Forward Looking Statements

Certain statements contained in this Form 10-Q, in other filings made by the Company with the U.S. Securities and Exchange Commission (SEC), and in the Company's press releases or other shareholder communications are forward-looking statements, as that term is defined in U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in the Company's affairs or the industry in which it conducts business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "would be," "will," "intends to," "projects" or similar expressions or the negative thereof.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company also advises readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks which are inherent in the Company's lending and investment activities, legislative changes, changes in the cost of funds, demand for loan products and financial services, changes in accounting principles, competitive and regulatory factors and successful execution of the Company's strategy and its Strategic Growth and Diversification Plan could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. For further discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements see "Part II. Item 1A. Risk Factors" of this Form 10-Q as well as "Part I. Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2008. Such forward-looking statements are not guarantees of future performance. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Recent Market Developments

Deposits in Citizens Financial Bank (the Bank) are insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum amount, which is generally $250,000 (in effect until December 31, 2013) per depositor subject to aggregation rules. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.

As disclosed in the Company's 2008 Annual Report on Form 10-K, the FDIC adopted a Restoration Plan to restore the reserve ratio of the Deposit Insurance Fund (DIF) to 1.15%. Effective April 1, 2009, the Restoration Plan provides base assessment rate adjustments downward for unsecured debt, upward for secured liabilities, and, for certain institutions, upward for brokered deposits. For most institutions, assessment rates are based on weighted-average supervisory ratings and financial ratios. Under the regulations of the FDIC, currently in effect, insurance assessments range between 0.07% and 0.78%, depending on a bank's risk classification, as well as its unsecured debt, secured liabilities and brokered deposits.

In addition, under an interim rule, the FDIC imposed a five basis point emergency special assessment on insured depository institutions on June 30, 2009. The special assessment is payable on September 30, 2009. The interim rule also authorizes the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance.

Increases in industry-wide deposit insurance premiums resulted in an additional $923,000 of FDIC insurance expense for the Bank during the second quarter of 2009 compared to the second quarter of 2008. Based upon the Restoration Plan, the emergency assessment of five basis points on June 30, 2009 and the proposed five basis point additional emergency special assessment after June 30, 2009, the Company anticipates its FDIC insurance expense will increase operating expenses for the year ended December 31, 2009.

Overview

Our results for the quarter ended June 30, 2009 were positive with net income totaling $670,000 and diluted earnings per share of $0.06. Our core business operations have improved in the midst of continued economic pressures and uncertainty. Opportunities for originating new loans are increasingly available which has allowed us to be very selective in the types of credits we choose to originate. Although total loans remained stable compared to December 31, 2008, total commercial loans increased $10.3 million from December 31, 2008. We continue to reduce our exposure to construction and land development loans and loan syndications.

Improving asset quality remains our number one strategic focus; however, economic conditions, including rising unemployment, are impacting our borrowers' ability to service their debt obligations. As a result of our efforts to improve overall asset quality, growth in non-performing assets has slowed significantly over the past two quarters as total non-performing assets increased modestly to $60.9 million.

The deposit environment has become more favorable with consumer savings rates on the rise and overall pricing within the industry being more rational than in the recent past. We continue to focus on building new and deepening existing relationships while remaining disciplined in our pricing, particularly our certificates of deposit. Total non-municipal core deposits increased $15.6 million from December 31, 2008.

Our net interest margin continues to benefit from relatively lower interest rates and lower premium amortization on FHLB debt while non-interest expense has been negatively affected by increased compensation, FDIC insurance premiums and professional fees.

Retention and growth of capital remains a focal point with us and within our industry. Our tangible common equity increased to $115.5 million, or 10.55% of tangible assets at June 30, 2009. The Bank's risk-based capital ratio was stable at 13.21% at June 30, 2009 and December 31, 2008. This ratio continues to be in excess of the regulatory requirements to be considered "well-capitalized" of 10%. At June 30, 2009, the Bank's risk-based capital was $27.8 million in excess of amounts required by regulatory agencies to be "well-capitalized."

Progress on Strategic Growth and Diversification Plan

The Company's Strategic Growth and Diversification Plan is built around four core objectives: decreasing non-performing loans; ensuring costs are appropriate given the Company's targeted future asset base; growing while diversifying by targeting small and mid-sized business owners for relationship-based banking opportunities; and expanding and deepening the Company's relationships with its clients by meeting a higher percentage of the clients' financial service needs.

While progress was made towards all core objectives, management is not satisfied with the rate of progress towards certain objectives. Although the ability to limit increases in non-performing assets during a period of significant economic duress is encouraging, management remains committed to the goal of aligning non-performing asset ratios with peer levels. In addition, operating costs remain relatively high, and it is increasingly clear that the Company's ability to achieve targeted earning asset levels will be hampered by current economic and regulatory conditions. As a result, management continues to focus on opportunistically cutting costs.

The Company's success in attracting new business banking clients, although not yet reflected in higher earning asset levels, played a significant role in its ability to grow deposits during 2009. Utilizing cross functional teams of business and retail calling officers, the Bank launched a dedicated effort to sell personal deposit and loan accounts to the owner/operators of its business clients, which resulted not only in strong deposit growth, but also in significant increases in the depth of the Bank's relationships with this important customer segment. These achievements lead management to believe the Company is better positioned to achieve quality, relationship-based loan growth as the economy recovers.

Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with U.S. GAAP which require the Company to establish various accounting policies. Certain of these accounting policies require management to make estimates, judgments or assumptions that could have a material effect on the carrying value of certain assets and liabilities. The estimates, judgments and assumptions used by management are based on historical experience, projected results, internal cash flow modeling techniques and other factors which management believes are reasonable under the circumstances.

The Company's significant accounting policies are presented in Note 1 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of the Company's Annual Report on Form 10-K for December 31, 2008. These policies, along with the disclosures presented in other financial statement notes and in this management's discussion and analysis, provide information on the methodology used for the valuation of significant assets and liabilities in the Company's financial statements. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for losses on loans, valuations and impairments of securities and the accounting for income taxes to be critical accounting policies.

Allowance for Losses on Loans. The Company maintains an allowance for losses on loans at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for losses on loans represents management's estimate of probable incurred losses in the loan portfolio at each statement of condition date and is based on the review of available and relevant information.

One component of the allowance for losses on loans contains allocations for probable inherent but undetected losses within various pools of loans with similar characteristics pursuant to SFAS No. 5, Accounting for Contingencies. This component is based in part on certain loss factors applied to various loan pools as stratified by the Company. In determining the appropriate loss factors for these loan pools, management considers historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.

The second component of the allowance for losses on loans contains allocations for probable losses that have been identified relating to specific borrowing relationships pursuant to SFAS No. 114. This component consists of expected losses resulting in specific credit allocations for individual loans not considered within the above mentioned loan pools. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. The Company assesses the adequacy of the allowance for losses on loans on a quarterly basis and adjusts the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at a level deemed appropriate by management. The evaluation of the adequacy of the allowance for losses on loans is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from management estimates, an additional provision for losses on loans could be required which could adversely affect earnings or the Company's financial position in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for losses on loans for the Bank and the carrying value of its other non-performing loans, based on information available to them at the time of their examinations. Any of these agencies could require the Bank to make additional provisions for losses on loans.

Securities. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The fair values of the Company's securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company's fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in FSP 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments and the newly adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Income Tax Accounting. Income tax expense recorded in the Company's consolidated statements of income involves management's interpretation and application of certain accounting pronouncements and federal and state tax codes. As such, the Company has identified income tax

accounting as a critical accounting policy. The Company is subject to examination by various regulatory taxing authorities. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management's current assessment of tax liabilities, the impact of which could be significant to the consolidated results of operations and reported earnings. Management believes the tax liabilities are adequately and properly recorded in the Company's consolidated financial statements.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables provide information regarding (i) the Company's interest
income recognized from interest-earning assets and their related average yields;
(ii) the amount of interest expense realized on interest-bearing liabilities and
their related average rates; (iii) net interest income; (iv) interest rate
spread; and (v) net interest margin. Information is based on average daily
balances during the periods indicated.

                                                                        Three Months Ended June 30,
                                                           2009                                             2008
                                         Average                         Average          Average                         Average
                                         Balance        Interest        Yield/Cost        Balance        Interest        Yield/Cost
                                                                          (Dollars in thousands)
Interest-earning assets:
Loans receivable
(1)                                    $   750,861     $     9,807             5.24 %   $   743,097     $    11,296             6.11 %
Securities
(2)                                        232,853           3,020             5.13         254,197           3,172             4.94
Other interest-earning assets (3)           29,766             137             1.85          74,090             564             3.06
Total interest-earning assets            1,013,480          12,964             5.13       1,071,384          15,032             5.64

Non-interest earning
assets                                      86,270                                           83,272
Total
assets                                 $ 1,099,750                                      $ 1,154,656

Interest-bearing liabilities:
Deposits:
Checking
accounts                               $   135,470             115             0.34     $   109,548             169             0.62
Money market
accounts                                   158,341             286             0.72         198,687           1,012             2.05
Savings
accounts                                   119,879             104             0.35         124,430             145             0.47
Certificates of
deposit                                    367,418           2,244             2.45         369,584           3,228             3.51
Total deposits                             781,108           2,749             1.41         802,249           4,554             2.28

Borrowed money:
Other short-term borrowed money (4)         10,870              20             0.74          29,311             124             1.70
FHLB borrowed money (5)(6)                 117,170             860             2.90         115,152           1,657             5.69
Total borrowed
money                                      128,040             880             2.72         144,463           1,781             4.88
Total interest-bearing liabilities         909,148           3,629             1.60         946,712           6,335             2.69
Non-interest bearing
deposits                                    64,509                                           61,616
Non-interest bearing liabilities            14,520                                           15,910
Total
liabilities                                988,177                                        1,024,238
Shareholders'
equity                                     111,573                                          130,418
Total liabilities and shareholders'
equity                                 $ 1,099,750                                      $ 1,154,656
Net interest-earning
assets                                 $   104,332                                      $   124,672
Net interest income / interest rate
spread                                                 $     9,335             3.53 %                   $     8,697             2.95 %
Net interest
margin                                                                         3.69 %                                           3.26 %
Ratio of average interest-earning
assets
to average interest-bearing
liabilities                                                                  111.48 %                                         113.17 %

(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis.

(2) Average balances of securities are based on amortized cost.

(3) Includes Federal Home Loan Bank (FHLB) stock, money market accounts, federal funds sold and interest-earning bank

deposits.

(4) Includes federal funds purchased, overnight borrowings from the Federal Reserve Board discount window and repurchase agreements (Repo Sweeps).

(5) The 2009 period includes an average of $117.2 million of contractual FHLB borrowed money reduced by an average of $71,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $61,000 of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 2.72% compared to an average contractual rate of 2.53%.

(6) The 2008 period includes an average of $116.0 million of contractual FHLB borrowed money reduced by an average of $870,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $449,000 of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 4.88% compared to an average contractual rate of 3.63%.

                                                                         Six Months Ended June 30,
                                                           2009                                             2008
                                         Average                         Average          Average                         Average
                                         Balance        Interest        Yield/Cost        Balance        Interest        Yield/Cost
                                                                          (Dollars in thousands)
Interest-earning assets:
Loans receivable
(1)                                    $   751,383     $    19,752             5.30 %   $   764,986     $    24,084             6.33 %
Securities
(2)                                        238,507           6,063             5.06         246,569           6,251             5.01
Other interest-earning assets (3)           31,619             380             2.42          60,272           1,011             3.37
Total interest-earning assets            1,021,509          26,195             5.17       1,071,827          31,346             5.88

Non-interest earning
assets                                      85,578                                           86,188
Total
assets                                 $ 1,107,087                                      $ 1,158,015

Interest-bearing liabilities:
Deposits:
Checking
accounts                               $   123,633             207             0.34     $   106,617             357             0.67
Money market
accounts                                   160,046             618             0.78         190,190           2,265             2.39
Savings
accounts                                   118,259             206             0.35         124,725             325             0.52
Certificates of
deposit                                    368,493           4,814             2.63         377,811           7,295             3.88
Total deposits                             770,431           5,845             1.53         799,343          10,242             2.58

  Borrowed money:
    Other short-term borrowed money
(4)                                         14,146              53             0.76          23,394             238             2.04
    FHLB borrowed money (5)(6)             132,117           1,787             2.69         126,421           3,604             5.64
    Total borrowed
money                                      146,263           1,840             2.50         149,815           3,842             5.07
Total interest-bearing liabilities         916,694           7,685             1.69         949,158          14,084             2.98
Non-interest bearing
deposits                                    64,180                                           61,820
Non-interest bearing liabilities            14,205                                           15,705
Total
liabilities                                995,079                                        1,026,683
Shareholders'
equity                                     112,008                                          131,332
. . .