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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission file number 2-96144

CITIZENS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

(304) 636-4095

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

This report contains 28 pages.

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FORM 10-Q

CITIZENS FINANCIAL CORP.

Quarter Ended March 31, 2004

INDEX

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PART I ITEM I – FINANCIAL INFORMATION

CITIZENS FINANCIAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

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

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CITIZENS FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands of dollars, except per share data)

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

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CITIZENS FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands of dollars, except per share data)

(Continued)

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

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CITIZENS FINANCIAL CORP.

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of dollars)

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

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CITIZENS FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands of dollars)

Three Months Ended March 31, 2004 and 2003

(unaudited)

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

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CITIZENS FINANCIAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

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

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CITIZENS FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

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

The condensed consolidated statements contained herein include the accounts of Citizens Financial Corp. and its wholly-owned subsidiaries Citizens National Bank (“the bank”) and Citizens Financial Services, LLC. All significant intercompany balances and transactions have been eliminated. The information contained in the financial statements is unaudited except where indicated. In the opinion of management, all adjustments for a fair presentation of the results of the interim periods have been made. All such adjustments were of a normal, recurring nature. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The financial statements and notes included herein should be read in conjunction with those included in Citizens’ 2003 Annual Report to Shareholders and Form 10-K.

NOTE 2 – RECLASSIFICATIONS

Certain accounts in the condensed consolidated financial statements for 2003, as previously presented, have been reclassified to conform with current year classifications.

NOTE 3 – SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2004 and December 31, 2003 are summarized as follows (in thousands):

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Provided below is a summary of securities available for sale which were in an unrealized loss position at March 31, 2004. None of these securities has been in a continuous loss position for twelve months or more. We believe the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer. Management intends, and has the ability, to hold these securities until maturity at which time the full value is expected to be recovered.

The maturities, amortized cost and estimated fair values of the bank’s securities at March 31, 2004 are summarized as follows (in thousands):

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Mortgage backed securities have remaining contractual maturities ranging from 2.75 to 12.25 years and are reflected in the maturity distribution schedule shown above based on their anticipated average life to maturity, which ranges from 1.03 to 5.24 years. The company’s equity securities are required to be held for membership in the Federal Reserve and Federal Home Loan Bank and are shown at cost since they may only be sold to the respective issuer or another member at par.

The proceeds from sales, calls and maturities of securities, including principal payments received on mortgage backed securities, and the related gross gains and losses realized for the three month periods ended March 31, 2004 and 2003 are as follows (in thousands):

At March 31, 2004 and December 31, 2003 securities with an amortized cost of $26,530,000 and $27,063,000, respectively, with estimated fair values of 27,466,000 and $27,920,000, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required or permitted by law.

At March 31, 2004, the company had a concentration within its corporate debt securities classification which included obligations of financial services industry companies with global operations having an approximate amortized cost of $2,331,000 and an estimated fair value of $2,390,000. There were no concentrations with any one issuer.

NOTE 4 – LOANS

Total loans are summarized as follows (in thousands):

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At March 31, 2004 our recorded investment in impaired loans was $1,128,000. The valuation allowance assigned to these loans totaled $404,000. Our average investment in the impaired loans was $1,127,000 during the quarter. The amount of interest income recorded on them in the first quarter was $8,000 while the amount of interest collected was $12,000. As explained in the Management’s Discussion section of this report changes in the risk characteristics of these loans occurring subsequent to the report date cause us to expect to charge-off approximately $934,000 of our impaired loans during the second quarter.

Loans in a nonaccrual status was $0 and $16,000 at March 31, 2004 and December 31, 2003, respectively.

NOTE 5 – ALLOWANCE FOR LOAN LOSSES

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

NOTE 6 – DEPOSITS

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

NOTE 7 – BORROWINGS

Short-term borrowings consist of securities sold under agreements to repurchase (repurchase agreements) and, when required, overnight advances under a line of credit with the Federal Home Loan Bank of Pittsburgh (FHLB). No such overnight advances were outstanding at March 31, 2004 while $3,000,000 was outstanding at December 31, 2003.

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Long-term borrowings are also obtained from the FHLB but are used to finance specific lending activities.

NOTE 8 – EMPLOYEE BENEFIT PLANS

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

Although our pension plan has provided a net periodic benefit in recent years, no benefit or cost was recorded in the first quarter of 2004 based on available actuarial data. We expect to receive an updated actuarial report during the second quarter of 2004 which will include estimated net periodic benefit or cost. Expense, or benefit as the case may be, will be adjusted at that time.

As described in our year end 2003 financial statements, we do not expect to make any contributions to our pension plan or other postretirement plans in 2004.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

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

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

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

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

NOTE 11 – EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares outstanding during the period. For the three months ended March 31, 2004 and 2003 the weighted average number of shares were 631,378 and 646,523, respectively. During the periods ended March 31, 2004 and 2003 the company did not have any dilutive securities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion and analysis presents the significant changes in financial condition and 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. Amounts and percentages used in this discussion have been rounded.

DESCRIPTION OF BUSINESS

We are a $206 million, one-bank holding company which provides loan, deposit, trust, brokerage and other banking and banking related services to customers in northcentral and eastern West Virginia and nearby areas through the six branch offices of our wholly-owned subsidiary bank.

FORWARD LOOKING STATEMENTS

This report contains forward looking statements which reflect our current expectations based on information available to us. These forward looking statements involve uncertainties 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”, “anticipated”, “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.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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.

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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 2003 Annual Report on 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

Throughout the first quarter of 2004 we continued efforts to make our full array of services more accessible to customers in our market area. To that end, the construction of our new Marlinton branch, as well as the expansion of our Petersburg facility, continued and we expect to complete both facilities during the second quarter. We also installed two new ATMs in the Snowshoe resort area and are currently in the process of establishing internet banking services. We believe that these improved delivery channels, together with our comprehensive selection of services and our commitment to superior customer service, will allow us to increase our number of services per household and gain market share.

RESULTS OF OPERATIONS

EARNINGS SUMMARY

Net income for the first quarter of 2004 of $534,000 was $23,000 more than in the first quarter of 2003. On a per share basis earnings increased $.06 to $.85. Return on average equity also improved from 9.95% to 10.31%. Return on average assets, however, fell from $1.12% to 1.03% due to asset growth. Additional details concerning our results of operations are discussed in the following sections of this report.

NET INTEREST INCOME

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

Net interest income for the quarter of $2,110,000 was $103,000, or 5.1%, more than in the first quarter of 2003. On a tax equivalent basis, net interest income rose $106,000 to $2,168,000. These improvements can be traced to changes which are similar to those we have experienced over the last several years; rising levels of interest earning assets and interest bearing liabilities as well as falling interest rates.

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Our average earning assets of $195,691,000 were more than $24 million greater than in the first quarter of 2003 due mostly to loan growth. The rate of which these assets produced income, however, fell 84 basis points to 5.94%. As a result, tax equivalent interest income only increased by $32,000 to $2,890,000.

A somewhat greater benefit was realized in the $74,000 reduction in interest expense. Here again growth, a $23 million increase in interest bearing liabilities, was offset by a 52 basis point drop in the cost of those liabilities.

As a result of these changes our net interest margin, which relates net interest income to earning assets, fell from 4.87% in the first quarter of 2003 to $4.44% in the current quarter. Such decreases in margin have been common throughout the banking industry in recent years due to the historically low levels of interest rates. At 4.44%, however, our margin remains above our peer group average. Additional information about interest rate risk is presented later in this report.

PROVISION FOR LOAN LOSSES

The provision for loan losses is management’s estimate of the amount which must be charged against current earnings in order to maintain the allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated based on quarterly evaluations of the loan portfolio. The provision for loan losses was $90,000 during the first quarter of 2004 and $81,000 during the first quarter of 2003. The factors which we consider in establishing the provision for loan losses, and in analyzing the allowance for loan losses, are discussed later in the Allowance for Loan Losses section of this report. As explained in that section, we expect our provision for loan losses to increase in the second quarter of 2004.

NONINTEREST INCOME

Noninterest income, which includes all revenues other than interest and fee income related to earning assets, fell slightly from $329,000 in the first quarter of 2003 to $307,000 this quarter.

The primary cause of this decrease was a $57,000 drop in trust income which was unusually high last year because of the settlement of several large estates. Another significant source of income over the past few years has come from our secondary market loan program. Higher mortgage rates and the refinancing boom of recent years have resulted in fewer mortgages being written and, as a result, our quarterly income has fallen from $23,000 to $9,000. While warmer weather usually brings an increase in mortgage activity, higher interest rates may continue to depress our mortgage fee income for the foreseeable future.

The remaining components of noninterest income were either constant or showed some increase. With the exception of $19,000 in security gains, these items are generally of a recurring nature. Security gains, which resulted from the sale of one corporate bond made to improve the credit quality of the portfolio, are not expected during the remainder of the year.

NONINTEREST EXPENSE

Noninterest expense includes all items of expense other than interest expense, the provision for loan losses, and income taxes. Total noninterest expense of $1,624,000 is 9.5% more than in the first quarter of last year. This increase, however, was not unexpected as our budgeted level for the quarter was $1,645,000.

Most significant were increases in data processing of $17,000, salaries and employee benefits of $34,000, and other expense of $52,000. In the case of data processing, the higher costs are largely the result of operating two additional ATMs. Salaries and benefits increased as a result of higher salaries from normal merit increases and additions to staff, the absence of pension benefits recognized under applicable accounting standards, and an increase in the cost of providing

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retirement benefits to directors and selected officers. In total, those three items resulted in a $99,000 increase in expense. They were offset, however, by lower group insurance costs and an increase in the deferral of labor costs incurred to originate loans which together amounted to $75,000. The increase in other expense is due to several items the largest of which is $23,000 related to holding and selling of foreclosed real estate.

With the construction of one new branch facility and the expansion of another expected to be completed during the second quarter of 2004, noninterest expense is expected to increase during the remainder of 2004. For the year we anticipate total noninterest expense may exceed 2003 by approximately $575,000.

INCOME TAXES

Our provision for income taxes, which includes both federal and state income taxes, was $169,000 during the first quarter. This is down from last year’s $261,000 due to lower levels of taxable income and the receipt of approximately $32,000 in refunds resulting from the filing of amended returns. We have not been subject to the federal alternative minimum tax during the periods covered by this report nor do we expect to be subject to it in the foreseeable future.

FINANCIAL CONDITION

SUMMARY

Our pattern of balance sheet growth continued during the first quarter although at a somewhat slower pace than in 2003. Deposit growth for the quarter totaled $3,784,000 while loan growth of $857,000 was somewhat masked by the payoff of loans totaling more than $2 million in late March. Total assets declined due to the anticipated reduction of a repurchase agreement with a customer involved in a seasonal industry. We believe this agreement will continue to exhibit clear seasonal patterns and expect it to increase in amount again next winter. A further discussion of our major balance sheet categories, as well as liquidity and the impact of inflation, follows.

LOAN PORTFOLIO

Total loans at March 31, 2004 of $136,691,000 were temporarily depressed due to the loan payoff noted previously but were still $936,000 more than at year end. Overall, loan growth has been about as expected as our budgeted loan volume at quarter end was $136,200,000.

We continue to see erosion in our consumer lending efforts in the face of aggressive financing offers from auto manufacturers, questions about the strength of our local and national economy, and the resultant consumer uncertainty. Consequently, consumer loans fell by $474,000 during the quarter to $11,922,000.

Although higher interest rates have reduced demand for them, fixed rate residential mortgages, with their well developed sales and distribution channels continue to provide strong competition for our own variable rate mortgage products. Despite this, we are pleased that our residential mortgage portfolio increased by $1,462,000 during the quarter to $52,479,000. Commercial real estate loans, which grew significantly in 2003, fell by $774,000 during the quarter as a result of the loan payoff noted earlier. However, we expect this category of loans to show continued strength during the remainder of the year. Other forms of commercial lending grew modestly to $25,746,000 during the quarter.

ALLOWANCE FOR LOAN LOSSES

We maintain our allowance for loan losses at a level we consider adequate to provide for losses that can be reasonably anticipated based on quarterly evaluations of the loan portfolio. This evaluation considers the potential loss in

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