EXHIBIT 99.2

90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
Phone: (570) 724-3411 Fax: (570) 723-8097
E-Mail: cnemail@cnbankpa.com Web Page: http://www.cnbankpa.com
Stock Symbol: CZNC

Chartered 1864

FEDERAL DEPOSIT INSURANCE CORP

JUNE 30, 2006 QUARTERLY REPORT

Dear Shareholder:

Since the first quarter’s shareholder communication, there has been no improvement in the economic conditions that are tightening the interest rate spread for banks in general and for C&N specifically. The Federal Reserve Open Market Committee has increased the Fed Funds target rate two more times during the second quarter. That’s a total of 17 quarter percentage point increases since June of 2004 to a present target rate of 5.25%. The effect of these increases on banks has been to raise the price they must pay for deposits and borrowed funds. Rates banks receive on new loans and investments have increased, but much less. Thus even though C&N has been successful adding about $45 million (7.57%) to its loan portfolio and increasing the interest income by $2.2 million (7.59%), interest expense has increased by $2.3 million (22.6%). The result is a slight shrinking of the interest margin as compared to 2005. Other income and capital gains are up, but not enough to cover the increase in other expenses, which have increased primarily due to the new branches and staffing associated with our Lycoming County initiative and the overhead of the new administration building. These increased costs are investments we are making in your company to improve revenue and income opportunities as the new branches grow and become profitable and when the rate curve returns to a more historically positive slope.

During the past quarter, we have been shrinking our investments and borrowed funds due to the lack of interest spread opportunities. Borrowed funds are down nearly $75 million (26.4%) and available-for-sale securities have been reduced by nearly $91 million. We have sold a substantial portion of our municipal bond portfolio to allow us to use tax credits and to reduce our possible exposure to the federal alternative minimum tax.

Our Trust and Financial Management Group grew total assets under management by over $75 million (18.7%) since last year, and the revenue is increasing due both to growth and fee restructuring.

In June, the Russell 2000 index was reconstituted based on company market capitalizations. As a result C&N has been dropped from the index. We believe a great deal of our stock’s price volatility during the past year was due to being part of that index.

Craig G. Litchfield
Chairman, President & CEO
 

CITIZENS & NORTHERN CORPORATION
BOARD OF DIRECTORS

Craig G. Litchfield Chairman of the Board

Dennis F. Beardslee	Leo F. Lambert
R. Robert DeCamp	Edward L. Learn
Jan E. Fisher	Edward H. Owlett, III
R. Bruce Haner	Leonard Simpson
Susan E. Hartley	James E. Towner
Karl W. Kroeck	Ann M. Tyler

CITIZENS & NORTHERN BANK
OFFICES

428 S. Main Street, ATHENS, PA 18810	570-888-2291
111 Main Street, DUSHORE, PA 18614	570-928-8124
Main Street, EAST SMITHFIELD, PA 18817	570-596-3131
104 Main Street, ELKLAND, PA 16920	814-258-5111
230-232 Railroad Street, JERSEY SHORE, PA 17740	570-398-4555
102 E. Main Street, KNOXVILLE, PA 16928	814-326-4151
Main Street, LAPORTE, PA 18626	570-946-4011
Main Street, LIBERTY, PA 16930	570-324-2331
1085 S. Main Street, MANSFIELD, PA 16933	570-662-1111
RR 2 Box 3036, MONROETON, PA 18832	570-265-2157
3461 Rte.405 Highway, MUNCY, PA 17756	570-546-6666
Thompson Street, RALSTON, PA 17763	570-995-5421
1827 Elmira Street, SAYRE, PA 18840	570-888-2220
2 E. Mountain Ave., SO. WILLIAMSPORT, PA 17702	570-601-3016
41 Main Street, TIOGA, PA 16946	570-835-5236
428 Main Street, TOWANDA, PA18848	570-265-6171
Court House Square, TROY, PA 16947	570-297-2159
90-92 Main Street, WELLSBORO, PA 16901	570-724-3411
130 Court Street, WILLIAMSPORT, PA 17701	570-320-0100
1510 Dewey Ave., WILLIAMSPORT, PA 17702	570-323-9305
Route 6, WYSOX, PA 18854	570-265-9148

TRUST & FINANCIAL MANAGEMENT GROUP

90-92 MainStreet,Wellsboro,PA16901	800-487-8784
428 Main Street, Towanda, PA 18848	888-987-8784
503 N. Elmira Street, Sayre, PA 18840	888-760-8192
3461 Rte 405 Highway, Muncy, PA 17756	570-546-6666
130 Court Street, Williamsport, PA 17701	570-601-6000
ACCOUNT SERVICES - 90-92 Main St., Wellsboro, PA 16901	800-726-2265
BANKCARD SERVICES - 10 Nichols St., Wellsboro PA 16901	800-676-6639
CASH MANAGEMENT / INTERNET BANKING — 10 Nichols St., Wellsboro, PA 16901	570-724-0266
www.cnbankpa.com
FUNDS MANAGEMENT — 10 Nichols St., Wellsboro, PA 16901	800-577-9397
www.fmt@cnbankpa.com
C&N FINANCIAL SERVICES CORPORATION - 68 Main Street, Wellsboro, PA	866-ASK-CNFS
www.cnfinancialservices.com

CANISTEO VALLEY CORPORATION

3 Main Street, Canisteo, NY 14823 607-698-4295

FIRST STATE BANK
OFFICES

3 Main Street, CANISTEO, NY 14823	607-698-4295
6250 County Route 64, HORNELL, NY 14843	607-324-4081
www.fsbcanisteo.com

CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)

	3 MONTHS ENDED					6 MONTHS ENDED
	JUNE					JUNE
	2006			2005		2006		2005
	(Current)			(Prior Yr)		(Current)		(Prior Yr)
Interest and Dividend Income	$	15,984		$	14,908	$	31,847	$	29,601
Interest Expense		7,566			6,155		14,844		12,112
Interest Margin		8,418			8,753		17,003		17,489
(Credit)/Provision for Loan Losses		(300	)		375		300		750
Interest Margin After Provision for Loan Losses		8,718			8,378		16,703		16,739
Other Income		1,937			1,889		3,726		3,592
Realized Gains on Securities, Net		1,333			929		2,648		1,995
Other Expenses		7,976			7,173		15,819		14,301
Income Before Income Tax Provision		4,012			4,023		7,258		8,025
Income Tax Provision		813			725		1,239		1,432
NET INCOME	$	3,199		$	3,298	$	6,019	$	6,593
PER SHARE DATA (**):
Net Income — Basic	$	0.39		$	0.40	$	0.73	$	0.80
Net Income — Diluted	$	0.39		$	0.39	$	0.72	$	0.79
Dividend Per Share	$	0.24		$	0.23	$	0.48	$	0.46
Number Shares Used in Computation — Basic		8,281,011			8,292,574		8,288,921		8,283,921
Number Shares Used in Computation — Diluted		8,303,913			8,356,885		8,319,241		8,351,384
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Per Share Data) (Unaudited)
	JUNE 30,			JUNE 30,
	2006			2005
ASSETS
Cash & Due from Banks	$	42,084		$	16,653
Available-for-Sale Securities		362,573			453,288
Loans, Net		650,294			604,514
Intangible Assets		3,319			—
Other Assets		65,437			59,246
TOTAL ASSETS	$	1,123,707		$	1,133,701
LIABILITIES
Deposits	$	756,474		$	685,105
Repo Sweep Accounts		23,450			21,812
Total Deposits and Repo Sweeps		779,924			706,917
Borrowed Funds		208,389			283,349
Other Liabilities		6,768			10,619
TOTAL LIABILITIES		995,081			1,000,885
SHAREHOLDERS’ EQUITY
Shareholders’ Equity, Excluding Net Unrealized Gains/Losses on Available-for sale Securities		128,715			124,338
Net Unrealized Gains/Losses on Available-for-sale Securities (*)		(89	)		8,478
TOTAL SHAREHOLDERS’ EQUITY		128,626			132,816
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	1,123,707		$	1,133,701

CONSOLIDATED FINANCIAL HIGHLIGHTS
(In Thousands, Except Per Share Data) (Unaudited)

	6 MONTHS ENDED						%
	JUNE						INCREASE
	2006			2005			(DECREASE)
EARNINGS PERFORMANCE
Net Income	$	6,019		$	6,593			-8.71	%
Return on Average Assets		1.05	%		1.17	%		-10.26	%
Return on Average Assets, Excluding Unrealized Gains/Losses on Available-for-Sale Securities (***)		1.05	%		1.18	%		-11.02	%
Return on Average Equity		9.17	%		9.96	%		-7.93	%
Return on Average Equity, Excluding Unrealized Gains/Losses on Available-for-Sale Securities (***)		9.40	%		10.67	%		-11.90	%
BALANCE SHEET HIGHLIGHTS
Total Assets	$	1,123,707		$	1,133,701			-0.88	%
Available-for-Sale Securities		362,573			453,288			-20.01	%
Loans (Net)		650,294			604,514			7.57	%
Allowance for Loan Losses		8,062			7,037			14.57	%
Deposits and Repo Sweep Accounts		779,924			706,917			10.33	%
Trust Assets Under Management		476,437			401,360			18.71	%
SHAREHOLDERS’ VALUE (PER SHARE) (**)
Net Income — Basic	$	0.73		$	0.80			-8.75	%
Net Income — Diluted	$	0.72		$	0.79			-8.86	%
Dividends	$	0.48		$	0.46			4.35	%
Book Value	$	15.54		$	16.02			-3.00	%
Book Value, Excluding Unrealized Gains/Losses on Available-for- sale Securities (***)	$	15.55		$	14.99			3.74	%
Market Value (Last Trade)	$	23.62		$	31.24			-24.39	%
Market Value / Book Value		151.99	%		195.01	%		-22.06	%
Market Value / Book Value, Excluding Unrealized Gains/Losses on Available-for-Sale Securities (***)		151.90	%		208.41	%		-27.11	%
Price Earnings Multiple		16.18			19.53			-17.15	%
Dividend Yield		4.06	%		2.94	%		38.10	%
SAFETY AND SOUNDNESS
Tangible Equity / Tangible Assets, Excluding Unrealized Gains/Losses on Available-for- sale Securities		11.19	%		11.09	%		0.90	%
Nonperforming Assets / Total Assets		0.53	%		0.70	%		-24.29	%
Allowance for Loan Losses / Total Loans		1.22	%		1.15	%		6.09	%
Risk Based Capital Ratio		17.58	%		18.45	%		-4.72	%
AVERAGE BALANCES
Average Assets	$	1,148,544		$	1,130,873			1.56	%
Average Assets, Excluding Unrealized Gains/Losses on Available-for-sale Securities		1,143,791			1,117,488			2.35	%
Average Equity		131,205			132,409			-0.91	%
Average Equity, Excluding Unrealized Gains/Losses on Available-for-sale Securities		128,064			123,575			3.63	%

(*)	Net unrealized gains/losses on available-for-sale securities are presented as “Accumulated Other Comprehensive Income” in the annual and quarterly financial statements filed with the Securities and Exchange Commission.
(**)	For purposes of per share calculations, the market value and number of outstanding shares have been retroactively adjusted for the effects of 1% stock dividends issued in January of each year presented.
(***)	Generally accepted accounting principles (“GAAP”) require that available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through shareholders’ equity, net of tax. Management believes there is an inherent mismatch between the income statement and balance sheet related to unrealized gains/losses that may create a material inconsistency in the calculation of earnings-based ratios. Further, the amount of unrealized gains or losses may vary widely from period-to-period, depending on the financial markets as a whole and interest rate movements. Therefore, management has provided these “non-GAAP” ratios because we believe they provide meaningful information for evaluating the Corporation’s financial position and results of operations.