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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

    for the fiscal year ended December 31, 2003

or

Commission File No: 2-96144

CITIZENS FINANCIAL CORP.

(exact name of registrant as specified in its charter)

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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 of the Act).    Yes  ¨    No  x

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 $22,038,000.

As of February 29, 2004, Citizens Financial Corp. had 750,000 shares of common stock outstanding with a par value of $2.00.

This report contains 110 pages.

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CITIZENS FINANCIAL CORP.

FORM 10-K INDEX

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Citizens Financial Corp.

Form 10-K, Part I

Item 1. Business

Organizational History and Subsidiaries

Citizens Financial Corp., (“Citizens” or the “company”), is a $209 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”) and Citizens Financial Services, LLC.

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.

Citizens Financial Services was organized in West Virginia in 2000 for the purpose of investing in ProServ Insurance Agency, LLC. ProServ is a general insurance agency selling primarily property and casualty insurance and whose members are member banks of the West Virginia Bankers Association. Citizens Financial Services’ ownership in ProServ is less than 5%. Citizens Financial Services became inactive in 2003.

Business of Citizens and Subsidiaries

As a bank holding company, Citizens’ operations have been limited to the ownership of its subsidiaries. To date, it has not sought to conduct any other form of permitted business activity, nor are there any current plans to do so. Similarly, Citizens Financial Services’ operations have been limited to its ownership in ProServ. The financial impact of this venture on Citizens has been extremely minor.

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 and telebanking 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

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services from five of its six offices. In this regard, the bank has developed three primary loan portfolios: real estate, commercial, and consumer. Real estate loans consist of both residential and nonresidential loans. Residential real estate 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 mortgage 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 the directors loan committee. Historically, we have not experienced significant losses in this area, and these loans are viewed among the least risky made by the bank. Nonetheless, these loans, particularly those with larger balances, are subject to periodic review by the bank’s loan review officer.

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 in addition to periodic reviews by the bank’s loan review officer.

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 borrowers 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 the largest loans made by the bank and are considered to carry a higher level of risk than other types of 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 officer.

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 officer. As a result, risk is closely tied to adherence to proper underwriting procedures and the state 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 by testing by both the

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internal auditor 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 five years; bank qualified, investment grade municipal obligations maturing in less than ten 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 company’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.

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 administration and review, compliance, internal audit, marketing, training and development, human resources, and information technology support. Data processing, while administered through the main office, is provided through a third party processing company.

Employees

As of February 29, 2004, Citizens National Bank had a staff of 100 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. Neither Citizens Financial Corp. or Citizens Financial Services, LLC have any paid employees.

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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 28 banking offices representing 12 banks are located. As of June 30, 2003, the most recent date data is available, Citizens held 20.7% share of the $764,000,000 deposit base in those counties.

Among the newer forms of competition is the use of the internet to provide banking and financial services. Offered by many mutual funds, brokers and banks, including several in our market areas, we expect to make this service available to our customers in 2004.

Economic Characteristics of Citizens’ Marketplace

Citizens serves an area of northcentral and northeastern West Virginia including the counties of Randolph, Tucker, Grant and Pocahontas. This market is a largely rural, mountainous region covering approximately 2,876 square miles with a civilian labor force of 25,270.

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, 2003, the unemployment rate in this market was 6.4% compared to 5.6% for West Virginia and 5.4% nationwide. Average annual wages in the area approximate $24,898 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 subsidiaries 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

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Board. Citizens and its subsidiaries 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.

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 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

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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.

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.

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.

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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.

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, however, are not provided at the Beverly branch. During 2000 the bank acquired and opened a full service facility in Petersburg, West Virginia containing 2,280 square feet and also constructed another full service facility in Slatyfork, West Virginia containing 3,200 square feet. 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.

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In January 2002, the bank opened another full-service branch located in leased space within a supermarket in Marlinton, West Virginia. In 2004, the bank plans to complete the construction of a 3,500 square foot free-standing branch in Marlinton and to expand its existing Petersburg branch by 700 square feet.

In 2002 the bank purchased two buildings which adjoin its main office property for future expansion. One such building was demolished in 2003 while the other will be leased to the current tenants until such time as expansion plans are finalized.

Neither Citizens Financial Corp. or Citizens Financial Services, LLC, owns or leases any property. To date they have utilized the bank’s facilities and have not occupied more than a minimal amount of space. Neither company compensates the bank in any way for such usage as it is deemed to be insignificant.

Item 3. Legal Proceedings

As of December 31, 2003 Citizens Financial Corp. was not involved in any material legal proceedings. The bank is currently involved in various legal proceedings which occur in the normal course of business. After consultation with legal counsel, management believes 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 2003.

Part II

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

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

Citizens has only one class of stock, that being common stock, and all voting rights are vested in its holders. The shareholders of Citizens are entitled to one vote for each share of common stock owned on all matters subject to a vote of shareholders. At February 29, 2004 shareholders of record numbered approximately 486. The company has no plans to issue any other forms of capital.

Citizens maintains a policy under which it may purchase shares of its own stock for treasury, 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 December 31, 2003 and 2002 the number of treasury shares was 118,622 and 103,477, respectively. 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.

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

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 $1.50 per share in 2003 and $1.40 per share in 2002. 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.

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 announcement plan or program.

ISSURER PURCHASES OF EQUITY SECURITIES

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Item 6. Selected Financial Data

Selected financial data for the five years ended December 31, 2003 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this report.

Citizens Financial Corp.

Selected Financial Data Five Year Summary

(in thousands of dollars, except per share data)

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

Distribution of Assets, Liabilities & Shareholders’ Equity;

Interest Rates and Interest Differential

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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.

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Securities Portfolio

Presentation of the amortized cost of securities as of December 31, 2003 and 2002 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, 2003 and the weighted average yields of such securities (calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security).

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

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Loan Portfolio

Types of Loans

The distribution of loans by major category as of December 31, 2003 and 2002 may be found in Note 4 to the accompanying consolidated financial statements. All loans in the portfolio are domestic in nature.

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, 2003. Also provided are the amounts due after one year classified as fixed rate and variable rate loans.

Risk Elements

Nonperforming Loans

Nonperforming loans consist of loans in nonaccrual status, loans which are past due 90 days or more and still accruing interest and restructured loans. A table detailing the amounts of these loans as of December 31, 2003 and 2002 is presented as part of the management’s discussion and analysis section of this report.

Loans are generally placed on nonaccrual status when they are past due 90 days as to principal or interest unless they are both well secured and in the process of collection. Disclosure of the amount of such loans, as well as the amount of income which would have been recognized under their original terms, may be found in Note 4 to the accompanying consolidated financial statements. No income was recorded on these loans in 2003.

Potential Problem Loans

As stated in Note 5 to the accompanying consolidated financial statements, the company identified no loans which it classified as impaired due to doubts about the borrowers ability to repay as called for in the loan documents at December 31, 2003.

Loan Concentrations

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

Summary of Loan Loss Experience

Note 5 to the accompanying consolidated financial statements presents an analysis of the allowance for loan losses for the years ended December 31, 2003, 2002 and 2001.

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

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quality, changes in the mix and size of the loan portfolio, previous loss experience, general economic conditions and information about specific borrowers.

The ratio of net losses to average loans outstanding was .25% in 2003, .27% in 2002 and .09% in 2001.

The following table shows an allocation of the allowance for loan losses for the two years ended December 31, 2003 and 2002.

Deposits

The average daily amount of deposits and the rates paid on those deposits for the years ended December 31, 2003, 2002 and 2001 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, 2003 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.

Short-term Borrowing

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

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

INTRODUCTION AND CRITICAL ACCOUNTING POLICIES

The following discussion and analysis presents the significant changes in financial condition and the results of operations of Citizens Financial Corp. and its subsidiaries, Citizens National Bank of Elkins, and Citizens Financial Services, LLC, for the periods indicated and should be read in conjunction with our 2003 audited financial statements and Annual Report on Form 10-K. Because our primary business activities are conducted through the bank, this discussion focuses primarily on the financial condition and operations of the bank. This discussion may contain forward looking statements based on management’s current expectations. This forward looking information involves uncertainties including those associated with interest rates, the general economic environment, regulations, competitive changes, and other risks. 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. Actual results may differ materially. Amounts and percentages used in this discussion have been rounded.

As explained in Note 1 of this report, these financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the financial services industry. As such, we are required to make estimates and assumptions that can affect the amounts in our financial statements. A summary of our most significant accounting policies, including an explanation of how assets and liabilities are valued, is also presented in Note 1.

Due to the subjective valuation techniques used and the sensitivity of our financial statements to the assumptions and estimates needed to determine the allowance for loan losses, we have identified the determination of the allowance 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.

Results of Operations

Earnings Summary

Net income for the three years ended December 31, 2003, 2002, and 2001 was $2,012,000, $1,928,000 and $1,905,000, respectively. On a per share basis, both primary and fully diluted, net income was $3.14, $2.98 and $2.93 in each period, respectively. The return on average assets was 1.03% in 2003, 1.10% in 2002, and 1.20% in 2001 while the return on average equity was 9.65%, 9.77% and 10.29% in the same periods. A more detailed discussion of the factors influencing the company’s results of operations and financial condition is presented in the following sections of this report.

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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.

Our net interest income has risen in each of the last three years to $8,222,000 in 2003. On a tax-equivalent basis, net interest income totaled $8,454,000 in 2003 compared to $7,763,000 in 2002 and $7,320,000 in 2001 resulting in net interest margins of 4.62%, 4.71% and 4.88%, respectively. While this measure is falling, this has been normal throughout the industry and, at 4.62% our margin remains well above peer group averages.

Similar to 2001 and 2002, we attempted to use our expanding branch network, along with a variety of marketing and customer service efforts, to gain market share and grow in 2003. As a result, the size and composition of our balance sheet changed.

Average earning assets increased $18.3 million to $183.0 million. Growth such as this normally enhances earnings and, in fact, our growth increased interest income by $1,275,000. This is known as the volume variance. However, interest rates, as well as volumes, impact interest income. Because rates remained low during the year the yield on our earning assets fell from 7.12% in 2002 to 6.36% in 2003. The effect of this drop in yield, or rate variance, was to reduce interest income by $1,363,000. Thus, the combined impact of higher volumes of earning assets and the lower rates they carried was to reduce tax-equivalent interest income by just $88,000.

Changes in the size of our interest bearing liabilities, and their cost, were much more significant, however. Average interest bearing liabilities increased $16.9 million in 2003 to $152.4 million which caused interest expense to rise $437,000. The impact of lower interest rates on these liabilities, however, was much greater and ultimately was the prime factor in our improved level of net interest income. Lower interest rates allowed the cost of our interest bearing liabilities to fall 83 basis points to 2.10% which had the effect of reducing interest expense by $1,216,000. Combining the volume variance with the rate variance we see interest expense was reduced by $779,000. So reduced interest expense resulting from the low interest rate environment was the major reason our net interest income increased in 2003.

These results are similar to 2002 when growth in earning assets was $14.8 million and tax equivalent net interest income improved $443,000. As was the case in 2003, the increase in net interest income in 2002 was due to lower interest expense resulting from a low interest rate environment.

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The ability to maintain a strong net interest margin is crucial to our financial success. Looking forward, although economic signals are mixed, the interest rate environment in 2004 is expected to remain low but a stronger economy could result in some rate increases. Moderately higher rates would allow us to improve the yield on our earning assets while maintaining a low cost of funds. This would improve not only net interest income but also our net interest margin. A continuation of the current interest rate environment would likely extend our recent trend of recording higher net interest income but with our margin being reduced. Some of the variables we believe are important to the management of net interest income, as well as the methods we use, are discussed in the “Market Risk” portion of our Form 10-K. Additional details may also be found in the “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rate and Interest Differential” and “Rate Volume Analysis” sections of the 10-K.

Provision for Loan Losses

The provision for loan losses represents management’s estimate of the amount to be charged against current earnings to maintain the allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated based on quarterly evaluations of the loan portfolio. The provision for loan losses totaled $324,000 in 2003, $288,000 in 2002 and $347,000 in 2001.

Because the amount of the provision for loan losses is a function of management’s overall assessment of loan quality and the adequacy of the allowance for loan losses, we direct you to the “Allowance for Loan Losses” section of this report where we discuss the estimation methods and assumptions management uses in analyzing the allowance, as well as specific comments regarding loan quality, trends, concentrations and other factors.

Noninterest Income

Noninterest income, which is all revenues other than interest and fee income related to earning assets, has taken on greater importance in recent years due to increased competitive pressure and the restrictions it places on the pricing of interest bearing assets and liabilities. At $1,292,000 noninterest income was 10.2% of total income despite being down from $1,353,000 in 2002. In 2001 the total was $1,131,000.

The decrease in 2003 is due to lower levels of brokerage and secondary market loan fees. The secondary market mortgage program, although very popular in 2003, generated less income to the bank due to the restructuring of the fee splitting arrangement between the bank and the mortgage originators. Our brokerage program suffered in 2003 as we were without a licensed broker during the first quarter of the year and some customers may still be reluctant to invest in the equity markets following the down years of 2000-2002. Although these services can be somewhat cyclical in nature, we believe they will continue to meet the needs of customers and provide a significant source of noninterest income in the future. With our brokerage position now stable, we expect brokerage fees to approximate $70,000 in 2004. We are also in the process of re-evaluating the structure of our mortgage program and expect it to provide approximately $100,000 in fee income for the year.

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The remaining areas of noninterest income did quite well in 2003. Trust fees increased $21,000 to $253,000 while service fees rose $47,000 on the strength of higher overdraft, ATM, and minimum balance fees. Other noninterest income improved by $34,000 due to an increase in the cash surrender value of insurance policies which were purchased in 2002 to fund certain retirement benefits of officers and directors. Insurance commission remained flat and securities gains were just $276. Sales of investment securities, all of which are classified as available for sale, have been, and are expected to continue to be, infrequent.

In 2002, noninterest income was $1,353,000, which was an increase of $222,000 from 2001. Much of this was due to the success of the secondary market mortgage program which, although having just started in the fourth quarter of 2001, generated $232,000 of fees in 2002. Trust and service fees also performed well due to the bank’s growing customer base while other noninterest income increased again due to the increased cash surrender value of the insurance policies.

Noninterest Expense

Noninterest expense includes all items of expense other than interest expense, the provision for loan losses and income taxes. Total noninterest expense increased $502,000, or 8.8% in 2003 to $6,195,000. This follows totals of $5,692,000 in 2002 and $5,035,000 in 2001.

Unlike recent years when the addition of new branch offices caused salaries and operating costs to rise, the higher level of noninterest expense in 2003 is primarily due to increases in employee benefit costs. Our group insurance costs increased by $275,000 in 2003 mostly due to higher medical claims against our self-funded health insurance program. Claims for the year were $404,000 compared to $212,000 in 2002.

Costs related to the newly adopted executive and director supplemental retirement plan of $196,000 also contributed to the increase. This plan, which is explained in Note 10, carried a net cost of $127,000, before taxes, for the year. In contrast to these rising benefit costs, salaries increased just $30,000, or 1.2%, in 2003.

Increases were also observed in data processing expense, director fees, postage, professional fees and stationery costs. The increase in data processing expense is due to price increases imposed by third party vendors and an increase in the size of our customer base. Higher postage costs likewise reflect a growing customer base and increased mail volumes. Director fees, which include fees for various board committees, rose because the amount paid per meeting was increased. Professional fees increased $34,000, or 38.5%. Of this, more than $19,000 was related to the establishment and administration of the new executive and director retirement plan while additional costs were incurred for studies involving performance based compensation. The majority of these fees are nonrecurring.

Decreases in several other items helped to offset these expenses. Net occupancy expense fell by $22,000 due to greater rental income. Lower depreciation expense helped reduce equipment costs and other noninterest expense decreased $42,000 as some $39,000 in losses on the sale of foreclosed properties, present in 2002, were not incurred in 2003.

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In 2002 noninterest expense increased by $657,000. Of this, $252,000 was related to the opening of a new branch facility. Salaries also increased greatly in 2002, rising $323,000. This was due to compensation paid to the bank’s mortgage broker who, at this time, received a base salary plus a percentage of the commission generated by the program, as well as merit increases and the need to staff a new branch facility. Other noninterest expense, including losses on the sale of foreclosed properties, also increased in 2002.

With the opening of a de novo branch and the expansion of another scheduled for 2004, we believe noninterest expense will once again increase in the coming year. In the short-term this is expected to result in lower earnings. However, we believe the potential to generate additional earning assets, as well as noninterest income, will soon result in higher income levels. Although seeking growth within our current markets and nearby areas can be difficult in light of the existing economic conditions, we nonetheless believe that we must do so in order to enhance shareholder value.

Income Taxes

Income tax expense for the years 2003, 2002 and 2001 was $984,000, $992,000 and $997,000, respectively. Included in these figures are both federal and state income taxes. These figures represent effective tax rates of 32.8%, 34.0% and 34.4% in the respective years. We have not been subject to the federal alternative minimum tax during any of the periods covered by this report. Note 9 of the accompanying consolidated financial statements provides further information and additional disclosure of the significant components influencing our income taxes.

Financial Condition

Summary

While our national economy showed some signs of improvement in 2003, the economy within our market place shows limited expansion. Nonetheless, Citizens continues to grow as a result of the branching activity we have undertaken, strong marketing and product promotion efforts, and our commitment to customer service. During 2003 total assets increased $26.7 million, or 14.7%, to $209 million while gross loans and deposits increased $19.1 million and $13.8 million, respectively. A further discussion of our major balance sheet categories, as well as liquidity and the impact of inflation, follows.

Loan Portfolio

Total loans at December 31, 2003 of $135,755,000 were $19.1 million, or 16.4%, more than at the end of 2002 and represented 64.9% of total assets. Average total loans for the year were $124.7 million.

Much of this growth occurred in our mortgage portfolio which, at $89.1 million, grew by $11.2 million in 2003 to remain our largest loan

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portfolio. Included in this portfolio are several types of mortgage loans including 1-4 family residences, which total $51.0 million, home equity loans of $6.7 million, loans secured by nonresidential property of $30.9 million and other loans.

Our residential loans are nearly all variable rate in nature often adjusting annually or every three or five years. Consequently, we face strong competition from the fixed rate mortgage market where borrowers can lock in historically low interest rates. As a result, our residential mortgage portfolio rose by just $833,000 during the year. However, we continue to satisfy the demand for fixed rate mortgages through our secondary market program which originated $33.7 million in fixed rate mortgages during 2003 and provided fee income of $95,000. By continuing to use this approach we believe we are minimizing undesirable interest rate risk while maintaining customer relationships.

Our nonresidential mortgage lending primarily involves loans to local businesses including those in the automobile, farm equipment, tourism and other industries. These loans usually carry a variable rate which is tied to, and adjusts with, the prime rate. Due to the efforts of our commercial lending and business development personnel we were very successful in this area and were able to increase our nonresidential mortgage portfolio by $7.1 million. These efforts were vital to the growth of our total loan portfolio in light of the heavy competition for residential loans and the condition of the consumer lending market as is explained below.

The other major component of our mortgage lending business, home equities, rose by more than $3 million due to a promotion we ran during the second quarter.

As might be expected, our commercial lending also benefited from our business development activity. Such loans, which are secured by various business assets other than real estate, grew by $4.6 million to $25.4 million. This makes commercial loans our second largest loan portfolio. Those loans also typically carry a variable interest rate which adjusts with the prime rate.

Contrasting with the success of our mortgage and commercial lending activities is our consumer lending. After peaking in 2001, consumer lending has decreased in both 2002 and 2003 despite our expanding market. A drop of $2.2 million in 2002 was followed by a $1.3 million decrease in 2003. Total consumer loans now stand at $12.4 million. This is the result of several factors. First, many of our consumer loans are for the purchase of automobiles and auto manufacturers have continued to offer superior financing plans and cash rebates. In addition, the general weakness of our economy, worries about unemployment and the loss of wealth many consumers experienced in recent years caused many to postpone major purchases; it also caused us to tighten our credit standards as a means of maintaining credit quality.

We expect many of these same factors, strong fixed rate mortgage competition and consumer lending concerns, to impact our loan operations in 2004. Loan growth, therefore, is again expected to center on the nonresidential mortgage and commercial areas.

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Allowance for Loan Losses and Credit Quality

The allowance for loan losses is maintained at a level we consider adequate to provide for losses that can be reasonably anticipated based on quarterly evaluations of the loan portfolio. These evaluations consider the potential loss in specifically identified loans and homogeneous pools of loans as well as other factors such as delinquency levels, historical loss experience, current and anticipated economic conditions, concentrations of credit, changes in lending policies or staff, and other factors.

Loans which are specifically analyzed include all loans with balances in excess of $250,000, all loans past due 90 or more days and those placed on our internally generated watch list. Management develops this list from various sources including past due loan reports, previous internal and external loan evaluations and knowledge of each borrower’s financial situation. This list contains loans with possible weaknesses regarding collectibility, performance or the adequacy of collateral.

Loans that management places on the watch list are given a classification based on their perceived risk using a method similar to that of the bank’s primary regulatory agency. After management determines the watch list to be complete, detailed reviews of each loan are made. Based on the results of these reviews, specific reserves for potential losses are identified.

Potential losses for loans not specifically analyzed are quantified by applying historical loss factors to pools of loans. Separate pools, and separate loss factors, are used for each of our major loan portfolios. We may assign additional loss exposure for changes in economic conditions, trends in past due loans, changes in lending policies or staff, concentrations of credit, unused lines or letters of credit and other factors. Finally, because these methods carry inherent imprecision and subjectivity, we establish an additional reserve for losses that are likely to exist at the evaluation date but may not have been quantified by the specific, pooled, or other analyses. We then aggregate these unallocated losses with the losses identified in the specific, pooled, and other analyses. Based on this aggregate total, the allowance for loan losses is adjusted as necessary through a provision for loan losses.

By employing these procedures management has determined that the December 31, 2003 allowance for loan losses of $1,396,000, which is 1.03% of gross loans, is adequate when measured against reasonably anticipated losses. At year end 2002 the allowance was $1,386,000, or 1.19% of loans.

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In computing our allowance we specifically analyzed loans totaling $8.2 million. Of these it was determined that $467,000 of loans would require specific reserves totaling $289,000. Also within these loans were $352,000 of loans which were past due 90 days or more and which carried specific reserves of $97,000. Loans past due less than 90 days were $3,080,000 at year-end which, as a percent of total loans, is less than our historical average. A summary of nonperforming and past due loans is provided below:

Historical data suggests that of our three major loan portfolios, mortgage loans, our largest portfolio, carries the least amount of risk while commercial and consumer lending carry greater risk. As of December 31, estimated reserves attributable to mortgage lending were $103,000, or 7.4% of the total reserve. Reserves for commercial lending, including those for loan concentrations in the automobile and lumber industries, were $813,000, 58.2% of the total, while consumer reserves were $185,000 which is 13.2% of the total. Other reserves were assigned based on changes in our lending staff, local economic conditions and other factors.

Net charge-offs totaled $314,000 in 2003, an increase of just $14,000 from 2002. Of this total, $123,000 was related to one credit. The loss on this loan was specifically identified in our analysis prior to the charge-off. Although the risk of loss is inherent in the lending process, we believe we have similarly addressed each of the relevant risk factors in our analysis and were not aware of any credit issues existing at December 31, 2003 which were likely to have a significant negative impact on future earnings, capital or liquidity. Subsequent to year-end, discussions with one of our commercial loan customers revealed the potential for additional loss, however. This customer’s loan payments were current both at December 31, 2003 and February 29, 2004. The amount of risk, if any, is being studied and cannot be reasonably estimated, nor can we establish that a loss is either probable or likely, at this time. We continue to work with the customer to further clarify the situation and in the event it is determined that a loss exists, appropriate adjustments to the allowance for loan losses will be made. Please refer to Notes 4 and 5 for additional information on our loan portfolio and the allowance for loan losses.

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.

At December 31, 2003, securities totaled $60,077,000 which was $5.9 million more than at year-end 2002. Our securities portfolio is a major component of our assets structure representing 28.7% of assets at year-end and 31.0% of average earning assets during the year.

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As we have in the past, we continue to follow a practice of constructing a short-term, laddered portfolio structure. The laddered structure allows the portfolio to generate a more or less continual stream of maturing bonds which, if not pledged, can be used to fund other investments, such as loans, if necessary. It also serves as a method of preventing “market timing” by keeping the bank continually involved in portfolio management. The portfolio management systems we use support our belief that we can neither successfully engage in market timing over the long-term nor is market timing appropriate for our bank.

By maintaining a short-term portfolio we attempt to reduce our exposure to interest rate swings. At December 31, 2003, the weighted average life of the portfolio was 2.24 years.

Over the past two years we have also managed the portfolio with added attention to credit quality. This comes partly in response to the well publicized corporate abuses during that time. As a result, corporate debt securities, which can offer superior yields, were reduced from $15.4 million in 2001 to $10.3 million in 2002 to just under $7.0 million in 2003. As a percent of the total portfolio, corporate issues are now just 11.6% compared to 31.3% at the end of 2001. While we expect to continue to utilize corporate securities in the future, we will do so only after fully considering the risk involved in doing so.

It is likely, therefore, that most of our securities transactions will involve U.S. agency issues and mortgage backed securities issued by these agencies while bank qualified municipal debt may typically be used to a lesser degree. Equity investments in the Federal Reserve Bank and Federal Home Loan Bank are dictated by our membership in those organizations; no other form of equity investing is likely. This conservative approach clearly favors safety over yield. Combined with the low interest rate environment, our conservative approach caused the average yield on our securities portfolio to fall to 4.48% in 2003 compared to 5.27% in 2002. However, the most recent peer group data which is available shows our yield to exceed the peer average by 21 basis points. In addition, our short-term portfolio structure will allow us to quickly reap the benefits of higher yields in the event interest rates rise. Please refer to Note 3 to our financial statements for additional information about our securities portfolio.

We generally try to minimize our involvement in the overnight federal funds market preferring to fully utilize available funds for higher yielding loan and securities alternatives while relying on maturing securities, loan repayments and deposit growth for liquidity. Nonetheless, at any given time, the execution of specific investing or funding strategies, or normal fluctuations in deposit and loan balances, may require the bank to sell, or buy, funds on an overnight basis. As of the report date we had no federal funds sold and $3 million of overnight borrowings. For the year, federal funds sold averaged $1,525,000 while overnight borrowings averaged $1,079,000.

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Deposits and Other Funding Sources

Our recent efforts to grow deposits throughout our market area despite low interest rates continued to be successful in 2003. Deposits increased in each of our market areas and bankwide, total deposits rose $13.8 million to $161.5 million, a 9.3% increase. This was achieved without the addition of any new facilities during the year and follows a $15.9 million increase in 2002.

We review new deposit accounts, as well as closed accounts, on a weekly basis and have found that funds continue to flow into demand deposit, savings and money market accounts despite relatively low yields and 2003’s improving stock market and mutual fund returns.

Growth in noninterest bearing demand deposits of $3.5 million actually eclipsed the 2002 growth of $2.8 million. At $23.5 million, noninterest bearing deposits comprise 14.55% of total deposits. Savings, money market, and interest bearing checking accounts increased a combined $4.75 million during the year which is 8.1%. Management views these deposits as very stable, long-term sources of funds and believes they play an important role in maintaining liquidity and balancing asset liability concerns.

Our largest deposit category is certificates of deposit. Total certificates at December 31, 2003 were $74.6 million including $11.6 million of individual retirement accounts. Thus, CDs make up 46.2% of total deposits.

In total, CDs grew by $5.6 million in 2003 largely in certificates of $100,000 or more. These jumbo CDs, as they are known, are issued to a variety of local businesses, individuals and fraternal organizations. We do not advertise these funds in any way nor do we accept out of the area or brokered deposits. The growth in these funds is closely associated with the growth in our branch network and our efforts to develop more complete relationships with our customers. A number of these instruments were formerly held in the bank as regular certificates but became “jumbo” when customers added to them, a feature we make available on all of our CD products and which customers clearly appreciate. We monitor our jumbo CDs on a weekly basis and have found that, although they may carry interest rates slightly higher than our regular CDs, they have been a stable source of funds over the years.

Regular CDs, which total $48 million, were nearly steady in 2003. Although customers remain hesitant to invest in long-term certificates, we were particularly successful in promoting our three year certificates for the second consecutive year. In addition to allowing customers to add to the certificate, three year customers can also make limited penalty free withdraws and bump the rate higher should higher rates be offered. These popular features, as well as strategic pricing, resulted in a $7.8 million increase in 2003. We believe these deposits represent a stable source of low cost, mid-term funding which helps to protect against rising interest rates.

With more branch expansion on the horizon in 2004, we believe deposit growth should continue. However, should the equity markets continue their strong performance and other competitive factors materialize, the rate of deposit growth may slow.

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We also utilize borrowings to fund our lending, investing and operating activities. Long-term borrowings includes term loans from the Federal Home Loan Bank of Pittsburgh which are used to fund specific larger loans. The terms of these borrowings are typically structured so that the cash flow provided by the loans closely matches the cash needed to repay the borrowing. During 2003 we borrowed $3 million in this manner. By funding some of our larger loans in this way we not only match cash flow streams, but also maintain an acceptable net interest spread on the loan and preserve operating liquidity.

Our short-term borrowings include overnight borrowings, which were discussed earlier, and repurchase agreements. As of December 31, 2003, we had five repurchase agreements, two more than previously, totaling $19.0 million. The growth in these accounts is directly related to the geographic growth in our marketplace, and the ability of our business development efforts to identify new or previously underserved business opportunities.

Four of these repurchase agreements are expected to provide a generally stable source of funds. The fifth will exhibit seasonal fluctuations. Because of this, we may acquire other forms of debt financing to support our funding needs when seasonal balances fall. Such a possibility has been addressed as part of our liquidity management program and additional sources of financing, if needed, are readily available.

Capital Resources

Total capital of $20.5 million closely approximates last year’s $20.6 million although our asset growth did cause our capital to asset ratio to fall from 11.3% to 9.8%. This is still slightly higher than the peer group average, however.

Typically, a strong earnings performance such as ours would have increased capital. However, a decrease in the market value of our available for sale securities, the payment of dividends to our shareholders, and the purchase of treasury stock combined to offset the positive effect of our income on capital. An analysis of our equity accounts can be found in the Statement of Changes in Shareholders’ Equity. Note 13 to the financial statements provides a summary of our risk based capital ratios and the related regulatory requirements. As the note shows, we continue to exceed all such requirements by a significant margin. Our projections for 2004 indicate that this is likely to remain the case. As of December 31, 2003 we were not aware of any trends or uncertainties which we expect to materially impair our capital position. We expect capital to remain more than 9% of assets at this time.

Citizens stock is traded on the over the counter market under the symbol CIWV. Trading activity has historically been light and 32,070 shares were traded in 2003. Included in this total are 15,145 shares of treasury stock we purchased during the year. Such purchases are made from time to time on the open market as permitted under our stock repurchase policy when the Board of Directors considers it be in the best interest of the company to do so. The price of stock ranged from $35.00 to $43.25 in 2003 and ended the year at $42.50.

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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. Management believes that efficiently managing liquidity minimizes the bank’s involvement in the overnight federal funds markets and enhances earnings. Liquidity is provided by various internal sources including unpledged investment securities, federal funds sold, loan repayments and the ability to maintain a stable or growing deposit base. In addition, external sources of liquidity are also available from correspondent banks. Unused lines of credit with these banks approximate $66,600,000 and are available to provide liquidity in the event it is needed.

We monitor our liquidity on a continual basis and prepare formal liquidity forecasts quarterly utilizing the next twelve months projected loan, deposit and capital expenditure levels. Historically, we have funded our growth internally keeping our overnight lending and borrowing to a minimum and only occasionally securing term debt to finance certain larger loans. Current projections indicate that we are likely to need additional external funding during 2004.

This need arises as we expect loan growth to exceed deposit growth by approximately $3.6 million and the construction projects at our branch facilities are expected to require approximately $867,000 of additional funds. In addition, while investment securities with a book value of $15.4 million will mature in 2004, approximately $8.2 are pledged and will, therefore, be unavailable to provide liquidity. Further, as noted earlier, one repurchase agreement is expected to show seasonal variations in amount and will likely decrease during the warm weather months. Therefore, it is during this time that our needs will be at their highest. One potential source of liquidity during the year, however, comes from approximately $7.4 million of callable securities which are expected to be called.

Ample funding sources, including the Federal Home Loan Bank, and other correspondents, are available to meet these needs. We do not believe this need poses a risk to earnings, capital, customers or other business partners.

Impact of Inflation

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

However, inflation does affect noninterest expenses such as personnel

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costs and the cost of services and supplies we use. Management attempts to offset such increases by controlling the level of noninterest expenditures and increasing levels of noninterest income. Because inflation rates have generally been low during the time covered by the accompanying consolidated financial statements, the impact of inflation on our earnings has not been significant.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The primary form of market risk facing Citizens is interest rate risk. This is the risk that changes in the interest rates earned on loans, securities and other interest earning assets as well as in the interest rates paid on interest bearing liabilities could negatively impact earnings. Some amount of interest rate risk is inherent and appropriate in banking. Other types of risk, such as foreign currency exchange risk, commodity price risk and equity price risk are less crucial to us.

We control interest rate risk through our interest rate sensitivity management program, also known as asset/liability management. The objective of this program is to maximize net interest income while minimizing the risk of adverse effects from changing interest rates. This is done by controlling the mix and maturities of interest sensitive assets and liabilities. The bank has established an asset/liability committee for this purpose. The bank uses several techniques to monitor and control interest rate risk including gap analysis, interest rate shock testing and other forms of simulation modeling.

Gap analysis measures the amount of interest earning assets and interest bearing liabilities that could reprice in a given time period. When more assets could reprice the gap is said to be positive. This is normally beneficial when interest rates rise. When more liabilities can reprice, the gap is negative which is usually good as interest rates fall. Normally, the size of the gap is expressed as a percent of total assets.

Gap analysis is a static measure and does not consider future changes in the volume of rate sensitive assets and liabilities or the possibility that interest rates of various products may not change by the same amount or at the same time. Therefore, certain assumptions must be made in constructing the gap. We monitor our gap on a monthly basis. Our gap position at December 31, 2003 is presented in the following table:

GAP Analysis Table

(in thousands)