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 June 30, 2011OR[  ]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  [cnc10q_20110630finalhtml002.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)  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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.  Yes  [Ö]No  [ ]  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.
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 registrant had 471,973 shares of common stock, par value $20.00, outstanding at July 24, 2011.         Forward-Looking Statements  This report, including information incorporated by reference, contains, and future filings by Canandaigua National Corporation on Forms 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 and the Companys most recent Annual Report on Form 10-K. 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. Certain matters which management has identified, which may cause material variations are noted elsewhere herein and in the Companys other publicly filed reports. 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 caution readers not to place undue reliance on any of these forward-looking statements.       CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 30, 2011  PART I -- FINANCIAL INFORMATIONPAGEItem 1.  Financial Statements (Unaudited)Condensed consolidated balance sheets at June 30, 2011  and December 31, 20101Condensed consolidated statements of income for the three and six month periods endedJune 30, 2011 and 2010.2Condensed consolidated statements of stockholders' equity for the six-month periods endedJune 30, 2011 and 2010.3Condensed consolidated statements of cash flows for the six-month periods endedJune 30, 2011 and 2010.4Notes to condensed consolidated financial statements5Item 2.  Management's Discussion and Analysis of FinancialCondition and Results of Operations22Item 3. Quantitative and Qualitative Disclosures about Market Risk31Item 4. Controls and Procedures31PART II -- OTHER INFORMATIONItem 1.  Legal Proceedings32Item 1A.Risk Factors32Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds32Item 3.  Defaults Upon Senior Securities32Item 4.  (Removed andReserved)32Item 5.  Other Information32Item 6.  Exhibits34SIGNATURES35


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|PART I  FINANCIAL INFORMATIONItem 1. Financial Statements

CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSJune 30, 2011 and December 31, 2010 (Unaudited)
(dollars in thousands, except per share data)   June 30,December 31,20112010AssetsCash and due from banks$31,41128,951Interest-bearing deposits with other financial institutions3,5704,200Federal funds sold160,839105,078Securities:- Available for sale, at fair value118,318113,995- Held-to-maturity (fair value of $155,250 in 2011 and $160,401 in 2010)150,245155,881Loans - net1,160,1011,189,221Premises and equipment  net14,79414,370Accrued interest receivable6,2846,337Federal Home Loan Bank stock and Federal Reserve Bank stock2,6562,460Goodwill8,8188,818Intangible assets5,2805,724Prepaid FDIC Assessment4,0295,175Other assets23,54921,294Total Assets$1,689,8941,661,504Liabilities and Stockholders' EquityDeposits:DemandNon-interest bearing$209,506186,289Interest bearing156,412150,360Savings and money market676,744648,291Time451,926488,390Total deposits1,494,5881,473,330Borrowings-330Junior subordinated debentures51,54751,547Accrued interest payable and other liabilities12,86012,503Total Liabilities1,558,9951,537,710Stockholders' Equity:Preferred stock, $.01 par value; 4,000,000 sharesauthorized, no shares issued or outstanding--Common stock, $20.00 par value; 4,000,000 sharesauthorized, 486,624 shares issued in 2011 and 20109,7329,732Additional paid-in-capital8,8268,823Retained earnings116,460109,768Treasury stock, at cost (14,651 shares at June 30, 2011)and 14,437 at December 31, 2010)(4,819)(4,728)Accumulated other comprehensive income, net700199Total Stockholders' Equity130,899123,794Total Liabilities and Stockholders' Equity$1,689,8941,661,504  See accompanying notes to condensed consolidated financial statements.  1   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFor the three and six month periods ended June 30, 2011 and 2010 (Unaudited)
(dollars in thousands, except per share data)   Three Months EndedSix Months EndedJune 30,June 30,2011201020112010Interest income:Loans, including fees$16,17716,901$32,25633,120Securities2,0102,2104,0804,469Federal funds sold and other11558210113Total interest income18,30219,16936,54637,702Interest expense:Deposits2,4152,9635,0916,187Borrowings-96-173Junior subordinated debentures7427321,4871,477Total interest expense3,1573,7916,5787,837Net interest income15,14515,37829,96829,865Provision for loan losses:1405258902,950Net interest income after provision for loan losses15,00514,85329,07826,915Other income:Service charges on deposit accounts2,7222,7425,3075,297Trust and investment services income3,1172,5986,2165,404Net gain on sale of mortgage loans443542810910Loan servicing income, net243215466413Loan-related fees5682165151(Loss) on calls of securities, net(96)(99)(97)(104)Other operating income4344071,244830Total other income6,9196,48714,11112,901Operating expenses:Salaries and employee benefits7,8247,24715,82514,520Occupancy, net1,8831,7813,7163,439Technology and data processing1,1099812,1511,905Professional and other services8961,0931,8031,864Marketing and public relations6395951,3081,150Office supplies, printing and postage362349776719Intangible amortization222248444497Other real estate operations178190406414Other operating expenses1,7221,6033,7273,289Total operating expenses14,83514,08730,15627,797Income before income taxes7,0897,25313,03312,019Income taxes2,0451,8993,6503,148Net income5,0445,3549,3838,871Basic earnings per share$10.6811.36$19.8718.83Diluted earnings per share$10.5111.19$19.5418.53  See accompanying notes to condensed consolidated financial statements.  2   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYFor the six-month periods ended June 30, 2011 and 2010 (Unaudited)
(dollars in thousands, except share data)   AccumulatedNumber ofAdditionalOtherSharesCommonPaid-inRetainedTreasuryComprehensiveOutstandingStockCapitalEarningsStockIncome (Loss)TotalBalance at December 31, 2010472,187$9,7328,823109,768(4,728)199123,794Comprehensive income:Change in fair value ofInterest rate swaps,net of taxes of $113----178178Change in unrealized gain onsecurities available for sale,net of taxes of $177----297297Plus reclassification adjustmentfor realized losses included innet income on called securities,net of taxes of $12----2626Net income--9,383--9,383Total comprehensive income9,884Purchase of treasury stock(262)---(107)-(107)Shares issued as compensation48-3-16-19Cash dividend - $5.70 per share--(2,691)--(2,691)Balance at June 30, 2011471,973$9,7328,826116,460(4,819)700130,899Balance at December 31, 2009470,836$9,7328,59197,795(5,143)760111,735Comprehensive income:Change in fair value ofinterest rate swap,net of taxes of $154----239239Change in unrealized gain onsecurities available for sale,net of taxes of $101----240240Plus reclassification adjustmentfor realized losses included innet income on called securities,net of taxes of $58----110110Net income--8,871--8,871Total comprehensive income9,460Purchase of treasury stock(544)---(186)-(186)Shares issued as compensation145---50-50Exercise of stock options,including tax benefit of $2322,586-232(562)872-542Cash dividend - $5.15 per share--(2,425)--(2,425)Balance at June 30, 2010473,023$9,7328,823103,679(4,407)1,349119,176  See accompanying notes to condensed consolidated financial statements.  3   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six-month periods ended June 30, 2011 and 2010 (Unaudited)
(dollars in thousands)   20112010Cash flow from operating activities:Net income$9,3838,871Adjustments to reconcile net income tonet cash provided by operating activities:Depreciation, amortization and accretion2,7392,406Provision for loan losses8902,950Gain on sale of premises and equipment and other real estate, net(21)(6)Writedown of other real estate2523Deferred income tax benefit(328)(358)Income from equity-method investments, net(365)(37)Loss on calls of securities and write-down, net97104Gain on sale of mortgage loans, net(810)(910)Originations of loans held for sale(63,357)(84,537)Proceeds from sale of loans held for sale72,47175,389(Increase) decrease in other assets(1,303)1,463Increase (decrease) in all other liabilities422(2,130)Net cash provided by operating activities19,8433,228Cash flow from investing activities:Securities available-for-sale:Proceeds from maturities and calls27,08232,219Purchases(31,023)(30,113)Securities held to maturity:Proceeds from maturities and calls28,17317,641Purchases(23,124)(14,417)Loan principal collections in excess of originations, net19,622(21,726)Purchase of premises and equipment, net(1,537)(2,091)Purchases of FRB and FHLB stock, net(196)(130)Investment in equity-method investments(3)(756)Proceeds from sale of other real estate605364Net cash provided (used) by investing activities19,599(19,009)Cash flow from financing activities:Net increase in demand, savings and money market deposits57,72287,694Net decrease in time deposits(36,464)(33,419)Principal repayments of term borrowings(330)(1,247)Proceeds from sale of treasury stock1950Payments to acquire treasury stock(107)(186)Proceeds from issuance of treasury stock under stock option plan-310Tax benefit from stock option exercise-232Dividends paid(2,691)(2,425)Net cash provided by financing activities18,14951,009Net increase in cash and cash equivalents57,59135,228Cash and cash equivalents - beginning of period138,22978,224Cash and cash equivalents - end of period$195,820113,452Supplemental disclosure of cash flow information:Interest paid$6,8257,918Income taxes paid4,1003,386Supplemental schedule of noncash investing activitiesReal estate acquired in settlement of loans$3041,432  See accompanying notes to condensed consolidated financial statements.  4   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   (1)   Basis of Presentation  The 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, 2010 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 an independent registered public accounting firm.  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 six-month periods ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  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, 2010 (the 2010 Annual Report).  Amounts in prior periods' condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation.  Management has evaluated the impact of subsequent events on these financial statements to the date of filing of this Form 10-Q with the Securities and Exchange Commission.  Effective August 31, 2010, CNB Mortgage Company became a wholly-owned subsidiary of The Canandaigua National Bank and Trust Company. It was formerly a wholly-owned subsidiary of Canandaigua National Corporation. The reason for the change was to bring CNB Mortgage Company under the federal banking regulatory structure from New York States banking regulatory structure, which had become increasingly rigid and costly. There was no change in the consolidated financial results, in segment reporting, or in management of the companies.  (2) Securities  Amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2011 are summarized as follows:  June 30, 2011Gross UnrealizedAmortizedFairCostGainsLossesValueSecurities Available for Sale:U. S. Treasury$501--501Government sponsored enterprise obligations53,755190(343)53,602State and municipal obligations59,7552,110(31)61,834Corporate obligations(1)1,1885(194)999Equity securities1,29686-1,382Total securities Available for Sale$116,4952,391(568)118,318(1)Amortized cost includes cumulative $860,000 write-down prior to 2010 for other-than-temporary impairment.  Securities Held to Maturity:Government sponsored enterprise obligations$3,0083(25)2,986State and municipal obligations146,3564,980(132)151,204Corporate obligations881179-1,060Total Securities Held to Maturity$150,2455,162(157)155,250  5   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    (2) Securities(continued)  The amortized cost and fair value of debt securities by years to maturity as of June 30, 2011, follow (in thousands). Maturities of amortizing securities are classified in accordance with their contractual repayment schedules. Expected maturities will differ from contracted maturities since issuers may have the right to call or prepay obligations without penalties.  Available for SaleHeld to MaturityAmortizedAmortizedCost(1)Fair ValueCostFair ValueYearsUnder 1$19,60619,90230,04430,5141 to 542,42644,213104,310108,5395 to 1050,05249,81914,97115,09510 and over4,4114,3849201,102Total$116,495118,318150,245155,250(1)Amortized cost includes a cumulative $860,000 write-down prior to 2010 for other-than-temporary impairment.  The following table presents the fair value of securities with gross unrealized losses at June 30, 2011,  aggregated by category and length of time that individual securities have been in a continuous loss position (in thousands).  Less than 12 monthsOver 12 monthsTotalFairUnrealizedFairUnrealizedFairUnrealizedSecurities Available for Sale:ValueLossesValueLossesValueLossesU. S. Treasury$100---100-U.S. government sponsored enterprise obligations28,354343--28,354343State and municipal obligations2,15317958143,11131Corporate obligations--859194859194Total temporarily impaired securities$30,6073601,81720832,424568  Securities Held to Maturity:U.S. government sponsored enterprise obligations$1,97425--1,97425State and municipal obligations8,886893,2444312,130132Total temporarily impaired securities$10,8601143,2444314,104157  Substantially all of the unrealized losses on the Company's securities were caused by market interest rate changes from those in effect when the specific securities were purchased by the Company. With the exception of certain corporate obligations, discussed below, the contractual terms of these securities do not permit the issuer to settle the securities at a price less than par value. Except for certain corporate obligations, all securities rated by an independent rating agency carry an investment grade rating. Because the Company does not intend to sell the securities and it believes it is not likely to be required to sell the securities before recovery of their amortized cost basis, which may be, and is likely to be, maturity, the Company does not consider these securities to be other than temporarily impaired at June 30, 2011, except as discussed below.  In the available-for-sale portfolio, the Company holds approximately $1.0 million of bank trust-preferred securities with an adjusted cost basis of $1.2 million.  These securities are backed by debt obligations of banks, with about $0.8 million of the securities backed by two of the largest U.S. banks and $0.2 million backed by a pool of banks debt in the form of a collateralized debt obligation (CDO). As a result of market upheaval, a lack of regular trading market in these securities, and bank failures, the fair value of these securities had fallen sharply in 2008 and continued to fall in the first half of 2009.  As more fully discussed in the 2010 Annual Report, we have recognized cumulative other-than-temporary-impairment (OTTI) amounting to $0.9 million on one CDO. Management intends to sell this security in whole or in part over time. If the financial condition of the underlying banks deteriorates, further write-downs could occur before a sale. The maximum potential write-down would be its current carrying value of less than $0.2 million.  6   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    (2) Securities (continued)  Amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2010 are summarized as follows:  December 31, 2010Gross UnrealizedAmortizedFairCostGainsLossesValueSecurities Available for Sale:U.S. Treasury$503--503U.S. government sponsored enterprise obligations43,669203(663)43,209State and municipal obligations66,0041,988(34)67,958Corporate obligations(1)1,191-(233)958Equity securities1,29374-1,367Total securities Available for Sale$112,6602,265(930)113,995(1)Amortized cost includes cumulative write-downs of $860,000 prior to 2010 for other-than-temporary impairment.  Securities Held to Maturity:U.S. government sponsored agencies obligations$7,00533-7,038State and municipal obligations147,9654,400(324)152,041Corporate obligations911414(3)1,322Total securities Held to Maturity$155,8814,847(327)160,401  The following table presents the fair value of securities with gross unrealized losses at December 31, 2010, aggregated by category and length of time that individual securities have been in a continuous loss position (in thousands).  Less than 12 monthsOver 12 monthsTotalFairUnrealizedFairUnrealizedFairUnrealizedSecurities Available for Sale:ValueLossesValueLossesValueLossesU.S. government sponsored enterprise obligations$27,565663--27,565663State and municipal obligations1,066211,352132,41834Corporate obligations--778233778233Total temporarily impaired securities$28,6316842,13024630,761930Securities Held to Maturity:State and municipal obligations$11,9502764,7774816,727324Corporate obligations1513--1513Total temporarily impaired securities$12,1012794,7774816,878327  (3) Loans and Allowance for Loan Losses  Loans, other than loans designated as held for sale, are stated at the principal amount outstanding, net of deferred origination costs. Interest and deferred fees and costs on loans are credited to income based on the effective interest method. Loans held for sale are carried at the lower of cost or fair value.  The accrual of interest on commercial and real estate loans is generally discontinued, and previously accrued interest is reversed, when the loans become 90 days delinquent or when, in managements judgment, the collection of principal and interest is uncertain. Loans are returned to accrual status when the doubt no longer exists about the loan's collectability and the borrower has demonstrated a period of timely payment history. Specifically, the borrower will have resumed paying the full amount of scheduled interest and principal  7   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   payments; all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period (6 months); and, there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.  Interest on consumer loans is accrued until the loan becomes 120 days past due at which time principal and interest are generally charged off.  Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, and sufficient information exists to make a reasonable estimate of the inherent loss, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loans effective interest rate, or as a practical expedient, at the loans observable fair value or the fair value of underlying collateral if the loan is collateral-dependent.  In the absence of sufficient, current data to make a detailed assessment of collateral values or cash flows, management measures impairment on a pool basis using loss factors equivalent to those applied to similarly internally classified loans. Impairment reserves are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans are generally applied to reduce the principal balance outstanding. In considering loans for evaluation of specific impairment, management generally excludes smaller balance, homogeneous loans: residential mortgage loans, home equity loans, and all consumer loans, unless such loans were restructured in a troubled debt restructuring. These loans are collectively evaluated for risk of loss on a pool basis.  Loans  The Company's market area is generally Ontario County and Monroe County of New York State. Substantially all loans are made in its market area. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in the economic conditions in this area. The Company's concentrations of credit risk are as disclosed in the following table of loan classifications. The concentrations of credit risk in related loan commitments and letters of credit parallel the loan classifications reflected. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.  The major classifications of loans at June 30, 2011 and December 31, 2010, follow (in thousands), along with a description of their underwriting and risk characteristics:  20112010Commercial and industrial$199,400212,707Mortgages:Commercial433,449434,787Residential  - first lien240,163232,953Residential  - second lien95,58896,416Consumer:Automobile - indirect169,126181,481Other27,18926,437Loans held for sale5,80914,113Total loans1,170,7241,198,894Plus - Net deferred loan costs5,2145,962Less - Allowance for loan losses(15,837)(15,635)Loans - net$1,160,1011,189,221  Commercial and Industrial Loans: These loans generally include term loans and lines of credit.  Such loans are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and equipment purchases. As a general practice, a collateral lien is placed on equipment or other assets owned by the borrower.  These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure secondary collateral such as real estate and obtain personal guarantees of the borrowers.  To further reduce risk and enhance liquidity, these loans generally carry variable rates of interest, repricing in three- to five-year periods, and have a maturity of five years or less. Lines of credit generally have terms of one year or less and carry floating rates of interest (e.g., prime plus a margin).  Commercial Mortgages: Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures housing businesses, healthcare facilities, and other non-owner- occupied facilities.  These loans are less risky than commercial and industrial loans, since they are secured by real estate and buildings. The loans typically have  8   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   adjustable interest rates, repricing in three- to five-year periods, and require principal payments over a 10- to 25-year period.  Many of these loans include call provisions within 10 to 15 years of their origination. The Companys underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and the underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property serving as collateral.  Residential First-Lien Mortgages: We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage.  These loans are collateralized by owner-occupied properties located in the Companys market area. They are amortized over five to 30 years. Substantially all residential loans secured by first mortgage liens are originated by CNB Mortgage and sold to either the Bank or third-party investors.  Generally, fixed-rate mortgage loans with a maturity or call date of ten years or less and a rate of 5% or more are retained in the Companys portfolio.  For longer term, fixed-rate residential mortgages without escrow, the Company generally retains the servicing, but sells the right to receive principal and interest to Freddie Mac.  All loans not retained in the portfolio or sold to the Federal Home Loan Mortgage Company (FHLMC), also known as Freddie Mac, are sold to unrelated third parties with servicing released.  This practice allows the Company to manage interest rate risk, liquidity risk, and credit risk.  From time to time, the Company may also purchase residential mortgage loans which are originated and serviced by third parties. In an effort to manage risk of loss and strengthen secondary market liquidity opportunities, management typically uses secondary market underwriting, appraisal, and servicing guidelines.  Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 85% of appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including at each loan draw period.  Residential Second-Lien Mortgages: The Company originates home equity lines of credit and second mortgage loans (loans secured by a second [junior] lien position on one-to-four-family residential real estate).  These loans carry a higher risk than first mortgage residential loans as they are in a second position relating to collateral.  Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows.  A security interest, with title insurance when necessary, is taken in the underlying real estate.  Consumer Loans:  The Company funds a variety of consumer loans, including direct and indirect automobile loans, recreational vehicle loans, boat loans, aircraft loans, home improvement loans, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer's deposit account. A small amount of loans are unsecured, which carry a higher risk of loss.  Loans Held for Sale:  These are the Residential First-Lien Mortgages, discussed above, which are sold to Freddie Mac and other third parties. These loans are carried at their lower of cost or fair value, calculated on a loan-by-loan basis.  Allowance for Loan Losses  The allowance for loan losses is a valuation reserve for probable and inherent losses in the loan portfolio. Credit losses arise primarily from the loan portfolio, but may also be derived from other credit-related sources, when drawn upon, such as commitments, guarantees, and standby letters of credit. Additions are made to the allowance through periodic provisions, which are charged to expense. All losses of principal are charged to the allowance when incurred or when a determination is made that a loss is expected. Subsequent recoveries, if any, are credited to the allowance.  The Company has established a process to assess the adequacy of the allowance for loan losses and to identify the risks in the loan portfolio. This process consists of the identification of specific reserves for impaired commercial loans and residential mortgages and the calculation of general reserves, which is a formula-driven allocation.  The calculation of the general reserve involves several steps. A historical loss factor is applied to each loan by loan type and loan classification. The historical loss factors are calculated using a loan-by-loan, trailing eight-quarter net loss migration analysis for commercial loans. For all other loans, a portfolio-wide, trailing eight-quarter net loss migration analysis is used. Adjustments are then made to the historical loss factors based on current-period quantitative objective elements (delinquency, non-performing assets, classified/criticized loan trends, charge-offs, concentrations of credit, recoveries, etc.) and subjective elements (economic conditions, portfolio growth rate, portfolio management, credit policy, and others). This methodology is applied to the commercial, residential mortgage, and consumer portfolios, and their related off-balance sheet exposures. Any allowance for off-balance sheet exposures is recorded in Other Liabilities.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.  9   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    A summary of the changes in the allowance for loan losses follows (in thousands). Notwithstanding the estimated allocations set forth in any table, the entirety of the allowance is available to absorb losses in any portfolio:  For the Six-Month PeriodsEnded June 30,20112010Balance at the beginning of period$15,63514,232Loans charged off(1,286)(2,930)Recoveries of loans charged off598659Provision charged to operations8902,950Balance at end of period$15,83714,911  The following table presents an analysis of the allowance for loan losses by loan type, including a summary of the loans type individually and collectively evaluated for impairment as of June 30, 2011 (in thousands):  ResidentialResidentialmortgage  -mortgage  -LoansCommercialCommercialfirstsecondConsumer -Consumer -held forand industrialmortgagepositionpositionindirectothersaleUnallocatedTotalBeginning Balance$6,3641,3711,3045634,1961,155-68215,635Charge-offs(351)(43)(16)-(608)(268)--(1,286)Recoveries111-192315151--598Provision(1,352)103255698(287)-1,491890Ending Balance$4,7721,3381,6325704,601751-2,17315,837of which:Amount for loans individuallyevaluated for impairment$2,250330------2,580Amount for loans collectivelyevaluated for impairment$2,5221,0081,6325704,601751-2,17313,257Balance of loans individuallyevaluated for impairment$2,8881,376------4,264Balance of loans collectivelyevaluated for impairment$196,512432,073240,16395,588169,12627,1895,8095,2141,171,674  The balance in the allowance for loan losses increased to 1.35% of the loan portfolio at June 30, 2011 from 1.30% of the loan portfolio at December 31, 2010. This increase was principally due to higher allocations for residential mortgages (amounting to $0.3 million) and consumer-indirect loans (amounting to $0.7 million) based upon higher historical losses and past-due trends.  Another factor considered in the allowance is the level and trend of past due loans.  Loans past due and loans in nonaccrual status (non-performing loans) grew in the first half of 2011 as a percent of the portfolio, increasing the risk of loss in the portfolio, thus leading to an increase in the allowance for loan losses.  A handful of credit-related factors improved, which positively impacted the level of the allowance: (a) Improvements in the credit quality of commercial and industrial loans led to a $1.4 million reduced allocation to that portfolio; (b) A small improvement in the economy was recognized in our analysis. As of June 30, 2011, approximately 15 basis points or $1.8 million of the allowance was associated with the relatively slow economic conditions compared to 17 basis points or $2.0 million of the allowance at December 31, 2010; (c) We also considered the current level of net-chargeoffs, which can be an indicator, though indirectly correlated, of losses in the portfolio.  Net chargeoffs as a percentage of the portfolio fell to 12 basis points at June 30, 2011 compared to 40 basis points for the full year of 2010; (d) Finally, the total portfolio balance is considered in our evaluation of the allowance.  As the loan portfolio balance increases, so will the related allowance for loan losses, even when no other factors change. In the first half of 2011 the loan portfolio fell $28.2 million, and applying the beginning of the year allowance factor of 1.30%, portfolio shrinkage had a $0.4 million positive impact on the allowance for the year.  In monitoring the credit quality of the portfolio, management applies a credit quality indicator to substantially all commercial loans. These quality indicators, as more fully described in the 2010 Annual Report, range from one through eight in increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Loans rated 1 through 4 are generally allocated a lesser percentage allocation in the allowance for loan losses than loans rated from 5 through 8. Residential Mortgage Loans are generally rated 9, unless they are used to partially collateralize commercial loans, in which case they carry the rating of the respective commercial loan relationship, or if management wishes to recognize a well defined weakness or loss potential to more accurately reflect credit risk. Unrated loans are allocated a percentage of the allowance for loan losses on a pooled-basis.   10   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   The following tables present the loan portfolio as of June 30, 2011 and December 31, 2010 by credit quality indicator (in thousands). Except for loans in the 9 and unrated categories, credit quality indicators are reassessed for each applicable loan at least annually, generally upon the anniversary of the loans origination or receipt and analysis of the borrowers financial statements, when applicable.  Loans in category 9 and unrated are evaluated for credit quality after origination based upon delinquency status. (See Aging Analysis table). However, management is in the process of implementing a portfolio re-scoring tool, whereby credit scores are updated on a periodic basis.  Credit Quality Indicator Analysis as of June 30, 2011ResidentialResidentialmortgage  -mortgage  -LoansDeferredCommercialCommercialfirstsecondConsumer -Consumer -held forFees andand industrialmortgagepositionpositionindirectothersaleCostsTotal1-Superior$11,924----383--12,3072-Good9,26426,8871672,683----39,0013-Satisfactory67,189165,5281,272822----234,8114-Watch40,336189,2083,196417----233,1575- Special Mention18,89814,6021,749-----35,2496-Substandard22,49720,4745,917392-102--49,3827-Doubtful64--38----102Subtotal$170,172416,69912,3014,352-485--604,0099 and not rated29,22816,750227,86291,236169,12626,7045,8095,214571,929Total$199,400433,449240,16395,588169,12627,1895,8095,2141,175,938  Credit Quality Indicator Analysis as of December 31, 2010ResidentialResidentialmortgage  -mortgage  -LoansDeferredCommercialCommercialfirstsecondConsumer -Consumer -held forFees andand industrialmortgagepositionpositionindirectothersaleCostsTotal1-Superior$11,367----155--11,5222-Good13,27324,2332173,678----41,4013 Satisfactory70,400165,3501,0151,338----238,1034 Watch50,579193,9605,829459-5--250,8325 Special Mention17,98417,235981844----37,0446 Substandard20,98517,5943,720881----43,1807 Doubtful---38----388 Loss---------Subtotal$184,588418,37211,7627,238-160--622,1209 and not rated28,11916,415221,19189,178181,48126,27714,1135,962582,736Total$212,707434,787232,95396,416181,48126,43714,1135,9621,204,856   A summary of information regarding nonaccruing loans and other nonperforming assets as of June 30, 2011, December 31, 2010, and June 30, 2010 follows (in thousands):  June 30,December 31,June 30,201120102010Accruing loans 90 days or more delinquent$2,1771,589883Nonaccruing loans20,43921,24322,042Total nonperforming loans22,61622,83222,925Other real estate owned3,9914,2913,861(less write-down of other real estate owned)(551)(551)(53)Total nonperforming assets$26,05626,57226,733  11   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    The following tables presents, as of June 30, 2011 and December 31, 2010, additional details about the loan portfolio in the form of an aging analysis of the loan portfolio. Amounts exclude deferred fees and costs (in thousands).  Aging Analysis as of June 30, 201190 Days> 90 Days30-59 Days60-89 DaysOrTotalTotalandNon-AccrualPast DuePast DueGreaterPast DueCurrentLoansAccruingLoansCommercial and industrial$6872315,1046,022193,378199,4001,0314,073Commercial mortgages2,6582,02110,61515,294418,155433,449-10,615Residential - first lien508685,9166,834233,329240,1638145,102Residential - junior lien4941466251,26594,32395,58878547Consumer:Automobile - Indirect1,3464153402,101167,025169,126238102Other831311623026,95927,18916-Loans held-for-sale----5,8095,809--$5,3183,81222,61631,7461,138,9781,170,7242,17720,439  Aging Analysis as of December 31, 201090 Days> 90 Days30-59 Days60-89 DaysOrTotalTotalandNon-AccrualPast DuePast DueGreaterPast DueCurrentLoansAccruingLoansCommercial and industrial$2,5875424,2957,424205,283212,7072254,070Commercial mortgages2,720-11,44514,165420,622434,78741311,032Residential - first lien3,6211,4875,85110,959221,994232,9536275,224Residential - junior lien2161069481,27095,14696,41631917Consumer:Automobile - indirect1,7858152682,868178,613181,481268-Other3521602553725,90026,43725-Loans held-for-sale----14,11314,113--Total$11,2813,11022,83237,2231,161,6711,198,8941,58921,243    A summary of information regarding impaired loans follows (in thousands):  As of and forAs of and forAs of and forthe six-monththe yearthe six-monthperiod endedendedperiod endedJune 30,December 31,June 30,201120102010Recorded investment at period end$20,43921,65524,052Impaired loans with specific related allowance at period end$4,2643,1163,479Amount of specific related allowance at period end,$2,5806741,334Average investment during the period (1)$21,61821,86221,300Interest income recognized on a cash basis during the period$not meaningful35not meaningful  12   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    The details of impaired loans as of June 30, 2011 and December 31, 2010 follow (in thousands)  June 30, 2011  UnpaidSpecificAverageInterestRecordedprincipalRelatedRecordedincomeInvestmentbalanceAllowanceInvestmentRecognizedWith no specific allowanceCommercial and industrial$1,1851,372-1,454-Commercial mortgage9,23810,462-6,449-Residential mortgage - first position5,1035,256-3,164-Residential mortgage - second position547572-431-Consumer - other102102-101-Subtotal16,17517,764-11,599not meaningfulWith specific allowanceCommercial and industrial2,8883,2122,2502,871-Commercial mortgage1,3762,2843304,831-Residential mortgage - first position---1,965-Residential mortgage - second position---285-Consumer - other---67-Subtotal4,2645,4962,58010,019not meaningfulTotal$20,43923,2602,58021,618not meaningfulSummary by portfolio:Commercial$14,68717,3302,58015,605-Residential5,6505,828-5,845-Consumer and other102102-168-Total$20,43923,2602,58021,618not meaningful  December 31, 2010UnpaidSpecificAverageInterestRecordedprincipalRelatedRecordedincomeWith  no specific allowanceInvestmentbalanceAllowanceInvestmentRecognizedCommercial and industrial$3,1773,598-5,741-Commercial mortgage10,10710,446-9,94934Residential mortgage - first position4,3914,476-1,9881Residential mortgage - second position664668-642-Consumer - other200200-100-Subtotal18,53919,388-18,42035With  specific allowanceCommercial and industrial1,3051,3434492,037-Commercial mortgage9242,489511,070-Residential mortgage - first position833835124291-Residential mortgage - second position54565044-Subtotal3,1164,7236743,442-Total$21,65524,11167421,86235Summary by portfolio:Commercial$15,51317,87650018,79734Residential5,9426,0351742,9651Consumer and other200200-100-Total$21,65524,11167421,86235  (4)   Loan Servicing Assets  The Company services first-lien, residential loans for 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.  The Company services all loans for FHLMC on a non-recourse basis; therefore, its 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 non-recourse basis, whereby the Company is subject to credit losses only to the extent of the proportionate share of the loans principal balance owned.  The Companys contract to sell loans to FHLMC and to the Federal Housing Administration (FHA) via third-parties contain certain representations and warranties that if not met by the Company would require the repurchase of such loans.  The Company has not historically been subject to a material volume of repurchases nor is it currently.   13   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   Gross servicing fees earned by the Company for the three-month periods ended June 30, 2011 and 2010, respectively, amounted to $364,000 and $339,000.  Gross servicing fees earned by the Company for the six-month periods ended June 30, 2011 and 2010, respectively, amounted to $711,000 and $668,000.  These fees are included in net mortgage servicing income on the statements of income.  The following table presents the changes in loan servicing assets for the six-month periods ended June 30, 2011 and 2010, respectively, as well as the estimated fair value of the assets at the beginning and end of the period (in thousands).  20112010EstimatedEstimatedBookFairBookFairValueValueValueValueBalance at January 1,$2,222$3,418$1,797$2,893Originations253369Amortization(244)(255)Balance at June 30,$2,231$3,460$1,911$2,834  (5)   Capital Changes  At the Companys Annual Meeting on April 13, 2011, shareholders authorized 4,000,000 shares of preferred stock, and an increase in the number of authorized common shares to 4,000,000.  (6)   Dividend  On July 13, 2011, the Board of Directors declared a semi-annual $5.75 per share dividend on common stock to shareholders of record on July 23, 2011. The dividend was paid on August 1, 2011.  This is in addition to the semi-annual $5.70 per share dividend on common stock declared in January 2011, and paid to shareholders in February 2011.  (7)   Earnings Per Share  Basic 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-month periods ended June 30, 2011 and 2010 follow (dollars in thousands, except per share data):  Three-monthsSix-monthsEnded June 30,Ended June 30,2011201020112010Basic Earnings Per Share:Net income applicable to common shareholders$5,0445,354$9,3838,871Weighted average common shares outstanding472,137471,256472,140471,048Basic earnings per share$10.6811.36$19.8718.83Diluted Earnings Per Share:Net income applicable to common shareholders$5,0445,354$9,3838,871Weighted average common shares outstanding472,137471,256472,140471,048Effect of assumed exercise of stock options7,6777,3928,0617,656Total479,814478,648480,200478,704Diluted earnings per share$10.5111.19$19.5418.53  14   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   (8)   Segment Information  The Company is organized into three reportable segments: the Company and its banking and Florida trust 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 six month periods ended June 30, 2011 and 2010 follows (dollars in thousands).  Three months ended June 30,2011BankCNBMGVTIntersegmentTotalNet interest income$15,14523(5)15,145Non-interest income5,6857841,013(563)6,919Total revenues20,8307861,016(568)22,064Provision for loan losses140---140Intangible amortization50-172-222Other operating expenses13,400630805(222)14,613Total expenses13,590630977(222)14,975Income (loss) before tax7,24015639(346)7,089Income tax2,04569(18)(51)2,045Net income (loss)$5,1958757(295)5,044Total identifiable assets$1,675,2168,22916,716(10,267)1,689,894  Three months ended June 30,2010BankCNBMGVTIntersegmentTotalNet interest income$15,3832(3)(4)15,378Non-interest income5,3111,015969(808)6,487Total revenues20,6941,017966(812)21,865Provision for loan losses525---525Intangible amortization53-195-248Other operating expenses12,669466779(75)13,839Total expenses13,247466974(75)14,612Income (loss) before tax7,447551(8)(737)7,253Income tax1,89921736(253)1,899Net income (loss)$5,548334(44)(484)5,354Total identifiable assets$1,608,77015,19617,401(17,409)1,623,958  15   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)    Six months ended June 30,2011BankCNBMGVTIntersegmentTotalNet interest income$29,96856(11)29,968Non-interest income11,7071,5202,050(1,166)14,111Total revenues41,6751,5252,056(1,177)44,079Provision for loan losses890---890Intangible amortization100-344-444Other operating expenses27,3561,2011,549(394)29,712Total expenses28,3461,2011,893(394)31,046Income (loss) before tax13,329324163(783)13,033Income tax3,65013327(160)3,650Net income (loss)$9,679191136(623)9,383Total identifiable assets$1,675,2168,22916,716(10,267)1,689,894  Six months ended June 30,2010BankCNBMGVTIntersegmentTotalNet interest income$29,8756(4)(12)29,865Non-interest income10,7211,7841,973(1,577)12,901Total revenues40,5961,7901,969(1,589)42,766Provision for loan losses2,950---2,950Intangible amortization108-389-497Other operating expenses24,8699271,729(225)27,300Total expenses27,9279272,118(225)30,747Income (loss) before tax12,669863(149)(1,364)12,019Income tax3,148339(5)(334)3,148Net income (loss)$9,521524(144)(1,030)8,871Total identifiable assets$1,608,77015,19617,401(17,409)1,623,958  (9) Interest Rate Swap Agreement  The Company is exposed to interest rate risk as a result of both the timing of changes in interest rates of assets and liabilities, and the magnitude of those changes.  In order to reduce this risk for the Companys $30.9 million floating-rate junior subordinated debenture, the Company entered into an interest rate swap agreement in 2007, which expired on June 15, 2011.  This interest rate swap agreement modified the repricing characteristics of the debentures from a floating-rate debt (LIBOR +1.40%) to a fixed-rate debt (5.54%). For this swap agreement, amounts receivable or payable were recognized as accrued under the terms of the agreement, and the net differential was recorded as an adjustment to interest expense of the related debentures. The interest rate swap agreement was designated as a cash flow hedge. Therefore, the effective portion of the swaps unrealized gain or loss was recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, was immediately reported in other operating income.  The swap agreement was carried at fair value in Other Liabilities on the Condensed Consolidated Statement of Condition.  In consideration of the expiration of the aforementioned agreement, the Company entered into a forward interest rate swap agreement on July 1, 2010.  This swap became effective on June 15, 2011 and expires on June 15, 2021.  This interest rate swap agreement modifies the repricing characteristics of the Companys $30.9 million floating-rate junior subordinated debenture from a floating-rate debt (LIBOR +1.40%) to a fixed-rate debt (4.81%). The accounting for this is the same as the expired swap agreement.  (10) Fair Values of Financial Instruments  Current accounting pronouncements require disclosure of the estimated fair value of financial instruments. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly, non-distressed sale between market participants at the measurement date. With the exception of certain marketable securities and one-to-four-family residential mortgage loans originated for sale, the Companys financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with accounting disclosure pronouncements, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations.  Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. Finally, the Company expects to retain substantially all assets and liabilities measured at fair value to their maturity or call date.  Accordingly, the fair values disclosed herein are unlikely to represent the instruments liquidation values, and do not, with the exception of securities, consider exit costs, since they cannot be reasonably estimated by management.  The estimated fair values of the Company's financial instruments are as follows (in thousands):  June 30, 2011December 31, 2010CarryingFairCarryingFairFinancial Assets:AmountValueAmountValueCash and equivalents$195,820195,820138,229138,229Securities, available-for-sale and held-to-maturity(1)$271,219276,224272,336276,856Loans-net$1,160,1011,196,3781,189,2211,245,838Loan servicing assets$2,2313,4602,2223,418Financial Liabilities:Deposits:Demand, savings andmoney market accounts$1,042,6621,042,662984,940984,940Time deposits$451,926456,596488,390494,654Borrowings$--330328Junior subordinated debentures$51,54752,53351,54752,866Other financial instruments:Interest rate swap agreements$(642)(642)(933)(933)Letters of credit$(140)(140)(127)(127)(1)Includes the Company's investment in Federal Reserve Bank stock and Federal Home Loan Bank stock.  The following methods and assumptions were used to estimate the fair value of each class of financial instrument:  Cash and Equivalents  For these short-term instruments that generally mature in 90 days or less, or carry a market rate of interest, the carrying value approximates fair value.  Securities (Available-for-Sale and Held-to-Maturity)  Fair values for securities are determined using independent pricing services and market-participating brokers, or matrix models using observable inputs. 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. Management obtains a single market quote or price estimate for each security.  None of the quotes or estimates is considered a binding quote, as management would only request one if management had the positive intent to sell the securities in the foreseeable future and management believed the price quoted represented one from a market participant with the intent and the ability to purchase. Internal matrix models are used for non-traded municipal securities.  Matrix models consider observable inputs, such as benchmark interest rates and spreads.   16   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   Certain securities fair values are determined using unobservable inputs and include bank debt based CDOs. There is a very limited market and limited demand for these CDOs 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. Management considered fair values from brokerage firms which were determined using assumptions as to expected cash flows and approximate risk-adjusted discount rates.  Loans  Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by interest type such as floating, adjustable, and fixed-rate loans, and by portfolios such as commercial, mortgage, and consumer.  The fair value of performing loans is calculated by discounting scheduled cash flows through the loans' estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category. The estimate of maturity is based on the average maturity for each loan classification.  Delinquent loans (not in foreclosure) are valued using the method noted above, and also consider the fair value of collateral for collateral-dependent loans. While credit risk is a component of the discount rate used to value loans, delinquent loans are presumed to possess additional risk. Therefore, the calculated fair value of loans is reduced by the allowance for loan losses.  The fair value of loans held for sale is estimated based on outstanding investor commitments or in the absence of such commitments, is based on current yield requirements or quoted market prices.  Loan Servicing Assets  Fair value is determined through estimates provided by a third party. To estimate the fair value, the third party considers market prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. 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. The key economic assumptions used to determine the fair value of mortgage servicing rights at June 30, 2011 and 2010, and the sensitivity of such values to changes in those assumptions are summarized in the 2010 Annual Report and are substantially unchanged.  Deposits  The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated using a discounted cash flow approach that applies current market rates to a schedule of aggregated expected maturities of time deposits.  Borrowings  The fair value of borrowings is based on quoted market prices for the identical debt when traded as an asset in an active market.  If a quoted market price is not available, fair value is calculated by discounting scheduled cash flows through the borrowings' estimated maturity using current market rates.  Junior Subordinated Debentures  There is no trading market for the Companys debentures.  Therefore the fair value of junior subordinated debentures is determined using an expected present value technique. The fair value of the adjustable-rate debentures approximates their face amount, while the fair value of fixed-rate debentures is calculated by discounting scheduled cash flows through the debentures estimated maturity using current market rates.  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.  Other Financial Instruments The fair values of letters of credit and unused lines of credit approximate the fee charged to make the commitments.  17   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   (11) Fair Values Measurements  Some of the financial instruments disclosed in the previous note are measured at fair value in the condensed consolidated financial statements. Accounting principles establish a three-level valuation hierarchy for 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.  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 and non-recurring basis at June 30, 2011, by caption on the Condensed 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 SheetMeasured on a recurring basis:AssetsSecurities available-for-sale:U.S. Treasury$501--501U.S. government sponsoredenterprise obligations-53,602-53,602State and municipal obligation-61,834-61,834All other-1,3829992,381Total assets$501116,818999118,318LiabilitiesInterest rate swap agreement$-642-642Letters of credit-140-140Total liabilities$-782-782Measured on a non-recurring basis:AssetsLoansLoans-held-for-sale$-5,809-5,809Collateral dependent impaired loans--4,2644,264Other real estate owned--3,4403,440Loan servicing assets--3,4603,460Total assets$-5,80911,16416,973   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 (Level 3) for the three and six month periods ended June 30, 2011  and 2010 (in thousands).  Three months endedSix months endedJune 30, 2011June 30, 2011Securities available for sale, beginning of period$995$958Unrealized gain included in other comprehensive income441Securities available for sale, end of period$999$999   18   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   The following table presents for each of the fair-value hierarchy levels the Companys assets and liabilities that were measured at fair value on a recurring and non-recurring basis at December 31, 2010, 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 SheetMeasured on a recurring basis:AssetsSecurities available-for-sale:U.S. Treasury$503--503U.S. government sponsoredenterprise obligations-43,209-43,209State and municipal obligation-67,958-67,958All other-1,3679582,325Total assets$503112,534958113,995LiabilitiesInterest rate swap agreement$-933-933Letters of credit-127-127Total liabilities$-1,060-1,060Measured on a non-recurring basis:AssetsLoansLoans-held-for-sale$-14,113-14,113Collateral dependent impaired loans--3,1163,116Other assetsOther real estate owned--3,7403,740Loan servicing assets--2,2222,222Total assets$-14,1139,07823,191   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 (Level 3) for the three and six month periods ended June 30, 2010  (in thousands).  Three months endedSix months endedJune 30, 2010June 30, 2010Securities available for sale, beginning of period$1,004$972Unrealized gain included in other comprehensive income(9)23Securities available for sale, end of period$995$995  (12) Accounting Pronouncements Implemented in the Current Year  We implemented the following Accounting Standards Updates (ASU) as of January 1, 2011 with no impact to our financial condition or results of operations:  ASU 2010-28,IntangiblesGoodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.   19   CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited)   ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). ASU201-29 specifies that if a public entity presents comparative financial statements, the entity (acquirer) should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. It also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  20     Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  The 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 2010 Annual Report.  Critical Accounting Estimate  We 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.  We also consider the valuation of investment securities for Other-Than-Temporary-Impairment (OTTI) as critical in the current market environment given the lack of an active and liquid market for a small number of our holdings. There has been no change in our methodology for estimating the allowance or securities valuation, which is fully described within the 2010 Annual Report.  Significant Corporate Event  At its Wednesday, July 13, 2011, meeting the Companys Board of Directors authorized and approved, subject to shareholder approval, a stock split and a charter amendment.  The Company will hold a special meeting of shareholders on September 14, 2011, to seek the approval of the Companys shareholders of (a) a 4-for-1 forward stock split of the Companys common stock (the Stock Split) and (b) a corresponding amendment to the Companys Certificate of Incorporation that would affect the split by increasing the Companys total number of authorized shares from 8,000,000 to 20,000,000 shares, increasing the authorized number of shares of common stock from 4,000,000 to 16,000,000 shares, and implementing the stock split. The Board set August 1, 2011 as the record date for the determination of shareholders entitled to notice of, and to vote at, the special meeting.  Financial Overview  Diluted earnings per common share for the second quarter of 2011 fell 6.1% to $10.51 from $11.19 in the same quarter of 2010. Net income in these periods was $5.0 million and $5.4 million, respectively. Total assets at June 30, 2011 were $1,689.9 million compared to $1,661.5 million at December 31, 2010 and $1,624.0 million at June 30, 2010.  The current quarters earnings, as compared with the second quarter of 2010, reflected a modest rise in total revenues (net interest income and other income) and substantially lower provision for loan losses, offset by higher operating expenses.  Net interest income fell due to lower rates on earning assets and a general narrowing of net interest margin and spread. The lower provision for loan losses occurred due to improved credit quality conditions. Operating expense increases occurred in more major categories with the most significant being salaries and employee benefits reflecting incumbent salary increases and costs of new hires to support franchise growth.  With the exception of the loan portfolio, interest-earning assets and liabilities fell during the current quarter compared to March 31, 2011. Federal funds sold fell driven by seasonal outflows of municipal deposits, and investment balances fell due to seasonal municipal obligation maturities. Off-balance sheet, both the book value and fair value of Assets under Administration fell, reflecting new customer accounts offset by seasonal outflows and a relative decline in stock market performance.  We were encouraged by the increase in net loans, having reversed the last two quarters declines.  In addition, retail deposit growth continues, a reflection of the strength of our franchise. Notwithstanding the loan and retail deposit growth, the declining balance sheet and narrowing net interest margin, which accounts for over two-thirds of revenue, will have a negative impact on overall profitability.  Financial Condition (three months ended June 30, 2011)  At June 30, 2011, total assets were $1,689.9 million, down $21.4 million or 1.3% from $1,711.3 million at March 31, 2011.  Cash and cash equivalents (cash, balances with other financial institutions, and federal funds sold) were $195.8 million at March 31, 2011, falling $20.5 million on seasonal outflow of municipal deposits, and partially impacted by an increase in loans and decrease in investment balances.  The securities portfolio fell $6.4 million or 2.3% from March 31, 2011. Similar to our experience in the same quarter of 2010, we experienced a relatively high level of security calls (i.e., issuers repaid debt obligations before their stated maturities).   Market interest rates fell during this quarter compared to the first quarter of this year.  This decline made it beneficial for issuers to call outstanding higher cost obligations and replace with lower cost obligations. With this lower rate environment we found fewer investments with attractive terms (rate, maturity, credit quality) in which to invest.  Accordingly, we purchased fewer investments in this quarter, and the uninvested funds were held in Federal Funds Sold. As we discussed last quarter, considering the continued low loan demand and high Federal Funds Sold balance, we will seek to grow the investment portfolio in the coming quarters to improve overall interest margin.  21     However, our ability to do so will be restricted by the supply of high-quality US government sponsored enterprise obligations and municipal obligations, our preferred investment choices.  The securities portfolio consists principally of New York State municipal obligations (77.5% of total at June 30, 2011) with the remainder mostly in US government sponsored enterprise obligations.  The total fair value of both the available-for-sale and the held-to-maturity securities portfolios exceeded amortized cost as a result of a decrease in mid- and long-term market rates since the securities purchase. In both portfolios we hold some securities with fair values below their amortized cost and we concluded at June 30, 2011, that there are none considered to be other than temporarily impaired.  Much continues to be written about high debt loads of municipalities and other government entities.  There has been concern from time to time of the possibilities of default given the budget pressures, including structural deficits that many municipalities face.  Our Company is an investor in state and municipal obligations. We invest only in New York State based obligors.  These investments are used to re-cycle the deposits of our local municipalities, and since we invest in New York State obligations, the money stays local and earns a tax-advantaged return.  Prior to purchasing an investment, our Treasury team performs a financial analysis of the obligor or the obligation using such tools as internal models, particularly for non-rated issuances, third-party analyses, and rating agency guidance. At June 30, 2011, 93% of the portfolio was rated A or better, 3% BBB, and 5% was unrated. In addition, 96% of the obligations were backed by third-party credit support, and 96% were general obligations of the municipalities with unlimited taxing authority. We found no evidence of credit deterioration in the portfolio at June 30, 2011.  In early August 2011, Congress passed, and the President signed, legislation to increase the nations debt limit as well as develop a process for addressing the current and future deficits. Lack of an agreement raised the specter of a U.S. government default on its debt.  There still lingers the risk of a rating agency downgrade of the US debt from its current AAA/Aaa. We can only speculate how a default or downgrade would impact the economy or our customers.  With respect to any direct impact on the Company, we believe it would have little as we hold only $500,000 in U.S. Treasury debt.  Loans, exclusive of loans held for sale, grew $3.1 million during the second quarter of 2011 with the gross portfolio totaling $1,175.9 million compared to $1,171.2 million at March 31, 2011. This reverses the past two quarters declines. Commercial loans (commercial and industrial loans and mortgages) grew $1.1 million with new originations keeping pace with paydowns and maturities.  Residential mortgages, first- and second-lien positions, grew about $6.5 million.  We usually see portfolio growth in the second and third quarters of the year as these are the heaviest home buying periods in our marketplace.  Despite very low, long-term interest rates, consumers continue to find our reasonably-priced 10-year callable, portfolio product favorable.  Conversely, the balance of indirectly originated automobile loans fell $4.3 million, a shallower decline than last quarters $8.1 million, but a decline nonetheless. As was the case in the first quarter of 2011, during this quarter we saw strong competition from captive auto finance companies, national and regional banks, and the U.S. governments majority-owned Ally Bank, which, with its declining funding costs, low effective tax rate, and exclusive or partially-exclusive financing agreements with GM and Chrysler, controls a substantial portion of the auto-finance supply and can offer lower interest rates on loan products.  In the coming quarter we expect both the commercial and residential portfolios to increase modestly, similar to this quarters pace.  Indirectly originated automobile loans, which usually increase in the summer months, may not this year given the highly competitive environment. Please see the section entitled Impaired Loans and Non-Performing Assets for a discussion of loan credit quality.  Total deposits at June 30, 2011, were $1,494.6 million and were down $28.3 million from March 31, 2011 with nearly all of the decline coming due to seasonal outflows of governmental entities.  Growth occurred only in demand accounts, which were principally business-related. Consistent with recent quarters, we continued to experience declines in time deposits, both consumer and business, and expect that to repeat through the end of 2011 as a result of the generally low interest rate environment in which depositors prefer to keep excess funds liquid awaiting higher rates and investment returns.  Since most of these matured time deposits were redeposited in other deposit types, our non-government deposits were only minimally impacted, but our interest costs declined as a result. Looking to the coming quarter, we expect consumer and commercial deposits to grow modestly and we expect little change in total municipal deposits consistent with prior years third quarters. However, it is likely gross deposits will decline following the maturity of approximately $15 million of brokered deposits in the third quarter of 2011.  As expected, there was no change in total borrowings. We do not expect to incur new long-term borrowings or need to access overnight borrowings for the foreseeable future, because the balance of federal funds sold and the strength of consumer and business deposit inflows should be sufficient to fund the increases we expect in earning assets.  Results of Operations (three months ended June 30, 2011)  Net interest income decreased $0.2 million or 1.5% for the quarter compared to the same quarter in 2010, reflecting a narrowing of interest rate margin and spread.  Average asset balances grew, but came in low yielding Federal Funds Sold. With general interest rates remaining low we have seen both asset yields and liability costs fall as maturing products are replaced at lower interest rates.  Furthermore, given the length of this very low interest rate environment, were finding it increasingly difficult to significantly lower rates on deposit products, yet rates continue to fall on earning assets, thus negatively impacting our interest rate spread and margin.  On a tax-equivalent basis, compared to the same quarter in 2010, the overall growth in interest-earning assets and interest-bearing liabilities had no impact on net interest income, and the change in rates had a $0.2 million negative impact. Net interest margin was 4.00% for the second quarter of 2011, down from 4.33% during the same quarter in 2010 and up slightly from 3.96% in the first quarter of 2011.  As we discussed in our 2010 Annual Report, we expect full-year net interest income (revenue) to increase year-on-year due to  22     expected balance sheet growth, but we expect little positive impact from rate changes given the current interest rate environment and our anticipation of continued low interest rates for the second half of the year.  Summary tax-equivalent net interest income information for the three-month periods ended June 30, 2011 and 2010 follows (dollars in thousands).  20112010AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateInterest-bearing deposits andfed funds sold$178,414$1150.26%$81,443$580.28%Securities275,9512,8554.14275,2933,1454.57Loans, net1,145,75616,1775.651,149,58616,9015.88Total interest-earning assets1,600,121$19,1474.79%1,506,323$20,1045.34%Non interest earning assets94,357104,729Total assets$1,694,478$1,611,052Total deposits$1,301,941$2,4150.74%$1,235,909$2,9630.96%Total debt51,5477425.7660,1528285.51Total interest-bearing liabilities1,353,488$3,1570.93%1,296,062$3,7911.17%Non-interest bearing liabilities213,757200,044Equity127,233114,946Total liabilities and equity$1,694,478$1,611,052Interest rate spread3.86%4.17%Net interest margin$15,9904.00%$16,3134.33%  The provision for loan losses was $0.1 million for the quarter, significantly lower than the $0.5 million for the same quarter last year. The lower provision in the 2011 quarter was mostly driven by stable asset quality, lower net charge-offs, and a decline in the overall loan portfolio balance. The higher provision in 2010 was mostly attributable to portfolio growth. Details of the allowance for loan losses and net charge-offs for the year to date is presented in Footnote 3 to the Condensed Consolidated Financial Statements.  Total other income for the quarter ended June 30, 2011 increased 6.7% to $6.9 million from $6.5 million in 2010.  Service charges on deposit accounts were relatively unchanged with lower revenues from our Courtesy Limit product offset by higher revenues for electronic banking services.  Changes in banking regulations for overdraft payment services, requiring affirmative customer opt-in and other limits on charges were effective in the middle of 2010, reducing year-over-year revenue.  Account maintenance service charges (included in service charges) were down slightly year-on-year due to higher customer balances offsetting their periodic fees. Electronic banking services (debit and ATM card revenues) continued to increase with consumers shifting from cash and checks to electronic transactions. We expect these trends to continue through the remainder of the year. A consequence of the passage of Financial Reform Act is the potential negative impact on debit card interchange income.  The so-called Durbin Amendment requires the Federal Reserve Board to adopt regulations limiting interchange fees that can be charged in an electronic debit card transaction to the reasonable and proportionate costs related to the incremental cost of the transaction. Banks under $10 billion in assets are exempt, which includes the Company.  However, the Company contracts with large debit card processors with which we have relatively weak bargaining power.  It is possible these processors, as a result of final rule, discussed in the following paragraph, will earn lower revenues, leaving less revenue per transaction for the Company from this $3.4 million per year revenue source. In June 2011, the Federal Reserve Board issued its final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. As required by the Financial Reform Act, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees is effective on October 1, 2011. We estimate this per-transaction amount is nearly 45% lower than our current average per-transaction revenue amount. Trust and investment services income grew 20.0% to $3.1 million for the second quarter of 2011 compared to $2.6 million for the same quarter in 2010. Total assets under administration (see table below) have grown year to year due to both organic growth in underlying accounts and higher fair value of assets within the accounts resulting from improved equity and bond markets. We anticipate book  23     value growth to continue into the coming quarters with year-over-year growth rates expected to be in the 10% range. We anticipate fair value growth will at least mirror book value growth.  Assets Under Administrationas of(in thousands)June 30,March 31,December 31,June 30,2011201120102010Book value$1,705,6441,717,4951,658,1111,591,411Fair value$1,909,4111,928,2611,830,5491,607,528  The net gain on sale of mortgages fell nearly 20% in 2011 from 2010 due to the expiration of government subsidized home buyer tax credits in June 2010.  This program significantly increased mortgage closings in the second quarter of 2010 over historical trends. (See table below).  In the coming quarter, usually a strong period for home sales and  mortgage closings in our region, we expect volumes to be similar to last years third quarter and this years second quarter with an equivalent amount of net gain on sale of mortgages.  CNB Mortgage Closed Loans by TypeFor the three-month periods ended June 30,(dollars in thousands)20112010Purchase money mortgages$29,76953,977Refinance mortgages12,36813,839Total mortgage originations$42,13767,816Percentage of loans retained in portfolio32.8%10.3%  Loan servicing fee income continued to rise. We expect this historical level of income for the Company to remain as long as rates remain historically low and we sell loans with servicing retained. The heavy mortgage refinance activity during the past few years had led us to sell more originations to third parties rather than add these low-rate, long-term assets to our portfolio.  We service many of these originated loans on behalf of Freddie Mac.  The balance of loans serviced for them stood at $444.4 million at June 30, 2011 compared to $435.2 million at December 31, 2010, and $407.1 million at June 30, 2010.  We also earn servicing fees from sold commercial loan participations. The total balance of participations sold was $112.0 million at June 30, 2011 compared to $ 116.1 million at December 30, 2010, and $125.2 million at June 30, 2010.  Other operating income was little changed for the quarter, but can fluctuate from time to time depending upon earnings from our nonmarketable investments. We expect to record earnings from these investment in the coming quarters, however the extent and timing cannot be determined.  Total operating expenses grew 5.3% or $0.7 million for the quarter ended June 30, 2011, compared to the same three-month period in 2010. With the exception of a drop in professional fees, all major categories increased, and were consistent with the growth in our franchise: loans, deposits, assets under administration, etc.  The largest component increase was in salaries and employee benefits reflecting the addition of new staff and raises for incumbents. We expect similar results for the third quarter of the year.  Professional fees fell from 2010, when we made a final payment to a vendor for consulting services.  Occupancy costs have increased with the addition of new offices including our newest banking office in the Town of Webster, New York.  Marketing and public relations expenses have increased due to an increase in television advertising, and continued promotional activities in Sarasota, Florida related to our trust business.  Technology and data processing expenses, professional and other services expenses, and office supplies and related expenses have increased consistent with the franchise growth.  The quarterly effective tax rate was 28.8% in 2011 and 26.2% in 2010.  The change in the effective rate is attributable to the ratio of tax-exempt income to total income. It is likely this rate will settle to 28% - 30% range through 2011 due to lower tax-exempt income from declining interest rates on tax-exempt bonds.  24      Financial Condition and Results of Operations (six months ended June 30, 2011)  At June 30, 2011, total assets of the Company were up $28.4 million or 1.7% from December 31, 2010. Cash and equivalents (cash, balances and federal funds sold) increased as a result of securities maturities, deposit growth, and net loan runoff.  Securities fell $1.3 million as calls and maturities exceeded purchases of new investments. Loans fell $28.9 million or 2.4%.  Most of the decline was attributable to commercial loan payoffs and commercial line of credit paydowns, as well as a slowing of originations of indirect automobile loans due to increased activity from nationally-based competitors.  Total deposits at June 30, 2011, were up $21.3 million or 1.4% with growth mostly in consumer and municipal deposits.  Net interest income was flat comparing the first six-months of 2011 to the same period in 2010. Net interest margin was positively impacted by a net increase in balances, but this was offset by the negative impact of falling rates in interest-earning assets. Summary tax-equivalent net interest income information for the six-month periods ended June 30, 2011 and 2010 follows:  20112010AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateInterest-bearing deposits andfed funds sold$163,770$2100.26%$79,752$1130.29%Securities274,8795,7924.21275,8226,3654.62Loans, net1,154,70932,2565.591,139,24733,1205.81Total interest-earning assets1,593,358$38,2584.80%1,494,821$39,5985.30%Non interest earning assets93,708105,215Total assets$1,687,066$1,600,036Total deposits$1,301,690$5,0910.78%$1,242,956$6,1871.00%Total debt51,6041,4875.7660,3371,6505.47Total interest-bearing liabilities1,353,294$6,5780.97%1,303,293$7,8371.20%Non-interest bearing liabilities208,450183,590Equity125,322113,153Total liabilities and equity$1,687,066$1,600,036Interest rate spread3.83%4.10%Net interest margin$31,6803.98%$31,7614.25%  The provision for loan losses was $2.1 million lower for the first six months of 2011 compared to the first six months of 2010.  The reasons are discussed in the three-month section above.  Other income for the six months ended June 30, 2011, increased 9.4% to $14.1 million from $12.9 million in 2010. The same factors impacting the three-month period impacted the six month period results; the exception coming in Other Operating Income which grew $0.4 million.  Of this amount, $0.3 million was due to earnings from our investment in Cephas Capital Partners which is in a wind-down phase.  Mortgage originations fell 23.7% for the six month period ended June 30, 2011 compared to the same period in 2010 due to the end of the government sponsored homebuyer credit in 2010.  Along with the overall decrease in volume was the reduction in net gain on the sale of mortgage loans. A summary of originations follows (dollars in thousands):  CNB Mortgage Closed Loans by TypeFor the three-month periods ended June 30,(dollars in thousands)20112010Purchase money mortgages$47,63177,512Refinance mortgages39,06836,142Total mortgage originations$86,699113,654Percentage of loans retained in portfolio26.9%25.6%  Operating expenses increased 8.5% or $2.4 million for the six months ended June 30, 2011, over the same period in 2010.  The reasons are the same as those discussed in the three-month section above.  The Company's effective tax rate for the year to date in 2011 increased to 28.0% from 26.0% in 2010. The change in the effective rate is attributable to the ratio of tax-exempt income to total income.  Liquidity  There has been no material change from December 31, 2010 in our available sources of wholesale liquidity from either the Federal Home Loan Bank of New York (FHLB) or the Federal Reserve Bank of New York.  At June 30, 2011 we had no overnight or short-term borrowings outstanding, and during the quarter we did not utilize any overnight or short-term borrowings. Given our high level of federal funds sold, continued deposit inflows and the slow pace of loan growth and investment purchases, we foresee no borrowings in the coming quarter.  For the six months ended June 30, 2011, cash flows from all activities provided $57.6 million in net cash and cash equivalents versus $35.2 million for the same period in 2010.  In both years the principal source of cash inflows was deposits.  Net cash provided by operating activities was $19.8 million in 2011 versus $3.2 million in 2010.  Both the largest source and use of operating cash in 2011 and 2010 were loans held for sale with origination and sales activity about 25% lower in 2011 than in 2010. Excluding the effect of loans held for sale, operating activities provided $11.5 million cash for the six-month period in 2011 and $13.3 million in 2010.  During the first half of 2011, investing activities provided $19.6 million in cash and equivalents compared to using $19.0 million in 2010. Significant investing activities in both periods occurred in the loan and securities portfolios.  However in 2011, the loan portfolios were a source of funding as principal collections exceeded net new loan originations, while in 2010 they were a use of cash. Net securities activities used cash in 2011 (increased the portfolio). In 2010, maturities and calls of higher yield investments equaled our new investments.  Cash provided by financing activities was $18.1 million in 2011 versus $51.0 million in 2010.  The main contributor in both years was deposit activity.  For the remainder of 2011, cash for growth is expected to come primarily from operating activities and customer deposits.  Customer deposit growth is expected to come mainly from Monroe and Ontario Counties consumers and businesses.  Contractual obligations and commitments  Less 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 disclosed in our 2010 Annual Report.  Also, as discussed more fully in our 2010 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).  June 30,2011December 31, 2010NotionalNotionalAmountAmountCommitments to extend credit:Commercial lines of credit$119,879101,481Commercial real estate and construction$35,79931,826Residential real estate at fixed rates$3,4233,871Home equity lines of credit$168,006150,085Unsecured personal lines of credit$16,37416,662Standby and commercial letters of credit$9,3248,180Commitments to sell real estate loans$5,80914,113  Capital Resources  Under the regulatory framework for prompt corrective action, as of June 30, 2011, the Company and Bank are categorized as "well-capitalized."  This is unchanged from December 31, 2010, and management anticipates no change in this classification for the foreseeable future.  On September 12, 2010, the Basel Committee on Banking Supervision released its proposal for revising capital requirements for internationally active financial institutions. These new standards are called Basel III.  As a signatory to this proposal, the United States banking regulators will be revising capital standards for financial institutions in the U.S.  Accordingly, our capital standards will change.  However, regulators have not released any new standards and are not expected to do so for some time.  Furthermore, the international standards do not become fully effective until 2018, which is likely when the U.S. standards would become fully effective.  It is too early to determine whether there will be any material impact to the Company.  In order to ensure the Company has the capital tools available to it to react to regulatory changes, on April 13, 2011, shareholders approved an increase in the number of authorized common shares, and the authorization of a new class of preferred stock.   In addition, the Companys shareholders will be asked to further increase the number of authorized shares in connection with the proposed 4-for-1 stock split. We do not contemplate issuing preferred stock in the foreseeable future.  Additional shares of common stock might be issued in consideration of stock-based compensation plans, additional stock-splits, or stock dividends.  Credit-Related Information  Allowance for Loan Losses , Net Charge-offs, and Non-performing Loans  Credit-related statistics follow (dollars in thousands):  June 30,March 31,December 31,June 30,2011201120102010Allowance as a percentage of total period end loans1.35%1.36%1.30%1.26%Allowance as a percentage of non-performing loans68.95%69.27%68.48%65.04%Net charge-offs to average loans (annualized)0.12%0.16%0.40%0.40%Non-performing loans to total period-end loans1.96%1.97%1.90%1.94%Non-performing assets to total period-endloans and other real estate2.25%2.25%2.21%2.25%  The provision for loan losses for the three-month period ended June 30, 2011 was lower than the same period in 2010, reflecting lower loan growth and improved credit quality compared to 2010. The balance in the allowance for loan losses changed little during the quarter, but was impacted by higher quantitative factors from the eight-quarterloss migration applied to the residential mortgage and the consumer indirect portfolio.  Conversely the allowances associated with commercial loans were reduced due to portfolio quality improvement, lower quantitative factors, and little change in the portfolios balance. As discussed more fully in the 2010 Annual Report, we determine the amount necessary in the allowance for loan losses based upon a number of factors.  Based on our current assessment of the loan portfolio, we believe the amount of the allowance for loan losses at June 30, 2011 is appropriate at $15.8 million. However, should non-performing and non-accrual loans increase, or should we experience declines in customers credit quality measured through loan impairment or internal loan classifications, we may need to establish a higher allowance for loan losses as a percentage of total loans, which would necessitate an increase to the provision for loan losses.  Net charge-offs in the second quarter of 2011 were $0.2 million, compared to $0.5 million in the first quarter of 2011 and $0.9 million in the second quarter of 2010.  Net charge-offs to average loans for the first six months fell in 2011 to a lower than average 12 basis points compared to 40 basis points in 2010. The 2010 figure was high due to a large charge-off on an impaired commercial loan with an impaired reserve in that years first quarter. In the coming quarter, we anticipate annualized net charge-offs in the 20-35 basis points range if we experience no significant portfolio deterioration.  Total non-performing loans were $22.6 million at June 30, 2011, down slightly from $23.0 million at March 31, 2011, and $22.8 million at year end 2010, and $22.9 million at June 30, 2010.  The general decline in non-performing loans during this twelve month period came mainly in commercial and industrial loans.  Non-performing first lien residential loans increased year over year, due to an increase in the number of borrowers unable to make timely principal payments or property tax payments.  Though a comparatively modest amount, other real-estate owned has also increased during the twelve month period, but is down from year-end 2010 due to property liquidations. Given the current economic climate and overall growth in non-performing loans, we can expect additional foreclosures in the coming periods.  In the process of resolving nonperforming loans, we may choose to restructure the contractual terms of certain loans and attempt to work out alternative payment schedules with the borrower in order to avoid foreclosure of collateral. Any loans that are modified are evaluated to determine if they are "troubled debt restructurings (TDR)" and if so, are evaluated for impairment.  A TDR is defined as a loan restructure where for legal or economic reasons related to a borrowers financial difficulties, the creditor grants one or more concessions to the borrower that it would not otherwise consider. Terms of loan agreements may be modified to fit the ability of the borrower to repay in respect of its current financial status and restructuring of loans may include the transfer of assets from the borrower to satisfy debt, a modification of loan terms, or a combination of the two. If a satisfactory restructure and payment arrangement cannot be reached, the loan may be referred to legal counsel for foreclosure.  As of June 30, 2011 there were two lending relationships, one totaling $4.9 million and one totaling $0.3 million, that were considered  TDRs due to the nature of the concessions granted due to the borrower. These balances are included in non-performing loans. For the largest one, we renegotiated certain terms of their loans in 2010.  The significant term modified was the monthly principal and interest payment amount.  We agreed to forbear our rights under default provisions in the loan agreements on the condition that the borrower made monthly payments which were significantly less than those required under the terms of the original loan agreements. The customer was in compliance with the terms of the forbearance agreement which expired in March 2011. We have renewed the forbearance agreement for an additional 24 months with higher monthly payments than under the previous agreement.  Following the implementation of ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which was issued in April 2011, and is discussed below, it is possible we will experience an increase in the volume of loans considered TDRs.  Impaired Loans  Total impaired loans have exhibited a positive trend during the past twelve months, having declined to $20.4 million at June 30, 2011 from $24.1 million at June 30, 2010 due to improvements in commercial and industrial loans.  Since year end 2010, total impaired loans decreased $1.3 million mostly due to improved credit quality for a handful of small commercial real estate relationships. At June 30, 2011 we identified a total of 87 loans totaling $20.4 million that were considered impaired.  Of these, 11, with a balance outstanding of $4.3 million had specific reserves calculated through a detailed analysis amounting to $2.6 million. The remaining 76 loans totaling $16.2 million were evaluated for impairment on a collective basis.  Though we see signs of improving regional economic conditions, their positive impact will be slow to realize.  We can anticipate more loans, though we know of no material ones, will become impaired in the coming quarters.  Concurrently, we expect some loans, which are currently impaired, to improve over this same period. Accordingly we do not expect the level of impaired loans to substantially decline during the September 30, 2011 quarter.  Impact of Financial Regulation Legislation  Management continues to navigate the myriad regulations and pronouncements resulting from the July 21, 2010 passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). Most of the major regulations have yet to be enacted, but planning and managing their implementation requires considerable forethought.  Our employees are working tirelessly to develop cost-effective solutions.  Items of particular concern include the following:  As discussed with the three-month results, the so-called Durbin Amendment required the Federal Reserve Board to adopt regulations limiting interchange fees that can be charged in an electronic debit card transaction to the reasonable and proportionate costs related to the incremental cost of the transaction. The Board has issued its rules.  The Consumer Financial Protection Bureau (CFPB), created by the Act, has come into existence. It will have an independent budget and be housed in the Federal Reserve Board, but not subject to its jurisdiction.  The CFPB has rulemaking authority to promulgate regulations regarding consumer financial products and services offered by all banks and thrifts, their affiliates and many non-bank financial services firms.  We cannot determine what the impact the CFPBs rules and regulations might have on the Company, its product offerings, its customers ability to purchase products to meet their specific needs, or the Companys general business practices, but they are likely to be significant given the CFPBs broad powers.  Proposed regulations on minimum standards for mortgages in section 1141 of the Financial Reform Act and related proposed amendments to Regulation Z would prohibit our offering of our popular three-year callable mortgage.  This product has been successfully managed by our borrowers for years, and has allowed us to finance their home purchases using an interest-rate risk managed product whose yield matches our cost of funds.  This contrasts with the typical 30-year fixed rate mortgage, which if placed on a banks balance sheet is funded by short-term deposits, leading to a significant asset-liability mismatch and a high interest rate risk.  In the first quarter of 2011, the FDIC finalized its new assessment system in accordance with the Financial Reform Act.  The changes became effective beginning this quarter and will be assessed against our prepayments to the FDIC at the end of September 2011. The FDIC Board approved a final rule that changes the assessment base for deposit insurance, adopts a new large-bank pricing assessment scheme, and sets a target size for the Deposit Insurance Fund.  The rule -- as mandated by the Dodd-Frank Act -- finalizes a target size for the Deposit Insurance Fund at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. As mandated by the Financial Reform Act, the rule changes the assessment base from adjusted domestic deposits to a banks average consolidated total assets minus average tangible equity. The rule defines tangible equity as Tier 1 capital. The rule lowers overall assessment rates in order to generate the same approximate amount of insurance premiums under the new larger base as was raised under the old base. The largest banks (over $10 billion in assets) are expected to pay higher insurance premiums, while smaller banks, ours included, should see lower relative premiums. Using an assessment calculator provided by the FDIC and data from our December 31, 2010 assessment, we estimate our annualized premiums may fall as much as $1.0 million.  Recent Accounting Standards to be implemented in Future Periods  The following presents a summary of Accounting Standards Updates (ASUs), exclusive of technical correction ASUs that will be subject to implementation in future periods.  ASU 2011-02.A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, issued April, 2011.   The amendments in this Update clarify the guidance on a creditors evaluation of whether it has granted a concession. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) The restructuring constitutes a concession; and (2) The debtor is experiencing financial difficulties. The amendments in this Update are effective for us for the third quarter of 2011, and are to be applied retrospectively to the beginning of 2011. We do not anticipate any significant impact upon adoption of these amendments.  ASU 2011-03.Reconsideration of Effective Control for Repurchase Agreements, issued April 2011. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. The guidance in this Update is effective for us on January 1, 2012. Since the Company does not currently engage in these types of transactions, the Update should have no impact on the Companys financial condition or results of operations.  ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, issued May 2011. The amendments are intended to converge fair value measurement and disclosure guidance in U.S. GAAP with the guidance in the International Accounting Standards Boards concurrently issued IFRS 13, Fair Value Measurement. The amendments in ASU 2011-04 do not modify the requirements for when fair value measurements apply; rather, they generally represent clarifications on how to measure and disclose fair value under ASC 820, Fair Value Measurement, including the following revisions: · The concepts of highest and best use and valuation premise are relevant only for measuring the fair value of nonfinancial assets and do not apply to financial assets and liabilities. · An entity should measure the fair value of an equity-classified financial instrument from the perspective of the market participant that holds the instrument as an asset. · An entity that holds a group of financial assets and financial liabilities whose market risk (that is, interest rate risk, currency risk or other price risk) and credit risk are managed on the basis of the entitys net risk exposure may apply an exception to the fair value requirements in ASC 820 if certain criteria are met. The exception allows such financial instruments to be measured on the basis of the reporting entitys net, rather than gross, exposure to those risks. · Premiums or discounts related to the unit of account are appropriate when measuring fair value of an asset or liability if market participants would incorporate them into the measurement (for example, a control premium). However, premiums or discounts related to size as a characteristic of the reporting entitys holding (that is, a blockage factor) should not be considered in a fair value measurement. The following new disclosures related to an entitys fair value measurements are required:  For Level 3 fair value measurements: · Quantitative information about unobservable inputs · Description of the valuation processes · Qualitative discussion about the sensitivity of the measurements · Information about the use of a nonfinancial asset when it differs from the assets highest and best use · The level of fair value hierarchy for assets and liabilities that are not measured at fair value but whose fair value is required to be disclosed. The guidance in this Update is effective for us on January 1, 2012.  We have not determined its impact on our financial statements.  ASU 2011-05 Presentation of Comprehensive Income, issued June 2011. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders equity, among other amendments in this Update.  The amendments require that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Currently we present components of other comprehensive income as part of the statement of changes in stockholders equity, which will no longer be allowable under this amendment.  The amendment will be applied retrospectively (prior periods will be restated), and will be effective for us beginning the first quarter of 2012.  We have not yet determined which disclosure method we will use.   25     Item 3. Quantitative and Qualitative Disclosures about Market Risk  Interest Rate Sensitivity and Asset / Liability Management Review  As set forth in our 2010 Annual Report, we predicted market interest rates for 2011 would remain fairly steady for most of the year at current historic lows with an increase in the fourth quarter of the year.  Upon review of recent economic, fiscal, and monetary reports, including a review of the Federal Open Market Committees minutes, we now believe market interest rates will remain at current historic lows for at least the remainder of 2011.  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 June 30, 2011 and December 31, 2010.  EstimatedChanges in InterestPercentage Change inRatesFuture Net Interest Income(basis points)20112010200(1)%(2)%100(4)(3)No change---100(1)(2)-200(1)(2)  Our model suggests our interest rate risk has increased slightly from year end for a smaller upward change in rates (+100 basis points), and improved slightly for larger change in rates both upward and downward. Our exposure to smaller increasing rates has increased, because, if interest rates move upward our liability costs (deposits and borrowings) will rise faster than our asset yields. We also believe this is the most likely scenario with rates more likely to rise than fall, although not until 2012 at the earliest. Our decreased exposure in a downward rate scenario is due principally to loans which have reached floor interest rates.  The Companys exposure to interest rates will change in September 2012 when its $20.6 million junior subordinated debenture converts from a fixed rate of interest of 6.32% per annum to a variable rate of LIBOR plus 1.44%.  Because of the long-term nature of this debenture, we prefer to fix its interest cost. In consideration of this rate change, we are evaluating entering into a forward interest rate swap agreement in the coming months. This agreement would be accounted no differently than our other interest rate swap agreements.  Item 4. Controls and Procedures  The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of June 30, 2011, 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 second quarter of 2011, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  26     PART II -- OTHER INFORMATION CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES  Item 1.  Legal proceedings  The Company and its subsidiaries are, from time to time, parties to or otherwise involved in legal proceedings arising in the normal course of business as either plaintiffs or defendants. Management does not believe that there is any pending or threatened proceeding against the Company or its subsidiaries which, if determined adversely, would have a material effect on the Company's business, results of operations, or financial condition.  Item 1A.  Risk Factors  There has been no material change to the risk factors disclosed in the 2010 Annual Report.  Item 2.Unregistered Sales of Equity Securitiesand Use of Proceeds  The following table sets forth, for the monthly period indicated in 2011, 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, the Canandaigua National Corporation Employee Stock Ownership Plan (ESOP) 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.  Shares repurchased by the Company are not part of a publicly announced plan or program.  The Bank, ESOP, and Company purchase prices per share were determined based on the most recent price established at the sealed-bid auction immediately preceding the purchase. Purchases occur on an ad-hoc basis when shares become available in the marketplace and the Company is interested in purchasing these shares for the corporate purposes discussed above. Sales occur when corporate needs require the use of shares and there are none available in the market at the time.  TotalAverageSharesPrice PerDatePurchased (#)Share ($)PurposeJanuary 201150$383.38TreasuryApril 201135$399.56CompensationJune 2011212$415.47TreasuryJune 20114$415.47CompensationJune 20119$415.47Arthur S. Hamlin Award  Item 3.  Defaults Upon Senior Securities  None  Item 4.  (Removed and Reserved)  Item 5.  Other information  Unresolved Staff Comments  None  27     Common Stock Trades  While the Company's stock is not actively traded, from time to time, shareholders sell shares to interested persons in sealed-bid public auctions administered by the Banks Trust Department at the request of selling shareholders. Our stock is not listed with a national securities exchange. Due to the limited number of transactions, the quarterly 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 transactions by selling shareholders and bidders in the Company's common stock during each period for transactions that were administered by the Banks Trust Department:  Number ofAverageHighestLowestDate ofSharesPriceAcceptedAcceptedTransactionSoldPer ShareBidBidFebruary 24, 2011737$399.56$428.82$394.77May 26, 2011759$415.47$440.00$410.00  Although the Companys common stock is not listed with a national securities exchange, it trades sporadically on the Over-the-Counter Bulletin Board System under the symbol CNND or CNND.OB. The following table sets forth a summary of information about these trades. Due to the limited number of transactions, the quarterly high, low and weighted average sale prices may not be indicative of the actual market value of the Company's stock.  The OTC Bulletin Board® (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities. An OTC equity security generally is any equity that is not listed or traded on NASDAQ® or a national securities exchange. The OTCBB is a quotation medium for subscribing members, not an issuer listing service, and should not be confused with The NASDAQ Stock MarketSM.  Investors must contact a broker/dealer to trade OTCBB securities. Investors do not have direct access to the OTCBB service. The Securities and Exchange Commission's (SEC's) Order-Handling Rules which apply to NASDAQ-listed securities do not apply to OTCBB securities.  The OTCBB market quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  Number ofQuarterlyQuarterlyQuarterlySharesAverageHighLowPeriodTransactedSales PriceSales PriceSales Price1st Quarter, 2011634$354.00$341.02$335.002nd Quarter, 2011159$360.49$375.00$346.00  28     Item 6.  Exhibits  ExhibitWhere exhibit may be found (incorporated by reference to the extent not filed herewith):(2.1)Stock purchase Agreement, dated September 6, 2007, by and among Canandaigua National Corporation, Genesee Valley Trust CompanyFiled as Exhibit 2.1 to Form 10-Q for the period ended June 30, 2010*(2.2)Asset Purchase Agreement, dated December 22, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J Gaess, and T.C. LewisFiled as Exhibit 2.2 to Form 10-Q for the period ended June 30, 2010*(2.3)Amendment to Asset Purchase Agreement, dated December 31, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J. Gaess, and T.C. LewisFiled as Exhibit 2.3 to Form 10-Q for the period ended June 30, 2010*(3.i)Certificate of Incorporation of the Registrant, as amendedFiled as Exhibit 3.i to Form 10-Q for the period ended March 31, 2011(3.ii.)By-laws of the Registrant, as amendedFiled as Exhibit 3.ii to Form 10-Q for the period ended March 31, 2011(11)Calculations of Basic Earnings Per Share and Diluted Earnings Per ShareNote 8 to the Condensed Consolidated Financial Statements(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(101)XBRL (eXtensible Business Reporting Language)*Certain portions of these agreements have been granted confidential treatment by the Securities and Exchange Commission. Confidential information is omitted from these agreements and filed separately with the Commission  29


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|SIGNATURES                                                                                                                                                                              
|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                       
|Pursuant 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)August 5, 2011/s/ George W. Hamlin, IVDateGeorge W. Hamlin, IVChairman and Chief Executive OfficerAugust 5, 2011/s/ Lawrence A. HeilbronnerDateLawrence A. HeilbronnerExecutive Vice President and
Chief Financial Officer   30