UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q








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





For
      the quarterly period ended
                    September 30,
  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.           YesT 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 companyT





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





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
                    November 10, 2008Common
      Stock ($2 par value)
                  1,829,504







1





FORM 10-Q


CITIZENS
FINANCIAL CORP.


Quarter
Ended September 30, 2008





INDEX





Page No.Part
      I.  Financial InformationItem
      1.  Financial StatementsCondensed Consolidated Balance Sheets September 30, 2008 and
      December 31, 2007
                      3Condensed Consolidated Statements of Income Three Months Ended
      September 30, 2008 and September 30, 2007 and Nine Months Ended September
      30, 2008 and September 30, 2007
                      4Statements of Comprehensive Income/Loss Three Months Ended
      September 30, 2008 and September 30, 2007 and Nine Months Ended September
      30, 2008 and September 30, 2007
                      5Condensed Consolidated Statements of Changes in Shareholders'
      Equity Nine Months Ended September 30, 2008 and September 30,
      2007
                      6Condensed Consolidated Statements of Cash Flows Nine Months
      Ended September 30, 2008 and September 30, 2007
                      7Notes to Condensed Consolidated Financial
      Statements
                      8-16Item 2.  Management's Discussion and Analysis of
      Financial Condition and Results of Operations
                      16-25Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                      Not
      ApplicableItem 4T. Controls and Procedures
                      26Part
      II.  Other Information and Index to ExhibitsItems 1 through 6
                      27Signatures
                      28Certification
      by Executive Officers Pursuant to Sections 302 and 906 of the
      Sarbanes-Oxley Act of 2002
                      29-32





2
 Index





PART I
ITEM I - FINANCIAL INFORMATION


CITIZENS FINANCIAL CORP.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands of dollars)





Sept. 30,
      2008
                        
                        
                        Dec. 31,
      2007(Unaudited)
                        
                        
                        *ASSETSCash
      and due from banks
                        
                        $
                        4,542
                        
                        
                        $
                        7,050Interest
      bearing deposits with other banks
                        
                        
                        6,691
                        
                        
                        
                        12Securities
      available for sale, at fair value
                        
                        
                        81,166
                        
                        
                        
                        58,559Loans,
      less allowance for loan losses of $2,064 and $1,763,
      respectively
                        
                        
                        173,174
                        
                        
                        
                        170,939Premises
      and equipment, net
                        
                        
                        4,100
                        
                        
                        
                        4,260Accrued
      interest receivable
                        
                        
                        1,544
                        
                        
                        
                        1,385Other
      assets
                        
                        
                        6,510
                        
                        
                        
                        4,390Total
      Assets
                        
                        $
                        277,727
                        
                        
                        $
                        246,595LIABILITIES AND SHAREHOLDERS'
      EQUITYDeposits:Noninterest
      bearing
                        
                        $
                        28,113
                        
                        
                        $
                        27,920Interest
      bearing
                        
                        
                        200,290
                        
                        
                        
                        173,376Total
      deposits
                        
                        
                        228,403
                        
                        
                        
                        201,296Short-term
      borrowings
                        
                        
                        17,289
                        
                        
                        
                        19,656Long-term
      borrowings
                        
                        
                        7,965
                        
                        
                        
                        2,719Other
      liabilities
                        
                        
                        2,583
                        
                        
                        
                        1,843Total
      liabilities
                        
                        
                        256,240
                        
                        
                        
                        225,514Commitments
      and contingencies
                        
                        
                        -
                        
                        
                        
                        -SHAREHOLDERS' EQUITYCommon
      stock, $2.00 par value, authorized 4,500,000 issued
    2,250,000
                        
                        
                        4,500
                        
                        
                        
                        4,500Retained
      earnings
                        
                        
                        21,594
                        
                        
                        
                        20,999Accumulated
      other comprehensive income/(loss)
                        
                        
                        (775
                        )
                        
                        
                        (586
                        )Treasury
      stock at cost, 420,496 shares
                        
                        
                        (3,832
                        )
                        
                        
                        (3,832
                        )Total
      shareholders' equity
                        
                        
                        21,487
                        
                        
                        
                        21,081Total
      Liabilities and Shareholders' Equity
                        
                        $
                        277,727
                        
                        
                        $
                        246,595





*From
audited financial statements.





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





3
 Index





CITIZENS FINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(In
thousands of dollars, except per share data)





Three
      Months Ended September30,
                          
                          
                          Nine
      Months Ended September30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007(Unaudited)
                          
                          
                          (Unaudited)INTEREST INCOMEInterest
      and fees on loans
                          
                          $
                          2,946
                          
                          
                          $
                          3,491
                          
                          
                          $
                          9,070
                          
                          
                          $
                          10,178Interest
      and dividends on securities:Taxable
                          
                          
                          665
                          
                          
                          
                          453
                          
                          
                          
                          1,567
                          
                          
                          
                          1,419Tax-exempt
                          
                          
                          213
                          
                          
                          
                          155
                          
                          
                          
                          626
                          
                          
                          
                          387Interest
      on interest bearing deposits with other banks
                          
                          
                          44
                          
                          
                          
                          33
                          
                          
                          
                          75
                          
                          
                          
                          79Interest
      on federal funds sold
                          
                          
                          17
                          
                          
                          
                          3
                          
                          
                          
                          28
                          
                          
                          
                          12Total
      interest income
                          
                          
                          3,885
                          
                          
                          
                          4,135
                          
                          
                          
                          11,366
                          
                          
                          
                          12,075INTEREST EXPENSEInterest
      on deposits
                          
                          
                          1,421
                          
                          
                          
                          1,532
                          
                          
                          
                          4,424
                          
                          
                          
                          4,417Interest
      on short-term borrowings
                          
                          
                          104
                          
                          
                          
                          187
                          
                          
                          
                          323
                          
                          
                          
                          520Interest
      on long-term borrowings
                          
                          
                          77
                          
                          
                          
                          33
                          
                          
                          
                          171
                          
                          
                          
                          104Total
      interest expense
                          
                          
                          1,602
                          
                          
                          
                          1,752
                          
                          
                          
                          4,918
                          
                          
                          
                          5,041Net
      interest income
                          
                          
                          2,283
                          
                          
                          
                          2,383
                          
                          
                          
                          6,448
                          
                          
                          
                          7,034Provision
      for loan losses
                          
                          
                          117
                          
                          
                          
                          149
                          
                          
                          
                          465
                          
                          
                          
                          805Net
      interest income after provision for loan losses
                          
                          
                          2,166
                          
                          
                          
                          2,234
                          
                          
                          
                          5,983
                          
                          
                          
                          6,229NONINTEREST INCOMETrust
      department income
                          
                          
                          53
                          
                          
                          
                          56
                          
                          
                          
                          190
                          
                          
                          
                          167Brokerage
      fees
                          
                          
                          33
                          
                          
                          
                          35
                          
                          
                          
                          122
                          
                          
                          
                          112Service
      fees
                          
                          
                          326
                          
                          
                          
                          267
                          
                          
                          
                          839
                          
                          
                          
                          769Insurance
      commissions
                          
                          
                          14
                          
                          
                          
                          8
                          
                          
                          
                          27
                          
                          
                          
                          17Security
      gains/(losses)
                          
                          
                          (57
                          )
                          
                          
                          -
                          
                          
                          
                          (53
                          )
                          
                          
                          -Secondary
      market loan fees
                          
                          
                          25
                          
                          
                          
                          17
                          
                          
                          
                          54
                          
                          
                          
                          83Other
                          
                          
                          56
                          
                          
                          
                          64
                          
                          
                          
                          175
                          
                          
                          
                          215Total
      noninterest income
                          
                          
                          450
                          
                          
                          
                          447
                          
                          
                          
                          1,354
                          
                          
                          
                          1,363NONINTEREST EXPENSESalaries
      and employee benefits
                          
                          
                          1,017
                          
                          
                          
                          927
                          
                          
                          
                          2,913
                          
                          
                          
                          2,895Net
      occupancy expense
                          
                          
                          103
                          
                          
                          
                          119
                          
                          
                          
                          325
                          
                          
                          
                          329Equipment
      expense
                          
                          
                          91
                          
                          
                          
                          80
                          
                          
                          
                          282
                          
                          
                          
                          293Data
      processing
                          
                          
                          138
                          
                          
                          
                          126
                          
                          
                          
                          426
                          
                          
                          
                          391Director
      fees
                          
                          
                          68
                          
                          
                          
                          58
                          
                          
                          
                          197
                          
                          
                          
                          193Postage
                          
                          
                          36
                          
                          
                          
                          47
                          
                          
                          
                          131
                          
                          
                          
                          131Professional
      service fees
                          
                          
                          93
                          
                          
                          
                          103
                          
                          
                          
                          237
                          
                          
                          
                          243Stationery
                          
                          
                          28
                          
                          
                          
                          44
                          
                          
                          
                          88
                          
                          
                          
                          119Software
      expense
                          
                          
                          62
                          
                          
                          
                          58
                          
                          
                          
                          187
                          
                          
                          
                          142Net
      cost of operation of other real estate
                          
                          
                          12
                          
                          
                          
                          269
                          
                          
                          
                          30
                          
                          
                          
                          451Other
                          
                          
                          287
                          
                          
                          
                          258
                          
                          
                          
                          796
                          
                          
                          
                          810Total
      noninterest expense
                          
                          
                          1,935
                          
                          
                          
                          2,089
                          
                          
                          
                          5,612
                          
                          
                          
                          5,997Income
      before income taxes
                          
                          
                          681
                          
                          
                          
                          592
                          
                          
                          
                          1,725
                          
                          
                          
                          1,595Income
      tax expense
                          
                          
                          169
                          
                          
                          
                          160
                          
                          
                          
                          398
                          
                          
                          
                          439Net
      income
                          
                          $
                          512
                          
                          
                          $
                          432
                          
                          
                          $
                          1,327
                          
                          
                          $
                          1,156Basic
      and fully diluted earnings per common share
                          
                          $
                          0.28
                          
                          
                          $
                          0.23
                          
                          
                          $
                          0.73
                          
                          
                          $
                          0.63Weighted
      average shares outstanding
                          
                          
                          1,829,504
                          
                          
                          
                          1,829,504
                          
                          
                          
                          1,829,504
                          
                          
                          
                          1,829,504Dividends
      per common share
                          
                          $
                          0.12
                          
                          
                          $
                          0.12
                          
                          
                          $
                          0.36
                          
                          
                          $
                          0.36





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





4
 Index





CITIZENS FINANCIAL CORP.


STATEMENTS
OF COMPREHENSIVE INCOME/LOSS


(In
thousands of dollars)





Three
      Months Ended September 30
                
                
                Nine
      Months Ended September 302008
                
                
                2007
                
                
                2008
                
                
                2007(Unaudited)
                
                
                (Unaudited)Net
      income
                
                $
                512
                
                
                $
                432
                
                
                $
                1,327
                
                
                $
                1,156Other
      comprehensive income:Gross
      unrealized gains/(losses)arising during the period
                
                
                357
                
                
                
                555
                
                
                
                (358
                )
                
                
                371Adjustment
      for income tax expense/ (benefit)
                
                
                (136
                )
                
                
                (211
                )
                
                
                136
                
                
                
                (141
                )221
                
                
                
                344
                
                
                
                (222
                )
                
                
                230Less:
      Reclassification adjustment for (gains)/losses included in net
      income
                
                
                57
                
                
                
                -
                
                
                
                53
                
                
                
                -Adjustment
      for income tax expense/(benefit)
                
                
                (21
                )
                
                
                -
                
                
                
                (20
                )
                
                
                -36
                
                
                
                -
                
                
                
                33
                
                
                
                -Other
      comprehensive income/(loss),net of tax
                
                
                257
                
                
                
                344
                
                
                
                (189
                )
                
                
                230Comprehensive
      income
                
                $
                769
                
                
                $
                776
                
                
                $
                1,138
                
                
                $
                1,386





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





5
 Index





CITIZENS FINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


(In
thousands of dollars)





Nine Months Ended September 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
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,327
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,327Net
      change in unrealized gain/loss on securities
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (189
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (189
                                                                                                                      )Cash
      dividends declared ($0.36 per share)
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (659
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (659
                                                                                                                      )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
      September 30, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      2,250,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4,500
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      21,594
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (775
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,832
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      21,487Balance,
      January 1, 2007
                                                                                                                      
                                                                                                                      
                                                                                                                      2,250,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4,500
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      20,843
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (1,233
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,832
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      20,278Net
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,156
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,156Net
      change in unrealized gain/loss on securities
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      230
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      230Cash
      dividends declared ($0.36 per share)
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (659
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (659
                                                                                                                      )Balance
      September 30, 2007
                                                                                                                      
                                                                                                                      
                                                                                                                      2,250,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4,500
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      21,340
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (1,003
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,832
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      21,005





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





6
 Index





CITIZENS FINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands of dollars)





Nine
      Months EndedSeptember 30,2008
                
                
                2007Cash
      flows from operating activities:
                
                (Unaudited)Net
      Income
                
                $
                1,327
                
                
                $
                1,156Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for loan losses
                
                
                465
                
                
                
                805Depreciation
      and amortization
                
                
                238
                
                
                
                241Amortization
      on securities
                
                
                30
                
                
                
                23Loss
      on sale of securities
                
                
                53
                
                
                
                -Loss
      on disposal of equipment
                
                
                5
                
                
                
                -Gain
      on sale of other assets
                
                
                (6
                )
                
                
                -Loss
      on sale of other real estate
                
                
                -
                
                
                
                284Provision
      for loss on other real estate
                
                
                -
                
                
                
                113Increase
      in accrued interest receivable
                
                
                (159
                )
                
                
                (25
                )(Increase)/decrease
      in other assets
                
                
                (1,724
                )
                
                
                124Increase/(decrease)
      in other liabilities
                
                
                622
                
                
                
                (187
                )Cash
      provided by operating activities
                
                
                851
                
                
                
                2,534Cash
      flows from investing activities:Principal
      payments, available for sale securities
                
                
                2,684
                
                
                
                1,395Proceeds
      from sales of available for sale securities
                
                
                1,936
                
                
                
                296Proceeds
      from maturities and calls, available for sale securities
                
                
                17,960
                
                
                
                13,655Purchases
      of available for sale securities
                
                
                (45,575
                )
                
                
                (11,927
                )Purchases
      of premises and equipment
                
                
                (100
                )
                
                
                (79
                )Proceeds
      from sale of other real estate
                
                
                248
                
                
                
                1,106Increase
      in loans
                
                
                (3,160
                )
                
                
                (7,221
                )Cash
      used in investing activities
                
                
                (26,007
                )
                
                
                (2,775
                )Cash
      flows from financing activities:Cash
      dividends paid
                
                
                (659
                )
                
                
                (659
                )Decrease
      in short-term borrowing
                
                
                (2,367
                )
                
                
                (1,918
                )Acquisition
      of long-term borrowing
                
                
                5,530
                
                
                
                -Repayment
      of long-term borrowing
                
                
                (284
                )
                
                
                (702
                )Increase/(decrease)
      in time deposits
                
                
                (2,067
                )
                
                
                933Increase
      in other deposits
                
                
                29,174
                
                
                
                4,574Cash
      provided by financing activities
                
                
                29,327
                
                
                
                2,228Net
      increase/(decrease) in cash and cash equivalents
                
                
                4,171
                
                
                
                1,987Cash
      and cash equivalents at beginning of period
                
                
                7,062
                
                
                
                6,095Cash
      and cash equivalents at end of period
                
                $
                11,233
                
                
                $
                8,082Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
                
                $
                4,972
                
                
                $
                5,006Income
      taxes
                
                
                348
                
                
                
                738Supplemental
      Schedule of Noncash Investing and Financing Activities:Other
      real estate and other assets acquired in settlement of
    loans
                
                $
                248
                
                
                $
                1,257Unrealized
      loss on securities available for sale
                
                
                (304
                )
                
                
                (240
                )





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





7
 Index





CITIZENS FINANCIAL 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 have
been made.  All such adjustments were of a normal, recurring
nature.  The results of operations for the nine months ended September
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 of 2008 as a change in
accounting principle through a cumulative-effect adjustment to retained earnings
of approximately $53,000, net of income tax.  This adjustment is
presented on our 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.





8
 Index





NOTE 4 -
SECURITIES





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





September 30, 2008Amortized
      Cost
                                
                                
                                Unrealized
      Gains
                                
                                
                                Unrealized
      Losses
                                
                                
                                Carrying
      Value (Estimated Fair Value)(Unaudited)Available
      for sale:U.S.
      Government agencies and corporations
                                
                                $
                                27,756
                                
                                
                                $
                                158
                                
                                
                                $
                                99
                                
                                
                                $
                                27,815Mortgage
      backed securities- U.S. Government agencies and
    corporations
                                
                                
                                21,852
                                
                                
                                
                                75
                                
                                
                                
                                134
                                
                                
                                
                                21,793Tax
      exempt state and political subdivisions
                                
                                
                                22,951
                                
                                
                                
                                156
                                
                                
                                
                                143
                                
                                
                                
                                22,964Corporate
      debt securities
                                
                                
                                7,655
                                
                                
                                
                                6
                                
                                
                                
                                265
                                
                                
                                
                                7,396Federal
      Reserve Bank stock
                                
                                
                                108
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                108Federal
      Home Loan Bank stock
                                
                                
                                927
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                927Community
      Financial Services Inc. stock
                                
                                
                                163
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                163Total
      securities available for sale
                                
                                $
                                81,412
                                
                                
                                $
                                395
                                
                                
                                $
                                641
                                
                                
                                $
                                81,166











December, 31, 2007*Amortized
      Cost
                                
                                
                                Unrealized
      Gains
                                
                                
                                Unrealized
      Losses
                                
                                
                                Carrying
      Value (Estimated Fair Value)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
                                
                                
                                
                                92
                                
                                
                                
                                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 September 30, 2008 and December 31,
2007.  As of September 30, 2008, these securities had a total fair
value of $36,236,000 and carried unrealized losses of $641,000 or
1.8%.  Securities which have been in a continuous loss position for
the past twelve months total $751,000.  The unrealized loss pertaining
to these securities is $9,000 or 1.20%.  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
unrealized 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.  The quality of the issuer, as well as our intent and
ability to hold these investments to maturity, provide strong evidence that we
will fully recover our investment.  In addition, no losses have been
recognized on the $29,020,000 of securities that carried unrealized losses at
December 31, 2007.





9
 Index




September 30, 2008Securities Available for
    SaleLess Than 12 Months
                                            
                                            
                                            12 Months or More
                                            
                                            
                                            TotalFair
      Value
                                            
                                            
                                            Unrealized
      Losses
                                            
                                            
                                            Fair
      Value
                                            
                                            
                                            Unrealized
      Losses
                                            
                                            
                                            Fair
      Value
                                            
                                            
                                            Unrealized
      LossesU.S.
      Government agencies and corporations
                                            
                                            $
                                            10,162
                                            
                                            
                                            $
                                            99
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            10,162
                                            
                                            
                                            $
                                            99Mortgage
      backed securities- U.S. Government agencies and
    corporations
                                            
                                            
                                            11,096
                                            
                                            
                                            
                                            125
                                            
                                            
                                            
                                            751
                                            
                                            
                                            
                                            9
                                            
                                            
                                            
                                            11,847
                                            
                                            
                                            
                                            134Tax
      exempt state and political subdivisions
                                            
                                            
                                            6,837
                                            
                                            
                                            
                                            143
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            6,837
                                            
                                            
                                            
                                            143Corporate
      debt securities
                                            
                                            
                                            7,390
                                            
                                            
                                            
                                            265
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7,390
                                            
                                            
                                            
                                            265Total
      securities available for sale
                                            
                                            $
                                            35,485
                                            
                                            
                                            $
                                            632
                                            
                                            
                                            $
                                            751
                                            
                                            
                                            $
                                            9
                                            
                                            
                                            $
                                            36,236
                                            
                                            
                                            $
                                            641








December 31, 2007*Securities Available for
    SaleLess Than 12 Months
                                            
                                            
                                            12 Months or More
                                            
                                            
                                            TotalFair
      Value
                                            
                                            
                                            Unrealized
      Losses
                                            
                                            
                                            Fair
      Value
                                            
                                            
                                            Unrealized
      Losses
                                            
                                            
                                            Fair
      Value
                                            
                                            
                                            Unrealized
      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
September 30, 2008 are summarized as follows (in thousands):





Available for saleAmortized
      Cost
                
                
                Estimated
      Fair ValueDue
      within 1 year
                
                $
                20,488
                
                
                $
                20,530Due
      after 1 but within 5 years
                
                
                33,461
                
                
                
                33,323Due
      after 5 but within 10 years
                
                
                26,265
                
                
                
                26,115Equity
      securities
                
                
                1,198
                
                
                
                1,198$
                81,412
                
                
                $
                81,166





Mortgage
backed securities have remaining contractual maturities ranging from 10 months
to 19.52 years and are reflected in the maturity distribution schedule shown
above based on their anticipated average life to maturity, which ranges from
0.42 to 9.73 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 nine month periods ended September 30, 2008 and 2007 are
as follows (in thousands):





Proceeds From
                    
                    
                    Gross RealizedSales
                    
                    
                    Calls
      and Maturities
                    
                    
                    Principal
      Payments
                    
                    
                    Gains
                    
                    
                    LossesSeptember
      30, 2008:Securities
      available for sale
                    
                    $
                    1,936
                    
                    
                    $
                    17,960
                    
                    
                    $
                    2,684
                    
                    
                    $
                    4
                    
                    
                    $
                    57September
      30, 2007:Securities
      available for sale
                    
                    $
                    296
                    
                    
                    $
                    13,655
                    
                    
                    $
                    1,395
                    
                    
                    $
                    -
                    
                    
                    $
                    -





At
September 30, 2008 and December 31, 2007 securities with an amortized cost of
$36,438,000 and $32,208,000, respectively, with estimated fair values of
$36,521,000 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
September 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 $7,153,000 and an
estimated fair value of $6,905,000.  There were no concentrations with
any one issuer.  At December 31, 2007 the securities portfolio
contained no concentrations within any specific industry or issuer.








NOTE 5 -
LOANS





Total
loans are summarized as follows (in thousands):





September 30, 2008
                  
                  
                  December 31, 2007(Unaudited)
                  
                  
                  *Commercial,
      financial and agricultural
                  
                  $
                  19,357
                  
                  
                  $
                  21,015Real
      estate - construction
                  
                  
                  12,675
                  
                  
                  
                  12,497Real
      estate – home equity
                  
                  
                  6,643
                  
                  
                  
                  6,798Real
      estate – residential mortgage
                  
                  
                  62,995
                  
                  
                  
                  61,726Real
      estate – commercial mortgage
                  
                  
                  58,803
                  
                  
                  
                  57,921Installment
      loans
                  
                  
                  11,529
                  
                  
                  
                  10,903Other
                  
                  
                  3,351
                  
                  
                  
                  2,012Total
      loans
                  
                  
                  175,353
                  
                  
                  
                  172,872Less:Allowance
      for loan losses
                  
                  
                  2,064
                  
                  
                  
                  1,763Net
      deferred loan origination fees and costs
                  
                  
                  115
                  
                  
                  
                  170Loans,
      net
                  
                  $
                  173,174
                  
                  
                  $
                  170,939





* From
audited financial statements





Loans in
a nonaccrual status were $3,219,000 and $4,487,000 at September 30, 2008 and
December 31, 2007, respectively.





Several
of the loans in a nonaccrual status are also considered impaired.  At
September 30, 2008 our recorded investment in impaired loans was
$2,199,000.  The valuation allowance assigned to these loans totaled
$566,000. Our average investment in the impaired loans was $2,253,000 during the
quarter.  The amount of interest income recorded on them in the third
quarter was $2,000 while the amount of interest collected was
$47,000.  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 September 30,
                
                
                Nine
      Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Balance
      at beginning of period
                
                $
                1,844
                
                
                $
                2,103
                
                
                $
                1,763
                
                
                $
                1,873Loans
      charged off:Commercial
      and industrial
                
                
                1
                
                
                
                149
                
                
                
                284
                
                
                
                334Real
      estate – res. mortgage
                
                
                -
                
                
                
                -
                
                
                
                11
                
                
                
                -Real
      estate – comm. mortgage
                
                
                83
                
                
                
                -
                
                
                
                107
                
                
                
                242Consumer
      and other
                
                
                5
                
                
                
                6
                
                
                
                6
                
                
                
                30Total
                
                
                89
                
                
                
                155
                
                
                
                408
                
                
                
                606Recoveries:Commercial
      and industrial
                
                
                121
                
                
                
                -
                
                
                
                169
                
                
                
                -Real
      estate – res. mortgage
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                -Real
      estate – comm. mortgage
                
                
                70
                
                
                
                -
                
                
                
                70
                
                
                
                -Consumer
      and other
                
                
                1
                
                
                
                1
                
                
                
                4
                
                
                
                26Total
      recoveries
                
                
                192
                
                
                
                1
                
                
                
                244
                
                
                
                26Net
      losses
                
                
                (103
                )
                
                
                154
                
                
                
                164
                
                
                
                580Provision
      for loan losses
                
                
                117
                
                
                
                149
                
                
                
                465
                
                
                
                805Balance
      at end of period
                
                $
                2,064
                
                
                $
                2,098
                
                
                $
                2,064
                
                
                $
                2,098








NOTE 7 -
DEPOSITS





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





Sept. 30, 2008
                  
                  
                  December 31, 2007(Unaudited)
                  
                  
                  *Interest
      bearing checking
                  
                  $
                  74,029
                  
                  
                  $
                  45,698Money
      market accounts
                  
                  
                  6,183
                  
                  
                  
                  5,406Savings
      accounts
                  
                  
                  21,462
                  
                  
                  
                  21,589Certificates
      of deposit under $100,000
                  
                  
                  57,296
                  
                  
                  
                  59,984Certificates
      of deposit of $100,000 or more
                  
                  
                  41,320
                  
                  
                  
                  40,699Total
                  
                  $
                  200,290
                  
                  
                  $
                  173,376





* From
audited financial statements








NOTE 8 -
BORROWINGS





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





Sept. 30, 2008
                  
                  
                  December 31, 2007(Unaudited)
                  
                  
                  *Short-term
      borrowings:Securities
      sold under agreements to repurchase
                  
                  $
                  17,289
                  
                  
                  $
                  14,258Federal
      funds purchased
                  
                  
                  -
                  
                  
                  
                  1,400Overnight
      advances from Federal Home Loan Bank of Pittsburgh (FHLB) line of
      credit
                  
                  
                  -
                  
                  
                  
                  3,998Total
                  
                  $
                  17,289
                  
                  
                  $
                  19,656Long-term
      borrowings:Advances
      from FHLB
                  
                  $
                  7,965
                  
                  
                  $
                  2,719





* From
audited financial statements





Long-term
borrowings are obtained from FHLB and are used to finance specific lending
activities.





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
      September 30,
                
                
                Nine Months Ended
      September 30,Pension Benefits
                
                
                Other Benefits
                
                
                Pension Benefits
                
                
                Other Benefits2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Service
      cost
                
                $
                39
                
                
                $
                29
                
                
                $
                4
                
                
                $
                5
                
                
                $
                118
                
                
                $
                87
                
                
                $
                12
                
                
                $
                15Interest
      cost
                
                
                77
                
                
                
                73
                
                
                
                8
                
                
                
                7
                
                
                
                231
                
                
                
                217
                
                
                
                23
                
                
                
                21Expected
      return on plan assets
                
                
                (87
                )
                
                
                (83
                )
                
                
                -
                
                
                
                -
                
                
                
                (263
                )
                
                
                (248
                )
                
                
                -
                
                
                
                -Net
      amortization and deferral
                
                
                18
                
                
                
                19
                
                
                
                3
                
                
                
                3
                
                
                
                54
                
                
                
                59
                
                
                
                9
                
                
                
                7Net
      periodic cost
                
                $
                47
                
                
                $
                38
                
                
                $
                15
                
                
                $
                15
                
                
                $
                140
                
                
                $
                115
                
                
                $
                44
                
                
                $
                43








In the
first nine months of 2008 we contributed $170,000 to our pension plan. 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 amounts represent credit risk
                    
                    Sept. 30,
      2008
                      (unaudited)
                    
                    
                    December 31,
      2007
                      *(in thousands)Commitments
      to extend credit
                    
                    $
                    25,489
                    
                    
                    $
                    24,603Standby
      letters of credit
                    
                    
                    751
                    
                    
                    
                    301Total
                    
                    $
                    26,240
                    
                    
                    $
                    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 nine months ended September 30, 2008 and
2007 the weighted average number of shares outstanding was
1,829,504.  During the periods ended September 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 September 30, 2008, the company held one OREO
valued at $212,400.





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 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated.  The Statement also establishes reporting requirements
that provide sufficient disclosures to clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling
owners.  SFAS 160 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 how and why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and 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.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS
162).  This Statement identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United
States.  SFAS 162 becomes effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411.  The Company does not expect the implementation of SFAS
162 to have a material impact on its consolidated financial
statements.





In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective
Date of FASB Statement No. 157” (FSP 157-2).  FSP FAS 157-2 delays the
effective date of SFAS 157, “Fair Value Measurements,” for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually).  The delay is intended to allow the FASB and constituents
additional time to consider the effect of various implementation issues that
have arisen, or that may arise, from the application of Statement
157.  FSP 157-2 defers the effective date of Statement 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years, for items within the scope of this FSP.  Examples of items to
which the deferral would and would not apply are listed in the
FSP.  The Company does not expect the implementation of FSP 157-2 to
have a material impact on its consolidated financial statements.





15
 Index





In
October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (FSP
157-3).  FSP 157-3 clarifies the application of SFAS 157, “Fair Value
Measurements,” in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active.  This FSP was
effective upon issuance, including prior periods for which financial statements
have not been issued.








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 $278 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 to other factors which may be more specific to our own
operations. Examples of such factors may include our ability to attract and
retain key personnel, implementing new technological systems, providing new
products to meet changing customer and competitive demands, our ability to
successfully manage growth strategies, the current economic environment posing
significant challenges and affecting our financial condition and results of
operations, 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.  When considering forward looking statements, you should keep in
mind the cautionary statements in this document and in our other SEC filings,
including the “Risk Factors” section in Item 1A of our 2007 Annual Report on
Form 10-K and subsequent reports.  Although we believe the
expectations reflected in our forward looking statements are reasonable, actual
results could differ materially.





16
 Index





CRITICAL ACCOUNTING
POLICIES





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





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





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





OVERVIEW





In the
past several weeks our national economy and the financial services industry have
experienced many unprecedented events.  The housing and credit crises,
along with volatile equity markets, have prompted the federal government to
implement large rescue packages and FDIC liquidity programs in an effort to
restore order and confidence to the financial markets.  The
uncertainty in the national economy, significant fluctuations in oil prices, and
rising food costs, continue to affect our local economic
activity.  Our local lumber and trucking industries have been affected
by higher fuel costs.  Local logging and lumber production has slowed
in response to softened demand from the housing crisis, and in turn prompted
employee layoffs.  Consumers have also been affected by higher fuel
and food prices in our markets where the median household income is well below
the national average.  As these trends continue we may experience a
more significant impact on the local markets in which we operate, as well as
additional changes to the regulatory environment in which we
operate.





17
 Index





With the
sustained economic uncertainty, loan demand continues to be relaxed with total
loans increasing by only $2.5 million to $175.4 million through September 30,
2008.  However, deposits have grown by $27.1 million to $228.4
million.  Of this amount, $13.8 million is a temporary deposit from
one of our customers that is expected to remain at our institution for three
additional months.  The remaining increase in deposits of $13.3
million is primarily centered in interest bearing checking.  With the
additional funding from deposits we increased our investment portfolio by $22.6
million to $81.2 million.  Overall, total assets increased by $31.1
million to $277.7 million.





Earnings
for the first three quarters of 2008 rose $171,000 or 14.8% to $1,327,000 over
the same period last year.  The increase is largely attributable to a
lower provision for loan loss and lower expenses related to foreclosed
properties as explained later in this report.





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





RESULTS OF
OPERATIONS





NET INTEREST
INCOME





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





Through
September 30 2008, the Federal Reserve had reduced the target Federal Funds rate
by 325 basis points from its high in September 2007.  Our yield on
earning assets has declined by 100 basis points, resulting in a decrease in
interest income of $709,000 to $11,366,000, despite a $25.3 million increase in
our average earning asset base.  This decrease in income is primarily
attributable to decreasing loan rates on our variable loan
portfolio.





Interest
expense has declined by only $123,000 to $4,918,000 as rates on interest bearing
liabilities declined by 34 basis points, while average interest bearing
liabilities have increased $15.4 million.  Competitive pressures to
price certificates of deposit higher than we would like have impacted our
ability to reduce this interest expense.





Overall,
as reflected in our income statement, net interest income decreased by $586,000
to $6,448,000 through the first three quarters of 2008.  On a tax
equivalent basis, net interest income decreased by the lesser amount of $435,000
to $6,830,000 as we increased our investment in tax-exempt municipal bonds in
the latter part of 2007.





Similarly,
for the third quarter, net interest income decreased by $100,000 to
$2,283,000.  This decrease was somewhat controlled as Citizens was
able to reduce rates on a number of large deposit accounts during the third
quarter.





18
 Index





Since
September 30, 2008 we have experienced an additional 100 basis point decline in
the Federal Funds target rate.  Many economists are predicting rates
to remain at or near the current level through 2009.  With these
expectations in mind, Citizens will continue to seek ways to reduce the cost of
interest bearing liabilities in order to maintain a strong net interest
margin.





PROVISION FOR LOAN
LOSSES





The
provision for loan losses is management’s estimate of the amount which must be
charged against current earnings in order to maintain the allowance for loan
losses at a level considered adequate to provide for losses 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.





Through
the first nine months of the year the provision for loan losses has decreased
$340,000 to $465,000, including a third quarter decrease of
$32,000.  The primary reason for the higher provision in 2007 was one
particular commercial credit involving an enterprise with increased business
risk that ultimately failed at the end of last year.  We have
completed the liquidation process related to that particular enterprise and do
not expect that it will have further impact on the provision or
earnings.





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 relies
on a significant use of judgment and estimates, therefore, 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 for more information on the quality of our loan portfolio and for further
discussion of the estimation methods and assumptions we use in analyzing the
allowance.





NONINTEREST
INCOME





Noninterest
income includes all revenues other than those related to earning
assets.  Through September 30 noninterest income totaled $1,354,000,
which was very close to the $1,363,000 for the same period last
year.  The third quarter total of $450,000 was similar to the third
quarter last year as well at $447,000.





The
largest component of noninterest income is service fees where increases in
overdraft and ATM and debit card program fees have contributed to a $70,000
improvement so far this year.  Our brokerage and trust programs
continue to be major contributors to noninterest income, collectively accounting
for a $33,000 increase in 2008. However, the slowdown in housing activity caused
us to experience a $29,000 decline in fees from our secondary market loan
program, which is another important source of noninterest income.





The
improvements mentioned above were offset when the company took a prudent step to
sell a particular corporate debt security that resulted in a $57,000 loss for
the quarter. Year-to-date the company has recorded net securities losses of
$53,000 compared to no losses in 2007. Additional information related to this
sale can be found in the “Securities Portfolio and Federal Funds Sold” section
of this report.  The reasons for the third quarter improvement are
very similar to year-to-date performance.





19
 Index





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 three quarters of 2008, noninterest expense has decreased by $385,000
or 6.4% to $5,612,000.  This decline was primarily the result of a
$421,000 decrease in expenses associated with foreclosed
properties.  Total expenses of this nature totaled $30,000 during
2008.  In addition, stationery costs have decreased by
$31,000.  Occupancy, equipment, and professional services expenses
have also declined by $21,000, collectively.





Our
largest noninterest expense, salaries and employee benefits, has increased
slightly by $18,000 for the year to $2,913,000.  Data processing and
software expenses have increased by $35,000 and $45,000,
respectively.  A portion of this increase is related to the newly
implemented loan processing software.





Analogous
to the decline in the year-to-date noninterest expense, the $1,935,000 of
expense recorded in the third quarter was $154,000 or 7.4% less than the
comparable period in 2007.  The majority of this savings was, again,
related to foreclosed property costs which decreased $257,000 to
$12,000.  These savings were partially offset due to a $90,000
increase in salaries and benefit costs.  This was largely the result
of increased costs related to our partially self-insured group medical plan
during the third quarter.





There are
a number of factors which could negatively impact noninterest expense in the
future.  For example, costs associated with foreclosed properties may
increase if foreclosure activity increases.  In addition, medical
claims under our partially self-insured group medical plan may
increase.  Also, we may incur additional costs related to compliance
with the Sarbanes-Oxley Act.  Currently, we are required to comply
with Section 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 nine months of 2008 of $398,000
includes both federal and state income taxes.  At this level taxes
were 23.1% of pretax income.  Quarterly taxes were
$169,000.  Through nine months of 2007 income tax expense totaled
$439,000 or 27.5% of pretax income.  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.





20
 Index





FINANCIAL
CONDITION





LOAN
PORTFOLIO





Ripple
effects from the national housing crisis, higher fuel prices, volatile equity
markets, job losses, and general uncertainty in the economy continue to
influence both consumers and businesses in our markets.  Our local
lumber, trucking, and tourism industries have experienced reduced
activity.  The unsteadiness in the economy combined with the higher
food fuel costs, have influenced consumers to limit spending.  All of
these factors have contributed to limiting our loan growth during the first
three quarters of 2008 with total loans growing by $2.5 million or 1.4% to
$175.4 million.





Over the
last several years, commercial loans have contributed largely to our growth, but
year-to-date total commercial loans have declined by $0.7 million or 0.9% to
$78.2 million. Commercial loans secured by real estate increased by $0.9 million
to $58.8 million, while other commercial loans declined by $1.6 million to $19.4
million.  Most of our commercial loan portfolio is secured by real
estate, whether or not repayment is linked to cash generated by the use or sale
of the real property.  In cases where repayment is linked to such use,
the timing and stability of cash flow, secondary sources of repayment, loan
guarantees, and collateral valuations are all important considerations in
granting the loan.





Retail
lending or lending to consumers for autos, homes, or other purposes has been
difficult for Citizens over the past several years.  Auto
manufacturers and specialized mortgage lenders have become very aggressive in
attracting consumers away from traditional banking institutions.  We
are now witnessing troubling economic events on Wall Street that are the result
of fall-out from these non-traditional home financing activities.





Our
residential mortgage portfolio has remained stable through September 30, 2008
with a 2.1% or $1.3 million increase to $63.0 million.  Citizens has
been successful in increasing our installment loan portfolio by adopting an
attractive automobile lending program and incorporating a new lending program on
recreational vehicles.  These programs have helped to increase our
installment portfolio by $0.6 million or 5.5% to $11.5 million. 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.





Finally,
other loans primarily comprised of tax-exempt entities grew by $1.4 million to
$3.4 million as we helped fund a local project.





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 nine months of 2008 the company completed the liquidation process of
the large commercial customer mentioned earlier in this report that accounted
for the majority of our charge-offs for both last year and this
year.  During 2008, we incurred net charge-offs related to this
customer of $158,000, while total net charge-offs for 2008 are
$164,000.  Impaired loans at September 30 were $2.2 million or $1.8
million less than at December 31, 2007, partially as a result of this
process.  Subsequent to September 30, 2008, we have received
information on another commercial enterprise which has loans with Citizens
totaling $2.8 million that may potentially become a problem.  We do
not currently have sufficient information to determine what exposure we may or
may not have regarding this enterprise.  However, we will continue to
closely monitor this situation and record any necessary adjustments when
information becomes available.  We continue to establish detailed
strategies to manage those loans that carry the greatest risk and monitor them
continuously.





21
 Index





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 September
30, our allowance was $2,064,000 or 1.18% of gross loans, compared to $1,763,000
or 1.02% at year-end.  The allowance included specific reserves
totaling $566,000 at September 30, which was similar to year-end at
$624,000.  Additional reserves on the remaining pools totaled $628,000
at September 30, compared to $308,000 at year-end.  Because this
portion of our allowance is based on our loan loss history, the increase of
$320,000 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 $870,000 at September 30 which is $239,000
higher than year-end at $631,000.  The majority of this increase is
related to events or reactions to economic factors such as increasing
unemployment, consumer price increases, minimum wage burdens on small
businesses, and increased potential for residential foreclosures.  At
December 31, 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 September 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.





SECURITIES PORTFOLIO AND
FEDERAL FUNDS SOLD





Funds
which are not needed to satisfy loan demand or operating needs are invested in
securities as a means of improving earnings while also providing liquidity and
balancing interest sensitivity concerns.  The securities we purchase
are limited to U.S. government agency issues, including mortgage backed issues
of U.S. agencies, obligations of state and political subdivisions and investment
grade corporate debt.  All of our securities are classified as
available for sale.  The Board of Directors is informed of all
securities transactions each month and a series of policy statements limit the
amount of credit and interest rate risk we may take.





During
the first three quarters of 2008, our securities portfolio grew by $22.6 million
to $81.2 million.  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,
increased deposits funded the remainder of the securities growth. Specifically,
one of our customers has made a deposit of approximately $13.8 million that is
expected to be withdrawn from the bank by year-end.  We currently have
$4.7 million of these funds invested in short-term securities and the remaining
funds in short-term certificates of deposit.  All such certificates of
deposit are fully FDIC insured.





22
 Index





Over the
last nine months we have primarily purchased securities issued by government
agencies with $15.4 million of debenture purchases and $17.9 million of
mortgage-backed securities purchases.  All of the mortgage-backed
securities were fixed rate securities with average lives of six years or
less.  In addition, the company purchased $9.1 million of corporate
debt securities and $2.6 million of municipal instruments.  Overall,
our portfolio is made up of $27.8 million of government agency securities, $21.8
million in mortgage-backed securities, $23.0 million in municipals, $7.4 million
in corporate debt securities, and $1.2 million in correspondent and Federal
Reserve Bank stock.





We have
always maintained what we believe is a conservative investment portfolio
strategy.  We typically invest in securities with relatively short
durations, fixed rates, and good credit ratings.  We do not invest in
any mortgage backed securities or collateralized mortgage obligations, other
than those that have traditionally carried the implied faith and credit of the
U.S. government.  In recent months we have witnessed events that were
once unimaginable—the government taking Fannie Mae and Freddie Mac into
conservatorship and large financial institutions being merged in order to
prevent bank failures.  In addition, the U.S. Treasury is working on
the implementation of a $700 billion rescue package and the FDIC has introduced
liquidity programs to restore confidence in the financial
sector.  These unprecedented events have prompted Citizens to look
closely at its securities portfolio to ensure that we adequately manage credit
risk.  In the third quarter, Citizens took what we believed were
prudent risk management steps and sold one corporate debt security, incurring a
loss of $57,000, in order to remove this asset from our balance
sheet.  This security had a par value of $1.5 million, and the issuer
was demonstrating financial difficulties.  Our remaining securities
are performing adequately, and all of them carry at least ‘A’ credit ratings
from the major credit rating agencies, with the exception of one local municipal
bond which is not rated.





As
illustrated in Note 3 to the condensed consolidated financial statements, a
number of our securities have fair values which are less than their amortized
book value.  As mentioned above, the issuers of these securities carry
good to exceptional credit ratings and we believe they are of sound financial
condition.  The quality of the issuer, as well as our intent and
ability to hold these investments until maturity, support that we do not
consider these investments to be other than temporarily impaired.





Our
short-term investments, including federal funds sold and interest bearing
deposits with other banks, have increased by $6.7 million since year-end and
include the certificate of deposit investments we made in response to the large
customer deposit mentioned above.





23
 Index





DEPOSITS AND OTHER FUNDING
SOURCES





Total
deposits increased by $27.1 million to $228.4 million since year-end with this
growth centered in interest bearing checking which grew by $28.3
million.  This growth includes the $13.8 million in temporary money
mentioned earlier in this report that is expected to be withdrawn by year-end,
as well as seasonal increases in deposits from local taxing authorities and some
larger commercial clients.  In addition, money market accounts
increased by $0.8 million, while certificates of deposit have decreased by $2.1
million.





Our
short-term borrowings consist of repurchase agreements and overnight borrowings
such as Federal Funds purchased.  These borrowings totaled $17.3
million at September 30 and have declined by $2.4 million since
year-end.  This decrease was primarily attributable to a decrease in
overnight borrowings.





Our
long-term borrowings historically consist of Federal Home Loan Bank
borrowings.  During the first nine months 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 fund a specific fixed
rate loan for one of our customers.  At September 30, long-term
borrowings totaled $8.0 million which is an net increase of $5.2 million since
year-end.








CAPITAL
RESOURCES





Our total
capital of $21.5 million, or 7.7% of total assets has increased by $406,000
since December 31, 2007 when capital was $21.0 million or 8.5% of total
assets.  Our percentage of capital relative to assets has decreased in
part due to the deposit increase including the $13.8 million temporary
deposit.  Banking regulations have established other capital measures
based on the general risk characteristics of the bank’s asset
base.  We continue to exceed all such regulatory capital measures and
are considered “well capitalized”.  We know of no events or trends
which are likely to materially impair future capital levels.





On
October 14, 2008, under the authority granted by the Emergency Economic
Stabilization Act of 2008 (the EESA), the United States Department of the
Treasury adopted the Troubled Asset Relief Program (TARP) and the Capital
Purchase Program (CPP) whereby the Treasury will purchase up to $250 billion of
preferred stock and warrants to be issued by United States banks, savings
associations and their holding companies.  Currently under the CPP
banks of all sizes and structures are eligible and encouraged to consider
applying to participate in a program that will provide a low cost form of
capital.  Financial institutions can use this capital for several
purposes including the acquisition of other institutions, increasing regulatory
capital levels, reducing classified assets, or increasing lending
activities.  Like most other banks across the country, Citizens is
currently evaluating the merits of this program as information is made
available.  As mentioned above, Citizens is considered “well
capitalized”, but we believe it is prudent for us to evaluate a program such as
this when considering future expansion and growth.





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.





24
 Index





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 with the exception of
certain loans which have been funded by borrowing funds from the Federal Home
Loan Bank of Pittsburgh and the use of overnight borrowings for short-term
needs.  Currently, we have access to approximately $96 million through
various FHLB programs in addition to available borrowing facilities with other
correspondent banks.





Our
liquidity demands have remained low during the first three quarters of 2008, as
we have seen significant deposit growth and relaxed 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.





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 significantly impact our financial position or results of
operations in the foreseeable future.





25
 Index





Part I Item4T


Controls
and Procedures





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





26
 Index





PART
II -  OTHER INFORMATION








Item 1.
            Legal
      Proceedings:





As of
September 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
      1A.
            Risk
      Factors:  Listed below is a risk factor that has been
      added to those disclosed in our Annual Report on Form 10-K for the fiscal
      year ended December 31, 2007:





The
global financial crisis may have an adverse effect on our company, business and
results of operations.





Significant
declines in the housing market in recent months, falling home prices, increased
foreclosures and unemployment as well as problems affecting the automobile
industry and business in general may adversely affect the company’s loan demand
as customers may be reluctant to borrow in this economic environment.
Additionally, the economic downturn may result in some of the company’s
borrowers being unable to make loan repayments and may result in foreclosures
and the company recording writedowns which would adversely affect the company’s
results of operations.





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





Item
      3.
            Defaults upon Senior
      Securities:  None.





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





Item
      5.
            Other
      Information:  None.





Item
      6.
            Exhibits:





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





27
 Index





SIGNATURES








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











CITIZENS
      FINANCIAL CORP.Date:
      November 12,
      2008
                    
                    /s/ Robert J. SchoonoverRobert
      J. SchoonoverPresidentChief
      Executive OfficerDate:
      November 12,
      2008
                    
                    /s/ Thomas K. DerbyshireThomas
      K. DerbyshireVice
      President, Treasurer andPrincipal
      Financial
Officer






28