
            
            1,050
            
            
            
            1,602
            
            
            
            3,374
            
            
            
            4,918Net
      interest income
            
            
            2,028
            
            
            
            2,283
            
            
            
            6,383
            
            
            
            6,448Provision
      for loan losses
            
            
            177
            
            
            
            117
            
            
            
            471
            
            
            
            465Net
      interest income after provision for loan losses
            
            
            1,851
            
            
            
            2,166
            
            
            
            5,912
            
            
            
            5,983NONINTEREST INCOMETrust
      department income
            
            
            52
            
            
            
            53
            
            
            
            178
            
            
            
            190Brokerage
      fees
            
            
            20
            
            
            
            33
            
            
            
            63
            
            
            
            122Service
      fees
            
            
            256
            
            
            
            326
            
            
            
            754
            
            
            
            839Insurance
      commissions
            
            
            10
            
            
            
            14
            
            
            
            33
            
            
            
            27Security
      gains/(losses)
            
            
            31
            
            
            
            (57
            )
            
            
            117
            
            
            
            (53
            )Impairment
      of Securities
            
            
            -
            
            
            
            -
            
            
            
            (163
            )
            
            
            -Secondary
      market loan fees
            
            
            16
            
            
            
            25
            
            
            
            106
            
            
            
            54Gain
      on sale of branches
            
            
            -
            
            
            
            -
            
            
            
            465
            
            
            
            -Gain
      on postretirement plan curtailment
            
            
            -
            
            
            
            -
            
            
            
            108
            
            
            
            -Other
            
            
            41
            
            
            
            56
            
            
            
            146
            
            
            
            175Total
      noninterest income
            
            
            426
            
            
            
            450
            
            
            
            1,807
            
            
            
            1,354NONINTEREST EXPENSESalaries
      and employee benefits
            
            
            872
            
            
            
            1,017
            
            
            
            2,834
            
            
            
            2,913Net
      occupancy expense
            
            
            82
            
            
            
            103
            
            
            
            290
            
            
            
            325Equipment
      expense
            
            
            75
            
            
            
            91
            
            
            
            248
            
            
            
            282Data
      processing
            
            
            135
            
            
            
            138
            
            
            
            471
            
            
            
            426Director
      fees
            
            
            63
            
            
            
            68
            
            
            
            200
            
            
            
            197Postage
            
            
            25
            
            
            
            36
            
            
            
            95
            
            
            
            131Professional
      service fees
            
            
            114
            
            
            
            93
            
            
            
            258
            
            
            
            237Stationery
            
            
            37
            
            
            
            28
            
            
            
            107
            
            
            
            88Software
      expense
            
            
            69
            
            
            
            62
            
            
            
            195
            
            
            
            187FDIC
      insurance assessment
            
            
            72
            
            
            
            50
            
            
            
            315
            
            
            
            107Other
            
            
            178
            
            
            
            249
            
            
            
            726
            
            
            
            719Total
      noninterest expense
            
            
            1,722
            
            
            
            1,935
            
            
            
            5,739
            
            
            
            5,612Income
      before income taxes
            
            
            555
            
            
            
            681
            
            
            
            1,980
            
            
            
            1,725Income
      tax expense
            
            
            127
            
            
            
            169
            
            
            
            498
            
            
            
            398Net
      income
            
            $
            428
            
            
            $
            512
            
            
            $
            1,482
            
            
            $
            1,327Basic
      and fully diluted earnings per common share
            
            $
            0.23
            
            
            $
            0.28
            
            
            $
            0.81
            
            
            $
            0.73Weighted
      average shares outstanding
            
            
            1,829,504
            
            
            
            1,829,504
            
            
            
            1,829,504
            
            
            
            1,829,504Dividends
      per common share
            
            $
            0.12
            
            
            $
            0.12
            
            
            $
            0.24
            
            
            $
            0.36





The
accompanying notes are an integral part of these financial
statements.


4
 Index


CITIZENSFINANCIAL CORP.


STATEMENTS
OF COMPREHENSIVE INCOME


(In
thousands of dollars)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30
            
            
            September 302009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Net
      income
            
            $
            428
            
            
            $
            512
            
            
            $
            1,482
            
            
            $
            1,327Other
      comprehensive income/(loss):Gross
      unrealized gain/(loss) arising during the period
            
            
            998
            
            
            
            357
            
            
            
            614
            
            
            
            (358
            )Adjustment
      for income tax (benefit)/expense
            
            
            (379
            )
            
            
            (136
            )
            
            
            (233
            )
            
            
            136619
            
            
            
            221
            
            
            
            381
            
            
            
            (222
            )Reclassification
      adjustment for losses on impairment of securities
            
            
            -
            
            
            
            -
            
            
            
            163
            
            
            
            -Adjustment
      for income tax benefit
            
            
            -
            
            
            
            -
            
            
            
            (63
            )
            
            
            --
            
            
            
            -
            
            
            
            100
            
            
            
            -Reclassification
      adjustment for (gains)/losses included in net income
            
            
            (31
            )
            
            
            57
            
            
            
            (117
            )
            
            
            53Adjustment
      for income tax benefit/(expense)
            
            
            12
            
            
            
            (21
            )
            
            
            45
            
            
            
            (20
            )(19
            )
            
            
            36
            
            
            
            (72
            )
            
            
            33Change
      in other post-retirement plan benefit obligations
            
            
            -
            
            
            
            -
            
            
            
            21
            
            
            
            -Adjustment
      for income tax expense
            
            
            -
            
            
            
            -
            
            
            
            (8
            )
            
            
            --
            
            
            
            -
            
            
            
            13
            
            
            
            -Other
      post-retirement plan curtailment
            
            
            -
            
            
            
            -
            
            
            
            72
            
            
            
            -Adjustment
      for income tax expense
            
            
            -
            
            
            
            -
            
            
            
            (27
            )
            
            
            --
            
            
            
            -
            
            
            
            45
            
            
            
            -Other
      comprehensive income/(loss), net of tax
            
            
            600
            
            
            
            257
            
            
            
            467
            
            
            
            (189
            )Comprehensive
      income
            
            $
            1,028
            
            
            $
            769
            
            
            $
            1,949
            
            
            $
            1,138





The
accompanying notes are an integral part of these financial
statements.


5
 Index


CITIZENSFINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


(In
thousands of dollars)





Nine Months Ended September 30, 2009 and
      2008(unaudited)Accumulated
            
            
            
            
            
            TotalOther
            
            
            
            
            
            Share-Common Stock
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasury
            
            
            holders'Shares
            
            
            Amount
            
            
            Earnings
            
            
            Income/(Loss)
            
            
            Stock
            
            
            EquityBalance,
      January 1, 2009
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            21,110
            
            
            $
            (937
            )
            
            $
            (3,832
            )
            
            $
            20,841Net
      income
            
            
            -
            
            
            
            -
            
            
            
            1,482
            
            
            
            -
            
            
            
            -
            
            
            
            1,482Other
      comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            467
            
            
            
            -
            
            
            
            467Cash
      dividends declared ($0.24 per share)
            
            
            -
            
            
            
            -
            
            
            
            (439
            )
            
            
            -
            
            
            
            -
            
            
            
            (439
            )Balance
      September 30, 2009
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            22,153
            
            
            $
            (470
            )
            
            $
            (3,832
            )
            
            $
            22,351Balance,
      January 1, 2008
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            20,999
            
            
            $
            (586
            )
            
            $
            (3,832
            )
            
            $
            21,081Net
      income
            
            
            -
            
            
            
            -
            
            
            
            1,327
            
            
            
            -
            
            
            
            -
            
            
            
            1,327Other
      comprehensive loss, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (189
            )
            
            
            -
            
            
            
            (189
            )Cash
      dividends declared ($0.36 per share)
            
            
            -
            
            
            
            -
            
            
            
            (659
            )
            
            
            -
            
            
            
            -
            
            
            
            (659
            )Effect
      of initial application of accounting pronouncement on recognizing
      liabilities on split-dollar life insurance obligations, net of
      tax
            
            
            -
            
            
            
            -
            
            
            
            (53
            )
            
            
            -
            
            
            
            -
            
            
            
            (53
            )Effect
      of changing pension planmeasurement date, net of
tax
            
            
            -
            
            
            
            -
            
            
            
            (20
            )
            
            
            -
            
            
            
            -
            
            
            
            (20
            )Balance
      September 30, 2008
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            21,594
            
            
            $
            (775
            )
            
            $
            (3,832
            )
            
            $
            21,487





The
accompanying notes are an integral part of these financial
statements.


6
 Index


CITIZENSFINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands of dollars)





Nine
      Months EndedSeptember 30,2009
            
            
            2008Cash
      flows from operating activities:
            
            (Unaudited)Net
      Income
            
            $
            1,482
            
            
            $
            1,327Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for loan losses
            
            
            471
            
            
            
            465Depreciation
      and amortization
            
            
            194
            
            
            
            238Amortization
      on securities
            
            
            -
            
            
            
            30(Gain)/loss
      on sale/call of securities
            
            
            (117
            )
            
            
            53Impairment
      of securities
            
            
            163
            
            
            
            -Loss
      on disposal of equipment
            
            
            -
            
            
            
            5Gain
      on sale of other assets
            
            
            -
            
            
            
            (6
            )Gain
      on sale of branches
            
            
            (465
            )
            
            
            -Gain
      on postretirement plan curtailment
            
            
            (108
            )
            
            
            -Loss
      on sale of other real estate
            
            
            10
            
            
            
            -(Increase)/decrease
      in accrued int. receivable
            
            
            338
            
            
            
            (159
            )(Increase)/decrease
      in other assets
            
            
            746
            
            
            
            (1,724
            )Increase/(decrease)
      in other liabilities
            
            
            (849
            )
            
            
            622Cash
      provided by operating activities
            
            
            1,865
            
            
            
            851Cash
      flows from investing activities:Principal
      payments on available for sale securities
            
            
            5,692
            
            
            
            2,684Proceeds
      from sales of available for sale
    securities  4,955
            
            
            1,936Proceeds
      from maturities and calls, available for sale securities
            
            
            18,395
            
            
            
            17,960Purchases
      of available for sale securities
            
            
            (10,772
            )
            
            
            (45,575
            )Purchases
      of premises and equipment
            
            
            (137
            )
            
            
            (100
            )Proceeds
      from sale of other real estate
            
            
            227
            
            
            
            248Proceeds
      from sale of premises and equipment
            
            
            1,086
            
            
            
            -Proceeds
      from sale of branch loans
            
            
            13,713
            
            
            
            -Increase
      in loans
            
            
            (282
            )
            
            
            (3,160
            )Cash
      provided/(used) by investing activities
            
            
            32,877
            
            
            
            (26,007
            )Cash
      flows from financing activities:Cash
      dividends paid
            
            
            (439
            )
            
            
            (659
            )Decrease
      in short-term borrowing
            
            
            (5,802
            )
            
            
            (2,367
            )Acquisition
      of long-term borrowing
            
            
            -
            
            
            
            5,530Repayment
      of long-term borrowing
            
            
            (305
            )
            
            
            (284
            )Cash
      paid for sale of branch deposits
            
            
            (21,276
            )
            
            
            -Decrease
      in time deposits
            
            
            (16,615
            )
            
            
            (2,067
            )Increase
      in other deposits
            
            
            1,351
            
            
            
            29,174Cash
      provided/(used) by financing activities
            
            
            (43,086
            )
            
            
            29,327Net
      (decrease)/increase in cash and cash equivalents
            
            
            (8,344
            )
            
            
            4,171Cash
      and cash equivalents at beginning of period
            
            
            13,381
            
            
            
            7,062Cash
      and cash equivalents at end of period
            
            $
            5,037
            
            
            $
            11,233Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            3,412
            
            
            $
            4,972Income
      taxes
            
            $
            512
            
            
            $
            348Supplemental
      disclosure of noncash investing and financing activities:Other
      real estate and other assets acquired in settlement of
    loans
            
            $
            188
            
            
            $
            248Unrealized
      gain/(loss) on securities available for sale
            
            $
            660
            
            
            $
            (305
            )





The
accompanying notes are an integral part of these financial
statements.


7
 Index


CITIZENSFINANCIAL CORP. AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -
BASIS OF
PRESENTATION





The accounting and reporting policies
of Citizens Financial Corp. and Subsidiaries ("Citizens", "the company" or “we”)
conform to accounting principles generally accepted in the United States of
America and to general policies within the financial services
industry.  The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period.  Actual results could differ
from those estimates.





The condensed consolidated financial
statements contained herein include the accounts of Citizens Financial Corp. and
its wholly-owned subsidiary Citizens Bank of West Virginia, Inc.("the
bank").  All significant intercompany balances and transactions have
been eliminated. The information contained in the financial statements is
unaudited except where indicated.  In the opinion of management, all
adjustments for a fair presentation of the results of the interim periods have
been made.  All such adjustments were of a normal, recurring
nature.  The results of operations for the nine months ended September
30, 2009 are not necessarily indicative of the results to be expected for the
full year.  The financial statements and notes included herein should
be read in conjunction with those included in Citizens' 2008 Annual Report to
Shareholders and Form 10-K.





NOTE 2 –
RECLASSIFICATIONS





Certain accounts in the condensed
consolidated financial statements for 2008, as previously presented, have been
reclassified to conform with current year classifications.





NOTE 3 -
SECURITIES





The amortized cost, unrealized gains,
unrealized losses and estimated fair values of securities at September 30, 2009
and December 31, 2008 are summarized as follows (in thousands):





September 30,
      2009CarryingValueAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            (EstimatedCost
            
            
            Gains
            
            
            Losses
            
            
            FairValue)(Unaudited)Available
      for sale:U.S.
      Government agencies and corporations
            
            $
            23,572
            
            
            $
            469
            
            
            $
            -
            
            
            $
            24,041Mortgage
      backed securities-U.S. Government agencies and
corporations
            
            
            14,563
            
            
            
            699
            
            
            
            -
            
            
            
            15,262Corporate
      debt securities
            
            
            2,004
            
            
            
            93
            
            
            
            -
            
            
            
            2,097Tax
      exempt state and political subdivisions
            
            
            20,389
            
            
            
            952
            
            
            
            -
            
            
            
            21,341Total
      securities available for sale
            
            $
            60,528
            
            
            $
            2,213
            
            
            $
            -
            
            
            $
            62,741


8
 Index




December, 31,
      2008*CarryingValueAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            (EstimatedCost
            
            
            Gains
            
            
            Losses
            
            
            Fair Value)(Unaudited)Available
      for sale:U.S.
      Government agencies and corporations
            
            $
            30,192
            
            
            $
            726
            
            
            $
            -
            
            
            $
            30,918Mortgage
      backed securities-U.S. Government agencies and
corporations
            
            
            21,032
            
            
            
            554
            
            
            
            11
            
            
            
            21,575Corporate
      debt securities
            
            
            5,133
            
            
            
            1
            
            
            
            59
            
            
            
            5,075Tax
      exempt state and political subdivisions
            
            
            22,948
            
            
            
            391
            
            
            
            49
            
            
            
            23,291Total
      securities available for sale
            
            $
            79,305
            
            
            $
            1,672
            
            
            $
            119
            
            
            $
            80,859





* From
audited financial statements





The tables below provide summaries of
securities available for sale which were in an unrealized loss position at
September 30, 2009 and December 31, 2008.  As of September 30, 2009,
these securities had a total fair value of $1,134,000 and carried unrealized
losses of $168, or 0.01%.  The table below reflects this loss as $0
because it presents dollars in thousands.  None of these securities
have been in a continuous loss position for more than 12
months.  Securities issued by U.S. government agencies and
corporations carry the implied faith and credit of the U.S.
Government.  An impairment is considered “other than temporary” if any
of the following conditions are met:  the company intends to sell the
security, it is more likely than not that the entity will be required to sell
the security before recovery of its amortized cost basis, or the company does
not expect to recover the security’s entire amortized cost (even if the entity
does not intend to sell).  In the event that a security would suffer
an impairment for a reason that was “other than temporary,” the company would be
expected to write down the security’s value to its new fair value, and the
amount of the write down would be included in earnings as a realized
loss.  The company does not intend to sell any securities;
additionally, it is more likely than not that the company will not be required
to sell any securities before recovery of its amortized cost basis, and the
company expects to recover all of its securities’ amortized cost
basis.  In addition, no impairment has been recognized on the
$6,184,000 of securities that carried unrealized losses at December 31,
2008.





September 30, 2009Securities Available for
    SaleLess Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government agencies and corporations
            
            $
            993
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            993
            
            
            $
            -Mortgage
      backed securities-U.S. Government agencies and
corporations
            
            
            141
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            141
            
            
            
            -Total
      securities available for sale
            
            $
            1,134
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,134
            
            
            $
            -


9
 Index




December 31, 2008*Securities Available for
    SaleLess Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government agencies and corporations
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Mortgage
      backed securities-U.S. Government agencies and
corporations
            
            
            -
            
            
            
            -
            
            
            
            660
            
            
            
            11
            
            
            
            660
            
            
            
            11Corporate
      debt securities
            
            
            3,436
            
            
            
            59
            
            
            
            -
            
            
            
            -
            
            
            
            3,436
            
            
            
            59Tax
      exempt state and political subdivisions
            
            
            639
            
            
            
            9
            
            
            
            1,449
            
            
            
            40
            
            
            
            2,088
            
            
            
            49Total
      securities available for sale
            
            $
            4,075
            
            
            $
            68
            
            
            $
            2,109
            
            
            $
            51
            
            
            $
            6,184
            
            
            $
            119





*From
audited financial statements.





The
maturities, amortized cost and estimated fair values of the bank's securities at
September 30, 2009 are summarized as follows (in thousands):





Available for saleAmortized
            
            
            EstimatedCost
            
            
            Fair ValueDue
      within 1 year
            
            $
            12,449
            
            
            $
            12,593Due
      after 1 but within 5 years
            
            
            25,337
            
            
            
            26,514Due
      after 5 but within 10 years
            
            
            20,742
            
            
            
            21,632Due
      after 10 years
            
            
            2,000
            
            
            
            2,002$
            60,528
            
            
            $
            62,741





Mortgage backed securities have
remaining contractual maturities ranging from 1 day to 18.5 years and are
reflected in the maturity distribution schedule shown above based on their
anticipated average life to maturity, which ranges from 0.04 to 3.63
years.





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 for the nine
month periods ended September 30, 2009 and 2008 are as follows (in
thousands):





Proceeds From
            
            
            Gross RealizedCalls
      and
            
            
            PrincipalSales
            
            
            Maturities
            
            
            Payments
            
            
            Gains
            
            
            LossesSeptember
      30, 2009:Securities
      available for sale
            
            $
            4,955
            
            
            $
            18,395
            
            
            $
            5,692
            
            
            $
            117
            
            
            $
            -September
      30, 2008:Securities
      available for sale
            
            $
            1,936
            
            
            $
            17,960
            
            
            $
            2,684
            
            
            $
            4
            
            
            $
            57





At September 30, 2009 and December 31,
2008 securities with an amortized cost of $37,769,000 and $44,446,000,
respectively, with estimated fair values of $39,145,000 and $45,375,000,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes required or permitted by
law.





At September 30, 2009 and December 31,
2008 our securities portfolio contained no concentrations within any specific
industry or issuer.


10
 Index


The company’s restricted investments
totaled $1,653,000 at September 30, 2009 and include the company’s equity
investment in the Federal Home Loan Bank of Pittsburgh (FHLB).  FHLB
stock is generally viewed as a long term investment and as a restricted
investments security which is carried at cost, because there is no market for
the stock other than the FHLBs or member institutions. Therefore, when
evaluating FHLB stock for impairment, its value is based on ultimate
recoverability of the par value rather than by recognizing temporary declines in
value. Despite the FHLB’s temporary suspension of cash dividend payments and
repurchases of excess capital stock in 2009, the company does not consider this
investment to be other temporarily impaired at September 30, 2009 and no
impairment has been recognized.  At December 31, 2008 restricted
investments totaled $1,192,000 and included equity investments in the FHLB, the
Federal Reserve Bank, and Silverton Financial Services Inc.





Silverton Financial Services Inc. is
the holding company of Silverton Bank, which was closed by regulators on May 1,
2009.  During the second quarter Citizens recorded an impairment of
our entire investment of $163,000.





NOTE 4 -
LOANS





Total loans are summarized as follows
(in thousands):





September 30, 2009
            
            
            December 31, 2008(Unaudited)
            
            
            *Commercial,
      financial and agricultural
            
            $
            20,175
            
            
            $
            20,262Real
      estate - construction
            
            
            19,209
            
            
            
            13,832Real
      estate – home equity
            
            
            5,017
            
            
            
            6,411Real
      estate – residential mortgage
            
            
            51,852
            
            
            
            62,695Real
      estate – commercial mortgage
            
            
            53,397
            
            
            
            59,806Installment
      loans
            
            
            10,767
            
            
            
            11,424Other
            
            
            3,535
            
            
            
            3,624Total
      loans
            
            
            163,952
            
            
            
            178,054Allowance
      for loan losses
            
            
            (2,353
            )
            
            
            (2,232
            )Net
      deferred loan origination fees and costs
            
            
            32
            
            
            
            (101
            )Loans,
      net
            
            $
            161,631
            
            
            $
            175,721





* From
audited financial statements





The following provides additional
information regarding impaired and nonaccrual loans:





September 30, 2009
            
            
            December 31, 2008Impaired
      loans with a valuation allowance
            
            $
            7,670
            
            
            $
            1,515Impaired
      loans without a valuation allowance
            
            
            707
            
            
            
            3,482Total
      impaired loans
            
            $
            8,377
            
            
            $
            4,997Valuation
      allowance related to impaired loans
            
            $
            892
            
            
            $
            533Total
      nonaccrual loans excluded from impaired loan disclosure
            
            $
            338
            
            
            $
            595Average
      investment in impaired loans
            
            $
            8,500
            
            
            $
            3,610Interest
      income recognized on impaired loans
            
            $
            84
            
            
            $
            123Interest
      income recognized on a cash basis on impaired loans
            
            $
            89
            
            
            $
            186


11
 Index


NOTE 5 -
ALLOWANCE FOR LOAN
LOSSES





Analyses of the allowance for loan
losses are presented below (in thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance
      at beginning of period
            
            $
            2,324
            
            
            $
            1,844
            
            
            $
            2,232
            
            
            $
            1,763Loans
      charged off:Commercial
      and industrial
            
            
            48
            
            
            
            1
            
            
            
            67
            
            
            
            284Real
      estate – res. mortgage
            
            
            96
            
            
            
            -
            
            
            
            158
            
            
            
            11Real
      estate – comm. mortgage
            
            
            -
            
            
            
            83
            
            
            
            115
            
            
            
            107Consumer
      and other
            
            
            16
            
            
            
            5
            
            
            
            38
            
            
            
            6Total
            
            
            160
            
            
            
            89
            
            
            
            378
            
            
            
            408Recoveries:Commercial
      and industrial
            
            
            7
            
            
            
            121
            
            
            
            9
            
            
            
            169Real
      estate – res. mortgage
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1Real
      estate – comm. mortgage
            
            
            2
            
            
            
            70
            
            
            
            5
            
            
            
            70Consumer
      and other
            
            
            3
            
            
            
            1
            
            
            
            14
            
            
            
            4Total
      recoveries
            
            
            12
            
            
            
            192
            
            
            
            28
            
            
            
            244Net
      losses/(recoveries)
            
            
            148
            
            
            
            (103
            )
            
            
            350
            
            
            
            164Provision
      for loan losses
            
            
            177
            
            
            
            117
            
            
            
            471
            
            
            
            465Balance
      at end of period
            
            $
            2,353
            
            
            $
            2,064
            
            
            $
            2,353
            
            
            $
            2,064





NOTE 6 -
DEPOSITS





The following is a summary of interest
bearing deposits by type (in thousands):





September 30, 2009
            
            
            December 31, 2008(Unaudited)
            
            
            *Interest
      bearing checking
            
            $
            32,468
            
            
            $
            35,106Money
      market accounts
            
            
            5,526
            
            
            
            5,719Savings
      accounts
            
            
            19,241
            
            
            
            22,097Certificates
      of deposit under $100,000
            
            
            53,895
            
            
            
            73,692Certificates
      of deposit of $100,000 or more
            
            
            42,339
            
            
            
            51,262Total
            
            $
            153,469
            
            
            $
            187,876





* From
audited financial statements





NOTE 7 -
BORROWINGS





The
following table summarizes our borrowings by type (in thousands):





September 30, 2009
            
            
            December 31, 2008(Unaudited)
            
            
            *Short-term
      borrowings:Securities
      sold under agreements to repurchase
            
            $
            25,724
            
            
            $
            28,786Federal
      funds purchased
            
            
            -
            
            
            
            1,500Overnight
      advances from Federal Home Loan Bank of Pittsburgh (FHLB) line of
      credit
            
            
            -
            
            
            
            1,240Total
            
            $
            25,724
            
            
            $
            31,526Long-term
      borrowings:Advances
      from FHLB
            
            $
            7,560
            
            
            $
            7,865





* From
audited financial statements


12
 Index


NOTE 8 -
EMPLOYEE BENEFIT
PLANS





The components of net periodic benefit
cost of our pension and other benefit plans are presented below (in
thousands):





Three Months Ended September
    30
            
            
            Nine Months Ended September
    30,Pension Benefits
            
            
            Other Benefits
            
            
            Pension Benefits
            
            
            Other Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      cost
            
            $
            34
            
            
            $
            39
            
            
            $
            -
            
            
            $
            4
            
            
            $
            102
            
            
            $
            118
            
            
            $
            8
            
            
            $
            12Interest
      cost
            
            
            85
            
            
            
            77
            
            
            
            5
            
            
            
            8
            
            
            
            254
            
            
            
            231
            
            
            
            20
            
            
            
            23Expected
      return on plan assets
            
            
            (89
            )
            
            
            (87
            )
            
            
            -
            
            
            
            -
            
            
            
            (266
            )
            
            
            (263
            )
            
            
            -
            
            
            
            -Net
      amortization and deferral
            
            
            28
            
            
            
            18
            
            
            
            (2
            )
            
            
            3
            
            
            
            85
            
            
            
            54
            
            
            
            4
            
            
            
            9Net
      periodic cost
            
            $
            58
            
            
            $
            47
            
            
            $
            3
            
            
            $
            15
            
            
            $
            175
            
            
            $
            140
            
            
            $
            32
            
            
            $
            44





During the first nine months of 2009,
we contributed $730,000 to our pension plan. We do not expect any additional
payments to the pension plan for the remainder of 2009.  Payments
totaling $209,000 were contributed to the plan during 2008.




The company curtailed its
postretirement healthcare and life insurance plan during the second quarter
2009.  This curtailment eliminated this benefit for most of the
company’s employees and resulted in a curtailment gain of $108,000 as reflected
in the income statement.  The future net periodic benefit cost of this
plan is expected to be reduced by $47,000 annually.





NOTE 9 -
COMMITMENTS AND
CONTINGENCIES





The company is not aware of any
commitments or contingencies which may reasonably be expected to have a material
impact on operating results, liquidity or capital resources.  Known
commitments and contingencies include the maintenance of reserve balances with
the Federal Reserve, various legal actions arising in the normal course of
business and commitments to extend credit.





NOTE 10 -
FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK





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





Financial
      instruments whose contract amounts represent credit risk
            
            September
      30, 2009
              (unaudited)
            
            
            December
      31, 2008
              *(in thousands)Commitments
      to extend credit
            
            $
            21,065
            
            
            $
            25,319Standby
      letters of credit
            
            
            724
            
            
            
            751Total
            
            $
            21,789
            
            
            $
            26,070





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





* From
audited financial statements.


13
 Index


NOTE 11 -
EARNINGS PER
SHARE





Basic earnings per share is calculated
on the weighted average number of shares outstanding during the
period.  For the three and nine months ended September 30, 2009 and
2008 the weighted average number of shares outstanding were
1,829,504.  During the periods ended September 30, 2009 and 2008 the
company did not have any dilutive securities.





NOTE 12 –
FAIR VALUE
MEASUREMENTS





Accounting standards define fair value,
establish a framework for measuring fair value, establish a three-level
valuation hierarchy for disclosure of fair value measurement and enhance
disclosure requirements for fair value measurements. The valuation hierarchy is
based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as follow:





Level
      1
            Inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active
markets.





Level
      2
            Inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      asset or liability, either directly or indirectly, for substantially the
      full term of the financial
instrument.





Level
      3
            Inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.





Following is a description of the
valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation
hierarchy:





Securities





Where quoted prices are available in an
active market, securities are classified within level 1 of the valuation
hierarchy. Level 1 securities would include highly liquid government bonds,
mortgage products and exchange traded equities. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics, or discounted cash flow. Level 2
securities would include U.S. agency securities, mortgage-backed agency
securities, obligations of states and political subdivisions and certain
corporate, asset backed and other securities. In certain cases where there is
limited activity or less transparency around inputs to the valuation, securities
are classified within level 3 of the valuation hierarchy.  Currently,
all of the Company’s securities are considered to be Level 2
securities.





Impaired
loans





Impaired loans are measured using
practical expedients, including an observable market price (if available), or
the fair value of the loan’s collateral (if the loan is collateral dependent).
Fair value of the loan’s collateral, when the loan is dependent on collateral,
is determined by appraisals or independent valuation which is then adjusted for
the cost related to liquidation of the collateral. At September 30, 2009,
impaired loans totaled $8,377,000.  Additional information related to
impaired loans can be found in Note 4.





Other Real Estate
Owned





Certain assets such as other real
estate owned (OREO) are measured at fair value less cost to sell. At September
30, 2009 OREO totaled $145,000.


14
 Index


We also disclose fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.  The following
summarizes the methods and significant assumptions used in estimating fair
value:





Cash and Due From
Banks:  The carrying values of cash and due from banks
approximate their estimated fair values.





Federal Funds
Sold:  The carrying values of federal funds sold approximate
their estimated fair values.





Securities:  Fair
value measurement is based upon quoted market prices, when available (Level 1).
If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which
significant assumptions are derived primarily from or corroborated by observable
market data. Third party vendors compile prices from various sources and may
determine the fair value of identical or similar securities by using pricing
models that considers observable market data (Level 2).





Loans:  The
estimated fair values for loans are computed based on scheduled future cash
flows of principal and interest, discounted at interest rates currently offered
for loans with similar terms to borrowers of similar credit
quality.  No prepayments of principal are assumed.





Accrued Interest Receivable
and Payable:  The carrying values of accrued interest
receivable and payable approximate their estimated fair values.





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





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





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





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


15
 Index


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





September 30, 2009
            
            
            December 31, 2008Estimated
            
            
            
            
            
            EstimatedCarrying
            
            
            Fair
            
            
            Carrying
            
            
            FairValue
            
            
            Value
            
            
            Value
            
            
            ValueFinancial
      assets:Cash
      and due from banks
            
            $
            3,216
            
            
            $
            3,216
            
            
            $
            3,943
            
            
            $
            3,943Interest
      bearing deposits with other banks
            
            
            1,821
            
            
            
            1,821
            
            
            
            9,438
            
            
            
            9,438Securities
      available for sale
            
            
            62,741
            
            
            
            62,741
            
            
            
            80,859
            
            
            
            80,859Loans,
      net
            
            
            161,631
            
            
            
            158,427
            
            
            
            175,721
            
            
            
            182,051Accrued
      interest receivable
            
            
            1,072
            
            
            
            1,072
            
            
            
            1,410
            
            
            
            1,410Financial
      liabilities:Deposits
            
            $
            180,032
            
            
            $
            181,416
            
            
            $
            217,429
            
            
            $
            219,262Short-term
      borrowings
            
            
            25,724
            
            
            
            25,724
            
            
            
            31,526
            
            
            
            31,526Long-term
      borrowings
            
            
            7,560
            
            
            
            7,707
            
            
            
            7,865
            
            
            
            8,073Accrued
      interest payable
            
            
            448
            
            
            
            448
            
            
            
            486
            
            
            
            486





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.





NOTE 13 –
SUBSEQUENT
EVENTS





In
preparing these financial statements, the company has evaluated events and
transactions for potential recognition or disclosure through November 12, 2009,
the date the financial statements were issued.





NOTE 14 –
SIGNIFICANT NEW
ACCOUNTING PRONOUNCEMENTS





In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(R), “Business Combinations”
(SFAS 141(R)) (ASC 805 Business Combinations). The Standard significantly
changed the financial accounting and reporting of business combination
transactions.  SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS 141(R) is effective for acquisition dates on or
after the beginning of an entity’s first year that begins after December 15,
2008.  The company does not expect the implementation of SFAS 141(R)
to have a material impact on its consolidated financial statements, at this
time.





In April 2009, the FASB issued FSP FAS
141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (ASC 805 Business
Combinations).  FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to
address application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination.  The FSP is effective
for assets and liabilities arising from contingencies in business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The company
does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on
its consolidated financial statements.


16
 Index


In April 2009, the FASB issued FSP FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (ASC 820 Fair Value Measurements and Disclosures). FSP FAS
157-4 provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased.  The FSP also includes guidance on
identifying circumstances that indicate a transaction is not
orderly.  FSP FAS 157-4 is effective for interim and annual periods
ending after June 15, 2009, and shall be applied
prospectively.  Earlier adoption is permitted for periods ending after
March 15, 2009.  The company does not expect the adoption of FSP FAS
157-4 to have a material impact on its consolidated financial
statements.





In April 2009, the FASB issued FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (ASC 825 Financial Instruments and ASC 270 Interim
Reporting).  FSP FAS 107-1 and APB 28-1 amends SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements.  In addition, the FSP amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in summarized financial
information at interim reporting periods.  The FSP is effective for
interim periods ending after June 15, 2009, with earlier adoption permitted for
periods ending after March 15, 2009.  The company does not expect the
adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its
consolidated financial statements.





In April 2009, the FASB issued FSP FAS
115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (ASC 320 Investments – Debt and Equity Securities).  FSP
FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt
securities to make guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity
securities.  The FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities.  FSP FAS 115-2 and FAS 124-2 is effective for interim and
annual periods ending after June 15, 2009, with earlier adoption permitted for
periods ending after March 15, 2009.  The company does not expect the
adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its
consolidated financial statements.





In April 2009, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB
111).  SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series
entitled “Other Than Temporary Impairment of Certain Investments in Debt and
Equity Securities.”  SAB 111 maintains the SEC Staff’s previous views
related to equity securities and amends Topic 5.M. to exclude debt securities
from its scope.  The company does not expect the implementation of SAB
111 to have a material impact on its consolidated financial
statements.





In May 2009, the FASB issued Statement
of Financial Accounting Standards No. 165, “Subsequent Events” (ASC 855
Subsequent Events).  SFAS 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 is effective for interim and annual periods ending after June 15, 2009. The
company does not expect the adoption of SFAS 165 to have a material impact on
its consolidated financial statements.





In June 2009, the FASB issued Statement
of Financial Accounting Standards No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140” (ASC 860 Transfers
and Servicing).  SFAS 166 provides guidance to improve the relevance,
representational faithfulness, and comparability of the information that a
report entity provides in its financial statements about a transfer of financial
assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. SFAS 166 is effective for interim and annual
periods beginning after November 15, 2009.  The company does not
expect the adoption of SFAS 166 to have a material impact on its consolidated
financial statements.


17
 Index


In June 2009, the FASB issued Statement
of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation
No. 46(R)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by
enterprises involved with variable interest entities.  SFAS 167 is
effective for interim and annual periods beginning after November 15,
2009.   Early adoption is prohibited. The company does not expect
the adoption of SFAS 167 to have a material impact on its consolidated financial
statements.





In June 2009, the FASB issued Statement
of Financial Accounting Standards No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles –
replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting
Principles).  SFAS 168 establishes the FASB Accounting Standards
Codification which will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities.  SFAS 168 is effective immediately. The
company does not expect the adoption of SFAS 168 to have a material impact on
its consolidated financial statements.





In June 2009, the FASB issued EITF
Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation
of Convertible Debt Issuance or Other Financing” (ASC 470 Debt).  EITF
Issue No. 09-1 clarifies how an entity should account for an own-share lending
arrangement that is entered into in contemplation of a convertible debt
offering.  EITF Issue No. 09-1 is effective for arrangements entered
into on or after June 15, 2009. Early adoption is prohibited.  The
company does not expect the adoption of EITF Issue No. 09-1 to have a material
impact on its consolidated financial statements.





In June 2009, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112
revises or rescinds portions of the interpretative guidance included in the
codification of SABs in order to make the interpretive guidance consistent with
current U.S. GAAP.  The company does not expect the adoption of SAB
112 to have a material impact on its consolidated financial
statements.





In August 2009, the FASB issued
Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements
and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05
amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” and
provides clarification for the fair value measurement of liabilities. ASU
2009-05 is effective for the first reporting period including interim period
beginning after issuance.  The company does not expect the adoption of
ASU 2009-05 to have a material impact on its consolidated financial
statements.





In September 2009, the FASB issued
Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements
and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on
estimating the fair value of alternative investments. ASU 2009-12 is effective
for interim and annual periods ending after December 15, 2009. The company does
not expect the adoption of ASU 2009-12 to have a material impact on its
consolidated financial statements.





In October 2009, the FASB issued
Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and
reporting guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The company
does not expect the adoption of ASU 2009-15 to have a material impact on its
consolidated financial statements.


18
 Index


In October 2009, the Securities and
Exchange Commission issued Release No. 33-99072, “Internal Control over
Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.”
Release No. 33-99072 delays the requirement for non-accelerated filers to
include an attestation report of their independent auditor on internal control
over financial reporting with their annual report until the fiscal year ending
on or after June 15, 2010.





Part1 Item 2


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





INTRODUCTION





The following discussion and analysis
presents the significant changes in financial condition and results of
operations of Citizens Financial Corp. and its subsidiary, Citizens Bank of West
Virginia, Inc. 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 document.  Readers are
also encouraged to obtain our Annual Report on Form 10-K for additional
information.  You may obtain our Form 10-K through various internet
sites including www.citizenswv.com.




Description of
Business





Citizens Financial Corp. is a $240
million Delaware corporation headquartered in Elkins, WV.  From there
our wholly-owned subsidiary, Citizens Bank of West Virginia, Inc., provides
loan, deposit, trust, brokerage and other banking and related services to
customers in north-central and eastern West Virginia and nearby areas through
four 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,
changing regulation and government policies affecting bank holding companies and
their subsidiaries, including changes in monetary policies negatively impacting
our operating results, dealing with the current economic environment which poses
significant challenges, our ability to absorb events arising out of a continued
deterioration in the financial condition of the U.S. banking system resulting in
actual losses or other than temporary impairment on the valuations of
investments we have made  in the securities of other financial
institutions, any additional special assessments by the FDIC, and
others.  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.


19
 Index


CRITICAL ACCOUNTING
POLICIES





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





Some policies rely more heavily on the
use of estimates, assumptions, and judgments than others and, therefore, have a
greater possibility of producing results that could be materially different than
originally reported.  Our most significant accounting policies,
including an explanation of how assets and liabilities are valued, may be found
in Note 1 to the consolidated financial statements in our 2008 Annual Report to
Shareholders and Form 10-K.





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





OVERVIEW





Despite the significant impact the
economic downturn continues to have on the banking industry, Citizens has
experienced positive changes in 2009.  We sold two branch offices that
were outside of our natural geographical market in order to operate more
efficiently and utilize resources more effectively.  In selling our
Marlinton and Petersburg offices, we reduced our loans by $13.7 million and
deposits by $22.1 million.  We recognized a net gain of $465,000 on
the sale of these branches.  In addition, our subsidiary bank
converted from a nationally-chartered institution to a state-chartered
institution under the new name Citizens Bank of West Virginia. This positive
move enables us to take advantage of lower regulatory fees, while allowing us to
continue to provide all of the services our customers have come to know and
expect.





The recession continues to impact the
nation and our industry.  Reduced consumer spending has prompted
companies to respond by cutting expenses through significant reductions in labor
force.  While our local economy does not usually experience the same
level of contraction as the national economy, local industries such as lumber,
trucking, and tourism are seeing reduced demand.  This has prompted
local layoffs and reductions in consumer spending.  With all of the
uncertainty in the economy, local loan demand continues to be
depressed.  Aside from the loans sold with the two branches mentioned
above, total loans increased only slightly by $0.3 million since year-end,
bringing total loans to $164.0 million at September 30.





The sale of the branch deposits, as
well as the transfer of $14.6 million in deposits of one customer out of the
bank and into the CDARS network has contributed significantly to the $42.9
million reduction in total assets to $239.6 million.  In order to fund
these liability reductions, we reduced our short-term CD investments and
securities portfolio.


20
 Index


During the first nine months of 2009,
Citizens earned $1,482,000, which is $155,000 or 11.7% more than the first three
quarters of 2008.  The increase in earnings is attributable to the
sale of the branches and our improvement in net interest
margin.  These improvements were partially offset by a special
assessment levied by the FDIC of $107,000, as well as a $163,000 impairment of
our equity investment in one of our correspondent banks, Silverton
Bank.





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 is 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.





With rates at historical lows,
maintaining a solid net interest margin has become increasingly important as
downward pressure continues on our earning asset base.  Citizens
continues to take steps to maintain our net interest margin.  The
margin for the first three quarters of 2009 was 3.78%, which increased 22 basis
points compared to the same period of 2008 at 3.56%.  Our improvement
in net interest margin has helped maintain our net interest income of
$6,383,000, which is down only $65,000 from 2008, in spite of the branch
divestiture that has contributed to a $16.5 million reduction in average earning
assets.  These results are a reflection of our ability to reduce the
cost of interest bearing liabilities by 85 basis points, while the yield on
earning assets declined by the lesser amount of 46 basis points when comparing
the first nine months of 2009 to 2008.  Our reduction in the cost of
interest bearing liabilities was accomplished by lowering certificate of deposit
offering rates and transferring the large deposit, mentioned in the Overview,
out of the bank.





Net
interest income for the third quarter of 2009 was $2,028,000, which is $255,000
lower than the third quarter of 2008.  This decrease is primarily
related to the reduction of our earning asset base related to the branch
sale.  We continue to closely monitor the yield on earning assets and
our cost of interest bearing liabilities in order to take advantage of available
adjustments.




As the
economic recession continues with rates at historically low levels, Citizens
will continue to seek ways to lower our cost of interest bearing liabilities in
order to maintain a strong net interest margin.





PROVISION FOR LOAN
LOSSES





The provision for loan losses is
management’s 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 that can be reasonably anticipated
based on quarterly evaluations of the loan portfolio.  Our provision
for loan losses was $471,000 and $465,000 in the first nine months of 2009 and
2008, respectively.





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 losses 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.


21
 Index


NONINTEREST
INCOME





Noninterest income for the first nine
months of 2009 increased $453,000 or 33.5% to $1,807,000 compared to the first
nine months of 2008.  The majority of the increase is related to the
gain on the sale of the Marlinton and Petersburg branches of $465,000 that
occurred in the second quarter.  In addition, the bank recorded a
$108,000 gain on the curtailment of its postretirement healthcare and life
insurance plan.  This curtailment eliminated this benefit for most of
the bank’s employees and is expected to reduce future net periodic benefit costs
by $47,000 annually.





Also during the second quarter, the
bank recognized an impairment of $163,000 on its investment in Silverton
Financial Services.  Additional information related to this impairment
can be found in the Securities Porfolio and Federal Funds Sold section of this
report.  This loss was partially offset by $117,000 in security
gains.





The largest component of noninterest
income is service fees which totaled $754,000 for the first three quarters of
2009 compared to $839,000 for the same period of 2008.  This decrease
of $85,000 or 10.1% is primarily related to a reduction in overdraft fees as
consumers have become more conservative and changed spending
habits.  In addition, minimum balance fees have decreased as result of
our introduction of free checking.  Fees from our secondary market
loan program have increased by $52,000 to $106,000 as customers have chosen to
take advantage of refinancing mortgages at historically low rates. During the
third quarter, our secondary market loan originator left Citizens, but we are in
the processs of training other staff members to originate these loans and expect
to introduce a more comprehensive secondary market loan program for our
customers very soon.  The transition to this new program is expected
to result in a reduction of this fee income until the program is fully
functional.





Our trust
services income decreased $12,000 to $178,000 for the first nine months of 2009
compared to the same period last year.  Brokerage income decreased
$59,000 to $63,000 over the same periods.  We believe these declines
are market related and expect income from these services to improve as the
economy recovers.  Both of these services continue to make important
contributions to noninterest income and strengthening customer
relationships.





During the third quarter, noninterest
income decreased $24,000 or 5.3% to $426,000.  This reduction is
reflection of lower service fees which decreased by $70,000 of 21.5% to
$256,000.  Similar to the results for the full year, this decrease was
primarily related to a reduction in overdraft fees and minimum balance fees on
checking accounts.  Also during the third quarter, we recorded
security gains of $31,000 compared to a security loss of $57,000 during the
third quarter of 2008.





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 we
operate.  As previously reported we sold two branches and expect this
sale will improve our noninterest expenses.  Nonetheless, controlling
noninterest expense is a key factor to achieving higher earnings.





Noninterest expense increased 2.3% or
$127,000 to $5,739,000 for the first nine months of 2009.  The FDIC
insurance assessment increased by $208,000 to $315,000 in the first three
quarters of 2009 compared to the same period last year.  This increase
was the result of higher assessment rates, as well as a one-time special
assessment levied against all banks at June 30 of $107,000.  These
expenses are necessary for the FDIC to rebuild its deposit insurance
fund.  Data processing expenses increased $45,000 to $471,000
primarily as a result of one-time fees paid to our core processor to transfer
the branch loans and deposits to the acquiring institution.


22
 Index


The largest component of noninterest
expense is salaries and employee benefits.  These personnel costs
decreased by $79,000 or 2.7% to $2,834,000 for the first nine months of 2009
compared to the same period last year.  This decrease is mainly the
result of the reduction in salaries as we now have fewer employees since the
branch sale, lower than expected health insurance costs, and a lower net
periodic benefit cost related to our retiree life and health insurance plan
curtailment.  These savings were partially offset by increased pension
benefit costs.  In addition, the branch sale has helped reduce our
premises, equipment, and postage costs.  Occupancy expense is down
$35,000 to $290,000, equipment expense has been reduced by $34,000 to $248,000,
and postage has been reduced by $36,000 to $95,000.





During the third quarter noninterest
expense was down $213,000 or 11.0% to $1,722,000 compared to last
year.  These results are very similar to those experienced for the
year as personnel, occupancy, equipment, and postage expenses are lower for the
quarter when compared to the previous year.  In addition, other
noninterest expense is down $71,000 primarily as a result of lower regulatory
fees as the bank converted to a state-chartered institution at the end of the
second quarter.





There are a number of factors which
could negatively impact noninterest expense in the future.  For
example, costs associated with foreclosed properties could increase if
foreclosure activity increases.  Medical claims under our partially
self-insured group medical plan may increase.  Also, we may incur
additional costs related to compliance with the Sarbanes-Oxley
Act.  Currently we are required to comply with Section 404(a) of the
Act and issue a conclusion about management’s assessment of internal control
over financial reporting.  We may become subject to Section 404(b) in
2010, and will be required to have our independent auditors attest to our
conclusions.  If we become subject to this, it will likely increase
our legal and professional expenses. However, in an effort to avoid these costs,
we are now in the process of entering into a going private transaction that will
allow us to suspend costly SEC reporting requirements, including the
Sarbanes-Oxley Act.  In addition, the cost of FDIC insurance may
continue to increase as the FDIC continues to assist failing banks in the
current economic environment.





INCOME
TAXES





Our provision for income taxes for the
first three quarters of 2009 of $498,000 includes both federal and state income
taxes.  At this level taxes were 25.2% of pretax
income.  The effective tax rate for the first three quarters of 2008
was 23.1% at $398,000.  Except for income earned on loans to and bonds
issued by municipalities and earnings on certain life insurance policies, all of
our income is taxable.





FINANCIAL
CONDITION





LOAN
PORTFOLIO





Our lending activity continues to be
effected by the economic recession that our nation is currently
facing.  The housing crisis has affected the local lumber and trucking
industries, while general economic uncertainty has reduced tourism
activity.  Consumers continue to limit spending due to economic
uncertainty, increased price levels on fuel and food, and local job
losses.  All of these factors have contributed to reduced lending
activity for Citizens.  In the first half of 2009, total loans
decreased by $14.1 million to $164.0 million.  This decline included
the sale of $13.7 million in loans with the two branches.


23
 Index


We sold $1.7 million in commercial
loans as part of our branch sale.  Aside from this intended reduction,
commercial loans have decreased by $4.8 million to $73.6 million at September
30, 2009.  This reduction was primarily made up of loans secured by
real estate.  Total commercial real estate loans totaled $53.4 million
at September 30, 2009, while other commercial loans totaled $20.2
million.  Most of our commercial loan portfolio is secured by real
estate, whether or not repayment is linked to cash generated by the use or sale
of the real property.  In cases where repayment is linked to such use,
the timing and stability of cash flow, secondary sources of repayment, loan
guarantees, and collateral valuations are all important considerations in
granting the loan.





Retail lending such as lending to
consumers for autos, homes, or for other purposes, has been more productive than
commercial lending in 2009.  However, it continues to be slower than
we would like.  Absent the sale of the branches, which resulted in the
transfer of $12.0 million of retail loans to the acquiring institution, retail
lending has increased slightly.  In the first nine months of 2009,
residential real estate loans have increased by $3.1 million, aside from the
branch sales transaction. Residential real estate loans including mortgage,
construction, and home equity loans totaled $76.1 million at September 30,
2009.  In addition, installment loans increased $1.4 million, aside
from the branch sale. Installment loans totaled $10.8 million at September 30,
2009.  We have seen a slight increase in consumer lending activity
since the first quarter of 2009, however, as previously mentioned consumers
continue to limit spending in the current economic
environment.  Citizens recognizes the importance of retail lending as
the cornerstone of who we are as a community bank.  We will continue
to actively seek new strategies to increase this segment of our business in
order to enhance portfolio diversification and reduce the inherent risk in our
portfolio.





CREDIT QUALITY AND ALLOWANCE
FOR LOAN LOSSES





As the economic downturn continues,
financial institutions across the country are facing major losses from the
housing crisis and the problems caused by sub-prime lending.  Reduced
consumer spending and economic uncertainty have resulted in significantly higher
levels of unemployment than seen in recent years and higher levels of business
failures.





Although our local economy does not
usually see the same level of contraction or growth as the national economy, we
have certainly seen a significant impact from recent economic
events.  In recent months local businesses have announced job cuts or
ceased operations, while consumers have significantly reduced
spending.





Since year-end past due loans have
reduced by $5.9 million to $1.7 million at September 30, 2009.  This
significant reduction is largely related to two land development loans that had
become delinquent, but are currently performing.  Impaired loans at
September 30, 2009 were $8.4 million compared to $5.0 million at
year-end.  The increase in impaired loans is mainly related to two
loan relationships where increased business risks are present in the current
economy.  However, these borrowers are continuing to pay as agreed and
are not past due.  Management continues to develop and implement
detailed action plans to manage the credits that present the greatest risk
within our portfolio.  We monitor the situation with these credits
continuously and keep in close contact with borrowers in order to assess our
position and respond appropriately.





Our inherent risk of loss in our
portfolio is addressed through our allowance for loan losses.  We
determine the amount of our allowance quarterly by evaluating specific larger
loans as well as pools of similar homogeneous loans.  Adjustments to
pooled factors for various trends, economic conditions, changes in our credit
management practices and abilities, and other factors may also be
made.  By employing a disciplined methodology we arrive at an
allowance for loan losses that we believe is adequate to provide for losses that
are inherent in the loan portfolio. As of September 30, 2009, our allowance was
$2,353,000, or 1.44% of gross loans, compared to year-end when the allowance was
$2,232,000, or 1.25% of gross loans. The increase in the ratio of our allowance
to gross loans is primarily attributable to the reduction in gross loans from
the branch sale.


24
 Index


In many
cases our security position helps limit our risk of loss and we believe we are
equipped to manage and resolve the risks contained in our
portfolio.  Based on information available to us, we believe our
analyses are 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 estimations 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.  All of our securities are classified as
available for sale.  The Board of Directors is informed of all
securities transactions each month and a series of policy statements limit the
amount of credit and interest rate risk we may take.





During the first three quarters of
2009, our securities portfolio has been reduced by $18.1 million to $62.7
million.  Proceeds from matured and called securities have been used
to fund the branch sale, as well as to fund a deposit transfer out of the bank
through a one-way sell transaction with the CDARS network.  As
explained in our most recent Form 10-K, the bank had been holding a large
deposit that we believed to be temporary.  Additional information
regarding this transaction can be found below in the Deposit and Other Funding
Sources of this report.  In addition, we recorded security gains of
$117,000 during 2009, which was primarily the result of bond swaps where the
replacement security provided similar risk characteristics and a slightly higher
yield.





Overall our portfolio is made up of
$24.0 million in agency securities, $15.3 million in agency mortgage-backed
securities, $21.3 million in municipals, and $2.1 million in corporate debt
securities.  We monitor credit ratings on our investments on a monthly
basis.  We continue to maintain what we believe is a conservative
investment portfolio strategy.  We typically invest in securities with
relatively short durations, fixed rates, and good credit ratings.  We
do not invest in any private label mortgage backed securities or collateralized
mortgage obligations.  All of our securities are performing
adequately, and all of them carry at least investment grade credit ratings from
the major credit rating agencies.





In addition to the securities mentioned
above, Citizens also maintains restricted investments in correspondent
banks.  Such investments totaled $1,653,000 and $1,192,000 at
September 30, 2009 and December 31, 2008, respectively.  At September
30, these included our equity investment in Federal Home Loan Bank of
Pittsburgh. During the second quarter we recorded a $163,000 impairment on our
investment in Silverton Financial Services Inc., the parent company of one of
our correspondent banks.  We do not expect to recover any of this
investment.





Our short-term investments including
Federal funds sold and interest bearing deposits with other banks totaled $1.8
million at September 30, 2009 compared to $9.4 million at year
end.  The reduction in our short-term investments has been used to
help fund the transfer of one customer’s temporary deposit into the CDARS
network.





DEPOSITS AND OTHER FUNDING
SOURCES





Deposits decreased by $37.4 million to
$180.0 million during the first three quarters of 2009.  Of this
decrease, $22.1 million of deposits were sold as part of the branch
sale.  In addition, one of our customers transferred $14.6 million
into the CDARS network through a one-way sell transaction.  This
deposit was originally placed in Citizens in 2008 with the intention of being
temporary in nature.  Once the customer informed us that it may not be
temporary, we decided to sell the excess funds through the CDARS
network.  This transaction allows the depositor to maintain a
relationship with Citizens, while having FDIC insurance on the entire balance of
the account.  In the current environment in which loan demand remains
soft, moving this higher-priced deposit off of our balance sheet has helped
maintain our net interest margin.  Absent the deposits transferred in
the branch sale and transfer to the CDARS network, total deposits show a slight
increase of $0.7 million to $180.0 million since year end.


25
 Index


Historically our borrowings have
consisted of repurchase agreements, Federal Home Loan Bank borrowings, and, when
necessary, overnight borrowings such as Federal funds
purchased.  Total borrowings of $33.3 million at September 30, 2009
were $6.1 million less than at year-end primarily due to a seasonal decrease in
our repurchase agreements.




CAPITAL
RESOURCES





At September 30, 2009, total capital of
$22.4 million or 9.3% of assets is $1.6 million higher than our position at
year-end when capital was $20.8 million or 7.4% of assets.  The
increase in our capital-to-assets ratio is primarily related to the overall
decrease in assets as we reduced our investment portfolio and sold the assets of
two branches.  Our risk based capital measures, which are established
for all banks through the regulatory process, continue to easily exceed required
levels.  We have no knowledge of any items or trends which are likely
to materially impair our capital position.





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.  Currently, we have access to approximately $75 million
through various FHLB programs.  Borrowings through the programs at
FHLB are secured by a blanket security interest in all unencumbered assets of
the bank.





During 2009 we satisfied liquidity
demands brought on by the branch sale and CDARS transfer by reducing our
investment securities and other short-term CD investments.  Overall,
our liquidity demands remain low as we continue to experience reduced loan
demand.  We expect to continue to satisfy our liquidity needs
primarily through internal sources.




IMPACT OF
INFLATION





The consolidated financial statements
and related data included in this report were prepared in accordance with
accounting principles generally accepted in the United States of America, 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 our 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 increasing costs by controlling
the level of noninterest expenditures and increasing levels of noninterest
income.  Because inflation rates have generally been low during the
time covered by the accompanying consolidated financial statements, the impact
of inflation on our earnings has not been significant.  Although
inflation could become a significant factor, current Federal Reserve policy does
not appear to indicate that it will be in the foreseeable
future.


26
 Index


PartI Item 4


Controls
and Procedures





As of the end of the period covered by
this Quarterly Report on Form 10-Q, 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 our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14.  Based upon that evaluation, the chief
executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to the company which is required to be included in our
periodic SEC filings.  There was no change in the company’s internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the company’s internal control over financial reporting.





PART
II -  OTHER INFORMATION





Item1.
            Legal
      Proceedings:  As of September 30, 2009 Citizens Financial
      Corp. is involved in various legal proceedings which occur in the normal
      course of business.  We believe all such litigation will be
      resolved without materially affecting our financial position or results of
      operations.  There are no other material proceedings known to be
      threatened or contemplated against either Citizens Financial Corp. or
      Citizens Bank of West Virginia,
Inc.





Item
      2.
            Unregistered Sales of
      Equity Securities and Use of
      Proceeds:    None.





Item
      3.
            Defaults upon Senior
      Securities:    None.





Item
      4.
            Submission of Matters
      to a Vote of Security
  Holders:  None.





Item
      5.
            Other
      Information:     None.





Item
      6.
            Exhibits and Reports
      on Form 8-K:





(a)
            Exhibits:
            The
      following exhibits are filed with this
report:


Exhibit
      No.
            Description of
      Exhibit





31.1
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350





31.2
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350





32.1
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350





32.2
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350




27
 Index


SIGNATURES





Pursuant
to the requirements 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.Date:
            11/12/09
            
            /s/Robert J. SchoonoverRobert
      J. SchoonoverPresident
      andChief
      Executive OfficerDate:
            11/12/09
            
            /s/Thomas K. DerbyshireThomas
      K. DerbyshireVice
      President, Treasurer andPrincipal
      Financial Officer






28