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
            June
      30, 2008





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.           Yes S  No
£





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





Large
      accelerated filer £
            Accelerated
      filer £Non-accelerated
      filer £
            Smaller
      reporting company S





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).       Yes £ No S





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





Class
            
            Outstanding at August 13,
    2008Common
      Stock ($2 par value)
            
            1,829,504







1




FORM10-Q


CITIZENS
FINANCIAL CORP.


Quarter
Ended June 30, 2008





INDEX







Page
      No.Part
      I.
            Financial
      InformationItem
      1.  Financial StatementsCondensed Consolidated Balance Sheets June 30, 2008 and
      December 31, 2007
            
            3Condensed Consolidated Statements of Income Three Months Ended
      June 30, 2008 and June 30, 2007 and Six Months Ended June 30, 2008 and
      June 30, 2007
            
            4Statements of Comprehensive Income/Loss Three Months Ended
      June 30, 2008 and June 30, 2007 and Six Months Ended June 30, 2008 and
      June 30, 2007
            
            5Condensed Consolidated Statements of Changes in
      Shareholders' Equity Six Months Ended June 30, 2008 and June 30,
      2007
            
            6Condensed Consolidated Statements of Cash Flows Six Months
      Ended June 30, 2008 and June 30, 2007
            
            7Notes to Condensed Consolidated Financial
      Statements
            
            8-15Item 2.  Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            
            16-24Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            
            Not
      ApplicableItem 4.  Controls and Procedures
            
            24Part
      II.
            Other
      Information and Index to ExhibitsItems 1 through 6
            
            25Signatures
            
            26Certification
      by Executive Officers Pursuant to Sections 302 and 906 of the
      Sarbanes-Oxley Act of 2002
            
            27-30


2
 Index




PARTI ITEM I - FINANCIAL INFORMATION


CITIZENS
FINANCIAL CORP.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands of dollars)





June 30,
            
            
            December 31,2008
            
            
            2007(Unaudited)
            
            
            *ASSETSCash
      and due from banks
            
            $
            7,019
            
            
            $
            7,050Interest
      bearing deposits with other banks
            
            
            1,881
            
            
            
            12Securities
      available for sale, at fair value
            
            
            75,460
            
            
            
            58,559Loans,
      less allowance for loan losses of $1,844 and $1,763,
      respectively
            
            
            174,796
            
            
            
            170,939Premises
      and equipment, net
            
            
            4,178
            
            
            
            4,260Accrued
      interest receivable
            
            
            1,369
            
            
            
            1,385Other
      assets
            
            
            4,949
            
            
            
            4,390Total
      Assets
            
            $
            269,652
            
            
            $
            246,595LIABILITIES AND
      SHAREHOLDERS' EQUITYDeposits:Noninterest
      bearing
            
            $
            28,977
            
            
            $
            27,920Interest
      bearing
            
            
            194,006
            
            
            
            173,376Total
      deposits
            
            
            222,983
            
            
            
            201,296Short-term
      borrowings
            
            
            14,997
            
            
            
            19,656Long-term
      borrowings
            
            
            8,063
            
            
            
            2,719Other
      liabilities
            
            
            2,671
            
            
            
            1,843Total
      liabilities
            
            
            248,714
            
            
            
            225,514Commitments
      and contingencies
            
            
            -
            
            
            
            -SHAREHOLDERS'
      EQUITYCommon
      stock, $2.00 par value, authorized 4,500,000 issued
    2,250,000
            
            
            4,500
            
            
            
            4,500Retained
      earnings
            
            
            21,302
            
            
            
            20,999Accumulated
      other comprehensive income/(loss)
            
            
            (1,032
            )
            
            
            (586
            )Treasury
      stock at cost, 420,496 shares
            
            
            (3,832
            )
            
            
            (3,832
            )Total
      shareholders' equity
            
            
            20,938
            
            
            
            21,081Total
      Liabilities and Shareholders' Equity
            
            $
            269,652
            
            
            $
            246,595





*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
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)INTEREST
      INCOMEInterest
      and fees on loans
            
            $
            3,001
            
            
            $
            3,387
            
            
            $
            6,124
            
            
            $
            6,687Interest
      and dividends on securities:Taxable
            
            
            509
            
            
            
            471
            
            
            
            902
            
            
            
            966Tax-exempt
            
            
            202
            
            
            
            128
            
            
            
            413
            
            
            
            232Interest
      on interest bearingdeposits with other
      banks
            
            
            7
            
            
            
            25
            
            
            
            31
            
            
            
            46Interest
      on federal funds sold
            
            
            9
            
            
            
            4
            
            
            
            11
            
            
            
            9Total
      interest income
            
            
            3,728
            
            
            
            4,015
            
            
            
            7,481
            
            
            
            7,940INTEREST
      EXPENSEInterest
      on deposits
            
            
            1,489
            
            
            
            1,471
            
            
            
            3,003
            
            
            
            2,885Interest
      on short-term borrowings
            
            
            93
            
            
            
            167
            
            
            
            219
            
            
            
            333Interest
      on long-term borrowings
            
            
            63
            
            
            
            34
            
            
            
            94
            
            
            
            71Total
      interest expense
            
            
            1,645
            
            
            
            1,672
            
            
            
            3,316
            
            
            
            3,289Net
      interest income
            
            
            2,083
            
            
            
            2,343
            
            
            
            4,165
            
            
            
            4,651Provision
      for loan losses
            
            
            222
            
            
            
            449
            
            
            
            348
            
            
            
            656Net
      interest income afterprovision for loan
    losses
            
            
            1,861
            
            
            
            1,894
            
            
            
            3,817
            
            
            
            3,995NONINTEREST
      INCOMETrust
      department income
            
            
            53
            
            
            
            57
            
            
            
            137
            
            
            
            111Brokerage
      fees
            
            
            41
            
            
            
            40
            
            
            
            89
            
            
            
            77Service
      fees
            
            
            272
            
            
            
            266
            
            
            
            513
            
            
            
            502Insurance
      commissions
            
            
            11
            
            
            
            9
            
            
            
            13
            
            
            
            9Security
      gains
            
            
            4
            
            
            
            -
            
            
            
            4
            
            
            
            -Secondary
      market loan fees
            
            
            16
            
            
            
            40
            
            
            
            29
            
            
            
            66Other
            
            
            53
            
            
            
            63
            
            
            
            119
            
            
            
            151Total
      noninterest income
            
            
            450
            
            
            
            475
            
            
            
            904
            
            
            
            916NONINTEREST
      EXPENSESalaries
      and employee benefits
            
            
            994
            
            
            
            998
            
            
            
            1,896
            
            
            
            1,968Net
      occupancy expense
            
            
            106
            
            
            
            102
            
            
            
            222
            
            
            
            210Equipment
      expense
            
            
            92
            
            
            
            104
            
            
            
            191
            
            
            
            213Data
      processing
            
            
            141
            
            
            
            128
            
            
            
            288
            
            
            
            265Director
      fees
            
            
            69
            
            
            
            72
            
            
            
            129
            
            
            
            135Postage
            
            
            42
            
            
            
            42
            
            
            
            95
            
            
            
            84Professional
      service fees
            
            
            68
            
            
            
            74
            
            
            
            144
            
            
            
            140Stationery
            
            
            31
            
            
            
            31
            
            
            
            60
            
            
            
            75Software
      expense
            
            
            60
            
            
            
            48
            
            
            
            125
            
            
            
            84Net
      cost of operation of other real estate
            
            
            18
            
            
            
            131
            
            
            
            18
            
            
            
            182Other
            
            
            256
            
            
            
            283
            
            
            
            509
            
            
            
            552Total
      noninterest expense
            
            
            1,877
            
            
            
            2,013
            
            
            
            3,677
            
            
            
            3,908Income
      before income taxes
            
            
            434
            
            
            
            356
            
            
            
            1,044
            
            
            
            1,003Income
      tax expense
            
            
            81
            
            
            
            85
            
            
            
            229
            
            
            
            279Net
      income
            
            $
            353
            
            
            $
            271
            
            
            $
            815
            
            
            $
            724Basic
      and fully diluted earningsper
      common share
            
            $
            0.19
            
            
            $
            0.15
            
            
            $
            0.45
            
            
            $
            0.40Weighted
      average shares outstanding
            
            
            1,829,504
            
            
            
            1,829,504
            
            
            
            1,829,504
            
            
            
            1,829,504Dividends
      per common share
            
            $
            0.12
            
            
            $
            0.12
            
            
            $
            0.24
            
            
            $
            0.24





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


4
 Index




CITIZENSFINANCIAL CORP.


STATEMENTS
OF COMPREHENSIVE INCOME/LOSS


(In
thousands of dollars)








Three
      Months Ended
            
            
            Six
      Months EndedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)Net
      income
            
            $
            353
            
            
            $
            271
            
            
            $
            815
            
            
            $
            724Other
      comprehensive income:Gross
      unrealized losses arising during the period
            
            
            (1,368
            )
            
            
            (369
            )
            
            
            (715
            )
            
            
            (184
            )Adjustment
      for income tax benefit
            
            
            520
            
            
            
            141
            
            
            
            272
            
            
            
            70(848
            )
            
            
            (228
            )
            
            
            (443
            )
            
            
            (114
            )Less:
      Reclassification adjustment for losses included in net
    income
            
            
            (4
            )
            
            
            -
            
            
            
            (4
            )
            
            
            -Adjustment
      for income tax benefit
            
            
            1
            
            
            
            -
            
            
            
            1
            
            
            
            -(3
            )
            
            
            -
            
            
            
            (3
            )
            
            
            -Other
      comprehensive loss, net of tax
            
            
            (851
            )
            
            
            (228
            )
            
            
            (446
            )
            
            
            (114
            )Comprehensive
      income/(loss)
            
            $
            (498
            )
            
            $
            43
            
            
            $
            369
            
            
            $
            610





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)




Six Months Ended June 30, 2008 and
      2007(unaudited)Common Stock
            
            
            Retained
            
            
            Accumulated
      Other Comprehensive
            
            
            Treasury
            
            
            Total
      Share-holders'Shares
            
            
            Amount
            
            
            Earnings
            
            
            Income/(Loss)
            
            
            Stock
            
            
            EquityBalance,
      January 1, 2008
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            20,999
            
            
            $
            (586
            )
            
            $
            (3,832
            )
            
            $
            21,081Net
      income
            
            
            -
            
            
            
            -
            
            
            
            815
            
            
            
            -
            
            
            
            -
            
            
            
            815Net
      change in unrealized gain/(loss) on securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (446
            )
            
            
            -
            
            
            
            (446
            )Cash
      dividends declared ($0.24 per share)
            
            
            -
            
            
            
            -
            
            
            
            (439
            )
            
            
            -
            
            
            
            -
            
            
            
            (439
            )Effect
      of initial application of emerging issues task force issue No. 06-4, net
      of tax
            
            
            -
            
            
            
            -
            
            
            
            (53
            )
            
            
            -
            
            
            
            -
            
            
            
            (53
            )Effect
      of changing pension plan measurement date pursuant to SFAS No. 158, net of
      tax
            
            
            -
            
            
            
            -
            
            
            
            (20
            )
            
            
            -
            
            
            
            -
            
            
            
            (20
            )Balance
      June 30, 2008
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            21,302
            
            
            $
            (1,032
            )
            
            $
            (3,832
            )
            
            $
            20,938Balance,
      January 1, 2007
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            20,843
            
            
            $
            (1,233
            )
            
            $
            (3,832
            )
            
            $
            20,278Net
      income
            
            
            -
            
            
            
            -
            
            
            
            724
            
            
            
            -
            
            
            
            -
            
            
            
            724Net
      change in unrealized gain/(loss) on securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (114
            )
            
            
            -
            
            
            
            (114
            )Cash
      dividends declared ($0.24 per share)
            
            
            -
            
            
            
            -
            
            
            
            (439
            )
            
            
            -
            
            
            
            -
            
            
            
            (439
            )Balance
      June 30, 2007
            
            
            2,250,000
            
            
            $
            4,500
            
            
            $
            21,128
            
            
            $
            (1,347
            )
            
            $
            (3,832
            )
            
            $
            20,449





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)


Six
      Months Ended
              June 30,2008
            
            
            2007Cash
      flows from operating activities:
            
            (Unaudited)Net
      Income
            
            $
            815
            
            
            $
            724Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for loan losses
            
            
            348
            
            
            
            656Depreciation
      and amortization
            
            
            159
            
            
            
            162Amortization
      on securities
            
            
            4
            
            
            
            19Gain
      on sale/call of securities
            
            
            (4
            )
            
            
            -Loss
      on sale of other real estate
            
            
            -
            
            
            
            21Provision
      for loss on other real estate
            
            
            -
            
            
            
            112Decrease
      in accrued interest receivable
            
            
            16
            
            
            
            66(Increase)/decrease
      in other assets
            
            
            (246
            )
            
            
            192Increase
      in other liabilities
            
            
            709
            
            
            
            38Cash
      provided by operating activities
            
            
            1,801
            
            
            
            1,990Cash
      flows from investing activities:Principal
      payments, available for sale securities
            
            
            1,807
            
            
            
            888Proceeds
      from sales of available for sale securities
            
            
            484
            
            
            
            274Proceeds
      from maturities and calls,available
      for sale securities
            
            
            12,110
            
            
            
            10,155Purchases
      of available for sale securities
            
            
            (32,021
            )
            
            
            (8,403
            )Purchases
      of premises and equipment
            
            
            (71
            )
            
            
            (50
            )Proceeds
      from sale of other real estate
            
            
            248
            
            
            
            144Increase
      in loans
            
            
            (4,453
            )
            
            
            (3,401
            )Cash
      used in investing activities
            
            
            (21,896
            )
            
            
            (393
            )Cash
      flows from financing activities:Cash
      dividends paid
            
            
            (439
            )
            
            
            (439
            )Decrease
      in short-term borrowing
            
            
            (4,659
            )
            
            
            (918
            )Acquisition
      of long-term borrowing
            
            
            5,530
            
            
            
            -Repayment
      of long-term borrowing
            
            
            (186
            )
            
            
            (534
            )Increase
      in time deposits
            
            
            3,430
            
            
            
            1,202Increase/(decrease)
      in other deposits
            
            
            18,257
            
            
            
            (535
            )Cash
      provided by/(used in) financing activities
            
            
            21,933
            
            
            
            (1,224
            )Net
      increase/(decrease) in cash and cash equivalents
            
            
            1,838
            
            
            
            373Cash
      and cash equivalents at beginning of period
            
            
            7,062
            
            
            
            6,095Cash
      and cash equivalents at end of period
            
            $
            8,900
            
            
            $
            6,468Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            3,268
            
            
            $
            3,274Income
      taxes
            
            
            178
            
            
            
            470Supplemental
      Schedule of Noncash Investing and Financing Activities:Other
      real estate and other assets acquired in settlement of
    loans
            
            $
            248
            
            
            $
            1,257Unrealized
      gain/(loss) on securities available for sale
            
            
            (719
            )
            
            
            (184
            )





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





The
condensed consolidated statements contained herein include the accounts of
Citizens Financial Corp. and its wholly-owned subsidiary Citizens National Bank
("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 and
all adjustments that are necessary to make the financial statements no
misleading have been made.  All such adjustments were of a normal,
recurring nature.  The results of operations for the six-month and
three-month periods ended June 30, 2008, 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' 2007 Annual Report to Shareholders and Form 10-K.





NOTE 2 –
SPLIT-DOLLAR LIFE
INSURANCE ARRANGEMENT





In
September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.”  This consensus
concludes that for a split-dollar life insurance arrangement within the scope of
this Issue, an employer should recognize a liability for future benefits in
accordance with SFAS 106 (if, in substance, a postretirement benefit plan
exists) or APB Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive agreement
with the employee.  The consensus is effective for fiscal years
beginning after December 15, 2007.  Accordingly the company must
record a liability for the post retirement cost of the insurance policies
carried by the bank to fund the directors and executive officers supplemental
retirement plan.  Additional information related to this plan can be
found in our Note 11 of our 2007 Annual Report to Shareholders and Form
10-K.





The
company adopted this issue in the first quarter 2008 as a change in accounting
principle through a cumulative-effect adjustment to retained earnings of
approximately $53,000, net of income tax.  This adjustment is
presented on our condensed consolidated statements of changes in shareholders’
equity in this report.








NOTE 3 –
RECLASSIFICATIONS





Certain
accounts in the condensed consolidated financial statements for 2007, as
previously presented, have been reclassified to conform with current year
classifications.








NOTE 4 -
SECURITIES





The
amortized cost, unrealized gains, unrealized losses and estimated fair values of
securities at June 30, 2008 and December 31, 2007 are summarized as follows (in
thousands):




8
 Index




June 30, 2008Amortized
              Cost
            
            
            Unrealized
              Gains
            
            
            Unrealized
              Losses
            
            
            Carrying
      Value (Estimated Fair Value)Available
      for sale:U.S.
      Government agencies and corporations
            
            $
            24,833
            
            
            $
            198
            
            
            $
            152
            
            
            $
            24,879Mortgage
      backed securities -U.S. Government agencies and
    corporations
            
            
            18,636
            
            
            
            22
            
            
            
            519
            
            
            
            18,139Tax
      exempt state and political subdivisions
            
            
            22,383
            
            
            
            60
            
            
            
            206
            
            
            
            22,237Corporate
      debt securities
            
            
            9,182
            
            
            
            14
            
            
            
            78
            
            
            
            9,118Federal
      Reserve Bank stock.
            
            
            108
            
            
            
            -
            
            
            
            -
            
            
            
            108Federal
      Home Loan Bank stock
            
            
            816
            
            
            
            -
            
            
            
            -
            
            
            
            816Community
      Financial Services Inc. stock
            
            
            163
            
            
            
            -
            
            
            
            -
            
            
            
            163Total
      securities available for sale
            
            $
            76,121
            
            
            $
            294
            
            
            $
            955
            
            
            $
            75,460







December, 31,
      2007*Amortized
      Cost
            
            
            UnrealizedGains
            
            
            Unrealized
      Losses
            
            
            Carrying
      Value (Estimated Value)(Unaudited)Available
      for sale:U.S.
      Government agencies and corporations
            
            $
            28,084
            
            
            $
            227
            
            
            $
            19
            
            
            $
            28,291Mortgage
      backed securities-U.S. Government agencies and
corporations
            
            
            6,587
            
            
            
            14
            
            
            
            41
            
            
            
            6,561Tax
      exempt state and political subdivisions
            
            
            22,717
            
            
            
            91
            
            
            
            215
            
            
            
            22,594Federal
      Reserve Bank stock
            
            
            108
            
            
            
            -
            
            
            
            -
            
            
            
            108Federal
      Home Loan Bank stock
            
            
            842
            
            
            
            -
            
            
            
            -
            
            
            
            842Community
      Financial Services Inc Stock
            
            
            163
            
            
            
            -
            
            
            
            -
            
            
            
            163Total
      securities available for sale.
            
            $
            58,501
            
            
            $
            333
            
            
            $
            275
            
            
            $
            58,559





* From
audited financial statements





The
tables below provide summaries of securities available for sale which were in an
unrealized loss position at June 30, 2008 and December 31, 2007.  As
of June 30, 2008, these securities had a total fair value of $42,493,000 and
carried unrealized losses of $955,000, or 2.2%.  Securities which have
been in a continuous loss position for the past twelve months total
$8,910,000.  The unrealized loss pertaining to these securities is
$58,000 or 0.7%.  The majority of these losses are on securities
issued by U.S. government agencies and corporations which carry the implied
faith and credit of the U.S. Government.  The other losses are on
municipal instruments and corporate debt securities.  With the
exception of one municipal which is not rated, all of these instruments carry A
ratings from the major credit rating agencies.  With the excellent
credit quality in our portfolio, we believe these unrealized losses are the
result of changing interest rates, and we will be able to fully recover our
investment.  In addition, no losses have been recognized on the
$29,020,000 of securities that carried unrealized losses at December 31,
2007.


9
 Index




June 30, 2008Securities 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
            
            $
            5,336
            
            
            $
            152
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,336
            
            
            $
            152Mortgage
      backed securities - U.S. Government agencies and
    corporations
            
            
            13,032
            
            
            
            491
            
            
            
            2,208
            
            
            
            28
            
            
            
            15,240
            
            
            
            519Tax
      exempt state and political subdivisions
            
            
            7,608
            
            
            
            176
            
            
            
            6,702
            
            
            
            30
            
            
            
            14,310
            
            
            
            206Corporate
      debt securities
            
            
            7,607
            
            
            
            78
            
            
            
            -
            
            
            
            -
            
            
            
            7,607
            
            
            
            78Total
      securities available for sale
            
            $
            33,583
            
            
            $
            897
            
            
            $
            8,910
            
            
            $
            58
            
            
            $
            42,493
            
            
            $
            955








December 31, 2007*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
            
            $
            -
            
            
            $
            -
            
            
            $
            10,973
            
            
            $
            19
            
            
            $
            10,973
            
            
            $
            19Mortgage
      backed securities -U.S. Government agencies and
    corporations
            
            
            -
            
            
            
            -
            
            
            
            4,887
            
            
            
            40
            
            
            
            4,887
            
            
            
            41Tax
      exempt state and political subdivisions
            
            
            11,243
            
            
            
            193
            
            
            
            1,917
            
            
            
            23
            
            
            
            13,160
            
            
            
            215Total
      securities available for sale
            
            $
            11,243
            
            
            $
            193
            
            
            $
            17,777
            
            
            $
            82
            
            
            $
            29,020
            
            
            $
            275




*From
audited financial statements.





The
maturities, amortized cost and estimated fair values of the bank's securities at
June 30, 2008 are summarized as follows (in thousands):





Available for saleAmortized
              Cost
            
            
            Estimated
              Fair ValueDue
      within 1 year
            
            $
            22,831
            
            
            $
            22,872Due
      after 1 but within 5 years
            
            
            32,452
            
            
            
            32,169Due
      after 5 but within 10 years
            
            
            14,795
            
            
            
            14,586Due
      after 10 years
            
            
            4,956
            
            
            
            4,746Equity
      securities
            
            
            1,087
            
            
            
            1,087$
            76,121
            
            
            $
            75,460





Mortgage
backed securities have remaining contractual maturities ranging from 1 day to
19.75 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
11.07 years.  The company’s equity securities are required to be held
for membership in the Federal Reserve and Federal Home Loan Bank and are shown
at cost since they may only be sold to the respective issuer or another member
at par.  The company’s remaining equities consist of a minimal
investment in Silverton Bank, a correspondent bank the company uses for several
services.


10
 Index


The
proceeds from sales, calls and maturities of securities, including principal
payments received on mortgage backed securities, and the related gross gains and
losses realized for the six month periods ended June 30, 2008 and 2007 are as
follows (in thousands):





Proceeds From
            
            
            Gross RealizedCalls
      and
            
            
            PrincipalSales
            
            
            Maturities
            
            
            Payments
            
            
            Gains
            
            
            LossesJune
      30, 2008:Securities
      available for sale
            
            $
            484
            
            
            $
            12,110
            
            
            $
            1,807
            
            
            $
            4
            
            
            $
            -June
      30, 2007:Securities
      available for sale
            
            $
            274
            
            
            $
            10,155
            
            
            $
            888
            
            
            $
            -
            
            
            $
            -








At June
30, 2008 and December 31, 2007 securities with an amortized cost of $33,054,000
and $32,208,000, respectively, with estimated fair values of $33,015,000 and
$32,358,000, respectively, were pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes required or
permitted by law.





At June
30, 2008, the company had a concentration within its corporate debt securities
classification which included obligations of financial services industry
companies having an approximate amortized cost of $9,182,000 and an estimated
fair value of $9,118,000. There were no concentrations with any one
issuer.





NOTE 5 -
LOANS





Total
loans are summarized as follows (in thousands):





June 30, 2008
            
            
            December 31, 2007*Commercial,
      financial and agricultural
            
            $
            20,995
            
            
            $
            21,015Real
      estate - construction
            
            
            13,198
            
            
            
            12,497Real
      estate – home equity
            
            
            6,646
            
            
            
            6,798Real
      estate – residential mortgage
            
            
            60,672
            
            
            
            61,726Real
      estate – commercial mortgage
            
            
            60,417
            
            
            
            57,921Installment
      loans
            
            
            11,438
            
            
            
            10,903Other
            
            
            3,407
            
            
            
            2,012Total
      loans
            
            
            176,773
            
            
            
            172,872Less:Allowance
      for loan losses
            
            
            1,844
            
            
            
            1,763Net
      deferred loan originationfees and costs
            
            
            133
            
            
            
            54Loans,
      net
            
            $
            174,796
            
            
            $
            170,939





* From
audited financial statements





Loans in
a nonaccrual status were $3,553,000 and $4,487,000 at June 30, 2008 and December
31, 2007, respectively.





Many of
the loans in a nonaccrual status are also considered impaired.  At
June 30, 2008 our recorded investment in impaired loans was
$2,926,000.  The valuation allowance assigned to these loans totaled
$620,000. Our average investment in the impaired loans was $3,385,000 during the
quarter.  The amount of interest income recorded on them in the second
quarter was $8,000 while the amount of interest collected was $57,346. Impaired
loans at December 31, 2007 were $4,038,000.


11
 Index




NOTE 6 -
ALLOWANCE FOR LOAN
LOSSES




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





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            1,921
            
            
            $
            1,822
            
            
            $
            1,763
            
            
            $
            1,873Loans
      charged off:Commercial
      and industrial
            
            
            283
            
            
            
            100
            
            
            
            283
            
            
            
            185Real
      estate – res. mortgage
            
            
            -
            
            
            
            -
            
            
            
            11
            
            
            
            -Real
      estate – comm. mortgage
            
            
            24
            
            
            
            75
            
            
            
            24
            
            
            
            242Consumer
      and other
            
            
            1
            
            
            
            5
            
            
            
            1
            
            
            
            24Total
            
            
            308
            
            
            
            180
            
            
            
            319
            
            
            
            451Recoveries:Commercial
      and industrial
            
            
            6
            
            
            
            -
            
            
            
            48
            
            
            
            -Real
      estate – res. mortgage
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            -Real
      estate – comm. mortgage
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other
            
            
            3
            
            
            
            12
            
            
            
            3
            
            
            
            25Total
      recoveries
            
            
            9
            
            
            
            12
            
            
            
            52
            
            
            
            25Net
      losses
            
            
            299
            
            
            
            168
            
            
            
            267
            
            
            
            426Provision
      for loan losses
            
            
            222
            
            
            
            449
            
            
            
            348
            
            
            
            656Balance
      at end of period
            
            $
            1,844
            
            
            $
            2,103
            
            
            $
            1,844
            
            
            $
            2,103








NOTE 7 -
DEPOSITS




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





June 30, 2008
            
            
            December 31, 2007*Interest
      bearing checking
            
            $
            63,148
            
            
            $
            45,698Money
      market accounts
            
            
            5,493
            
            
            
            5,406Savings
      accounts
            
            
            21,251
            
            
            
            21,589Certificates
      of deposit under $100,000
            
            
            59,446
            
            
            
            59,984Certificates
      of deposit of $100,000 or more
            
            
            44,668
            
            
            
            40,699Total
            
            $
            194,006
            
            
            $
            173,376





* From
audited financial statements








NOTE 8 -
BORROWINGS





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





June 30, 2008
            
            
            December 31, 2007*Short-term
      borrowings:Securities
      sold under agreements to repurchase
            
            $
            13,297
            
            
            $
            14,258Federal
      funds purchased
            
            
            1,700
            
            
            
            1,400Overnight
      advances from Federal Home Loan Bank of Pittsburgh (FHLB) line of
      credit
            
            
            -
            
            
            
            3,998Total
            
            $
            14,997
            
            
            $
            19,656Long-term
      borrowings:Advances
      from FHLB
            
            $
            8,063
            
            
            $
            2,719





* From
audited financial statements


12
 Index


NOTE 9 -
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
      June 30,
            
            
            Six Months Ended
    June 30,Pension Benefits
            
            
            Other Benefits
            
            
            Pension Benefits
            
            
            Other Benefits2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            50
            
            
            $
            29
            
            
            $
            4
            
            
            $
            5
            
            
            $
            79
            
            
            $
            58
            
            
            $
            8
            
            
            $
            10Interest
      cost
            
            
            80
            
            
            
            72
            
            
            
            7
            
            
            
            7
            
            
            
            154
            
            
            
            144
            
            
            
            15
            
            
            
            14Expected
      return on plan assets
            
            
            (88
            )
            
            
            (82
            )
            
            
            -
            
            
            
            -
            
            
            
            (176
            )
            
            
            (165
            )
            
            
            -
            
            
            
            -Net
      amortization and deferral
            
            
            22
            
            
            
            20
            
            
            
            3
            
            
            
            2
            
            
            
            36
            
            
            
            40
            
            
            
            6
            
            
            
            4Net
      periodic cost
            
            $
            64
            
            
            $
            39
            
            
            $
            14
            
            
            $
            14
            
            
            $
            93
            
            
            $
            77
            
            
            $
            29
            
            
            $
            28








In the
first half of 2008 we contributed $70,000 to our pension plan.  Our
pension plan calls for a minimum contribution of approximately $123,000 for the
remainder of 2008.  Payments totaling $128,000 were contributed to the
plan during 2007.








NOTE 10 -
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 11 -
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
            
            June 30,
      2008
            
            
            December 31,
      2007amounts
      represent credit risk
            
            (Unaudited)
            
            
            *(in thousands)Commitments
      to extend credit
            
            $
            22,776
            
            
            $
            24,603Standby
      letters of credit
            
            
            801
            
            
            
            301Total
            
            $
            23,577
            
            
            $
            24,904





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 12 -
EARNINGS PER
SHARE





Basic
earnings per share is based on the weighted average number of shares outstanding
during the period.  For the six months ended June 30, 2008 and 2007
the weighted average number of shares outstanding was
1,829,504.  During the periods ended June 30, 2008 and 2007 the
company did not have any dilutive securities.








NOTE 13 –
FAIR VALUE
MEASUREMENTS





SFAS No.
157, Fair Value Measurements, defines fair value, establishes a framework for
measuring fair value, establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances 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





SFAS No.
157 applies to loans measured for impairment using the practical expedients
permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
including impaired loans measured at an observable market price (if available),
or at 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.  Impaired loans are discussed further in Note
5.





Other Real Estate
Owned





Certain
assets such as other real estate owned (OREO) are measured at fair value less
cost to sell. We believe that the fair value component in its valuation follows
the provisions of SFAS No. 157. At June 30, 2008, the company had no
OREO.


14
 Index




NOTE 14 –
SIGNIFICANT NEW
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS
141(R)).  The Standard will significantly change the financial
accounting and reporting of business combination transactions.  SFAS
141(R) establishes the criteria for how an acquiring entity in a business
combination recognizes the assets acquired and liabilities assumed in the
transaction; establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination.  Acquisition related costs including finder's fees,
advisory, legal, accounting valuation and other professional and consulting fees
are required to be expensed as incurred.  SFAS 141(R) is effective for
fiscal years beginning after December 15, 2008 and early implementation is not
permitted. The company does not expect the implementation to have a material
impact on its consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS
160). SFAS 160 requires the company to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This Statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited.   The
company does not expect the implementation of SFAS 160 to have a material impact
on its consolidated financial statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards  No.
161, “Disclosures about Derivative Instruments and Hedging Activities – an
amendment of FASB Statement No. 133” (SFAS 161).  SFAS 161 changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows.  SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, with early application permitted. The
company does not expect the implementation of SFAS 161 to have a material impact
on its consolidated financial statements.


15
 Index


Part 1 Item2


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 National Bank of Elkins, for the periods
indicated.  It should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this 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.cnbelkins.com.





Description of
Business





Citizens
Financial Corp. is a $270 million Delaware corporation headquartered in Elkins,
WV.  From there our wholly-owned subsidiary, Citizens National Bank of
Elkins, provides loan, deposit, trust, brokerage and other banking and related
services to customers in northcentral and eastern West Virginia and nearby areas
through six branch offices.  We conduct no business other than the
ownership of our subsidiary bank.





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 other factors which may be more specific to our own
operations including factors set forth in the “Risk Factors” section of our Form
10-K for the fiscal year ended December 31, 2007.  Examples of such
factors may include our ability to attract and retain key personnel,
implementing new technological systems, providing new products to meet changing
customer and competitive demands, our ability to successfully manage growth
strategies, controlling costs, maintaining our net interest margin, maintaining
good credit quality, and others.  Forward looking statements can be
identified by words such as “may”, “will”, “expect”, “anticipate”, “believe”,
“estimate”, “plans”, “intends”, or similar words.  We do not attempt
to update any forward looking statements.  When provided, we intend
forward looking information to assist readers in understanding anticipated
future operations and we include them pursuant to applicable safe harbor
provisions of the Private Securities Litigation Reform Act of
1995.  Although we believe the expectations reflected in our forward
looking statements are reasonable, actual results could differ
materially.





CRITICAL ACCOUNTING
POLICIES





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


16
 Index


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





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





OVERVIEW





As the
national economy continues to struggle in the wake of housing crisis and
uncertainty in oil prices, our local economy has begun exhibiting signs of a
slowdown.  Higher fuel costs have affected both the lumber and
trucking industries in our area.  Furthermore, the decline in the
housing market has softened demand for logging and lumber production, and in
turn prompted employee layoffs within local industry.  Consumers have
also been affected by the higher fuel and food prices in markets where the
median household income is well below the national average.  As these
trends continue, demand for loans remains lower than we would
like.  However, during the first half of 2008 assets grew by $23.1
million or 9.4% to $269.7 million primarily due to a $21.7 million increase in
deposits.  This includes a temporary deposit from one of our customers
of approximately $8 million that is expected to remain at our institution for no
more than six months.  The remaining $13.7 million increase is
primarily centered in interest bearing checking.  Our asset growth
consisted of a $3.9 million increase in loans to $176.8 million and a $16.9
million increase in our investment portfolio to $75.5 million.





The first
six months of 2008 produced net income of $815,000 which was $91,000 or 12.6%
higher than the same period last year.  The increase in income is
largely attributable to a lower provision for loan loss of $348,000 in 2008
compared to $656,000 in 2007, as well as lower expenses related to foreclosed
properties falling by $164,000 to $18,000 in 2008.  These savings were
partially offset by continued pressure on our net interest margin as market
interest rates have fallen 325 basis points since September 2007.





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


17
 Index


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.





Like many
financial institutions across the country, Citizens has experienced net interest
margin compression during the first half of 2008, as Federal Reserve target
rates have been reduced by 325 basis points since September 2007.  Our
net interest margin for the first six months of 2008 of 3.69% is 52 basis points
lower than our margin for the same period last year.  This compression
is primarily the result of decreasing loan rates on our variable rate products
combined with competitive pressures to continue to price certificates of deposit
higher than we would like.





As noted
above, net interest income is comprised of two components, interest income and
interest expense.  Despite a $10.6 million increase in our average
earning asset base, interest income in 2008 is down by $459,000 to $7,481,000 as
our yield on earning assets declined by 62 basis
points.   Interest expense increased by $27,000 due to a $8.8
million increase in average interest bearing liabilities.





As
reflected on our income statement, net interest income decreased by $486,000 to
$4,165,000 during the first six months of 2008.  On a tax equivalent
basis , net interest income decreased by the lesser amount of $375,000 to
$4,417,000 as Citizens increased its investment in tax-exempt municipal bonds in
the latter part of 2007.  Similarly, for the second quarter, net
interest income decreased by $260,000 to $2,083,000.





As the
current rate environment is expected to continue into 2009, Citizens will
continue to look for opportunities to decrease our cost of interest bearing
liabilities.  Since the end of June 2008, Citizens has been able to
reduce rates on a number of large deposit accounts.  We expect that
these rate reductions will improve our cost of funding and ultimately strengthen
our 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 which are inherent
in the loan portfolio.  Because of this, the amount of the provision
is subject to the estimation techniques and judgments involved in assessing the
allowance which may cause the provision to increase or decrease in the
future.  We determine the amount of the provision, as well as the
adequacy of the allowance for loan losses, quarterly.





For the
first half of 2008 the provision for loan losses was $348,000 compared to
$656,000 during the first half of 2007.  The second quarter provision
was $222,000 in 2008 compared to $449,000 in 2007.  The provision was
higher in 2007 due to one particular commercial credit involving an enterprise
that exhibited increased business risk last year and ultimately failed at the
end of last year.  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.


18
 Index




NONINTEREST
INCOME





Noninterest
income decreased slightly by $12,000 or 1.3% to $904,000 during the first half
of 2008.  This decrease was largely due to a $37,000 decrease in fee
income from our secondary market mortgage program, as demand for these mortgages
has softened.  Other noninterest income also declined by $32,000 and
mainly consisted of decreased revenue from check cashing fees, wire transfer
fees, and income derived from the outsourcing of our official check
program.





The
largest component of noninterest income continues to be service fees which
increased $11,000 to $513,000 as a result of higher ATM and debit card program
fees. Our involvement in trust and brokerage services continues to be a major
contributor to noninterest income.  Collectively, our trust and
brokerage programs have increased $38,000 in the first half of
2008.





During
the second quarter, noninterest income decreased by $25,000 or 5.3% to
$450,000.  Much like the year-to-date decrease, this decline is mainly
the result of lower loan volumes in our secondary market mortgage program which
was $24,000 less in the second quarter of 2008 compared to the same period in
2007.





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.  Therefore, controlling
noninterest expense is a key factor to achieving higher earnings.





During
the first half of 2008, noninterest expense has decreased by $231,000 or 5.9% to
$3,677,000.  Our largest noninterest expense, salaries and employee
benefits, decreased $72,000 as we experienced lower medical insurance
costs.  We also benefitted from a $164,000 decrease in costs related
to foreclosed properties, as we had an unusually high number of these properties
in 2007.  Costs related to foreclosures in the first half of 2008
totaled $18,000.  Other costs such as equipment expense, stationery,
and director fees were down a combined $43,000.





Our cost
savings were partially offset due to increased software costs of $41,000, as we
are implementing a new loan processing software that we believe will improve
efficiency in our lending function.  In addition, data processing,
occupancy, and postage expenses have increased by a combined
$46,000.





Analogous
to the change in the year-to-date noninterest expense, the $1,877,000 of expense
recorded in the second quarter was $136,000 or 6.8% less than the comparable
period in 2007.  The majority of this savings was related to
foreclosed property costs which decreased $113,000 to $18,000.


19
 Index


There are
a number of factors which could negatively impact noninterest expense in the
future.  For example, salaries and benefits could rise if medical
claims under our partially self-insured group medical plan increase. Also, we
may incur additional costs related to compliance with the Sarbanes-Oxley
Act.  Currently we are required to comply with Section 404a of the Act
and issue a conclusion about management’s assessment of internal control over
financial reporting.  We currently expect that in 2009 we will be
required to have our independent accountants attest to our
conclusions.





INCOME
TAXES





Our
provision for income taxes for the first half of 2008 of $229,000 includes both
federal and state income taxes.  At this level taxes
were     21.9% of pretax income.  Through six
months of 2007 income tax expense totaled $279,000 or 27.8% of pretax
income.  During the second quarter of 2008 we recorded taxes of
$81,000 or 18.7% of pretax income compared to $85,000 or 23.9% during the
comparable period last year.  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.  The decrease in the tax rate in 2008 is
primarily attributable to increased earnings on tax-exempt municipal
bonds.





FINANCIAL
CONDITION





LOAN
PORTFOLIO





Ripple
effects from the national housing crisis and high fuel prices continue to
influence both consumers and industry in our markets.  Our local
lumber, trucking, and tourism industries have experienced reduced
activity.  The unsteadiness in the economy combined with higher food
and fuel costs, have influenced consumers to limit spending.  All of
these factors have contributed to limiting our loan growth during the first half
of 2008 with total loans growing by $3.9 million to $176.8 million.





Most of
our loan growth in the first six months of 2008 has been centered in commercial
real estate lending which grew $2.5 million to $60.4 million.  This
growth was primarily comprised of three large loans to fund projects at a local
ski resort.  Other commercial loans, not secured by real estate,
remained stable at $21.0 million during the first half of the year. Most of our
commercial loans are 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.





In
addition, other loans primarily comprised of tax-exempt entities grew by $1.4
million to $3.4 million as we helped fund a local project.  We expect
to disburse an additional $1.5 million on this project by year-end.





Retail
lending, or lending to consumers for autos, homes, or for other purposes, has
been difficult for Citizens over the past several years.  Auto
manufacturers and specialty mortgage companies have launched aggressive
campaigns to pull consumers away from traditional banking
institutions.  Residential mortgage lending declined by $1.1 million
to $60.7 million over the first six months of 2008, while construction loans
increased by $701,000 to $13.2 million over the same time
period.  Installment loans increased by $535,000 to $11.4 million
during the first half of the year, as Citizens has continued to maintain
attractive automobile rates and has incorporated a new lending program on
recreational vehicles into our product offerings.  We believe this new
program will add quality loans to our portfolio and give us another opportunity
to reach consumers in our markets.  Citizens will continue to actively
seek new strategies and programs to increase the retail segment of our business
in order to enhance portfolio diversification and reduce the inherent risk in
our portfolio.


20
 Index




CREDIT QUALITY AND ALLOWANCE
FOR LOAN LOSSES





Despite
the weak economic situation impacting the nation and our local markets, we
believe Citizens continues to take appropriate action to systematically reduce
the risk in our credit portfolio by relying on the improvements we have made
with respect to our personnel, monitoring process, and loan grading
processes.  Additional information related to our improvements can be
found in our 2007 annual report to shareholders on Form 10-K.





During
the first quarter of 2008, we began the liquidation process of the commercial
customer mentioned earlier that accounted for the majority of our loan
charge-offs last year.  During the second quarter, we continued that
process and recognized an additional $275,000 of loss on this credit. We do not
expect any additional charge-offs related to this particular
credit.  Absent this charge, we would have had net recoveries of
$8,000 for the first half of 2008.  Impaired loans at June 30 were
$2.9 million or $1.1 million less than at December 31, 2007, as a result of this
process.  We continue to establish detailed strategies to manage those
loans which carry the greatest risk and monitor them continuously.





The
inherent risk of loss in our loan 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 June 30,
our allowance was $1,844,000 or 1.04% of gross loans, compared to $1,763,000 or
1.02% at year-end.  The allowance included specific reserves totaling
$620,000 at June 30, which was substantially the same as year-end at
$624,000.  Additional reserves on the remaining pools totaled $646,000
at June 30, compared to $308,000 at year-end.  Since this portion of
our allowance is based on our loan loss history, the increase of $338,000 is
primarily the result of adding the large commercial charge-off we sustained last
year to our historical losses calculation.  Other adjustments to
pooled factors totaled $578,000 at June 30 which was similar to year-end at
$631,000.  At December 31, our allowance also contained an unallocated
reserve of $200,000 due to the economic uncertainty present at that
time.  We believe we have adequately addressed those uncertainties
through the other factors indicated above and, therefore, have no unallocated
reserve remaining at June 30, 2008.





In many
cases, our security position helps limit our risk of loss, and we believe we are
well 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 the loan losses will 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.


21
 Index




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.





Our
securities portfolio grew by $16.9 million to $75.5 million during the first
half of 2008.  A portion of this growth is due to an investment
transaction in which we funded a $5 million security purchase with long-term
borrowings from Federal Home Loan Bank.  We expect this $5 million
transaction to have a pre-tax profit margin between 1.0% and 1.9% over the next
two years, depending on the interest rate environment.  In addition,
increasing deposits funded the remaining securities
growth.  Specifically, one of our customers has made a deposit of
approximately $8 million that is expected to remain in the bank for six
months.  We have invested $6.2 million of these funds in short-term
corporate bonds with at least “A” credit ratings and the remaining balance in
short-term certificates of deposit.  All such certificates of deposit
are less than $100,000 each and are fully FDIC insured.





Our
investment strategies for the first half of the year have led us to invest a
significant portion of this growth in mortgage-backed securities issued by U.S.
government agencies.  These securities provide a good source of cash
flow with average lives of less than six years, while providing a reasonable
return on investment in today’s market.  We have not and do not intend
to invest in mortgage-backed securities with sub-prime exposure. All of our
mortgage-backed securities carry the implied faith and credit of the U.S.
government.  We purchased a total of $13.9 million in mortgage-backed
securities, as well as $6.5 million of U.S. government agency bonds, $9.1
million of corporate debt securities, and $2.0 million in municipal instruments
during the first half of 2008.





Overall
our portfolio is made up of $24.9 million in agency securities, $18.1 million in
mortgage-backed securities, $22.2 million in municipals, $9.1 million in
corporate debt securities, and $1.1 million in correspondent and Federal Reserve
Bank stock.  We monitor credit ratings on our investments on a monthly
basis.  With the exception of one municipal bond which is not rated,
all of these instruments carry good to exceptional credit ratings from the major
credit rating agencies.





Our
short-term investments, including federal funds sold and interest bearing
deposits with other banks, have increased $1.9 million since year end and
include the certificate of deposit investments we made in response to the large
customer deposit mentioned above.





DEPOSITS AND OTHER FUNDING
SOURCES





Deposits
have grown $21.7 million since year end with most of the growth centered in
interest bearing checking, which grew by $17.5 million.  This growth
included the $8 million temporary deposit mentioned earlier in this report that
is expected to be withdrawn within six months.  In addition,
certificates of deposit increased by $3.4 million and noninterest bearing demand
deposits increased by $1.1 million.


22
 Index




Our
short-term borrowings consist of repurchase agreements and overnight borrowings
such as Federal Funds purchased.  These borrowings totaled $14,997,000
at June 30 and were down $4.7 million since year-end.  The decrease
was primarily attributable to a decline in the amount of overnight borrowings
since year end.





Our
long-term borrowings historically consist of Federal Home Loan Bank
borrowings.  During the first half of 2008, we borrowed $5 million in
order to invest in a mortgage-backed security as noted earlier.  In
addition we borrowed $530,000 to match fund a fixed rate loan for one of our
customers.  At June 30, 2008, long-term borrowings totaled $8,063,000
and had increased $5.3 million since year-end.





CAPITAL
RESOURCES





Our total
capital of $20,938,000 or 7.8% of total assets is similar to our position at
year-end when capital was $21,081,000 or 8.5% of assets.  Our
percentage of capital relative to assets has decreased in part due to the
deposit increase including the $8 million temporary deposit.  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 from the Federal
Home Loan Bank of Pittsburgh.  Currently, we have access to
approximately $95 million through various FHLB programs in addition to available
borrowing facilities with other correspondent banks.





Our
liquidity demands were low during the first half of 2008, as we continued to
experience reduced loan demand.  Aside from specific transactions
designed to enhance earnings such as the $5 million investment transaction
mentioned in this report, we expect 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.


23
 Index


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.  As previously noted in this report we have recently
experienced increasing fuel and food prices impacting our
economy.  However, based on current Federal Reserve policy we do not
expect inflation to materially impact our financial position or results of
operations in the foreseeable future.








Part
I Item4


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.  Subsequent to
the date of that evaluation, there have been no significant changes in our
internal controls or in other factors that could significantly offset internal
controls, nor were any corrective actions required with regard to significant
deficiencies or material weaknesses.


24
 Index




PARTII -  OTHER INFORMATION








Item
      1.
            Legal
      Proceedings:





As of
June 30, 2008, Citizens Financial Corp. was 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 National Bank.





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:  The annual meeting of
      shareholders of Citizens Financial Corp. was held on April 19,
      2008.  The shareholders determined that the maximum number of
      directors would be fixed at nine and that directors Max L. Armentrout,
      William T. Johnson, Jr., and L.T. Williams will serve three year terms
      ending in April 2011.  Each of these directors was
      unopposed.





In
addition to the foregoing nominees, the following seven (6) persons were serving
as members of the Board of Directors as of the report date for terms to expire
in the year indicated for each member:  Robert N. Alday (2009);
William J Brown (2010); Edward L. Campbell (2010); Cyrus K. Kump (2009); Robert
J. Schoonover (2010); and John A. Yeager (2009).





Item
      5.
            Other
      Information:  None.





Item
      6.
            Exhibits:





The
following exhibits are filed with this report:


Exhibit No.
            
            Description of Exhibit31.1
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 135031.2
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 135032.1
            
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 135032.2
            
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350


25
 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.


CITIZENSFINANCIAL CORP.








Date:
      8/13/08
            /s/ Robert J.
      SchoonoverRobert
      J. SchoonoverPresident
      andChief
      Executive OfficerDate:
      8/13/08
            /s/ Thomas K.
      DerbyshireThomas
      K. DerbyshireVice
      President, Treasurer andPrincipal
      Financial Officer






26