UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q  [Ö]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended September 30, 2008OR[  ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from__________ to__________  Commission File Number: 2-94863  [logo.gif]  CANANDAIGUA NATIONAL CORPORATION(Exact name of registrant as specified in its charter)  New York(State or other jurisdiction of
incorporation or organization)16-1234823(IRS Employer Identification Number)72 South Main Street
Canandaigua, New York(Address of principal executive offices)14424(Zip code)  (585) 394-4260(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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  [Ö]No  [ ]  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ]           Accelerated filer [Ö]            Non-accelerated filer [ ]         Smaller reporting company [ ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ̈    No [Ö]  The number of shares outstanding of each of the issuer's classes of common stock was 472,348 shares of common stock, par value $20.00, outstanding at October 24, 2008.    1     Forward-Looking Statements
This report, including information incorporated by reference, contains, and future filings by Canandaigua National Corporation on Form 10-K, 10-Q and 8-K and future oral and written statements, press releases, and letters to shareholders by Canandaigua National Corporation and its management may contain, certain "forward-looking statements" intended to qualify for the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used or incorporated by reference in the Company's disclosures and documents, the words "anticipate," "believe," "contemplate," "estimate," "expect," "foresee," "project," "target," "goal," "budget" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act. Such forward-looking statements are subject to certain risks discussed within this document. These forward-looking statements are based on currently available financial, economic, and competitive data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, so should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, targeted, or budgeted. These forward-looking statements speak only as of the date of the document. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein.  We must caution readers not to place undue reliance on any of these forward-looking statements.     2     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
September 30, 2008  PART I -- FINANCIAL INFORMATIONPAGEItem 1.  Financial Statements (Unaudited)Condensed consolidated balance sheets at September 30, 2008 and December 31, 20074Condensed consolidated statements of income for the three- and nine-month periods endedSeptember 30, 2008 and 2007.5Condensed consolidated statements of stockholders' equity for the nine-month periods endedSeptember 30, 2008 and 20076Condensed consolidated statements of cash flows for the nine-month periods endedSeptember 30, 2008 and 20077Notes to condensed consolidated financial statements8Item 2.  Management's Discussion and Analysis of FinancialCondition and Results of Operations12Item 3. Quantitative and Qualitative Disclosures about Market Risk20Item 4. Controls and Procedures21PART II -- OTHER INFORMATIONItem 1.  Legal Proceedings22Item 1A.Risk Factors22Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds22Item 3.  Defaults Upon Senior Securities22Item 4.  Submission of Matters to a Vote of Security Holders22Item 5.  Other Information22Item 6.  Exhibits23SIGNATURES24    3     PART I  FINANCIAL INFORMATIONItem 1. Financial Statements  CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSSeptember 30, 2008 and December 31, 2007 (Unaudited)
(dollars in thousands, except per share data)  September 30,December 31,20082007AssetsCash and due from banks$58,79938,360Federal Funds Sold and interest-bearing deposits with other financial institutions2,2402,532Securities:- Available for sale, at fair value97,313110,814- Held-to-maturity (fair value of $161.369 in 2008 and $156,609 in 2007)161,336155,411Loans:Commercial, financial and agricultural203,535194,395Commercial mortgage386,773349,430Residential mortgage - first lien198,843158,655Residential mortgage - junior lien71,34869,407Consumer-automobile indirect165,786119,775Consumer and other24,70723,030Loans held for sale2,5381,810Total gross loans1,053,530916,502Plus:  Net deferred loan costs5,7384,047Less:  Allowance for loan losses(11,695)(9,679)Loans - net1,047,573910,870Premises and equipment - net10,23513,477Accrued interest receivable7,3816,803Federal Home Loan Bank stock and Federal Reserve Bank stock4,3323,765Goodwill and intangible assets15,8541,201Other assets15,37213,116Total Assets$1,420,4351,256,349Liabilities and Stockholders' EquityDeposits:DemandNon-interest-bearing$169,508156,223Interest-bearing122,681102,949Savings and money market454,582383,001Time455,660418,360Total deposits1,202,4311,060,533Borrowings57,38642,362Junior subordinated debentures51,54751,547Accrued interest payable and other liabilities12,1249,699Total Liabilities1,323,4881,164,141Stockholders' Equity:Common stock, $20 par value; 2,000,000 shares authorized;486,624 shares issued in 2008 and 20079,7329,732Additional paid-in capital8,5988,443Retained earnings83,89178,100Treasury stock, at cost (14,276 shares at September 30, 2008and 12,361 at December 31, 2007)(4,704)(4,198)Accumulated other comprehensive income (loss), net(570)131Total Stockholders' Equity96,94792,208Total Liabilities and Stockholders' Equity$1,420,4351,256,349  See accompanying notes to unaudited condensed consolidated financial statements.    4     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFor the three- and nine-month periods ended September 30, 2008 and 2007 (Unaudited)
(dollars in thousands, except per share data)Three months 
ended September 30,Nine months 
ended September 30,2008200720082007Interest income:Loans, including fees$16,40616,193$47,64646,804Securities2,3792,5297,0227,598Federal funds sold and other262643021,563Total interest income18,81118,98654,97055,965Interest expense:Deposits5,0717,77916,71923,052Borrowings547682518Junior subordinated debentures7615782,2712,662Total interest expense6,3798,36319,81525,732Net interest income12,43210,62335,15530,233Provision for loan losses9008702,9251,785Net interest income after provision for loan losses11,5329,75332,23028,448Other income:Service charges on deposit accounts2,2371,8326,4985,222Trust and investment services income2,7111,3538,1573,951Net gain on sale of mortgage loans108152463427Mortgage servicing income, net137151419446Loan-related fees115156291317Loss on write-down and call of securities, net(700)-(698)(1)Other operating income3785801,4261,175Total other income4,9864,22416,55611,537Operating expenses:Salaries and employee benefits6,1385,36718,20815,653Occupancy, net1,4551,2994,3613,941Marketing and public relations4244901,3321,324Office supplies, printing and postage3343261,055962Professional and other services7473762,8021,304Technology and data processing1,0848822,8232,529Intangible Amortization17044841131FDIC insurance1853243697Other operating expenses9436172,5771,842Total operating expenses11,4809,43334,43527,783Income before income taxes5,0384,54414,35112,202Income taxes1,3801,2033,8443,270Net income$3,6583,341$10,5078,932Basic earnings per share$7.747.01$22.1818.74Diluted earnings per share$7.616.88$21.8018.37   See accompanying notes to unaudited condensed consolidated financial statements.    5     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYFor the nine-month periods ended September 30, 2008 and 2007 (Unaudited)
(dollars in thousands, except share data)   AccumulatedNumber ofAdditionalOtherSharesCommonPaid-inRetainedTreasuryComprehensiveOutstandingStockCapitalEarningsStockIncome (Loss)TotalBalance at December 31, 2007474,263$9,7328,44378,100(4,198)13192,208Comprehensive income:Change in fair value ofInterest rate swap,net of taxes of ($211)----(230)(230)Change in unrealized loss onsecurities available for sale,net of taxes of ($303)----(471)(471)Net income--10,507--10,507Total comprehensive income9,806Recognition of stock optionexpense-10---10Purchase of treasury stock(4,292)---(1,343)-(1,343)Sale of treasury stock11---3-3Exercise of stock options,including tax benefit of $1442,366-145(450)834-529Cash dividend - $9.00 per share--(4,266)--(4,266)Balance at September 30, 2008472,348$9,7328,59883,891(4,704)(570)96,947Balance at December 31, 2006476,600$9,7328,10770,184(3,541)(923)83,559Comprehensive income:Change in unrealized loss onsecurities available for sale,net of taxes of $383----588588Net income--8,932--8,932Total comprehensive income9,520Recognition of stock optionexpense-68---68Purchase of treasury stock(4,643)---(1,555)-(1,555)Sale of treasury stock6---2-2Exercise of stock options,including tax benefit of $2173,618-217(648)1,320-889Cash dividend - $8.00 per share--(3,813)--(3,813)Balance at September 30, 2007475,581$9,7328,39274,655(3,774)(335)88,670  See accompanying notes to unaudited condensed consolidated financial statements.    6     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month periods ended September 30, 2008 and 2007 (Unaudited)
(dollars in thousands)  20082007Cash flow from operating activities:Net income$10,5078,932Adjustments to reconcile net income tonet cash provided by operating activities:Depreciation, amortization and accretion3,4112,598Provision for loan losses2,9251,785Deferred income tax benefit(1,696)(376)Loss on write-down and call of securities, net6981(Income) loss from equity-method investments, net(123)14Net gain on sale of mortgage loans(463)(427)Originations of loans held for sale(59,478)(59,872)Proceeds from sale of loans held for sale59,21361,393Stock option expense1068Increase in other assets(1,054)(1,096)Decrease (increase) in accrued interest payable and other liabilities1,984(414)Net cash provided by operating activities15,93412,606Cash flow from investing activities:Securities available-for-sale:Proceeds from maturities and calls54,69816,653Purchases(42,675)(15,438)Securities held to maturity:Proceeds from maturities and calls25,53930,400Purchases(32,049)(43,083)Loan purchases, originations and principal collections -- net(139,707)(44,210)Fixed asset purchases  net of proceeds from sale of $5,460 in 20081,938(1,513)Purchase of FHLB and FRB stock  net(568)(198)Investment in equity-method investments(38)(47)Acquisition, net of cash acquired(10,092)-Proceeds from sale of other real estate641283Net cash used in investing activities(142,313)(57,153)Cash flow from financing activities:Net increase in demand, savings and money market deposits104,59818,657Net increase in time deposits37,30020,662Overnight borrowings, net(5,200)-Proceeds from term borrowings15,000-Principal repayments on term borrowings(95)(46)Principal repayment of junior subordinated debentures-(20,619)Proceeds from issuance of junior subordinated debentures-20,619Proceeds from sale of treasury stock32Payments to acquire treasury stock(1,343)(1,555)Proceeds from issuance of treasury stock under stock option plan385672Tax benefit from stock option exercise144217Dividends paid(4,266)(3,813)Net cash provided by financing activities146,52634,796Net increase (decrease) in cash and cash equivalents20,147(9,751)Cash and cash equivalents - beginning of period40,89273,340Cash and cash equivalents - end of period$61,03963,589Supplemental disclosure of cash flow information:Interest paid$19,97125,590Income taxes paid4,983,624Supplemental schedule of noncash investing and financing activitiesReal estate acquired in settlement of loans$807303Acquisition:Fair value of assets acquired (noncash)15,152-Fair value of liabilities assumed5,060-  See accompanying notes to unaudited condensed consolidated financial statements.  7        CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements (Unaudited)  (1)   Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable regulations of the Securities and Exchange Commission (SEC) and with generally accepted accounting principles for interim financial information. Such principles are applied on a basis consistent with those reflected in the December 31, 2007, Form 10-K Report of the Company filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Management has prepared the financial information included herein without audit by independent certified public accountants.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three- and nine-month periods ended September 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2007.Amounts in prior periods' condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation.  (2)   DividendOn July 9, 2008, the Board of Directors declared a semi-annual $4.75 per share dividend on common stock to shareholders of record on July 19, 2008, which was paid on August 1, 2008.  This is in addition to the semi-annual $4.25 per share dividend on common stock declared in January 2008 and paid in February 2008.  (3)   Earnings Per ShareBasic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period.  Diluted earnings per share includes the maximum dilutive effect of stock issuable upon conversion of stock options. Calculations for the three- and nine-month periods ended September 30, 2008 and 2007 follow (dollars in thousands, except share data):   Three months endedNine months endedSeptember 30September30For the three months ended September 30,2008200720082007Basic Earnings Per Share:Net income applicable to common shareholders$3,6583,34110,5078,932Weighted average common shares outstanding472,779476,302473,702476,586Basic earnings per share$7.747.0122.1818.74Diluted Earnings Per Share:Net income applicable to common shareholders$3,6583,34110,5078,932Weighted average common shares outstanding472,779476,302473,702476,586Effect of assumed exercise of stock options7,7879,3018,2439,603Total480,566485,603481,945486,189Diluted earnings per share$7.616.8821.8018.37   8     (4)   Segment InformationThe Company is organized into three reportable segments: the Company and its banking subsidiaries (Bank), CNB Mortgage Company (CNBM), and Genesee Valley Trust Company (GVT). These have been segmented due to differences in their distribution channels, the volatility of their earnings, and internal and external financial reporting requirements.  The interim period reportable segment information for the three- and nine-month periods ended September 30, 2008 and 2007 follows (dollars in thousands).  Three months ended September 30,20082007BankCNBMGVTBankCNBMRevenues:From external customers$16,2671411,01014,645202Intersegment(495)508(13)(355)355Total segment revenues$15,77264999714,290557Net income:Bank$3,7783,411CNBM213141GVT36-Total segment net income4,0273,552Eliminations(369)(211)Total net income$3,6583,341   Nine months ended September 30,20082007BankCNBMGVTBankCNBMRevenues:From external customers$47,5405653,60641,235535Intersegment(1,094)1,112(18)(864)864Total segment revenues$46,4461,6773,58840,3711,399Net income:Bank$10,7529,190CNBM468264GVT(112)-Total segment net income11,1089,454Eliminations(601)(522)Total net income$10,5078,932   (5)   Mortgage Servicing AssetsThe Company services first-lien, residential loans for the Federal Home Loan Mortgage Company (FHLMC), also known as Freddie Mac, and certain commercial loans as lead participant.  The associated servicing rights (assets) entitle the Company to a future stream of cash flows based on the outstanding principal balance of the loans and contractual servicing fees.  Failure to service the loans in accordance with contractual requirements may lead to a termination of the servicing rights and the loss of future servicing fees.We service all loans for FHLMC on a non-recourse basis; therefore, our credit risk is limited to temporary advances of funds to FHLMC, while FHLMC retains all credit risk associated with the loans.  Commercial loans are serviced on a partial recourse basis, wherein we are subject to credit losses only to the extent of the proportionate share of the loans principal balance we own.Gross servicing fees earned by the Company for the three-month periods ended September 30, 2008 and 2007, respectively, amounted to $234,000 and $241,000, and for the nine-month periods ended September 30, 2008 and 2007 amounted to $704,000 and $714,000, respectively.  These fees are included in net mortgage servicing income on the statements of income.The following table presents the changes in mortgage servicing assets for the nine-month periods ended September 30, 2008 and 2007, respectively, as well as the estimated fair value of the assets at the beginning and end of the period (in thousands).  20082007BookEstimated
FairBookEstimated
FairValueValueValueValueBalance at January 1,$1,091$ 2,344$1,331$ 2,540Originations13076Amortization(285)(269)Balance at September 30,$936$ 2,353$1,138$ 2,420  9       Fair value is determined through estimates provided by a third party, using inputs including quoted prices for similar assets in active markets, and inputs that are observable for this asset, either directly or indirectly. The estimated fair value of mortgage servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. Additionally, estimated fair value assumes there is a willing buyer and willing seller in the transaction. Management does not intend to sell these servicing rights. The key economic assumptions used to determine the fair value of mortgage servicing rights at September 30, 2008 and 2007, and the sensitivity of such values to changes in those assumptions are summarized in the 2007 and 2006 Annual Report and are substantially the same.    (6) Acquisitions of Trust Company  On January 2, 2008, the Company completed its acquisition of 100% of the voting shares of Genesee Valley Trust Company (GVT), a Rochester-based trust company.  The acquisition of GVT provides the Company with additional trust and investment services income.  The total cash purchase price will approximate $18.3 million to $21.3 million depending upon the achievement of certain operating results over the next three years.  An initial payment of $13.1 million was made at closing. The acquisition resulted in the recording of certain intangible assets and goodwill all of which totaled $15.6 million, and substantially all of which will be deductible for income tax purposes.  Financial results for GVT are included in the consolidated financial statements of the Company beginning with the first quarter of 2008.(7) Fair Value MeasurementsWe implemented the provisions of Financial Accounting Standards Board (FASB) Statement No. 157 [as amended], Fair Value Measurements, on January 1, 2008. (In accordance with FASB Statement of Position No. 157-2, Effective Date of FASB Statement No.157, the Company has delayed application of Statement No. 157 for non-financial assets and non-financial liabilities until January 1, 2009.) This Statement provides guidance for using fair value to measure assets and liabilities and requires expanded disclosures about the extent to which companies measure assets and liabilities at fair value, and the effect of fair value measurements on earnings. This standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances.   Implementation of this statement had no practical impact on our financial position or results of operations, because there was no substantive change in our accounting for the financial instruments we report at fair value. The following disclosures are required under this standard:Determination of fair value:A detailed discussion of our valuation methodologies is disclosed in the footnotes to our 2007 Annual Report.  Such valuation methodologies were applied to all of the assets and liabilities carried at fair value, whether as a result of the adoption of SFAS 157 or previously carried at fair value. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves.Although we believe our fair value methods are reliable, they may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  Finally, we expect to retain substantially all assets and liabilities measured at fair value to their maturity or call date.  Accordingly, the fair value measurements are unlikely to represent the instruments liquidation values.Valuation Hierarchy: SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows.Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2  inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.Level 3  inputs to the valuation methodology are unobservable and significant to the fair value measurement.Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.Securities Available-for-Sale  10     All fair values for securities are determined using independent pricing services and market-participating brokers, or internal matrix models using observable inputs. We have categorized all securities available-for-sale as Level 2. The pricing service and brokers use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models.  Inputs to their pricing models include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. We obtain a single market quote or price estimate for each security.  None of the quotes or estimates is considered a binding quote, as we would only request one if we had the positive intent to sell the securities in the foreseeable future. Internal matrix models are used for non-traded municipal securities.  Our matrix considers observable inputs, such as benchmark interest rates and spreads.The Level 3 fair values are determined using unobservable inputs and included pooled trust preferred securities transferred to Level 3 in the third quarter of 2008. There is a very limited market and limited demand for pooled trust preferred securities due to imbalances in marketplace liquidity and the uncertainty in evaluating the credit risk in these securities. In determining fair value for these securities, management considered various inputs. We considered fair values from a pricing service derived from inputs from an inactive market. We also considered fair value derived from our own assumptions with data from outside brokerage firms, as to expected cash flows and approximate risk-adjusted discount rates.Share-based Payments (Incentive Stock Plan)The liability for the Companys Incentive Stock Plan is valued on a quarterly basis using the Black-Scholes-Merton model.  The parameters used are based upon observable market inputs and direct inputs, including dividend yield, risk-free interest rate, expected life, and volatility. Therefore, the liability is categorized as Level 2.Interest Rate Swap Agreement (Swap)The fair value of the swap was the amount the Company would have expected to pay to terminate the agreement and was based upon the present value of expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate.The following table presents for each of the fair-value hierarchy levels the Companys assets and liabilities that are measured at fair value on a recurring basis at September 30, 2008, by caption on the Consolidated Balance Sheet (dollars in thousands).  Internal modelsInternal modelsQuoted marketwith significantwith significantTotal carryingprices in activeobservable marketunobservable marketvalue in themarketsparametersparametersConsolidated(Level 1)(Level 2)(Level 3)Balance SheetAssetsSecurities available-for-sale$ -$ 96,876$ 437$ 97,313Total assets$ -$ 96,876$ 437$ 97,313LiabilitiesInterest rate swap agreement$ -$ 541$ -$ 541Share-based payments-549-549Total liabilities$ -$ 1,090$ -$ 1,090  The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended September 30, 2008 (dollars in thousands):  Three monthsNine monthsendedendedSeptember 30,September 30,20082008Securities available for sale (Level 3), beginning of period$--Transfers into Level 31,1371,137Impairment charges included in earnings(700)(700)Securities available for sale (Level 3), end of period$437437   Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). For our Company, these include loans held for sale, collateral-dependent impaired loans, other real estate owned, mortgage servicing rights, intangible assets, and commitments. At September 30, 2008, and during the three-and nine-month periods ended September 30, 2008, the balance and impact of these items were not material with the exception of collateral dependent impaired loans. The fair values of collateral-dependent impaired loans improved as measured by the change in reserves, which decreased $0.8 million, net for the third quarter principally due to our securing additional collateral underlying these impaired loans.Other Fair Value ConsiderationsThe FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, in February 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.This Statement was effective for us as of the beginning of 2008. This Statement permits application to eligible items existing at the effective date.  Adoption of the Statement had no impact on our financial position or results of operations as we did not make a fair value election for eligible items. Except for instruments explicitly required to be measured at fair value (discussed above) we do not use fair value to measure our financial instruments, and do not believe, despite FASBs intention, it is the appropriate measurement for a going concern holding substantially all of its assets and liabilities to maturity.(8)   Income taxesWe adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. We did not have any significant unrecognized tax benefits, and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.(9)   BorrowingsDuring the quarter ended September 30, 2008, the Company entered into two fixed-rate, term borrowings totaling $15 million from the Federal Home Loan Bank of New York. These borrowings are collateralized by residential mortgages. Terms of the borrowings follow (dollars in thousands):  11       AmountInterest RateMaturity Date$7,5003.32%August, 2009$7,5003.64%August, 2010  Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following is our discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. This discussion and analysis supplements our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.Critical Accounting EstimateWe are instructed, pursuant to SEC guidance, to evaluate and disclose those accounting estimates that we judge to be critical - those most important to the portrayal of the Company's financial condition and results, and that require our most difficult, subjective and complex judgments. We consider the Allowance for Loan Losses (Allowance) as critical given the inherent uncertainty in evaluating the levels of the allowance required to reflect credit losses in the portfolio. There has been no change in our methodology for estimating the Allowance, which is fully described within the 2007 Annual Report.Significant Events During this YearIn October 2008, we opened our 22nd banking office.  This full-service office is located in the town of Henrietta of Monroe County, New York.  We own the building which is subject to a multi-year ground lease.In July 2008, we entered into a five-year lease agreement for an office in Sarasota, Florida.  We expect to open the office close to the end of 2008. The office will principally serve our out-of-state trust customers.In June 2008, we completed the sale and subsequent lease-back of nine banking offices.  Total proceeds from the sale amounted to $5,460,000.  The carrying value and transaction costs totaled $4,013,000, resulting in a net gain of $1,447,000.  Included in this gain was a loss on disposal of one office, amounting to $111,000.  The gross gain of $1,558,000 is deferred and included in Accrued Interest Payable and Other Liabilities in the balance sheet will be amortized as a credit to Occupancy expenses on a straight-line basis over the next 15 years, the term of the underlying leases.In January 2008, we completed our acquisition of Genesee Valley Trust Company (GVT).  GVT, headquartered in Pittsford, New York, is a trust company which provides money management, retirement services, and estate and financial planning services to local families, individuals, businesses and non-profit organizations.  Under the terms of the agreement, CNC acquired all of the outstanding shares of GVT capital stock for cash.  The transaction is structured with a portion of the purchase price payable at closing, with additional minimum and contingent amounts payable depending on certain operating results of GVT during the three years after closing.  GVT will retain its name and operate as a wholly owned subsidiary of CNC.Financial OverviewWe are pleased to report Canandaigua National generated net income of $3.7 million for the three-months ended September 30, 2008, an increase of 9.5% over the $3.3 million for the same period in 2007.  Diluted earnings per share were $7.61 and $6.88 for these periods, respectively.  Reflecting franchise growth and the GVT acquisition, earnings were positively impacted by a $2.6 million (17.3%) growth in total revenues (net interest income and non-interest income). Operating expenses increased $2.0 million (21.7%).  Included in our three month results was a $0.9 million increase in the provision for loan loss, due to substantial loan portfolio growth. Additionally, we recognized a $0.7 impairment on the value of certain investment securities.In the third quarter we continued to grow the balance sheet with gross loans increasing 7.6%. Securities grew 2.5%.  On the liability side of the balance sheet total deposits grew 8.6% reflecting a flight of retail and commercial deposits to safe banks, such as ours, and the seasonal inflow of municipal deposit from property tax receipts. Borrowings grew 1.2% to fund asset growth beyond deposit inflows.

Off-balance sheet asset growth for the quarter has been slower than on-balance sheet growth with a $13.1 million (0.8%) net increase in the book value of assets under management. However, the poor performing stock market resulted in a $129.9 million (7.4%) decline in, the value of assets under management.For the nine month period ended September 30, 2008, net income grew 17.6% to $10.5 million compared to $8.9 million for the nine months ended September 30, 2007. Diluted earnings per share were $21.80 and $18.37 for the same nine-month periods.  Since the end of the year, the balance sheet grew 13.1% with loans up 15.1% and deposits up 13.4%.  Off-balance sheet, giving effect of the GVT acquisition, the market value of assets under management fell 10.0%. On a relative basis, the market indices are down nearly twice as much with the Dow Jones Industrial average down 18.2% for the first nine months of the year and the S&P 500 down 20.6%.  Financial Condition (three months ended September 30, 2008)At September 30, 2008, total assets were $1,420.4 million, up $96.9 million or 7.3% from $1,323.5 million at June 30, 2008. Cash and cash equivalents (cash, balances with other financial institutions, and federal funds sold) grew $13.8 million to $61.0 million, mostly as a result of seasonal inflows of municipal deposits.Investment securities grew $6.5 million from June 30, 2008 as we replaced securities which were called earlier in the year. All of this growth has been in the held-to-maturity portfolio, and comprised mostly of tax-exempt municipal obligations.  We anticipate purchasing additional securities during the remainder of the year in both the held-to maturity and available-for sale portfolios, and expect maturities to be in the short to medium term (under five years), consistent with our asset-liability management needs.  12     The investment portfolio consists principally of New York State municipality obligations (85.2% of total at September 30, 2008) with the remainder mostly in US Treasury and US government sponsored agency obligations.  Included in these are secured obligations of the Federal National Mortgage Agency (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both of these agencies were taken into conservatorship by the federal government in the recent quarter.  The agency obligations we hold are senior-secured and have not been subject to the market losses incurred by non-secured obligations. Additionally, we have not and do not hold any common or preferred stock of these agencies. With the exception of the following, we consider all unrealized losses in the portfolio to be temporary and we have the ability and intent to hold these securities until their fair value recovers.

We hold approximately $1.2 million of bank trust-preferred securities with a cost basis of $2.0 million, accounting for less than one-half of one percent of our total securities.  These securities are backed by debt obligations of banks, with about half of the securities backed by some of the largest U.S. banks and the other half backed by a pool of banks (pooled trust preferred). Because of the recent market upheaval and the fear of additional bank failures, the market value of these securities has fallen sharply.  There has been no reduction in our cash receipts (interest) on these securities; that is they are current as to principal and interest.  However, the collateral underlying the pooled trust preferreds has diminished due to debt defaults and interest deferrals of some of the banks.  We analyzed the expected underlying cash flows and the ability of the collateral to produce sufficient cash flows to support future principal and interest payments.  Our analysis indicated these cash flows would be insufficient, and accordingly, we have written down these pooled trust preferreds by $0.7 million during the quarter.  For income tax planning purposes we may sell these pooled trust preferred securities, the timing of which is not determinable because there is little demand for these types of securities, and it is possible their value might improve in the near term as a result of the federal governments financial package announced in October. Further write-downs could occur should the fair value decline.

The following table presents the types and carrying values of securities at September 30, 2008 (dollars in thousands.)  Available forHeld toSaleMaturitySecurities Available for Sale:U.S. Treasury$-6,998U.S. government sponsored agencies obligations29,06813State and municipal obligations66,353153,899Corporate and foreign obligations1,186426Equity securities706-Total securities$97,313161,336   Gross loans increased $75.1 million to $1,059.3 million. The commercial portfolio increased $12.4 million on strong originations of real estate secured loans.  The residential loan portfolios grew $22.7 million with our 3- and 10-year callable products continuing to account for most of the increase. The consumer loan portfolios increased $40.0 million for the quarter, substantially all of which came in the indirect automobile loan portfolio.  Though overall automobile sales in the region are down relative to 2007, our originations have increased, we believe, on the strength of our customer service, particularly of dealers, our market-competitive pricing, the pullback of national lenders, manufacturer-based lenders, and a decline in leasing. For the remainder of 2008, we expect total loans to continue to increase with growth, albeit slower, in all portfolios.  We will endeavor to slow the growth rate of the portfolio commensurate with the growth rate of our equity capital.  Please see the section entitled Impaired Loans and Non-Performing Assets for a discussion of credit quality.Total deposits at September 30, 2008, were $1,202.4 million and were up $95.7 million from June 30, 2008.  As discussed in our Annual Report, we experienced a large outflow of municipal deposits in December 2007, driven by multi-national and regional banks needs for term deposits to create balance sheet liquidity.  These deposits returned to our Bank during the first quarter, but as happened in December, we saw these municipal deposits move to the larger banks once again in June due to aggressive pricing from those institutions.   By September of this year much of these municipal deposits once again returned to our Bank.  For the quarter, consumer and business deposits grew $55.0 million (5.6%), while municipal deposits grew $ 40.7 million (24.6%). Average total deposits for the quarter increased $25.5 million (2.3%).Growth in deposit types occurred mostly in the higher interest-cost accounts (savings, money-market, time), and less so in the lower interest-cost accounts (demand). We believe this relative growth pattern will continue for the remainder of the year.  Consumers and businesses have been shifting cash from non-bank accounts (stock market, money market mutual funds, etc.) into our Bank, preferring safety and liquidity, over volatility.  During this quarter, we raised approximately $15 million in brokered deposits, which were used to fund the growth in indirect loans and match the interest costs against this portfolio for asset-liability management purposes.  The indirect loan portfolio continues to grow, and, as a result, we may raise additional brokered deposits, if needed.Total borrowings increased a modest $0.7 million for the quarter, amounting to $57.4 million at September 30, 2008. Of this total, $36.4 million was overnight borrowings and $15.7 million was term borrowings from the Federal Home Loan Bank of New York (FHLB), all of which was secured by residential mortgage loans.  The remaining $5.3 million was net debt recorded upon the acquisition of GVT.  During the quarter we converted $15 million of FHLB borrowing from overnight to term-fixed in an effort to better match the interest rate risk and maturity characteristics of our loans. We expect to continue borrowing overnight to fund daily cash flows, and possibly increase term borrowings depending upon asset-liability management needs.Results of Operations (three months ended September 30, 2008)Net interest income increased $1.8 million or 17.0% for the quarter over the same quarter in 2007, reflecting the positive impact of the balance sheet's year-over-year growth and significantly improved margin. During the third quarter of 2008, market interest rates continued to fall and the yield curve was positively sloped.On a tax-equivalent basis, compared to the same quarter in 2007, the overall growth in interest-earning assets and interest-bearing liabilities had a $1.3 million positive impact on net interest income, while the change in rates had a $0.5 million positive impact. For the previous five quarters we had experienced an ever-improving margin due to a number of factors, including: our close management of interest rate risk within the context of a volatile interest rate environment, an overall declining interest rate environment, and an upwardly sloping yield curve.  Net interest margin for the current quarter widened from the same quarter in 2007 by 25 basis points. As anticipated in our last quarterly report, the result of the long-term general downward trend in interest rates has recently caused a slight narrowing of our net interest margin.  Asset yields continue to fall (6 basis points for the quarter) due to reinvestment in new loans and securities at rates lower than those maturing.  However, liability rates were near their lows given current interest rates and remained unchanged for the quarter.  As a result our net interest margin declined from 4.26% last quarter (June 30, 2008) to 4.20% this quarter. For the fourth quarter of 2008, we also anticipate a further decline in net interest margin caused mainly by the 50 basis point drop in the prime interest rate in October. However, we also expect net interest margin and spread will be higher on a year-over-year basis compared to the fourth quarter of 2007. Summary tax-equivalent net interest income information for the three-month periods ended September 30, 2008 and 2007 follows (dollars in thousands).  20082007AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateTotal interest-earningassets$1,268,67419,7026.21%1,147,17119,6876.86%Total interest-bearingliabilities$1,082,7416,3792.36%964,8108,3633.47%Interest rate spread3.85%3.39%Net interest margin$13,3234.20%11,3243.95%   The provision for loan losses was $0.9 million for the quarter, same as last year.  In 2008 the provision was primarily due to loan portfolio growth and consideration of qualitative aspects of the loan portfolio, while in 2007 most of the provision was due to changes in asset quality. A summary of the allowance for loan losses and net charge-offs for the year to date is presented in the following section.Other income for the quarter ended September 30, 2008 increased 18.0% to $5.0 million from $4.2 million in 2007 with major categories showing improvement. Service charges on deposit accounts increased 22.1% on a combination of fee increases and growth in electronic banking services, mostly debit card transactions.  13     Trust and investment services income increased 100.4% from 2007 due to assets acquired through GVT, organic growth in assets under management, and adjustments in account fee structures implemented in the past two years.  At September 30, 2008, the market value of assets under management was $1,627.0 million compared to $1,202.9 million at September 30, 2007.  As noted in the previous section, since the beginning of 2008, the equity markets have declined from where they closed in 2007.  This decline, if continued, will have a negative relative effect on trust and investment income, since this income is tied to the market value of assets managed. However, because of the GVT acquisition, total trust and investment services income will be higher in 2008 than in 2007.Mortgage originations for the quarter increased about 4.4% in 2008 when compared to 2007, and we retained a similar percentage of these loans in our portfolio in both years (see table below).  For the quarter, the net gain on the sale of mortgage loans improved slightly over 2007s quarter mainly due to a higher relative mix of refinance loans, which are marginally more profitable than purchase money mortgages, and a higher gain recognized on the value of servicing rights retained.  Despite the continued negative national housing news, median housing prices in our market area remain relatively strong and sales of existing homes has declined only modestly. We have a positive outlook for the remainder of the year.  We expect total originations to remain near last years with a higher percentage of refinance mortgages in 2008 than 2007.  We also expect the net gain on sales of mortgage loans to exceed 2007s.   CNB Mortgage Closed Loans by Type
For the three-month periods ended September 30,
(dollars in thousands)  20082007Purchase money mortgages$29,76830,570Refinance mortgages12,1149,511Total mortgage originations$41,88240,081Percentage of loans retained in portfolio52.3%51.5%  Included in other income is the $0.7 million write-down of pooled trust preferred securities.Operating expenses increased fairly substantially (21.7% or $2.0 million) for the quarter ended September 30, 2008, over the same three-month period in 2007.  GVT accounted for $1.1 million of the increase.  Excluding the effect of GVT, operating expenses increased by 9.5%, with increases occurring in almost all categories associated with franchise growth.  About half of the non-GVT expense growth came from salary and employee benefits cost increases.  These resulted from an increased number of employees, incumbent salary increases averaging 3.0%, and higher benefit costs.  Dollar changes for all other operating expense categories were modest, generally reflecting overall franchise growth.  For the remainder of the year, we expect growth in non-GVT operating expenses to be in the low double-digits range, again reflective of franchise growth, particularly as we open our new offices.The quarterly effective tax rate was 27.4% in 2008 and 26.4% in 2007.  The change in the effective rate is attributable to a combination of the ratio of tax-exempt income to total income and an increase in our federal marginal tax rate due to our improved profitability.  Financial Condition and Results of Operations (nine months ended September 30, 2008)At September 30, 2008, total assets of the Company were up $164.1 million or 13.1% from December 31, 2007. Cash and equivalents (cash, balances and federal funds sold) increased as a result of cash held at GVT and municipal deposit inflows.  Securities decreased as a result of early in the year calls.  Loans grew $138.7 million or 15.1%. This growth occurred in all portfolios with the largest increase in indirect automobile loans.  Total deposits at September 30, 2008, were up 13.4% with growth from all customer types: consumer, commercial, and municipal deposit.Net interest income improved 16.3% for the nine-month period in 2008 from the same period in 2007. The increase in net interest spread was caused by rates on interest-bearing liabilities falling faster than yields on interest-earning assets (99 basis points versus 41 basis points) combined with growth in the average balance of these liabilities and assets.  Summary tax-equivalent net interest income information for the nine-month periods ended September 30, 2008 and 2007 follows:   14     20082007AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateTotal interest-earningassets$1,215,76857,5056.31%1,150,79257,9866.72%Total interest-bearingliabilities$1,038,80219,8152.54%971,01925,7323.53%Interest rate spread3.77%3.19%Net interest margin$37,6904.13%$32,2543.74%   15     Other income for the nine months ended September 30, 2008, increased 43.5% to $16.6 million from $11.5 million in 2007. Service charges on deposit accounts increased due to growth in electronic banking services, mostly debit card transactions and a general increases in service fees.  Trust and investment services income grew 106.5% on an increase in assets under management from organic growth and the GVT acquisition.  For the nine-month period ended September 30, 2008, the book value of assets under management, our measure of customer growth, increased 56.3% or $583.0 million.For the nine month period ended September 30, 2008, we experienced an 8.2% increase in mortgage originations over the same period in 2007, driven by growth in refinance mortgages.  Along with this increase in volume was the net gain on the sale of mortgage loans. A summary of originations follows (dollars in thousands):  CNB Mortgage Closed Loans by TypeFor the nine-month periods ended September 30,(dollars in thousands)  20082007Purchase money mortgages$66,01070,087Refinance mortgages43,46731,083Total mortgage originations$109,477101,170Percentage of loans retained in portfolio45.7%40.8%  Included in other income is the $0.7 million write-down of pooled trust preferred securities.Operating expenses increased 23.9% or $6.7 million for the nine months ended September 30, 2008, over the same period in 2007 with GVT accounting for $3.7 million of the increase.  Most of the increases came in salary and employee benefits, professional and other services, and intangible amortization.  Excluding the effect of GVT, salaries and employee benefits were higher due to a higher headcount, salary increases and higher benefit costs. Professional fees were higher due to consulting and asset management services.The Company's effective tax rate for the year to date in 2008 and 2007 was 26.8%.  LiquidityOur principal source of day to day liquidity is through wholesale, secured borrowing lines from the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB).  Since the beginning of the year, credit available to us under these lines has increased $46.2 million (25.2%) to $229 million in availability at September 30, 2008, consistent with the growth in residential and consumer loans, which secure these lines. During most of the third quarter of 2008 we have accessed these lines to provide funds for asset growth in excess of deposit growth.  At no time during the quarter did we experience any difficulties accessing these lines.  Furthermore, with the exception of one day in mid-September, the daily cost of borrowing has been within 40 basis points of the FRBs fed funds rate.  Or, stated another way, the liquidity and credit crises faced by many financial and commercial institutions has not negatively affected our Company.  We have funds available to us, and have had no problem accessing them at reasonable rates.For the nine months ended September 30, 2008, cash flows from all activities provided $20.1 million in net cash and cash equivalents versus using $9.8 million for the same period in 2007.  In both years the principal source of cash inflows was deposits.Net cash provided by operating activities was $15.9 million in 2008 versus $12.6 million in 2007.  Both the largest source and use of operating cash in 2008 and 2007 were loans held for sale.  Activity in both years was fairly similar. Excluding the effects of loans held for sale, operating activities provided $16.7 million of cash for the nine-month period in 2008 and $11.5 million in 2007.For the first nine months of 2008, investing activities used $142.3 million in cash and equivalents while using $57.2 million in 2007. The largest uses in both years were net loan originations and purchases.  Also included in investing activities in 2008 was $10.1 million of cash used to purchase GVT.Cash provided by financing activities was $146.5 million in 2008 versus $34.8 million in 2007.  The main contributor in both years was deposit activity, which was significantly higher in 2008 than in 2007. Net borrowings were also a source of cash in 2008.For the remainder of 2008, cash for growth is expected to come primarily from operating activities and customer deposits throughout our market area.  To the extent necessary, we will also access our borrowing lines from the FHLB and FRB.   Contractual obligationsLess material, but a part of our ongoing operations, and expected to be funded through normal operations, are liquidity uses such as lease obligations, long-term debt repayments, and other funding commitments. There has been no material change from the information we presented in our Annual Report and Form 10-K for the year ended December 31, 2007.  As discussed more fully in our 2007 annual report, in the normal course of business, various commitments and contingent liabilities are outstanding. Because many commitments and almost all letters of credit expire without being funded in whole or in part, the notional amounts are not estimates of future cash flows.  The following table presents the notional amount of the Company's significant commitments. Most of these commitments are not included in the Company's consolidated balance sheet (in thousands).    September 30, 2008December 31, 2007NotionalNotionalAmountAmountCommitments to extend credit:Commercial lines of credit$105,662103,195Commercial real estate and construction$25,61234,465Residential real estate at fixed rates$4,3791,175Home equity lines of credit$75,74155,353Unsecured personal lines of credit$15,97615,967Standby and commercial letters of credit$11,1659,946Commitments to sell real estate loans$2,5381,810   Capital ResourcesUnder the regulatory framework for prompt corrective action, as of September 30, 2008, the Company and Bank are categorized as "well-capitalized."   This is unchanged from December 31, 2007, and management anticipates no change in this classification for the foreseeable future.With total asset growth exceeding 13% this year, compared with total stockholders equity growth of 5.1%, our overall leverage has increased, and our capital ratios have declined somewhat since the beginning of the year.  We intend to bring the growth of assets and equity more in balance during the coming quarter and into 2009 by slowing the rate of asset growth.As part of the U.S. Treasury's Troubled Asset Relief Program (TARP), we will consider applying for the sale of senior preferred stock and warrants to the U.S Treasury.  If we apply and our application is approved, the additional capital will allow us to continue to fund loans in our community and grow the balance sheet at the pace demanded by our lending market.There are still many unanswered questions as we consider applying. Chief among them are:
·
What is the true cost of the preferred stock? The stated dividend rate is 5%, but we may need to incur significant costs to file paperwork with the Securities and Exchange Commission for the issuance of the warrants.
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What will be the redemption price of the warrants? They are to be redeemed at fair market value.  Given our minimal trading activity, we are unable to determine whether the government will adjust that value.
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Will we be able to repurchase the warrants? If the government sells the warrants to a third party, it may be to a shareholder that does not share the same interests as our shareholders (buy and hold).
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Will we be able to increase our annual dividend to common stockholders? We have historically increased our dividends, and our payout rate is roughly 30% of net income.  Under the TARP program, dividend increases must be approved by the government, and approval is not guaranteed.
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What additional restriction will the government place on banks using TARP funds?  Though we are already highly regulated, it is possible additional laws and regulations may be enacted with respect to banks using TARP funds, the impact of which cannot be determined.   16     Allowance for Loan Losses and Net Charge-offsChanges in the allowance for loan losses for the nine-month periods ended September 30, 2008, and 2007 follow (dollars in thousands):  September 30,20082007Balance at beginning of period$9,6799,041Provision for loan losses2,9251,785Loans charged off(1,343)(1,868)Recoveries on loans previously charged off434482Balance at end of period$11,6959,440Allowance as a percentage of total period end loans1.11%1.06%Allowance as a percentage of non-performing loans120.1%150.0%  The provision for loan losses for the nine-month period ended September 30, 2008 was significantly higher than the same period in 2007 with the increase due to growth in the total loan portfolio and consideration of changes in the qualitative aspects of the loan portfolio.  Compared to September 30, 2007, the total loan portfolio has grown $164.1 million or 18.9%, while net charge-offs were nearly 35% lower in 2008 than in 2007.  During the year, impaired loans grew by $4.4 million, but the allowance associated with impaired loans decreased $0.4 million.The balance in the allowance, funded by the provision for loan losses, has also increased commensurate with the increased risk in the portfolio from identified impaired loans and from growth in the total loan portfolio. As discussed more fully in our Annual Report, we determine the amount necessary in the allowance for loan losses based upon a number of factors.  These factors include specific allocations for impaired loans, and allocations associated with historical charge-offs, as well as our consideration of qualitative factors impacting the level of inherent risk in the portfolio.  Allocations for both impaired loans and for historical charge-offs have increased from last quarter and year-end.Based on our current assessment of the loan portfolio, we believe the amount of the allowance for loan losses at September 30, 2008, is adequate at $11.7 million.   Impaired Loans and Non-Performing Assets  Impaired LoansInformation on impaired loans for the nine-month periods ended September 30, 2008, and 2007 and twelve months ended December 31, 2007, follows (dollars in thousands):  Nine MonthsTwelve MonthsNine MonthsEndedEndedEndedSeptember 30,December 31,September 30,200820072007Recorded investment at period end$9,5955,2306,149Impaired loans as percent of total loans0.91%0.57%0.69%Impaired loans with related allowance$3138681,229Related allowance$313675856Average investment during period$7,7126,1716,406Interest income recognized during periodn/mn/mn/mn/m  not meaningful  Though overall credit quality has declined somewhat year-over year, during the recent three-month period we experienced an improvement in credit quality as measured by loan impairment. Impaired loans declined during the current quarter by $0.7 million compared to June 30, 2008 due to a combination of loan collections and loan charge-offs, offset by additions of newly impaired loans.  Also declining during the quarter were impaired loans with a related allowance from $2.8 million at June 30, 2008 to $0.3 million at September 30, 2008, due to our success in obtaining additional collateral on several large lending relationships. The year-over-year increase in impaired loans has been driven principally by one $4.8 million commercial real estate relationship, which we believe is adequately collateralized as of September 30, 2008.Non-performing assets (refer to table below) declined slightly from last quarter. However, should we experience declines in customers credit quality measured through loan impairment or internal loan classifications, non-performing assets will increase.  If that occurs we would need a higher allowance for loan losses as a percentage of total loans, which would necessitate an increase to the provision for loan losses. Though our local economy remains stable, state and national economic statistics suggest a continued slow-down, which could ultimately impact the ability of our borrowers to service their indebtedness to us.   17     Non-Performing AssetsNon-Performing Assets(Dollars in thousands)  September 30,December 31,September 30,200820072007Loans past due 90 days or more and accruing:Commercial, financial & agricultural$273653Real estate-commercial---Real estate-residential78133-Consumer and other408692Total past due 90 days or more and accruing145255145Loans in non-accrual status:Commercial, financial & agricultural4,0639711,026Real estate-commercial2,7313,7034,637Real estate-residential2,774541470Consumer and other271516Total non-accrual loans9,5955,2306,149Total non-performing loans9,7405,4856,294Other real estate ownedCommercial639459194Residential237232109Total other real estate owned876691303Total non-performing assets$10,6166,1766,597Non-performing loans to total period-end loans0.93%0.60%0.71%Non-performing assets to total period-endloans and other real estate1.01%0.67%0.74%  There were no troubled debt restructurings.Total non-performing loans increased $4.3 million to $9.7 million at September 30, 2008, from $5.5 million at December 31, 2007, and $6.3 million at September 30, 2007.  The 2008 increase was due to the factors discussed in "Impaired Loans" above.At September 30, 2008, other real estate owned consisted of four commercial and two residential properties.  We are actively pursuing their liquidation.   Recent Accounting Standards to be implemented in Future PeriodsFASB issued Statement No. 160 Noncontrolling Interest in Consolidated Financial Statements  an amendment of ARB 51, in December 2007. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards.This Statement will change the way our consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the Company (parent) and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Currently, net income attributable to our noncontrolling interests is reported by us as an other expense. Thus, this Statement results in more transparent reporting of the net income attributable to the noncontrolling interest.The Statement establishes a single method of accounting for changes in our ownership interest in a subsidiary that do not result in deconsolidation. The Statement also requires that we recognize a gain or loss in net income when a subsidiary is deconsolidated. A parent deconsolidates a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. If a parent retains a noncontrolling equity investment in the former subsidiary, that investment is measured at its fair value. Additionally, this statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parents owners and the interests of the noncontrolling owners of a subsidiary.This Statement is effective for us on January 1, 2009.  We do not expect implementation of this Statement will have an impact on our financial condition or results of operations.  Currently, minority interests in our financial statements are immaterial.  18     FASB issued a replacement to the current Statement No. 141 Business Combinations, in December 2007. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This replaces Statement 141s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values, which we utilized for our GVT acquisition. The replaced Statement 141's guidance resulted in not recognizing some assets and liabilities at the acquisition date, and it also resulted in measuring some assets and liabilities at amounts other than their fair values at the acquisition date.This Statement requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. This Statement requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date, as opposed to the current method which results in future adjustments to business combination accounting as the contingencies are settled.This Statement makes significant amendments to other Statements and various other amendments to the authoritative literature intended to provide additional guidance or to conform the guidance in that literature to that provided in this Statement. This Statement applies to us prospectively for any business combination for which the acquisition date is on or after January 1, 2009.  We are prohibited from applying it before that date.  Since we cannot predict whether we will have future business combinations, we cannot determine the impact this Statement might have on our financial statements.FASB issued Statement No 161, Disclosures about Derivative Instruments and Hedging Activities (an amendment to FASB Statement No. 133), in March 2008. Statement 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and related Interpretations, and how derivative instruments and related hedged items affect a companys financial positions, financial performance, and cash flows.  The required disclosures include the fair value of derivative instruments and their gains and losses in tabular format, information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and a companys strategies and objectives for using derivative financial instruments. The statement also requires entities to disclose information that would enable users of its financial statements to understand the volume of its derivative activity.Statement 161 is effective for our fiscal 2009 financial statements.  The format and specific disclosures related to our derivative activity will depend upon the nature of our derivatives activity at that time.FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, in May 2008. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SECs approval of the Public Company Accounting Oversight Boards amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Given our current accounting policies we expect this statement will have no impact on our financial statements.    Item 3. Quantitative and Qualitative Disclosures about Market RiskInterest Rate Sensitivity and Asset / Liability Management ReviewAs you read in our annual report, we predicted market interest rates for 2008 to fall early in the year, and then stabilize.  As it turned out, for most of the first nine months of the year, interest rates have declined, and have continued to do so into October.  Current predictions suggest a further reduction in short-term interest rates before the end of the year, as inflation worries give way to economic slowdown worries.  We believe the Federal Open Market Committee (FOMC) may now lower rates an additional 1⁄4% to 1⁄2% before the year end, as opposed to our earlier prediction that they would rise by that time period.  Though we have a liability-sensitive balance sheet, should this or a larger decrease occur, it is likely our net interest margin and interest spread will decline as rates paid on liabilities are near their lows and rates earned on assets will reset lower from their current rates.  We measure net interest income at-risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus- or minus-200 basis points over a twelve-month period.  This provides a basis or benchmark for our Asset/Liability Committee to manage our interest rate risk profile. Presented below is a table showing our interest rate risk profile at September 30, 2008 and December 31, 2007.  Our models suggest our interest rate risk has increased slightly from year end for a 200 basis point change in rates.   19     EstimatedChanges in InterestPercentage Change inRatesFuture Net Interest Income(basis points)20082007+200(2)%(1)%+100(4)(4)No change---10044-200(2)n/m**not meaningful  20          Item 4. Controls and ProceduresThe Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of September 30, 2008, that the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.Also, there have been no changes in the Company's internal control over financial reporting that occurred during the third quarter of 2008, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.   21      PART II -- OTHER INFORMATIONCANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESItem 1.  Legal proceedingsNoneItem 1A.  Risk FactorsThere has been no material change to the risk factors disclosed in the Company's Form 10-K for the year ended December 31, 2007.Item 2.Unregistered Sales of Equity Securitiesand Use of ProceedsThe following table sets forth, for the monthly periods indicated in 2008, the total number of shares purchased and the price paid per share by The Canandaigua National Bank and Trust Company (Bank) for the Arthur S. Hamlin Award and the Canandaigua National Corporation for treasury.  Each of these entities is considered an affiliated purchaser of the Company under Item 703 of Regulation S-K.  The Company and Bank purchase prices per share were determined based on the most recent open-market transaction know to us immediately preceding the purchase.  TotalAverageSharesPrice PerDatePurchased (#)Share ($)PurposeJanuary 2008190$ 324.66TreasuryMarch 20081,690$ 313.76TreasuryJune 20081,822$ 310.14TreasuryJune 200811$ 310.14Arthur S. Hamlin AwardAugust 2008258$ 310.14TreasurySeptember 2008332$ 320.11Treasury   Item 3.  Defaults Upon Senior SecuritiesNoneItem 4.  Submission of Matters to a Vote of Security HoldersNoneItem 5.  Other information - Common Stock TradeWhile the Company's stock is not actively traded, it trades sporadically on the Over-the-Counter Bulletin Board system and periodically in auctions conducted by the Banks Trust Department as agent for selling shareholders at their request. In addition, it is not listed with a national securities exchange. Due to the limited number of transactions, the high, low and weighted average sale prices may not be indicative of the actual market value of the Company's stock. The following table sets forth a summary of open-market transactions regarding the Company's common stock during each period for transactions that were administered by the Banks Trust Department:  Dates of Open-Market TransactionsNumber of
Shares
SoldAverage
Price
Per ShareHighest Accepted
BidLowest
Accepted
BidMarch 13, 2008950$ 313.76$ 330.00$ 305.00June 12, 2008953$ 310.14$ 325.00$ 305.25August 14, 2008744$ 320.11$ 322.50$ 312.00   22     Item 6.  Exhibits  ExhibitWhere exhibit may be found:(3.i)Certificate of Incorporation of the RegistrantExhibit (3.i) on Form 10-K for the year ended December 31, 2004(3.ii.)By-laws of the RegistrantExhibit (3.ii) on Form 10-K for the year ended December 31, 2004(10.1)Canandaigua National Corporation Stock Option PlanExhibit (10.1) on Form 10-K for the year ended December 31, 2005(10.2)Canandaigua National Corporation Incentive Stock PlanExhibit (10.2) on Form 10-K for the year ended December 31, 2005(11)Calculations of Basic Earnings Per Share and Diluted
Earnings Per ShareNote 3 to the Condensed Consolidated Financial Statements(20)Interim Period Letter to ShareholdersFiled Herewith(31.1)Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002Filed Herewith(31.2)Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002Filed Herewith(32)Certification of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed Herewith   23      SIGNATURESCANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  CANANDAIGUA NATIONAL CORPORATION(Registrant)November 6, 2008/s/ George W. Hamlin, IVDateGeorge W. Hamlin, IVPresident and Chief Executive OfficerNovember 6, 2008/s/ Lawrence A. HeilbronnerDateLawrence A. HeilbronnerExecutive Vice President and
Chief Financial Officer    24