UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

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

for the fiscal year ended December 31, 2008

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

Commission File No: 2-96144

CITIZENS FINANCIAL CORP.

(exact name of registrant as specified in its charter)

Delaware		55-0666598
(State of Incorporation)		(I.R.S. Employer Identification Number)

213 Third St.
Elkins, West Virginia		26241
(Address of Principal Executive Offices)		(Zip Code)

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

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes £

No T

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

Yes £

No T

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes T

No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes T

No £

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

Large Accelerated Filer £

Accelerated Filer £

Non-Accelerated Filer £

Smaller Reporting Company T

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

Yes £

No T

The aggregate market value of Citizens Financial Corp. common stock, representing all of its voting stock that was held by nonaffiliates as of the last business day of Citizens most recently completed second fiscal quarter, approximated $15,261,703.

As of March 11, 2009 Citizens Financial Corp. had 1,829,504 shares of common stock outstanding with a par value of $2.00.

Documents incorporated by reference: None

CITIZENS FINANCIAL CORP.

FORM 10-K INDEX

			Page

Part I	Item 1	Business	4

	Item 1A	Risk Factors	Not applicable

	Item 2	Properties	10

	Item 3	Legal Proceedings	10

	Item 4	Submission of Matters to a Vote of Security Holders	10

Part II	Item 5	Market for Registrant’s Common Equity, Related Stockholders Matters, and Issuer Purchases of Equity Securities	10

	Item 6	Selected Financial Data	Not applicable

	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 7A	Quantitative and Qualitative Disclosures Amount Market Risk	Not applicable

	Item 8	Financial Statements and Supplementary Data	26

	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55

	Item 9A	Controls and Procedures	55

	Item 9B	Other Information	55

Part III	Item 10	Directors, Executive Officers, and Corporate Governance	56

	Item 11	Executive Compensation	57

	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60

	Item 13	Certain Relationships and Related Transactions and Director Independence	61

	Item 14	Principal Accounting Fees and Services	62

Part IV	Item 15	Exhibits and Financial Statement Schedules	62

Citizens Financial Corp.

Form 10-K, Part I

Item 1. Business

Organizational History and Subsidiaries

Citizens Financial Corp., ("Citizens" or the “company"), is a $283 million bank holding company providing retail and commercial banking services primarily in central and eastern West Virginia. Citizens was incorporated in the State of Delaware in 1986 and is the parent company and sole owner of Citizens National Bank of Elkins (the “bank”).

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

Business of Citizens and Subsidiary

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

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

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

Lending Activities

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

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

Index

The commercial loan portfolio consists of loans to local businesses and are secured by liens on accounts receivable, inventory, machinery and equipment, or other business assets. If necessary, personal guarantees of the business owners, key man life insurance, and other forms of collateral are also required although business cash flow represents the primary source of repayment. These loans are subject to the risks of the borrower’s industry. Such industries include auto dealerships, lumbering and lumber related businesses, various tourism and hospitality businesses, and retail and wholesale merchants. Commercial loans are typically among the largest loans made by the bank and are considered to carry a higher level of risk than smaller loans. Underwriting standards require a comprehensive credit analysis, and the appraisal of real property and significant machinery, such as lumbering equipment, held as collateral. We attempt to limit risk by diversifying the commercial loan portfolio within the constraints of our economic market and closely monitoring any concentrations of credit. Periodic credit reviews of commercial loans are performed by the loan review function.

Due to the limited size of our market area as well as the increased competition for home mortgage and auto loans, we also participate in commercial loans in surrounding markets through other community banks similar to ourselves. These loans may be secured by commercial real estate or other business property although the primary source of repayment is from business operations. Because these loans may be outside our primary market area they are subject to extensive analysis including the business and credit history of the borrowers and any guarantors, cash flow and payment abilities, collateral valuations and other pertinent factors. Additional security such as the assignment of life insurance and various loan covenants designed to limit risk are also obtained when necessary. As of December 31, 2007, these loans totaled $27.3 million, or 15.3% of our total loan portfolio.

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

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

Investment Activities

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

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

Deposit Functions

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

Index

Banking Operations

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

Employees

As of February 28, 2009, Citizens National Bank had a staff of 84 full-time equivalent employees. The bank’s employees are not represented by any union or other collective bargaining agreement and employee relations are believed to be good. Citizens Financial Corp. does not have any paid employees.

Competition

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

We maintain offices in Randolph, Tucker, Grant and Pocahontas Counties, West Virginia where a total of 27 banking offices representing 12 banks are located. As of June 30, 2008, the most recent date data is available, Citizens held a 24.8% share of the $900 million deposit base in those counties.

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

Economic Characteristics of Citizens’ Marketplace

Citizens serves an area of West Virginia including the counties of Randolph, Tucker, Grant and Pocahontas. This market is a largely rural, mountainous region covering approximately 2,876 square miles with a civilian labor force of 24,480.

The economy of this area typically does not experience highs or lows to the same degree as the national economy and is generally less prosperous than the nation as a whole. Major industries in the area include lumber and wood products, tourism, and poultry operations. Other major sources of employment include public schools, hospitals and other health care providers and various forms of local and state governmental services. As of December, 2008, the unemployment rate in this market was 6.5% compared to 4.4% for West Virginia and 7.1% nationwide. Average annual wages in the area approximate $29,804 which is below both state and national levels. Ongoing roadway improvements are helping to improve access to and transportation within the area and are expected to provide long-term economic benefits. However, the local economy is not expected to undergo significant changes in the short-term.

Supervision and Regulation

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

Bank Holding Company Regulation

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

Index

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

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

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

Bank Subsidiary Regulation

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

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

Capital Requirements

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

Citizens National Bank is subject to substantially similar capital requirements adopted by its applicable regulatory agencies. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a regulatory framework which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution’s capital category. Among other things, FDICIA authorized regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Citizens is well capitalized as detailed in Note 13 to the accompanying consolidated financial statements.

Index

FDIC Assessments

The FDIC imposes an assessment against all depository institutions for deposit insurance. This assessment is based on the risk category of the institution and, prior to 2009, ranged from five to 43 basis points of an institution’s deposits. On October 7, 2008, as a result of decreases in the reserve ratio of the DIF, the FDIC issued a proposed rule establishing a Restoration Plan for the DIF. The rulemaking proposed that, effective January 1, 2009, assessment rates would increase uniformly by seven basis points for the first quarter 2009 assessment period. The rulemaking proposed to alter the way in which the FDIC’s risk-based assessment system differentiates for risk and set new deposit insurance assessment rates, effective April 1, 2009. Under the proposed rule, the FDIC would first establish an institution’s initial base assessment rate. This initial base assessment rate would range, depending on the risk category of the institution, from 10 to 45 basis points. The FDIC would then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustment to the initial base assessment rate would be based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate would range from eight to 77.5 basis points of the institution’s deposits. On December 22, 2008, the FDIC published a final rule raising the current deposit insurance assessment rates uniformly for all institutions by seven basis points (to a range from 12 to 50 basis points) for the first quarter of 2009. However, the FDIC approved an extension of the comment period on the parts of the proposed rulemaking that would become effective on April 1, 2009. The FDIC expects to issue a second final rule early in 2009, to be effective April 1, 2009, to change the way that the FDIC’s assessment differentiates for risk and to set new assessment rates beginning with the second quarter of 2009. On February 27, 2009, the FDIC proposed an emergency assessment charged to all financial institutions of 0.20% of insured deposits as of June 30, 2009, payable on September 30, 2009. In March of 2009, the FDIC reduced the amount of the proposed assessment to 0.10% of insured deposits as of June 30, 2009.

Troubled Asset Relief Program – Capital Purchase Program

On October 3, 2008, the Federal government enacted the Emergency Economic Stabilization Act of 2008 (“EESA”). EESA was enacted to provide liquidity to the U.S. financial system and lessen the impact of looming economic problems. The EESA included broad authority. The centerpiece of the EESA is the Troubled Asset Relief Program (“TARP”). EESA’s broad authority was interpreted to allow the U.S. Treasury to purchase equity interests in both healthy and troubled financial institutions. The equity purchase program is commonly referred to as the Capital Purchase Program (“CPP”). The company does not plan to participate in the CPP at this time, as the company’s capital levels continue to exceed the requirements to be considered well-capitalized.

America Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the U.S. Treasury, until the institution has repaid the U.S. Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the recipient’s appropriate regulatory agency.

Future Legislation

Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such legislation may change banking statutes and the operating environment of the company and the bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the company or the bank. With the recent enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. The company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

Federal and State Laws

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

Index

Monetary Policy and Economic Conditions

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

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

Effect of Environmental Regulation

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

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

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

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

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

Sarbanes-Oxley

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

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

Index

Item 2. Properties

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

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

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

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

Item 3. Legal Proceedings

As of December 31, 2008 Citizens Financial Corp. was not involved in any material legal proceedings. The bank is involved in various legal proceedings which occur in the normal course of business, however. After consultation with legal counsel, we believe that all such litigation will be resolved without materially affecting the company’s financial position or results of operations. In addition, there are no material proceedings known to be threatened or contemplated against the company or its subsidiaries.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of Citizens Financial Corp. during the fourth quarter of 2008.

Part II

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

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

Citizens has only one class of stock, that being common stock, and all voting rights are vested in its holders. The shareholders of Citizens are entitled to one vote for each share of common stock owned on all matters subject to a vote of shareholders. At February 28, 2009 shareholders of record numbered approximately 460. The company has no plans to issue any other forms of capital.

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

Index

Citizens maintains a policy under which it may repurchase shares of its own stock, subject to certain limitations, when the Board of Directors determines it is in the best interest of the company to do so. Such shares are purchased on the open market through independent brokers. At both December 31, 2008 and 2007, the company had repurchased 420,496 shares. The purchase of these shares has not had a material impact on either capital or liquidity. No plans currently exist regarding their use and there are no plans regarding future purchases.

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

	High		Low
2009
First Quarter through
February 28, 2009	$	7.00	$	6.60

2008
First Quarter	$	10.82	$	10.05
Second Quarter	$	12.71	$	8.93
Third Quarter	$	9.82	$	7.78
Fourth Quarter	$	9.30	$	7.00

2007
First Quarter	$	19.89	$	18.92
Second Quarter	$	19.28	$	17.19
Third Quarter	$	17.68	$	13.28
Fourth Quarter	$	14.85	$	11.25

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

Citizens shareholders are entitled to receive dividends when and as declared by its Board of Directors. Dividends are typically paid quarterly. Aggregate dividends were $0.40 per share in 2008 and $0.48 per share in 2007. Payment of dividends by Citizens is dependent upon payment of dividends to it by the subsidiary bank. The ability of the bank to pay dividends is subject to certain limitations imposed by national banking laws as outlined in Note 13 to the accompanying consolidated financial statements.

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of shares purchased	Average price paid per share	Total Number of shares purchased as part of publicly announced plans or programs	Maximum Number of shares that may yet be purchased under the plans or programs

October 1-31, 2008	-	N/A	N/A	N/A
November 1-30, 2008	-	N/A	N/A	N/A
December 1-31, 2008	-	N/A	N/A	N/A

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

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Distribution of Assets, Liabilities & Shareholders' Equity;

Interest Rates and Interest Differential

	2008								2007
	Avg Bal			Interest		Yield/Rate			Avg Bal			Interest		Yield/Rate
	(in thousands of dollars)								(in thousands of dollars)
Interest Earning Assets:

Federal funds sold and interest bearing deposits with other banks	$	5,352		$	156		2.91	%	$	2,166		$	110		5.08	%
Securities:
Taxable		49,121			2,237		4.55			43,295			1,844		4.26
Tax-exempt (1)		22,627			1,270		5.61			15,835			883		5.58
Loans (net of unearned interest) (1) (2)		175,544			12,026		6.85			170,263			13,474		7.91
Total interest earning assets (1)		252,644			15,689		6.21			231,559			16,311		7.04

Nonearning assets:
Cash and due from banks		5,556								4,951
Bank premises and equipment, net		4,190								4,260
Other assets		6,633								6,677
Allowance for loan losses		(2,009	)							(1,920	)
Total assets	$	267,014							$	245,527

Interest Bearing Liabilities:
Savings deposits	$	21,553			90		0.42		$	21,867			121		0.55
Time deposits		106,544			4,325		4.06			99,855			4,536		4.54
NOW accounts		55,232			1,240		2.25			44,999			1,277		2.84
Money market accounts		5,550			25		0.45			5,603			28		0.50
Borrowings		25,367			709		2.79			22,294			819		3.67
Total interest bearing liabilities		214,246			6,389		2.98			194,618			6,781		3.48

Noninterest bearing liabilities:
Demand deposits		27,914								26,623
Other liabilities		3,215								3,373
Shareholders' equity		21,639								20,913
Total liabilities and shareholder's equity	$	267,014							$	245,527

Net interest income (1)				$	9,300							$	9,530

Net interest income to average earning assets (1)							3.68	%							4.12	%

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

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

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Rate Volume Analysis

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

	2008 Compared to 2007
	Increase			(Decrease)			Due to
	(in thousands of dollars)
	Volume			Rate			Total
Interest earned on:
Federal funds sold and interest bearing deposits with other banks	$	(62	)	$	108		$	46
Taxable securities		132			261			393
Tax-exempt securities		7			380			387
Loans		(1,853	)		405			(1,448	)
Total interest earned		(1,776	)		1,154			(622	)

Interest expense on:
Savings deposits		(29	)		(2	)		(31	)
Time deposits		(501	)		290			(211	)
NOW accounts		(298	)		261			(37	)
Money market accounts		(3	)		-			(3	)
Other borrowing		(213	)		103			(110	)
Total interest expense		(1,044	)		652			(392	)

Net interest income	$	(732	)	$	502		$	(230	)

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Securities Portfolio

Presentation of the amortized cost of securities as of December 31, 2008 and 2007 may be found in Note 3 to the accompanying consolidated financial statements.

The following table sets forth the maturities of securities as of December 31, 2008 and the weighted average yields of such securities (calculated on the as is of the amortized cost and effective yields weighted for the scheduled maturity of each security).

	Within One					After One but					After Five but					After Ten
	Year					Within Five Years					Within Ten Years					Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(in thousands of dollars)
U.S. Treasury and other U.S. government agencies and corporations	$	16,991		4.24	%	$	21,194		4.55	%	$	13,039		5.32	%	$	-		-	%	$	51,224		4.64	%
State and political subdivisions (1)		2,322		5.09			6,458		5.39			14,168		5.45			-		-			22,948		5.39
Other securities		2,137		3.23			2,996		5.31			-		-			1,192		0.54			6,325		3.71

Total	$	21,450		4.23	%	$	30,648		4.80	%	$	27,207		5.39	%	$	1,192		0.54	%	$	80,497		4.78	%

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

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

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Loan Portfolio

Types of Loans

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

	December 31
	2008		2007		2006		2005		2004
	(in thousands of dollars)
Commercial, financial and agricultural	$	20,262	$	21,016	$	26,969	$	26,589	$	23,831
Real estate-construction		13,832		12,497		13,964		10,559		8,759
Real estate-mortgage		128,912		126,445		114,966		104,868		101,083
Installment loans		11,424		10,903		10,635		9,726		10,734
Other		3,624		2,012		1,611		2,051		1,636
Total loans	$	178,054	$	172,873	$	168,145	$	153,793	$	146,043

Loan Maturities and Interest Rate Sensitivity

Note 4 to the accompanying consolidated financial statements also provides data concerning the contractual maturities of loans, including commercial, financial and agricultural loans as well as real estate construction loans, as of December 31, 2008. Also provided are the amounts due after one year classified as fixed rate and variable rate loans.

Risk Elements

Nonperforming Loans

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

	December 31
	2008		2007		2006		2005		2004
	(in thousands of dollars)
Nonaccrual loans	$	5,471	$	4,487	$	2,208	$	58	$	-
Loans past due 90 days or more still accruing interest		313		206		-		538		559
Troubled debt restructurings	-			-		-		-		-
Total	$	5,784	$	4,693	$	2,208	$	596	$	559

Potential Problem Loans

As stated in Note 5 to the accompanying consolidated financial statements, impaired loans totaled $4,997,217 and $4,037,521 at December 31, 2008 and 2007. These loans were classified as impaired due to doubts about the borrower’s ability to repay as called for in the loan documents. Additional information regarding these loans may also be found in Note 5

Loan Concentrations

Information concerning loan concentrations is provided in Note 4 to the accompanying consolidated financial statements.

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Summary of Loan Loss Experience

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

	December 31
	2008			2007			2006			2005			2004
	(in thousands of dollars)
Balance, beginning of year	$	1,763		$	1,873		$	1,597		$	1,378		$	1,396
Charge offs:
Commercial, financial and agricultural		302			1,538			123			-			1,031
Real estate-mortgage		1,441			348			-			-			36
Installment		28			49			39			90			198
Total		1,771			1,935			162			90			1,165

Recoveries:
Commercial, financial and agricultural		181			8			4			5			192
Real estate-mortgage		90			-			-			1			-
Installment		10			34			11			28			20
Total		281			42			15			34			212

Net charge offs		1,490			1,893			147			56			953
Provisions for loan losses		1,959			1,783			423			275			935
Balance, end of year	$	2,232		$	1,763		$	1,873		$	1,597		$	1,378

Ratio of net charge-offs during the period to average loans outstanding during the period		0.84	%		1.11	%		0.09	%		0.04	%		0.67	%

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

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

	Allocation of Allowance For Loan Losses
	December 31,
	2008		2007		2006		2005		2004

Commercial, financial and agricultural	$	1,001	$	552	$	1,077	$	901	$	717
Real estate-construction		368		-		-		-		-
Real estate-mortgage		786		879		589		320		282
Installment and other		77		132		65		151		173
Unallocated		-		200		142		225		206
Total	$	2,232	$	1,763	$	1,873	$	1,597	$	1,378

	Percent of Loans in Each Category to Total Loans
	December 31,
	2008			2007			2006			2005			2004

Commercial, financial and agricultural		11	%		12	%		16	%		17	%		16	%
Real estate-construction		8			7			8			7			6
Real estate-mortgage		72			73			68			68			69
Installment and other		9			8			8			8			9
Total		100	%		100	%		100	%		100	%		100	%

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Deposits

The average daily amount of deposits and the rates paid on those deposits for the years ended December 31, 2008, 2007 and 2006 were previously presented in the Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential.

A table summarizing the maturities of time certificates of deposit, including individual retirement accounts, of $100,000 or more as of December 31, 2008 may be found in Note 7 to the accompanying consolidated financial statements. There were no other time deposits of $100,000 or more at that date.

Return on Equity and Assets

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

	Year Ended December 31
	2008			2007
Return on average assets		0.35	%		0.42	%
Return on average equity		4.24			4.94
Dividend payout ratio		79.85			84.94
Average equity to assets ratio		8.09			8.52

Short-term Borrowing

Information concerning the company's short-term borrowings is presented in Note 11 to the accompanying consolidated financial statements.

Disclosure of Contractual Obligations

The following table provides information regarding the contractual obligations of Citizens Financial Corp. at December 31, 2008:

	Payments Due By Period
	(in thousands of dollars)
			Less than		1 – 3		3 -5		More than
	Total		1 year		years		years		5 years
Contractual obligations

Long-term debt	$	7,865	$	409	$	3,376	$	3,172	$	908
Capital leases		-		-		-		-		-
Operating leases		79		39		40		-		-
Purchase obligations		-		-		-		-		-
Other long-term liabilities		-		-		-		-		-
Total	$	7,944	$	448	$	3,416	$	3,172	$	908

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

INTRODUCTION

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

Description of Business

Citizens Financial Corp. is a $283 million Delaware corporation headquartered in Elkins, West Virginia. From there, our wholly-owned subsidiary, Citizens National Bank of Elkins, provides loan, deposit, trust, brokerage and other banking and related services to customers in northcentral and eastern West Virginia and nearby areas through six branch offices. We conduct no business other than the ownership of our bank subsidiary.

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FORWARD LOOKING STATEMENTS

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

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 2008 Annual Report to Shareholders and Form 10-K.

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

OVERVIEW

The current economic crisis has had a significant impact on the banking industry and our national economy during the past couple of years. This recession has driven consumers to reduce spending and in-turn prompted companies to respond by cutting expenses through significant reductions in labor force. What began as a slowdown in housing, has now ballooned into the largest financial crisis since the Great Depression. While our local economy does not usually experience the same level of contraction as the national economy, local industries such as lumber, trucking, and tourism are seeing reduced demand. This has prompted local layoffs and reductions in consumer spending. Citizens has not been immune to these economic conditions. In the last two years we have experienced lower than anticipated earnings due to the failure of two commercial enterprises affected by the slumping economy. In 2008, a long-standing local automobile dealership was forced to cease operations resulting in a loan charge-off of $1.3 million, while in 2007 a local manufactured housing business closed due to lack of demand for its products resulting in a $1.2 million charge-off.

Earnings for the last two years have been characterized by larger provisions for loan loss primarily attributable to these two commercial credits. In 2008, the company earned $916,000 compared to $1,034,000 in 2007. The company’s return on average assets was 0.35% and 0.42% for 2008 and 2007, respectively. While many banks in the country have seen a broad-based weakening in their credit portfolio in the wake of the sub-prime exposures and housing crisis, Citizens has not participated in sub-prime lending and does not operate in markets where housing prices are falling dramatically. Citizens has been somewhat insulated from these credit issues. However, as this recession continues the company may experience additional loan losses as the financial crisis continues to impact more and more sectors of the economy. In 2008, we recognized additional risks that are present in the current economy and increased our allowance for loan losses from $1,763,000 at year-end 2007 to $2,232,000 at December 31, 2008. Management has developed detailed strategies to manage the credits that present the greatest risk to our portfolio. We monitor the situation with these credits continuously and keep in close contact with borrowers in order to assess our position and respond appropriately.

Index

With the economic recession has come relaxed loan demand. Our loan portfolio grew by only $5. 2 million, or 3.0%, to $178.1 million in 2008. However, deposits have grown by $16.1 million, or 8.0%, to $217.4 million. Of this amount, $13.1 million was expected to be a temporary deposit from one customer. Repurchase agreements have also increased by $14.5 million to $28.8 million. With the additional funding from deposits and repurchase agreements, we increased our investment portfolio by $23.5 million to $82.1 million. Many of these investment purchases were short-term instruments that would provide additional liquidity, if necessary. Overall, total assets increased by $35.9 million or 14.6% to $282.5 million.

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

RESULTS OF OPERATIONS

Net Interest Income

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

By the end of 2008, the Federal Reserve had effectively reduced the target Federal Funds rate to zero from its high in September 2007 of 5.25%. This severe decline in rates caused our yield on earning assets to fall 83 basis points in 2008, resulting in a decrease in interest income of $790,000 to $15,177,000, despite a $21.1 million increase in our average earning asset base. This decrease in income is primarily attributable to decreasing loan rates on our variable rate loan portfolio.

Interest expense has decreased by only $391,000 to $6,390,000 as rates on interest bearing liabilities declined by 50 basis points, while average interest bearing liabilities have increased by $19.6 million. Competitive pressures to price certificates of deposit higher than we would have liked combined with already low rates on savings and other similar products impacted our ability to reduce interest expense.

Overall, as reflected on our income statement, net interest income decreased by $399,000 to $8,787,000 in 2008. On a tax equivalent basis, net interest income decreased by the lesser amount of $230,000 to $9,300,000 as we increased our investment in tax-exempt municipal bonds in the latter part of 2007.

With rates at these historically low levels and the expectation that rates will remain at these levels for some time, Citizens will seek ways to lower the cost of our interest bearing liabilities in order to maintain a strong net interest margin. Citizens has begun doing this through a new free checking promotion to attempt to garner additional non-interest bearing deposits.

Provision for Loan Losses

The provision for loan losses is our estimate of the amount which must be charged against current earnings in order to maintain the allowance for loan losses at a level considered adequate to provide for losses which are inherent in the loan portfolio. This amount is determined through quarterly evaluations of the loan portfolio. Our provision for loan losses totaled $1,959,000 in 2008 and $1,783,000 in 2007. These levels of provision are much higher than Citizens has historically experienced. The higher 2008 provision is primarily the result of a local automobile dealership that was unable to continue operations. The 2007 provision is mainly the result of the failure of a local manufactured housing business.

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

Noninterest Income

Noninterest income, which includes all revenues other than interest and fees on earning assets, is an important factor in our overall profitability. Total noninterest income increased $82,000, or 4.5%, to $1,921,000 in 2008.

This increase is the result of several factors, most notably rising levels of service and trust fees. Service fees are the largest single component of noninterest income and increased $125,000 in 2008 due to higher overdraft fees and increasing fees from our debit cards and ATM network. Trust income increased by $75,000 in 2008 to $306,000 as we settled several estates during the year. Our insurance commissions also increased by $10,000 to $44,000 in 2008.

Index

In 2008, the company had net security losses of $49,000 which compares to $2,000 of security gains in 2007. The loss in 2008 was primarily the result of the sale of a particular corporate debt security which was displaying increased business risk. This sale resulted in a $57,000 loss. Additional information related to this sale can be found in the “Securities Portfolio and Federal Funds Sold” section of this report. Securities are typically held until maturity, unless they are called. However, we may sell certain securities from time to time in order to satisfy asset/liability management needs or respond to increased risk in the securities portfolio as we did in 2008.

Fees we earn from our secondary market loan operations declined by $28,000 to $72,000 in 2008 as loan demand slowed, reflecting the overall housing trends. We expect that income from this program will increase in 2009 as interest rates are at historic lows and individuals will want to lock in these low fixed rates by refinancing current mortgages. Other noninterest income decreased by $49,000 to $245,000 due mainly to lower fees from cashing noncustomer checks and processing wire transfers, as well as the elimination of fees received from the outsourcing of our cashier’s check processing. In 2008, we brought our cashier’s check processing back in-house as our outsourced provider was exiting that line of business.

We plan to perform a review of our noninterest income in 2009 to identify areas which might produce increased revenue. We believe we may be able to improve performance in several areas and that our diverse services, such as trust, brokerage and secondary market mortgages, provide us with a competitive advantage in several of our markets. Many of our competitors do not offer such a wide array of services.

Noninterest Expense

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

In 2008, noninterest expense decreased by $227,000, or 2.8%, to $7,746,000. The decrease was primarily related to lower costs associated with the valuation, operation, and disposition of real estate acquired in satisfaction of loans. These costs decreased by $406,000 to $35,000 in 2008. In 2007, we experienced a much higher level of costs in this area that were largely the result of commercial real estate loan foreclosures. In addition to these savings, the company also incurred lower expenses related to equipment and stationery, which declined by $20,000 and $27,000, respectively.

Salaries and employee benefits increased by $127,000 or 3.3%, to $4,011,000 in 2008. Of this amount, salaries increased by $96,000, or 3.4%, to $2,962,000 as a result of normal employee increases. Benefit costs increased $31,000, or 3.0%, to $1,049,000 largely as a result of increased employee pension costs. In addition, data processing costs and software expenses increased by $48,000 and $44,000, respectively. A portion of these increases is related to the implementation of a new loan processing software.

There are a number of factors that could negatively impact noninterest expense in the future. For example, costs associated with foreclosed properties could 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 404(a) of the Act and issue a conclusion about management’s assessment of internal control over financial reporting. We expect that we will become subject to Section 404(b) in 2009, and will be required to have our independent accountants attest to our conclusions. This will likely increase our legal and professional expenses.

Income Taxes

The company’s provision for income taxes includes both federal and state income taxes. The company has a combined statutory tax rate for federal and state tax of approximately 38.0%. Total taxes were $87,000, or 8.7%, of pre-tax income in 2008 and $235,000, or 18.5%, of pre-tax income in 2007. The reason for the lower level of tax in both of these years is primarily the result of higher levels of loan charge-offs. In addition, an increasing investment in tax-exempt municipal bonds has contributed to the lower rate. With the exception of income earned on loans to and bonds issued by municipalities, and income from certain life insurance policies, all of our income is taxable. The company was subject to alternative minimum tax in both years. However, we expect to fully recover this tax by offsetting it against taxable income in future years. Note 10 of the accompanying consolidated financial statements provides additional information concerning our income tax expense.

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 and fuel costs have influenced consumers to limit spending. All of these factors have contributed to limiting our loan growth during 2008 with total loans growing by $5.2 million, or 3.0%, to $178.1 million.

Over the last several years, Citizens has experienced growth in the commercial loan area, but in 2008 this growth was limited to $1.1 million or 1.4%. Total commercial loans were $80.1 million at the end of 2008. Of this amount, commercial loans secured by real estate increased by $1.9 million, or 3.3%, to $59.8 million, while other commercial loans declined by $0.8 million, or 3.6%, to $20.3 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 for several years. Non-traditional financers such as auto manufacturers and specialized mortgage lenders have become very aggressive in attracting consumers away from traditional banking institutions. In 2008, we witnessed many troubling economic events on Wall Street that are the result of fallout from these non-traditional financing activities. Citizens has not participated in these non-traditional lending activities often termed as “sub-prime” lending. We offer our clients traditional mortgage options to fit their current income levels and focus on adding quality consumer credits to our portfolio.

Within the retail classification, our residential mortgage portfolio has remained stable this year with a $1.0 million, or 1.6%, increase to $62.7 million. In addition, Citizens has seen a $500,000, or 4.8%, increase in our consumer installment loan portfolio which totaled $11.4 million at year-end. The majority of this increase was generated by our attractive automobile lending program and a new lending program for recreational vehicles that began in 2008.

Citizens will continue to actively seek new strategies and programs to increase the retail segment of our business in order to enhance the portfolio diversification and reduce the inherent risk in our portfolio. We recently began a new consumer deposit promotion designed to broaden our consumer base through a new “free checking” product. We hope to use this broader consumer base to expand our retail lending opportunities.

Finally, other loans primarily comprised of tax-exempt entities grew by $1.6 million to $3.6 million as we helped fund a local project.

Credit Quality and Allowance for Loan Losses

Many financial institutions across the country are facing major losses from the housing crisis and the problems caused by sub-prime lending. Reduced consumer spending and economic uncertainty have resulted in significantly higher levels of unemployment than seen in recent years and higher levels of business failures. On the national level, credit has tightened and markets have become illiquid amid fears of “toxic” housing assets and business failures. The credit needs of large corporations, such as the Detroit automobile manufacturers, have gone unmet by the private sector, and the Federal government has had to step in to prevent these giants from collapsing.

While our local economy does not usually see the same level of contraction or growth as the national economy, we have certainly seen a significant impact from recent economic events. In recent months local businesses have announced job cuts and consumers have significantly reduced spending. Businesses in our communities have been forced to cease operations; such is the case with a long-standing local auto dealership which closed its doors during the fourth quarter. The failure of this dealership has resulted in a $1.3 million loan charge-off at December 31, 2008. The loan had been performing satisfactorily as recently as September 30, 2008, but declining sales ultimately forced this dealership to cease operations. We are now in the process of working with the borrower to find a buyer for the dealership. However, should the borrower not be successful in selling the business, we expect to start foreclosure proceedings. The remaining balance on this particular credit is $1.5 million, and management believes this balance to be secured based on the most recent appraisal of the property.

The economic uncertainty continues to have an impact on our loan portfolio as we have experienced increases in past due and impaired loans. At December 31, 2008, the bank had total past due loans of $7.6 million, which is $4.7 million higher than the prior year-end. Included in these past due loans are impaired loans of $5.0 million. At December 31, 2007, impaired loans totaled $4.0 million. The increase is centered in two land development loans that have become delinquent. Management is working diligently and developing detailed strategies to manage these credits which present the greatest risk to our portfolio. We monitor the situation with these credits continuously and keep in close contact with borrowers in order to assess our position and respond appropriately.

Index

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

As of December 31, 2008, our allowance for loan losses was $2,232,000, or 1.25%, of gross loans compared to $1,763,000, or 1.02%, at year-end 2007. The allowance includes reserves on specifically analyzed loans of $533,000 at December 31, 2008, which is similar to the $624,000 at year-end 2007. Reserves on the remaining pools of homogeneous loans totaled $612,000 at year-end, while at December 31, 2007, these totaled $308,000. Because this portion of the allowance is based on our loan loss history, the increase of $304,000 is primarily the result of adding the large commercial charge-off we sustained last year to our historical loss calculation. The allowance also includes adjustments to the reserves on the pools of homogenous loans for various economic and environmental factors. These adjustments totaled $1,087,000 at December 31, 2008, which is $456,000 higher than year-end 2007. 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, 2007, our allowance contained a 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, we have no unallocated reserve remaining at December 31, 2008.

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

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 2008 our securities portfolio grew by $23.5 million to $82.1 million. A portion of this growth was due to an investment transaction in which we funded a $5 million security purchase with long-term borrowings from Federal Home Loan Bank of Pittsburgh. We expect this 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. Increased deposits funded the remainder of the securities growth. Specifically, one of our customers has a deposit that we believed to be temporary totaling $13.1 million at year-end. This temporary deposit was invested in short-term securities, as well as short-term certificates of deposit. All such certificates of deposit are fully FDIC insured.

Over the last year we have primarily purchased securities issued by government agencies including $21.4 million of debenture purchases and $17.9 million of mortgage-backed securities purchases. All of the mortgage-backed securities were fixed rate securities that had average lives of less than six years when purchased. In addition the company purchased $9.2 million of corporate debt securities and $2.6 million of municipal instruments. Overall, our portfolio is currently comprised of $30.9 million of government agency securities, $21.6 million of government agency mortgage-backed securities, $23.3 million of municipal instruments, $5.1 million of corporate debt securities, and $1.2 million of correspondent and Federal Reserve Bank stock.

Index

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 carry the implied faith and credit of the U.S. government. In 2008 we witnessed events that were once unimaginable—the government took Fannie Mae and Freddie Mac into conservatorship and large financial institutions were merged in order to prevent bank failures. In addition, the U.S. Treasury implemented a $700 billion rescue package, and the FDIC introduced liquidity programs to restore confidence in the financial sector. These unprecedented events prompted Citizens to look closely at its securities portfolio to ensure that we adequately manage credit risk. As a result, we 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 investment grade 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 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 $9.4 million since prior year-end and include the certificate of deposit investments we made in response to the large customer deposit mentioned above.

Deposits and Other Funding Sources

Total deposits increased by $16.1 million to $217.4 million in 2008. The majority of this growth was centered in certificates of deposit (CDs) which increased $24.2 million to $125.0 million. The growth in CDs was attributable to a new product called the Certificate of Deposit Account Registry Service (CDARS) that we implemented in fourth quarter of 2008 in order to allow customers to maintain full FDIC insurance coverage on their deposits. The program works by placing CDs for our customers at several different institutions across the country in amounts less than the applicable FDIC insurance limit. In turn, other banks provide reciprocal deposits back to our institution for the same amount. In this way, we are able to maintain the customer relationship, provide full FDIC insurance, and have the ability to invest our customer’s funding locally.

Aside from the growth in CDs, noninterest bearing demand deposits increased by $1.6 million to $29.6 million at year end, while money market accounts and savings accounts increased by the lesser amounts of $313,000 and $509,000, respectively. However, interest bearing checking accounts declined by $10.6 million, as we transferred some of this into the CDARS program for a particular customer and placed the remaining funds into a repurchase agreement.

Our short-term borrowings consist of repurchase agreements and overnight borrowings such as Federal Funds purchased. These borrowings totaled $31.5 million at December 31, 2008, and have increased by $11.9 million since year-end 2007. The majority of the increase is related to a new repurchase agreement we executed with a customer in 2008 in which we transferred existing deposits of the customer into this new account.

Long-term borrowings historically consist of Federal Home Loan Bank borrowings. In 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 December 31, 2008, long-term borrowings totaled $7.9 million, which is $5.1 million higher than year-end 2007.

Capital Resources

Total capital of $20.8 million, or 7.38% of assets, decreased $239,000 in 2008. This decline in capital is the result of recording the change in pension and other post-retirement plan assets and benefit obligations in other comprehensive income. Additional information related to this change can be found in Note 10 of the accompanying financial statements. We believe this level of capital, as well as our capital structure, is adequate to support current and anticipated future operations. A complete analysis of our capital accounts is provided in the accompanying Statement of Changes in Shareholders’ Equity. During 2008, the company reduced the annual dividend from $0.48 per share in 2007 to $0.40 in 2008, as a means of both maintaining the adequacy of our capital and aligning dividends with our earnings level.

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

Index

Trading activity in the stock continues to be light with 29,600 shares trading in 2008, none of which were treasury shares. Similar to many other financial institutions across the country that have experienced depressed earnings, our performance pushed our stock value downward in 2008. The price at year-end was $7.00, which is $4.25 less than December 31, 2007. The stock continues to trade on the over-the-counter market under the symbol CIWV.OB.

Off-Balance-Sheet Obligations

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

Liquidity

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

We monitor liquidity on a regular basis by preparing projected balance sheets and analyzing our sources and uses of funds. Historically, we have satisfied our liquidity needs through internal sources of funds with the exception of certain loans which have been funded by borrowing funds from the Federal Home Loan Bank of Pittsburgh. We have access to approximately $102 million through various FHLB programs. In the current economic environment, loan demand remains soft and liquidity needs have lessened as a result. We are not aware of any other trends, commitments, events or uncertainties which may impair our ability to satisfy our operating cash needs.

Impact of Inflation

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

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

Index

Item 8. Financial Statements and Supplementary Data

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2008 and 2007

ASSETS	2008			2007

Cash and due from banks	$	3,943,066		$	7,049,699
Interest bearing deposits with other banks		9,438,048			12,421
Securities available for sale, at fair value		80,859,148			57,446,339
Restricted investments		1,191,514			1,113,114
Loans, less allowance for loan losses of $2,231,874 and $1,763,300, respectively		175,721,333			170,939,264
Bank premises and equipment, net		4,105,995			4,259,664
Accrued interest receivable		1,409,645			1,384,943
Other assets		5,865,361			4,389,441

Total assets	$	282,534,070		$	246,594,885

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
Deposits:
Noninterest bearing	$	29,552,473		$	27,919,859
Interest bearing		187,876,377			173,376,611
Total deposits		217,428,850			201,296,470
Short-term borrowings		31,525,514			19,655,942
Long-term borrowings		7,865,485			2,718,865
Other liabilities		4,872,665			1,842,680

Total liabilities		261,692,514			225,513,957

Commitments and contingencies		-			-

Shareholders' equity
Common stock, $2.00 par value, authorized 4,500,000 shares, issued 2,250,000 shares		4,500,000			4,500,000
Retained earnings		21,109,894			20,998,645
Accumulated other comprehensive loss		(936,775	)		(586,154	)
Treasury stock at cost, 420,496 shares		(3,831,563	)		(3,831,563	)

Total shareholders' equity		20,841,556			21,080,928

Total liabilities and shareholders' equity	$	282,534,070		$	246,594,885

See Notes to Consolidated Financial Statements

Index

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For The Years Ended December 31, 2008 and 2007

	2008			2007
Interest and dividend income
Interest and fees on loans	$	11,945,226		$	13,430,613
Interest and dividends on securities:
Taxable		2,237,299			1,844,104
Tax-exempt		838,070			582,457
Interest on interest bearing deposits with other banks		127,946			95,655
Interest on federal funds sold		28,406			13,888
Total interest and dividend income		15,176,947			15,966,717

Interest expense
Interest on deposits		5,680,569			5,961,553
Interest on short-term borrowings		462,174			683,957
Interest on long-term borrowings		246,812			135,263
Total interest expense		6,389,555			6,780,773

Net interest income		8,787,392			9,185,944
Provision for loan losses		1,959,299			1,783,155
Net interest income after provision for loan losses		6,828,093			7,402,789

Noninterest income
Trust income		306,361			230,683
Service fees		1,143,088			1,017,516
Insurance commissions		44,137			34,275
Securities gains/(losses), net		(49,477	)		2,399
Brokerage fees		159,932			159,927
Secondary market loan fees		72,444			100,379
Other		244,853			293,562
Total noninterest income		1,921,338			1,838,741

Noninterest expense
Salaries and employee benefits		4,010,704			3,883,356
Net occupancy expense		427,774			426,039
Equipment expense		366,801			386,476
Data processing		565,348			517,265
Director fees		270,386			256,220
Postage expense		164,483			170,812
Professional service fees		427,187			421,406
Stationery		121,969			149,128
Software expense		248,122			204,418
Net cost of operation of other real estate		34,537			440,881
Other		1,108,724			1,116,616
Total noninterest expense		7,746,035			7,972,617
Income before income taxes		1,003,396			1,268,913
Income tax expense		86,968			235,087
Net income	$	916,428		$	1,033,826

Basic and fully diluted earnings per common share	$	0.50		$	0.57

Basic and fully diluted average common shares outstanding		1,829,504			1,829,504

See Notes to Consolidated Financial Statements

Index

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For The Years Ended December 31, 2008 and 2007

	2008			2007

Net Income	$	916,428		$	1,033,826

Other comprehensive income/(loss):
Gross unrealized gains arising during the period		1,445,210			671,673
Adjustment for income tax expense		(549,179	)		(255,237	)
		896,031			416,436

Reclassification adjustment for (gains)/losses included in net income		49,477			(2,399	)
Adjustment for income tax (benefit)/expense		(18,802	)		913
		30,675			(1,486	)

Change in pension and other post-retirement plan assets and benefit obligations		(2,060,206	)		374,670
Adjustment for income tax (benefit)/expense		782,879			(142,375	)
		(1,277,327	)		232,295


Other comprehensive income/(loss), net of tax		(350,621	)		647,245

Comprehensive Income	$	565,807		$	1,681,071

See Notes to Consolidated Financial Statements

Index

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2008 and 2007

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Shareholders’
	Shares		Amount		Earnings			Income/(Loss)			Stock			Equity

Balance, December 31, 2006		2,250,000	$	4,500,000	$	20,842,981		$	(1,233,399	)	$	(3,831,563	)	$	20,278,019

Net income		-		-		1,033,826			-			-			1,033,826

Cash dividends declared ($0.48 per share)		-		-		(878,162	)		-			-			(878,162	)

Other comprehensive income, net of tax		-		-		-			647,245			-			647,245

Balance, December 31, 2007		2,250,000		4,500,000		20,998,645			(586,154	)		(3,831,563	)		21,080,928

Net income		-		-		916,428			-			-			916,428

Cash dividends declared ($0.40 per share)		-		-		(731,801	)		-			-			(731,801	)

Effect of initial application of emerging issues task force issue No. 06-4, net of tax		-		-		(52,778	)		-			-			(52,778	)

Effect of change in pension plan measurement date pursuant to SFAS No. 158, net of tax		-		-		(20,600	)		-			-			(20,600	)

Other comprehensive loss, net of tax		-		-		-			(350,621	)		-			(350,621	)

Balance, December 31, 2008		2,250,000	$	4,500,000	$	21,109,894		$	(936,775	)	$	(3,831,563	)	$	20,841,556

See Notes to Consolidated Financial Statements

Index

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2008 and 2007

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	916,428		$	1,033,826
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		315,488			320,082
Provision for loan losses		1,959,299			1,783,155
Deferred income tax expense/(benefit)		(71,097	)		59,753
Amortization of security premiums, net of accretion of security discounts		52,643			24,057
Securities (gains)/losses, net		49,477			(2,399	)
Provision for loss on other real estate owned		-			112,493
(Gain)/loss on sale of other real estate		(300	)		273,140
(Gain)/loss on sale of equipment and other assets		1,200			(11,917	)
(Increase)/decrease in accrued interest receivable		(24,702	)		8,525
(Increase)/decrease in other assets		(908,939	)		51,532
Increase/(decrease) in other liabilities		851,427			(596,684	)
Net cash provided by operating activities		3,140,924			3,055,563

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale		2,031,075			345,900
Proceeds from maturities and calls of securities available for sale		24,460,000			19,365,000
Principal payments received on securities available for sale		3,610,120			1,854,838
Purchases of securities available for sale		(52,199,796	)		(19,732,036	)
Loans made to customers, net		(7,430,073	)		( 7,761,908	)
Purchases of bank premises and equipment		(182,665	)		(235,331	)
Proceeds from sale of other real estate		472,638			1,170,650
Net cash used in investing activities		(29,238,701	)		(4,992,887	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in demand deposit, NOW, money market and savings accounts		(8,137,594	)		3,016,517
Net increase in time deposits		24,269,974			1,736,738
Net increase/(decrease) in short-term borrowings		11,869,572			(177,492	)
Proceeds from long-term borrowings		5,530,000			-
Repayments of long-term borrowings		(383,380	)		(792,905	)
Dividends paid		(731,801	)		(878,162	)
Net cash provided by financing activities		32,416,771			2,904,696
Increase in cash and cash equivalents		6,318,994			967,372
Cash and cash equivalents:
Beginning		7,062,120			6,094,748
Ending	$	13,381,114		$	7,062,120

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits and on other borrowings	$	6,426,720		$	6,768,464
Income taxes	$	514,746		$	924,352

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Other real estate and other assets acquired in settlement of loans	$	753,705		$	1,257,378
Unrealized gain on securities available for sale	$	1,494,688		$	669,274

See Notes to Consolidated Financial Statements

Index

CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies

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

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

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

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

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

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

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

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

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

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

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

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

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

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

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

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

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

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

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

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

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

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

Basic and Fully Diluted Earnings per Share: Basic and fully diluted earnings per common share is computed based upon the weighted average shares outstanding. The weighted average shares outstanding were 1,829,504 for the years ended December 31, 2008 and 2007. We did not have any potentially dilutive securities during that time.

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

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

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

Advertising: Advertising costs are expensed as they are incurred. Advertising expenses were $33,623 and $39,601 for the years 2008 and 2007, respectively.

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

Significant New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board (FASB) reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benefit postretirement. The company adopted the provisions of these standards effective January 1, 2008. Additional information regarding this adoption can be found in Note 10.

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The company adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The company adopted SFAS 159 effective January 1, 2008. The company decided not to report any existing financial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the consolidated financial statements.

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

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

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

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

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the company on January 1, 2009. The adoption of SFAS No. 161 is not expected to have a material impact on the company’s consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on the company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the consolidated financial statements.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 were effective for the company on December 31, 2008 and did not have a material impact on the consolidated financial statements.

In October 2008, the FASB issued FSP FAS 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 No. 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the company’s consolidated financial statements.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of financial assets and interest in variable interest entities, adoption of the FSP will not affect the company’s financial condition, results of operations or cash flows.

In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the consolidated financial statements.

Note 2. Restrictions on Cash and Amounts Due from Banks

The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2008 the reserve requirement was $75,000. We had no reserve requirement at December 31, 2007.

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CITIZENS FINANCIAL CORP.

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Note 3. Securities

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at December 31, 2008 and 2007, are summarized below. All such securities are available for sale.

	2008
							Carrying
							Value
							(Estimated
	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value)

U.S. Government agencies and corporations	$	30,192,224	$	725,683	$	-	$	30,917,907
Mortgage backed securities - U.S. Government agencies and corporations		21,031,846		554,109		10,936		21,575,019
Corporate debt securities		5,133,279		1,304		59,146		5,075,437
Tax exempt state and political subdivisions		22,948,432		391,380		49,067		23,290,745

Total securities available for sale	$	79,305,781	$	1,672,476	$	119,149	$	80,859,148

	2007
							Carrying
							Value
							(Estimated
	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value)

U.S. Government agencies and corporations	$	28,083,464	$	227,154	$	19,073	$	28,291,545
Mortgage backed securities - U.S. Government agencies and corporations		6,587,411		14,238		40,667		6,560,982
Tax exempt state and political subdivisions		22,716,824		91,692		214,704		22,593,812

Total securities available for sale	$	57,387,699	$	333,084	$	274,444	$	57,446,339

The tables which follow provide summaries of securities which were in an unrealized loss position at December 31, 2008 and 2007, all of which are available for sale. As of December 31, 2008, these securities had a total fair value of $6,183,696 and carried unrealized losses of $119,149 or 1.93%. The fair value of securities which have been in a continuous loss position for the past twelve months total $2,109,123. The unrealized loss pertaining to these securities is $51,582 or 2.45%. The majority of these losses are on corporate debt securities and municipal instruments. With the exception of one municipal which is not rated, all of these instruments carry investment grade ratings from the major credit rating agencies. The remaining losses are on securities issued by U.S. government agencies and corporations which carry the implied faith and credit of the U.S. Government. 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 $29,020,029 of securities that carried unrealized losses at December 31, 2007.

	2008
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies and corporations	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage backed securities – U.S.Government agencies and corporations		-		-		660,401		10,936		660,401		10,936
Corporate debt securities		3,435,584		59,146		-		-		3,435,584		59,146
Tax-exempt state and political
Subdivisions		638,989		8,421		1,448,722		40,646		2,087,711		49,067
Total	$	4,074,573	$	67,567	$	2,109,123	$	51,582	$	6,183,696	$	119,149

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

	2007
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies and corporations	$	-	$	-	$	10,973,400	$	19,073	$	10,973,400	$	19,073
Mortgage backed securities – U.S. Government agencies and corporations		-		-		4,886,591		40,667		4,886,591		40,667
Tax-exempt state and political
Subdivisions		11,243,398		191,945		1,916,640		22,759		13,160,038		214,704
Total	$	11,248,398	$	191,945	$	17,776,631	$	82,499	$	29,020,029	$	274,444

The maturities, amortized cost and estimated fair values of securities at December 31, 2008 are summarized as follows:

			Carrying
			Value
			(Estimated
	Amortized		Fair
	Cost		Value)
Due within one year	$	21,450,539	$	21,661,657
Due after one through five years		30,647,694		31,362,013
Due after five through ten years		27,207,548		27,835,438
Total	$	79,305,781	$	80,859,148

Mortgage backed securities have remaining contractual maturities ranging from 7 months to 19.25 years and are reflected in the maturity distribution schedule based on their anticipated average life to maturity, which ranges from 0.30 to 9.38 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated life to maturity of the specific obligation.

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

	Proceeds From						Gross Realized
Years Ended			Calls and		Principal
December 31,	Sales		Maturities		Payments		Gains		Losses

2008	$	2,031,075	$	24,460,000	$	3,610,120	$	7,325	$	56,802

2007	$	345,900	$	19,365,000	$	1,854,838	$	2,399	$	-

At December 31, 2008 and 2007 securities with amortized costs of $44,466,265 and $32,207,744, respectively, and estimated fair values of $45,375,428 and $32,357,657, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required or permitted by law.

At December 31, 2008 and 2007 the company’s securities portfolio had no concentrations within any specific industry or issuer.

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

The company’s restricted investments totaled $1,191,514 and $1,113,114 at December 31, 2008 and 2007, respectively. These include equity investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, and Siverton Financial Services Inc. stock. Such securities are carried at cost, since they may only be sold back to the respective issuer or another member.

Note 4. Loans

Loans are summarized as follows:
	December 31,
	2008		2007
Commercial, financial and agricultural	$	20,262,356	$	21,015,554
Real estate – construction		13,832,198		12,497,098
Real estate – home equity		6,410,624		6,797,712
Real estate – residential mortgage		62,695,378		61,726,209
Real estate – commercial mortgage		59,806,565		57,921,473
Installment loans		11,423,736		10,902,926
Other		3,623,570		2,011,614
Total loans		178,054,427		172,872,576

Less:
Allowance for loan losses		2,231,874		1,763,300
Net deferred loan origination fees and costs		101,220		170,012

Loans, net	$	175,721,333	$	170,939,264

Included in the above balance of net loans are nonaccrual loans of $5,471,601 and $4,487,291 at December 31, 2008 and 2007, respectively. If interest on those nonaccrual loans had been accrued, such income would have approximated $215,830 and $233,744 for the years ended December 31, 2008 and 2007, respectively.

The bank makes loans to its directors, executive officers and their related interests in the normal course of business. The activity with respect to these loans for the years ended December 31, 2008 and 2007 follows:

	2008			2007
Balance, beginning	$	6,311,436		$	6,111,725
Additions		927,494			1,095,224
Amounts collected		(844,527	)		(895,513	)

Balance, ending	$	6,394,403		$	6,311,436

The following represents the maturities and sensitivities of loans to changes in interest rates at December 31, 2008, without regard to scheduled periodic principal repayments on amortizing loans:

			Due After 1
	Due		But Within				Due
	Within 1 Yr		5 Yrs		After 5 Yrs		Total
Commercial, financial and agricultural	$	7,070,518	$	5,049,344	$	8,142,494	$	20,262,356
Real estate – construction		10,844,323		2,768,361		219,514		13,832,198
Real estate – home equity		65,959		2,924,909		3,419,756		6,410,624
Real estate – residential mortgage		1,289,323		4,737,109		56,668,946		62,695,378
Real estate – commercial mortgage		5,165,334		10,318,667		44,322,564		59,806,565
Installment loans		729,797		7,918,946		2,774,993		11,423,736
Other		605,670		1,893,156		1,124,744		3,623,570

Total	$	25,770,924	$	35,610,492	$	116,673,011	$	178,054,427


Loans due after one year with:

Variable rates	$	123,705,427
Fixed rates		28,578,076

Total	$	152,283,503

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CITIZENS FINANCIAL CORP.

AND SUBSIDIARY

Concentrations of Credit Risk: The bank grants installment, commercial and residential loans to customers in central and eastern West Virginia in striving to maintain a diversified loan portfolio. Nonetheless, concentrations of credit, defined as loans to a customer, the customers’ related parties, or to a number of customers operating in the same industry, which in the aggregate total 25% or more of capital, can occur. At December 31, 2008, we had four such concentrations.

Extensions of credit to companies in the lodging, restaurant and bar industry totaled $13,471,783. These loans are usually made to finance the purchase, operation or improvement of these establishments and are generally secured by liens on the subject property. Extensions of credit for the purchase of rental real estate totaled $15,804,795. These loans are usually made to purchase or improve the subject property and are secured by the rental unit(s). Extensions of credit for construction and contractors totaled $16,558,258. These loans are generally secured by the subject property and draw requests are approved based on scheduled work completed and periodic inspections of construction progress. Also, extensions of credit for ski resort related loans totaled $25,125,663. These loans are extended to business and residential properties in and around various West Virginia ski resorts. Additional collateral such as pledges of accounts receivable, real estate, or personal guarantees may also be required when granting any of these credits. The bank evaluates each such customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based upon these credit evaluations.

Note 5. Allowance for Loan Losses

An analysis of the allowance for loan losses for the years ended December 31, 2008 and 2007, is as follows:

	2008		2007

Balance, beginning of year	$	1,763,300	$	1,873,038

Charge offs:
Commercial, financial and agricultural		301,662		1,538,565
Real estate – commercial mortgage		1,362,253		347,695
Real estate – residential mortgage		79,238		78
Installment		28,456		48,839
Total		1,771,609		1,935,177

Recoveries:
Commercial, financial and agricultural		180,901		8,055
Real estate – commercial mortgage		88,531		-
Real estate – residential mortgage		1,206		-
Installment		10,246		34,229
Total		280,884		42,284

Net charge-offs		1,490,725		1,892,893
Provision for loan losses		1,959,299		1,783,155

Balance, end of year	$	2,231,874	$	1,763,300

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

	December 31,
	2008	2007
Impaired loans without a valuation allowance

CITIZENS FINANCIAL CORP/DE/ 10-K