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, 2009OR[  ]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  [cnblogo.gif]  CANANDAIGUA NATIONAL CORPORATION(Exact name of registrant as specified in its charter)  New York(State or other jurisdiction of
incorporation or organization)16-1234823(IRS Employer Identification Number)72 South Main Street
Canandaigua, New York(Address of principal executive offices)14424(Zip code)  (585) 394-4260(Registrant's telephone number, including area code)NOT APPLICABLE(Former name, former address and former fiscal year, if changed since last report)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  [Ö]No  [ ]  Indicate by check mark whether the registrant 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 (or for such shorter period that the registrant was required to submit and post such files).  Yes  [ ]No  [ ]  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ]           Accelerated filer [Ö]            Non-accelerated filer [ ]         Smaller reporting company [ ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]    No [Ö]  The number of shares outstanding of each of the issuer's classes of common stock was 471,256 shares of common stock, par value $20.00, outstanding at July 24, 2009.    1     Forward-Looking Statements
This report, including information incorporated by reference, contains, and future filings by Canandaigua National Corporation on Form 10-K, 10-Q and 8-K and future oral and written statements, press releases, and letters to shareholders by Canandaigua National Corporation and its management may contain, certain "forward-looking statements" intended to qualify for the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used or incorporated by reference in the Company's disclosures and documents, the words "anticipate," "believe," "contemplate," "estimate," "expect," "foresee," "project," "target," "goal," "budget" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act. Such forward-looking statements are subject to certain risks discussed within this document. These forward-looking statements are based on currently available financial, economic, and competitive data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, so should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, targeted, or budgeted. These forward-looking statements speak only as of the date of the document. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein.  We must caution readers not to place undue reliance on any of these forward-looking statements.     2     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 30, 2009  PART I -- FINANCIAL INFORMATIONPAGEItem 1.  Financial Statements (Unaudited)Condensed consolidated balance sheets at June 30, 2009 and December 31, 20084Condensed consolidated statements of income for the three- and six-month periods endedJune 30, 2009 and 2008.5Condensed consolidated statements of stockholders' equity for the six-month periods endedJune 30, 2009 and 20086Condensed consolidated statements of cash flows for the six-month periods endedJune 30, 2009 and 20087Notes to condensed consolidated financial statements8Item 2.  Management's Discussion and Analysis of FinancialCondition and Results of Operations17Item 3. Quantitative and Qualitative Disclosures about Market Risk25Item 4. Controls and Procedures25PART II -- OTHER INFORMATIONItem 1.  Legal Proceedings26Item 1A.Risk Factors26Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds26Item 3.  Defaults Upon Senior Securities26Item 4.  Submission of Matters to a Vote of Security Holders26Item 5.  Other Information26Item 6.  Exhibits27SIGNATURES28    3     PART I  FINANCIAL INFORMATIONItem 1. Financial Statements  CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSJune 30, 2009 and December 31, 2008 (Unaudited)
(dollars in thousands, except per share data)  June 30,December 31,20092008AssetsCash and due from banks$31,29829,109Interest-bearing deposits with other financial institutions3,5733,561Federal funds sold75,728-Securities:- Available for sale, at fair value103,08396,520- Held-to-maturity (fair value of $162,052 in 2009 and $155,183 in 2008)157,694161,738Loans:Commercial and industrial214,774205,818Commercial mortgage407,242389,907Residential mortgage - first lien206,373213,411Residential mortgage - junior lien77,11575,971Consumer-automobile indirect168,669168,830Consumer and other26,54026,846Loans held for sale10,0432,053Total gross loans1,110,7561,082,836Plus:  Net deferred loan costs5,7215,776Less:  Allowance for loan losses(13,708)(11,992)Loans - net1,102,7691,076,620Premises and equipment - net11,50311,268Accrued interest receivable6,3456,580Federal Home Loan Bank stock and Federal Reserve Bank stock2,9072,891Goodwill and intangible assets16,02316,554Other assets18,42414,196Total Assets$1,529,3471,419,037Liabilities and Stockholders' EquityDeposits:DemandNon-interest-bearing$176,666166,437Interest-bearing123,016114,581Savings and money market560,434494,195Time482,171453,694Total deposits1,342,2871,228,907Borrowings17,43925,859Junior subordinated debentures51,54751,547Accrued interest payable and other liabilities13,08412,286Total Liabilities1,424,3571,318,599Stockholders' Equity:Common stock, $20 par value; 2,000,000 shares authorized;486,624 shares issued in 2009 and 20089,7329,732Additional paid-in capital8,5918,591Retained earnings91,48187,273Treasury stock, at cost (15,368shares at June 30, 2009and 14,765 at December 31, 2008)(5,006)(4,819)Accumulated other comprehensive income (loss), net192(339)Total Stockholders' Equity104,990100,438Total Liabilities and Stockholders' Equity$1,529,3471,419,037  See accompanying notes to condensed consolidated financial statements.    4     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFor the three- and six-month periods ended June 30, 2009 and 2008 (Unaudited)
(dollars in thousands, except per share data)Three months 
ended June 30,Six months 
ended June 30,2009200820092008Interest income:Loans, including fees$16,21815,631$32,55931,240Securities2,2062,2684,4284,643Federal funds sold and other509383276Total interest income18,47417,99237,07036,159Interest expense:Deposits4,3995,1339,17511,648Borrowings160113319278Junior subordinated debentures7517481,4991,510Total interest expense5,3105,99410,99313,436Net interest income13,16411,99826,07722,723Provision for loan losses1,4001,4452,5552,025Net interest income after provision for loan losses11,76410,55323,52220,698Other income:Service charges on deposit accounts2,1052,1754,1394,261Trust and investment services income2,3272,6774,6265,446Net gain on sale of mortgage loans1,3021902,046355Mortgage servicing income, net113142239282Loan-related fees6098124176(Loss) gain on write-down and call of securities, net(165)-(162)2Other operating income5354008271,048Total other income6,2775,68211,83911,570Operating expenses:Salaries and employee benefits7,7245,97614,33812,070Occupancy, net1,5391,4653,0322,906Marketing and public relations487563942908Office supplies, printing and postage370340743721Professional and other services6911,0681,4462,055Technology and data processing8278671,7331,739Intangible amortization266462532671Other real estate operations2026165961FDIC insurance1,0991831,283251Other operating expenses1,0228682,1001,573Total operating expenses14,22711,85326,80822,955Income before income taxes3,8144,3828,5539,313Income taxes8531,0992,0532,464Net income$2,9613,283$6,5006,849Basic earnings per share$6.286.94$13.7814.44Diluted earnings per share$6.186.82$13.5614.19         See accompanying notes to condensed consolidated financial statements.    5     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYFor the six-month periods ended June 30, 2009 and 2008 (Unaudited)
(dollars in thousands, except share data)   AccumulatedNumber ofAdditionalOtherSharesCommonPaid-inRetainedTreasuryComprehensiveOutstandingStockCapitalEarningsStockIncome (Loss)TotalBalance at December 31, 2008471,859$9,7328,59187,273(4,819)(339)100,438Comprehensive income:Change in fair value ofInterest rate swap,net of taxes of $99----156156Change in unrealized loss onsecurities available for sale,net of taxes of $224----375375Net income--6,500--6,500Total comprehensive income7,031Recognition of stock optionexpensePurchase of treasury stock(709)---(223)-(223)Sale of treasury stock106--(3)36-33Cash dividend - $4.85 per share--(2,289)--(2,289)Balance at June 30, 2009471,256$9,7328,59191,481(5,006)192104,990Balance at December 31, 2007474,263$9,7328,44378,100(4,198)13192,208Comprehensive income:Change in fair value ofInterest rate swap,net of taxes of ($110)----(73)(73)Change in unrealized loss onsecurities available for sale,net of taxes of ($174)----(268)(268)Net income--6,849--6,849Total comprehensive income6,508Recognition of stock optionexpense-10---10Purchase of treasury stock(3,702)---(1,157)-(1,157)Sale of treasury stock11---3-3Exercise of stock options,including tax benefit of $1442,366-145(450)834-529Cash dividend - $4.25 per share--(2,019)--(2,019)Balance at June 30, 2008472,938$9,7328,59882,480(4,518)(210)96,082  See accompanying notes to condensed consolidated financial statements.    6     CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six-month periods ended June 30, 2009 and 2008 (Unaudited)
(dollars in thousands)  20092008Cash flow from operating activities:Net income$6,5006,849Adjustments to reconcile net income tonet cash provided by operating activities:Depreciation, amortization and accretion2,4312,512Provision for loan losses2,5552,025Deferred income tax benefit(578)(525)Gain on sale of premises and equipment and other real estate, net(19)-Loss (gain) on write-down and call of securities, net162(2)Loss (income) from equity-method investments, net33(95)Net gain on sale of mortgage loans(2,046)(355)Originations of loans held for sale(170,558)(39,479)Proceeds from sale of loans held for sale164,61439,339Stock option expense-10Increase in other assets(1,377)(860)Decrease in accrued interest payable and other liabilities1,0532,464Net cash provided by operating activities2,77011,883Cash flow from investing activities:Securities available-for-sale:Proceeds from maturities and calls14,51246,698Purchases(20,759)(33,931)Securities held to maturity:Proceeds from maturities and calls25,78523,600Purchases(22,227)(23,131)Loan originations and principal collections, net(23,578)(64,418)Fixed asset purchases  net of proceeds from sale of $5,460 in 2008(1,190)2,789Purchase of FHLB and FRB stock, net(16)(540)Investment in equity-method investments(23)(23)Acquisition, net of cash acquired-(10,092)Proceeds from sale of other real estate225615Net cash used in investing activities(27,271)(58,433)Cash flow from financing activities:Net increase in demand, savings and money market deposits84,90384,499Net increase (decrease) in time deposits28,477(38,296)Proceeds from overnight borrowings-9,444Payments on overnight borrowings(4,400)-Principal repayments on borrowings(4,071)(87)Proceeds from sale of treasury stock333Payments to acquire treasury stock(223)(1,157)Proceeds from issuance of treasury stock under stock option plan-385Tax benefit from stock option exercise-144Dividends paid(2,289)(2,019)Net cash provided by financing activities102,43052,916Net increase in cash and cash equivalents77,9296,366Cash and cash equivalents - beginning of period32,67040,892Cash and cash equivalents - end of period$110,59947,258Supplemental disclosure of cash flow information:Interest paid$11,38813,835Income taxes paid2,5632,978Supplemental schedule of noncash investing and financing activitiesReal estate acquired in settlement of loans$2,864660Acquisition:Fair value of assets acquired (noncash)-15,152Fair value of liabilities assumed-5,060  See accompanying notes to condensed consolidated financial statements.  7       CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements (Unaudited)  (1)   Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable regulations of the Securities and Exchange Commission (SEC) and with generally accepted accounting principles for interim financial information. Such principles are applied on a basis consistent with those reflected in the December 31, 2008, Form 10-K Report of the Company filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Management has prepared the financial information included herein without audit by independent certified public accountants.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three- and six-month periods ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  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, 2008.Amounts in prior periods' condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation.We have evaluated the impact of subsequent events on these financial statements through August 5, 2009,  the date these financial statements were available to be issued.  (2)   DividendOn July 15, 2009, the Board of Directors declared a semi-annual $5.05 per share dividend on common stock to shareholders of record of July 25, 2009, which was paid on August 3, 2009.  This is in addition to the semi-annual $4.85 per share dividend on common stock declared in January 2009 and paid in February 2009.  (3)   Earnings Per ShareBasic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period.  Diluted earnings per share includes the maximum dilutive effect of stock issuable upon conversion of stock options. Calculations for the three- and six-month periods ended June 30, 2009 and 2008 follow (dollars in thousands, except share data):  Three months Six months Ended June 30, ended June 30, For the three months ended June 30,2009200820092008Basic Earnings Per Share:Net income applicable to common shareholders$2,9613,2836,5006,849Weighted average common shares outstanding471,379473,386471,558474,169Basic earnings per share$6.286.9413.7814.44Diluted Earnings Per Share:Net income applicable to common shareholders$2,9613,2836,5006,849Weighted average common shares outstanding471,379473,386471,558474,169Effect of assumed exercise of stock options7,6747,9997,8258,473Total479,053481,385479,383482,642Diluted earnings per share$6.186.8213.5614.19   8     (4)   Segment InformationThe Company is organized into three reportable segments: the Company and its banking subsidiaries (Bank), CNB Mortgage Company (CNBM), and Genesee Valley Trust Company (GVT). These have been segmented due to differences in their distribution channels, the volatility of their earnings, and internal and external financial reporting requirements.  The interim period reportable segment information for the three- and six-month periods ended June 30, 2009 and 2008 follows (dollars in thousands).  Three months ended June 30,20092008BankCNBMGVTBankCNBMGVTRevenues:From external customers$18,16437590216,3351771,168Intersegment(1,539)1,610(71)(503)44855Total segment revenues$16,6251,98583115,8326251,223Net income:Bank$4,1663,552CNBM950215GVT(788)(174)Total segment net income4,3283,593Eliminations(1,367)(310)Total net income$2,9613,283  Six months ended June 30,20092008BankCNBMGVTBankCNBMGVTRevenues:From external customers$35,4656431,80831,3334242,536Intersegment(2,509)2,600(91)(659)60455Total segment revenues$32,9563,2431,71730,6741,0282,591Net income:Bank$7,9627,034CNBM1,497255GVT(953)(148)Total segment net income8,5067,141Eliminations(2,006)(292)Total net income$6,5006,849  The operating results of GVT for the first six months of 2009 have been negatively affected by a decline in revenues caused by the fall in fair value of assets under administration and a retirement expense accrual upon the presidents early retirement  (5)   Mortgage Servicing AssetsThe Company services first-lien, residential loans for the Federal Home Loan Mortgage Company (FHLMC), also known as Freddie Mac, and certain commercial loans as lead participant.  The associated servicing rights (assets) entitle the Company to a future stream of cash flows based on the outstanding principal balance of the loans and contractual servicing fees.  Failure to service the loans in accordance with contractual requirements may lead to a termination of the servicing rights and the loss of future servicing fees.We service all loans for FHLMC on a non-recourse basis; therefore, our credit risk is limited to temporary advances of funds to FHLMC, while FHLMC retains all credit risk associated with the loans.  Commercial loans are serviced on non- recourse basis, wherein we are subject to credit losses only to the extent of the proportionate share of the loans principal balance we own.Gross servicing fees earned by the Company for the three-month periods ended June 30, 2009 and 2008, respectively, amounted to $258,000 and $193,000, and for the six-month periods ended June 30, 2009 and 2008 amounted to $489,000 and $427,000, respectively.  These fees are included in net mortgage servicing income on the statements of income.The following table presents the changes in mortgage servicing assets for the six-month periods ended June 30, 2009 and 2008, respectively, as well as the estimated fair value of the assets at the beginning and end of the period (in thousands).  20092008BookEstimated
FairBookEstimated
FairValueValueValueValueBalance at January 1,$8551,597$1,091$ 2,344Originations92295Amortization(250)(189)Balance at June 30,$1,527$ 2,134$997$ 2,175  9       (6) Interest Rate Swap AgreementThe 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 million floating-rate junior subordinated debenture, the Company entered into an interest rate swap agreement in 2007.  This interest rate swap agreement modifies the repricing characteristics of the debentures from a floating-rate debt to a fixed-rate debt. For this swap agreement, amounts receivable or payable are recognized as accrued under the terms of the agreement, and the net differential is recorded as an adjustment to interest expense of the related debentures. The interest rate swap agreement is designated as a cash flow hedge. Therefore, the effective portion of the swaps unrealized gain or loss was initially recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, is immediately reported in other operating income.  The swap agreement is carried at fair value in Other Liabilities on the Condensed Consolidated Statement of Condition. The following footnote provides fair value information.  (7) Fair Values of Financial InstrumentsCurrent 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 and 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.The estimated fair values of the Company's financial instruments are as follows (in thousands):  June 30, 2009December 31, 2008CarryingFairCarryingFairFinancial Assets:AmountValueAmountValueCash and equivalents$110,599110,59932,67032,670Securities, available-for-sale and held-to-maturity$260,777265,135261,149264,387Loans-net$1,102,7691,125,0821,076,6201,102,079Mortgage servicing rights$1,5272,1348551,597Financial Liabilities:Deposits:Demand, savings andmoney market accounts$860,116860,116755,213755,213Time deposits$482,171477,814453,694461,246Borrowings$17,43917,84325,85926,102Junior subordinated debentures$51,54754,01651,54754,331Other financial instruments:Interest rate swap agreement$(1,617)(1,617)(1,872)(1,872)Letters of credit$(162)(162)(133)(133)Commitments to originate loans$(57)(57)--  The following methods and assumptions were used to estimate the fair value of each class of financial instrument:Cash and EquivalentsFor these short-term instruments that generally mature 90 days or less, or carry a market rate of interest, the carrying value approximates fair value.   10     (7) Fair Values of Financial Instruments (continued)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. We obtain a single market quote or price estimate for each security.  None of the quotes or estimates is considered a binding quote, as we would only request one if we had the positive intent to sell the securities in the foreseeable future and we believed the price quoted represented one from a market participant with an intent and the ability to purchase. Internal matrix models are used for non-traded municipal securities.  Our matrix considers observable inputs, such as benchmark interest rates and spreads.Certain securities fair values are determined using unobservable inputs and included 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. We considered fair values from  several brokerage firms. We also considered fair value derived from our own assumptions with data from outside brokerage firms as to expected cash flows and approximate risk-adjusted discount rates, and we utilized models provided by third parties.LoansFair 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 in consideration of the value fair 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.Mortgage Servicing RightsFair value is determined through estimates provided by a third party, using inputs including quoted prices for similar assets in active markets, and inputs that are observable for this asset, either directly or indirectly. The estimated fair value of mortgage servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. The key economic assumptions used to determine the fair value of mortgage servicing rights at June 30, 2009 and 2008, and the sensitivity of such values to changes in those assumptions are summarized in the 2008 and 2007 Annual Report and are substantially unchanged.  DepositsThe 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.BorrowingsThe fair value of borrowings is calculated by discounting scheduled cash flows through the borrowings' estimated maturity using current market rates.Junior Subordinated DebenturesThe fair value of the adjustable-rate junior subordinated debentures approximates their face amount, while the fair value of fixed-rate debentures is calculated by discounting scheduled cash flows through the borrowings' 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.   11     (7) Fair Values of Financial Instruments (continued)Other Financial InstrumentsThe fair values of letters of credit, unused lines of credit and commitments to originate loans approximate the fee charged to make the commitments.(8) Fair Values MeasurementsSome of the financial instruments disclosed in the previous note are measured at fair value in the 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, 2009, 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:Securities available-for-sale$ -102,269814103,083Total$ -102,269814103,083Measured on a non-recurring basis:AssetsLoansLoans-held-for-sale-10,043-10,043Collateral dependent impaired loans--8,8228,822Other assetsOther real estate owned--3,3683,368Mortgage servicing rights-2,1342,134Total assets$ -10,04314,32424,367LiabilitiesInterest rate swap agreement$ --1,6171,617Letters of credit$ --162162Commitments to originate loans$ --5757Total liabilities$ --1,8361,836  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-month and six-month periods ended June 30, 2009 (in thousands).  Three monthsSix monthsEnded June 30,ended June 30,20092009Securities available for sale, beginning of period$724359Transfers into Level 3 during the period-540Unrealized gain included in other comprehensive income21035Impairment charges included in earnings(120)(120)Securities available for sale, end of period$814814   12     (8) Fair Values Measurements (continued)The following table presents for each of the fair-value hierarchy levels the Companys assets and liabilities that are measured at fair value on a recurring basis at June 30, 2008, by caption on the Consolidated Balance Sheet (dollars in thousands).  Internal modelsInternal modelsQuoted marketwith significantwith significantTotal carryingprices in activeobservable marketunobservable marketvalue in themarketsparametersparametersConsolidated(Level 1)(Level 2)(Level 3)Balance SheetMeasured on a recurring basis:Securities available-for-sale$ -$ 97,623$ -$ 97,623Total$ -$ 97,623$ -$ 97,623  (9) SecuritiesAmortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2009 and December 31, 2008 are summarized as follows:June 30, 2009Gross UnrealizedAmortizedFairCostGainsLossesValueSecurities Available for Sale:Government sponsored enterprise obligations$19,996317(10)20,303State and municipal obligations78,6622,131(153)80,640Corporate obligations(1)1,226-(412)814Equity securities1,29234-1,326Total securities Available for Sale$101,1762,482(575)103,083(1)Amortized cost includes a cumulative $820,000 write-down for other-than-temporary impairment.Securities Held to Maturity:U.S. Treasury$1,0004-1,004Government sponsored enterprise obligations1,0176-1,023State and municipal obligations154,9614,432(153)159,240Corporate obligations71670(1)785Total securities Held to Maturity$157,6944,512(154)162,052   13     (9) Securities (continued)  December 31, 2008Gross UnrealizedAmortizedFairCostGainsLossesValueSecurities Available for Sale:Government sponsored enterprise obligations$21,997400-22,397State and municipal obligations70,5781,366(28)71,916Corporate obligations(1)1,344-(446)898Equity securities1,29321(5)1,309Total securities Available for Sale$95,2121,787(479)96,520(1)Amortized cost includes a $700,000 write-down for other-than-temporary impairment.Securities Held to Maturity:U.S. Treasury$4,99986-5,085Government sponsored enterprise obligations124-16State and municipal obligations156,1873,240(110)159,317Corporate obligations54023(5)558Total securities Held to Maturity$161,7383,353(115)164,976The amortized cost and fair value of debt securities by years to maturity as of June 30, 2009, follow (in thousands). Maturities of mortgage-backed securities are classified in accordance with the 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 MaturityAmortized Cost(1)Fair ValueAmortized CostFair ValueYearsUnder 1$13,74113,96225,23125,5191 to 564,83966,680103,023106,4475 to 1020,07820,30128,07828,65310 and over1,2268141,3621,433Total$99,884101,757157,694162,052  (1)Amortized cost includes a $700,000 write-down for other-than-temporary impairment.   The following table presents gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009.  June 30, 2009Less than 12 monthsOver 12 monthsTotalFairUnrealizedFairUnrealizedFairUnrealizedSecurities Available for SaleValueLossesValueLossesValueLossesGovernment sponsored enterprise obligations$1,98910--1,98910State and municipal obligations7,8891491,90449,793153Corporate and foreign obligations--634412634412Total temporarily impaired securities$9,8781592,53841612,416575Securities Held to MaturityState and municipal obligations$11,4611163,6283715,089153Corporate obligations--261261Total temporarily impaired securities$11,4611163,6543815,115154   14     (9) Securities (continued)Substantially all of the unrealized losses on the Company's securities were caused by market interest rate changes from those in effect when the 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, 2009, except as discussed below.In the available-for-sale portfolio, the Company holds approximately $0.8 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 $0.5 million of the securities backed by two of the largest U.S. banks and $0.3 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 2009.  Until the June 2009 quarter, there had been no reduction in our cash receipts (interest) on these securities; that is, they were current as to principal and interest.  However, the collateral underlying one CDO had diminished due to debt defaults and interest deferrals of some of the banks, and in the June 2009 quarter, interest payments due have been deferred.  Management analyzed the expected underlying cash flows and the ability of the collateral to produce sufficient cash flows to support future principal and interest payments.  Managements analysis indicated these cash flows would be insufficient, and accordingly, the Company wrote down this CDO by $0.7 million during the quarter ended September 30, 2008. An additional write-down of $0.1 million was taken in the current quarter.  Because all of the impairment is deemed to be credit related, the entire write-down has been charged to income with none charged to other comprehensive income.  We intend to sell this security, but if the financial condition of the underlying banks continues to deteriorate, further write-downs could occur before its sale. However,  the maximum write-down would be its current carrying value of less than $0.2 million.The following table presents gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008.  December 31, 2008Less than 12 monthsOver 12 monthsTotalFairUnrealizedFairUnrealizedFairUnrealizedSecurities Available for SaleValueLossesValueLossesValueLossesState and municipal obligations$6,7422575037,49228Corporate and foreign obligations--598446898446Equity securities5955--5955Total temporarily impaired securities$7,337301,3484498,685479Securities Held to MaturityState and municipal obligations$5,260634,9994710,259110Corporate obligations11622431405Total temporarily impaired securities$5,376655,0235010,399115  (10) Accounting Pronouncements Implemented in the Current YearIn May 2009, the Financial Accounting Standards Board (FASB) issued Statement No. 165, Subsequent Events. Without any impact on our consolidated financial statements we implemented its provisions as of June 30, 2009. Statement 165 addresses accounting and disclosure requirements related to subsequent events. Statement 165 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the companys expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies are required to disclose the date through which subsequent events have been evaluated.In April 2009, the FASB issued the following three statements associated with fair-value measurements and other-than-than-temporary impairments (OTTI). The statements attempted to respond to concerns raised by certain constituent groups about the effects of accounting requirements for write-downs of investment securities in the current economic environment and concerns emphasized in Congressional hearings on fair-value accounting held by the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Entities. The subcommittee instructed the FASB to take immediate action to address those constituent concerns.  These were effective for and have been implemented in the current periods consolidated financial statements.  Implementing these statements resulted in additional footnote disclosures.  There was no impact on the consolidated financial statements but could in future periods relative to securities with other than temporary impairment.  15     (10) Accounting Pronouncements Implemented in the Current Year (continued)FASB Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.This FASB Staff Position (FSP) provided additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also included guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasized that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The objective of an OTTI analysis under existing U.S. generally accepted accounting principles (GAAP) is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment is impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis.  This FASB Staff Position (FSP) amended the OTTI guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This FSP did not amend existing recognition and measurement guidance related to OTTI of equity securities.FASB Staff Position No. FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments. This FSP amended FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amended APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at interim reporting periods.The following accounting pronouncements were effective for the Company on January 1, 2009.  None had a material impact on the Company as there were no material transactions which the pronouncements impacted.  The FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activitiesin March 2008. The new standard was intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial position, financial performance, and cash flows.The FASB issued Statement No. 160 Noncontrolling Interest in Consolidated Financial Statements  an amendment of ARB 51, in December 2007. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards.  This Statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the Company (parent) and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Formerly, net income attributable to our noncontrolling interests was reported by us as an other expense. Thus, this Statement is intended to result in more transparent reporting of the net income attributable to the noncontrolling interest.The Statement also established a single method of accounting for changes in our ownership interest in a subsidiary that do not result in deconsolidation. The statement requires that we recognize a gain or loss in net income when a subsidiary is deconsolidated. A parent deconsolidates a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. If a parent retains a noncontrolling equity investment in the former subsidiary, that investment is measured at its fair value. Additionally, this statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parents owners and the interests of the noncontrolling owners of a subsidiary.FASB issued a replacement to Statement No. 141 Business Combinations (141R), in December 2007. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This replaces Statement 141s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values, which we utilized for our GVT acquisition.  Statement 141's guidance resulted in not recognizing some assets and liabilities at the acquisition date, and it also resulted in measuring some assets and liabilities at amounts other than their fair values at the acquisition date.  16     (10) Accounting Pronouncements Implemented in the Current Year (continued)This revised statement requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. This Statement requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date, as opposed to the former method which results in future adjustments to business combination accounting as the contingencies are settled. This will have a significant impact on any future business combination transactions.This statement makes significant amendments to other statements and other amendments to the authoritative literature intended to provide additional guidance or to conform the guidance in that literature to that provided in this statement.  Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following is our discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. This discussion and analysis supplements our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.Critical Accounting EstimateWe are instructed, pursuant to SEC guidance, to evaluate and disclose those accounting estimates that we judge to be critical - those most important to the portrayal of the Company's financial condition and results, and that require our most difficult, subjective and complex judgments. We consider the Allowance for Loan Losses (allowance) as critical given the inherent uncertainty in evaluating the levels of the allowance required to reflect credit losses in the portfolio.  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 2008 Annual Report.Recent EventsWe are pleased to report that on July 10, 2009 we received notice from the Office of the Comptroller of the Currency authorizing our opening of our Sarasota, Florida subsidiary, Canandaigua National Trust Company of Florida. This comes following approval from the Federal Reserve Bank of New York on April 17, 2009.  We have commenced operations.In June 2009 we executed a lease for our 22nd banking branch to be located in Webster, New York for which we expect construction to begin in Spring 2010, and in July 2009 we executed a lease for our 23rd banking branch to be located in Greece, New York for which we expect construction to begin in Spring 2011.On June 30 2009, James V. DAmico, President of Genesee Valley Trust Company, retired.  Joseph L. Dugan, Executive Vice President of The Canandaigua National Bank and Trust Company, is serving as Interim President..On April 3, 2009 we formally notified the U.S. Treasury Department to withdraw our application for funds under the Troubled Asset Relief Capital Purchase Program (TARP).  Our objections to the program (detailed in our 2008 Annual Report) were presented with a request to amend the proposed purchase agreement.  Treasury advised us that it was unwilling to amend the agreement on our terms, and we determined receipt of the funds under the objectionable terms would not be in the interest of our shareholders, customers, community, and employees. We had intended to use this additional capital to leverage our current deposit taking activities and expand lending in the community by an additional $250 million.Also in April 2009, we commenced construction of our 21st banking branch to be located on Alexander Street in the city of Rochester, New York.  We anticipate opening this facility near the end of the year.As discussed in our Annual Report, we expected a doubling of our FDIC insurance expenses for the full year from $0.8 million in 2008 to approximately $1.6 million in 2009. This expectation was based on information available in January 2009.  Subsequently the FDIC assessed a special 5 basis point premium on net assets of the bank (assets less capital) that cost an additional $0.7 million in the second quarter.  With the assessment, total premium expense for the year was expected to be $2.3 million. However, the FDIC has approval to apply for additional assessments over the next several quarters.  With additional bank failures since this assessment and the expected level of reserves on hand at the FDIC by year end, we believe it is highly likely the FDIC will make an additional assessment in the fourth quarter of 2009, which we believe will cost us nearly $0.8 million.  17     Financial OverviewIn consideration of two significant second-quarter expense items, we are pleased to report net income of $3.0 million for the three-months ended June 30, 2009, a decrease of 9.8% from the $3.3 million for the same period in 2008.  Diluted earnings per share were $6.18 and $6.82 for these periods, respectively.  Reflecting franchise growth, the GVT acquisition, and strong mortgage originations, earnings were positively impacted by a $1.8 million (10.0%) growth in total revenues (net interest income and non-interest income). Operating expenses increased $2.4 million (20.0%).  Contributing to the quarters expense growth were a $0.7 million industry-wide special assessment by the FDIC and $0.8 million accrual for retirement expenses for the former GVT president.  Exclusive of these, operating expenses would have increased only $0.7 million or 5.9%.In the second quarter we continued to grow the balance sheet with gross loans increasing 1.4%. Total deposits increased 0.9% inclusive of seasonal municipal deposit outflows. Off-balance sheet asset growth for the quarter was negative with a $4.8 million (0.3%) net decrease in the book value of assets under management. However, with the markets rebound in the second quarter, the fair value of assets under management grew $89.1 million or 6.4% in the quarter.For the six month period ended June 30, 2009, net income fell 5.1% to $6.5 million compared to $6.8 million for the six months ended June 30, 2008. Diluted earnings per share were $13.56 and $14.19 for the same six-month periods.  Since the end of the year, the balance sheet grew 7.8% with loans up 2.6% and deposits up 9.2%.  Off-balance sheet, the book value of assets under management fell 0.8%, while the fair value of assets under management grew 1.4%.For the remainder of the year we expect balance sheet growth to be similar in size and nature as the first half of the year.  We also expect operating results to be fairly similar, except without another retirement accrual expense.  Given the FDICs continued takeover of banks, we anticipate another special assessment in the fourth quarter of the year. Cumulatively, net income for 2009 is likely to be lower than 2008.  Financial Condition (three months ended June 30, 2009)At June 30, 2009, total assets were $1,529.3 million, up $17.1 million or 1.1% from $1,512.3 million at March 31, 2009. Cash and cash equivalents (cash, balances with other financial institutions, and federal funds sold) grew $1.6 million to $110.6 million.The securities portfolio grew a modest $1.4 million from March 2009. We have retained most of our liquidity in federal funds sold rather than purchasing securities.  With minimal relative returns available on short-term securities we have chosen not to significantly increase this portfolio. Notwithstanding, we do anticipate a modest volume of securities purchases during the remainder of the year in both the available-for-sale and held-to-maturity portfolios.The securities portfolio consists principally of New York State municipality obligations (90.3% of total at June 30, 2009) with the remainder mostly in US Treasury and US agency 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 concluded there are none considered to be other than temporarily impaired, which could require a write-down of carrying value in the income statement other than one security discussed below.During this quarter, due to continued credit deterioration of the underlying collateral in one CDO, we wrote down its carrying value by $0.1 million.  This is in addition to the $0.7 million write-down we took on this CDO in the third quarter of 2008.  This CDO is backed by a pool of debt obligations of banks. Because of the continuing economic strains and bank failures, the fair value of this security had fallen further.  The collateral underlying this CDO had diminished due to debt defaults and interest deferrals of some of the banks.  As in each quarter, we analyzed the expected underlying cash flows and the ability of the collateral to produce sufficient cash flows to support future principal and interest payments.  Our analysis indicated these cash flows would be insufficient, and accordingly, we have written down this CDO.Gross loans increased $15.5 million to $1,116.5 million. The commercial portfolio increased $17.5 million on continued strong originations in all categories.  The residential loan portfolios fell $0.9 million reflecting the impact of the current mortgage refinance boom.  With long-term mortgage rates near or below 5%, we tend to sell most mortgage originations in the secondary market, and to the extent these are sold to Freddie Mac, we retain the servicing. The consumer loan portfolios increased $2.6 million for the quarter, over half of which came in the indirect automobile loan portfolio. The remainder came in direct consumer loans reflecting our commitment to continue lending in our communities despite the recession.  For the remainder of 2009, we expect the volume of total loans to continue to increase with the percentage of growth remaining in single digits in all portfolios.  Please see the section entitled Impaired Loans and Non-Performing Assets for a discussion of credit quality.Total deposits at June 30, 2009, were $1,342.3 million and were up $12.5 million from March 31, 2009.  Growth in deposits principally occurred in demand and time.  Consumer deposits grew $16.0 million from March 31, 2009, commercial deposits grew $23.4 million, and municipal deposits, following their typical seasonality, fell $26.9 million.  We continue to experience strong consumer and commercial deposit growth as customers seek the safety of our institution and the liquidity that deposits offer over other investment alternatives.  For the remainder of the year, we expect deposits to grow, but at a lower annualized rate than in this quarter.  We do anticipate an increase in municipal deposits in the next quarter, again, consistent with seasonality.  18     Growth in deposit types occurred in the lower interest-cost accounts (demand) with higher cost accounts (savings, money market, and time) showing decreases. The shift in deposit mix had a positive impact on net interest income, as discussed in the Results of Operations section. Because we do not believe market rates will fall further during the rest of the year, we do not expect this trend of shifting deposit types will continue.  We now expect depositors will wait for a rate increase, and then will move excess deposits back to money market and time deposit accounts or into the equity markets.Total borrowings remained unchanged.  We do not expect borrowings to change for the remainder of the year, because the strength of deposit inflows should be sufficient to fund the modest increases we project for the loan and securities portfolios.Results of Operations (three months ended June 30, 2009)Net interest income increased $1.2 million or 9.7% for the quarter over the same quarter in 2008, reflecting the positive impact of the balance sheet's year-over-year growth, despite a narrowing of margin. Falling interest rates earlier in the year allowed us to rapidly reduce rates paid on deposits, while asset yield declines would occur in later periods.  Those asset yield reductions impacted the second quarter of 2009.On a tax-equivalent basis, compared to the same quarter in 2008, the overall growth in interest-earning assets and interest-bearing liabilities had a $1.6 million positive impact on net interest income, while the change in rates had a $0.2 million negative impact. Net interest margin was 3.97% for the second quarter of 2009, down from 4.26% during the same quarter in 2008.  As we discussed in our Annual Report, we expect net interest income to increase for the year due to our balance sheet growth, but we expect little change in current net interest spread or net interest margin given the interest rate environment. Summary tax-equivalent net interest income information for the three-month periods ended June 30, 2009 and 2008 follows (dollars in thousands).  20092008AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateTotal interest-earningassets$1,423,42319,4275.46%1,196,53618,7346.26%Total interest-bearingliabilities$1,227,0095,3101.73%1,017,7795,9942.36%Interest rate spread3.73%3.90%Net interest margin$14,1173.97%12,7404.26%   The provision for loan losses was unchanged at $1.4 million for the quarter compared to the same quarter last year. The provision in the 2009 quarter was mostly driven by an increase in reserves for impaired loans, while 2008s provision was mostly driven by increased reserves associated with portfolio growth. A summary of the allowance for loan losses and net charge-offs for the year to date is presented in a following section.Total other income for the quarter ended June 30, 2009 increased 10.5% to $6.3 million from $5.7 million in 2008 with only mortgage banking income showing significant improvement. Service charges on deposit accounts fell a modest 3.2%. Most of the decline occurred in overdraft processing fees, which had fallen commensurate with a slowing of overall checking transaction volume and an increase in customers available balances due to overall deposit growth.  Debit and ATM card revenues continue to increase (up 6.5% year-on-year) with consumers shifting from cash and checks to electronic transactions.Trust and investment services income fell $0.4 million or 13.1% as a result of the fall in fair value of assets under management. The equity markets declined significantly from where they closed in June 2008.  This decline, if continued through the end of 2009, will have a negative effect on trust and investment income, since this income is tied to the fair value of assets managed.  The table below presents information about period-end balances of assets under administration (dollars in thousands):  Assets Under Administration
as ofJune 30,March 31,June 30,200920092008Cost basis of assets under administration$1,561,4251,556,6161,599,112Fair value of assets under administration$1,470,4441,381,3551,731,965    19     The rapid fall in mortgage interest rates during 2009 has led to a refinance boom not seen in over five years.  Our total originations have nearly tripled for the quarter compared to the same quarter in 2008.  Corresponding with this increase in volume, the net gain on loans sold increased substantially when compared to 2008.  Though most of the increased volume has come in refinance mortgages, purchase money mortgages also showed strong growth (31.2%) which is the critical component of mortgage banking profitability in non-refinance periods.  (See table below). Despite the continued negative national housing news, housing prices and sales in our market area remain relatively strong, and we have a positive outlook for the remainder of the year.  We expect originations to remain much higher than last year with the refinance wave continuing at least into the third quarter.  We also expect to continue selling most of the originated loans given their low interest rates.  CNB Mortgage Closed Loans by Type
For the three-month periods ended June 30,
(dollars in thousands)  20092008Purchase money mortgages$29,54322,512Refinance mortgages81,13618,920Total mortgage originations$110,67941,432Percentage of loans retained in portfolio12.3%49.9%  Operating expenses increased 20.0% or $2.4 million for the quarter ended June 30, 2009, over the same three-month period in 2008. However, as discussed above, $1.5 million of this increase was due to two non-standard expense accruals  FDIC premiums of $0.7 million and retirement expense accrual of $0.8 million. Excluding these items, operating expenses would have shown a more modest 7.2% increase, reflective of our franchise growth.  Salaries and benefits, excluding the retirement reserve, increased about 15% reflecting a higher headcount, incumbent salary increases averaging 3.0%, and higher benefit costs.Professional and other services declined year-on-year due to higher contract costs in 2008 for consulting fees.  FDIC premiums were higher, as discussed above.  Amortization expenses was lower because the underlying intangible is being amortized on a declining-balance method, which results in lower year on year amortization compared to straight-line amortization.  All other categories of operating expenses changed relatively little. For the remainder of the year we expect expenses to rise less than 10%, reflecting our year-on-year franchise growth.The quarterly effective tax rate was 22.4% in 2009 and 25.1% in 2008.  The change in the effective rate is attributable to the ratio of tax-exempt income to total income.  Financial Condition and Results of Operations (six months ended June 30, 2009)At June 30, 2009, total assets of the Company were up $110.3 million or 7.8% from December 31, 2008. Cash and equivalents (cash, balances and federal funds sold) increased as a result of deposit growth exceeding securities purchases and loan originations.  Securities increased only modestly as we chose not to purchase investments locking us into low medium and long-term rates.  Loans grew $27.9 million or 2.6%.  Total deposits at June 30, 2009, were up 9.2% with growth mostly in consumer and commercial deposits.Net interest income improved 14.8% for the six-month period in 2009 from the same period in 2008. The increase in net interest margin was caused by rates on interest-bearing liabilities falling faster than yields on interest-earning assets combined with growth in the average balance of these liabilities and assets.  Summary tax-equivalent net interest income information for the six-month periods ended June 30, 2009 and 2008 follows:  20092008AnnualizedAnnualizedAverageAverageAverageAverageBalanceInterestRateBalanceInterestRateTotal interest-earningassets$1,401,76238,9645.56%1,191,84837,8036.34%Total interest-bearingliabilities$1,206,42810,9931.82%1,016,87713,4362.64%Interest rate spread3.74%3.70%Net interest margin$27,9713.99%$24,3674.09%  Other income for the six months ended June 30, 2009, increased 2.3% to $11.8 million from $11.6 million in 2008. The same factors impacting the three-month period impacted the six month period results.Mortgage originations increased 173.2% for the six month period ended June 30, 2009 versus the same period in 2008.  Along with this increase in volume was the net gain on the sale of mortgage loans. A summary of originations follows (dollars in thousands):  20       CNB Mortgage Closed Loans by TypeFor the six-month periods ended June 30,(dollars in thousands).  20092008Purchase money mortgages$48,09336,242Refinance mortgages136,58931,353Total mortgage originations$184,68267,595Percentage of loans retained in portfolio12.0%41.6%  Operating expenses increased 16.8% or $3.9 million for the six months ended June 30, 2009, over the same period in 2008 with higher FDIC premiums, retirement expense accrual, and ORE expenses accounting for about two thirds of the increase.  The remainder of the changes were related to franchise growth and expansion.The Company's effective tax rate for the year to date in 2009 decreased to 24.0% from 26.5% in 2008. The change in the effective rate is attributable to the ratio of tax-exempt income to total income.  LiquidityThere has been no material change from December 31, 2008, 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.For the six months ended June 30, 2009, cash flows from all activities provided $77.9 million in net cash and cash equivalents versus $6.4 million for the same period in 2008.  In both years the principal source of cash inflows was deposits.Net cash provided by operating activities was $2.8 million in 2009 versus $11.9 million in 2008.  Both the largest source and use of operating cash in 2009 and 2008 were loans held for sale with activity in 2009 over four times that of 2008. Excluding the effect of loans held for sale, operating activities provided $10.8 million cash for the six-month period in 2009 and $12.4 million in 2008.For the first six months of 2009, investing activities used $27.3 million in cash and equivalents in 2009 and $58.4 million in 2008. Investing activities provided funds in 2008, because we experienced significant cash inflows following calls of many of our U.S. Agency securities. This did not occur in 2009.  Net loan activity was lower in 2009 than in 2008 when the pullback of national and regional banks lending activity allowed us to significantly increase our indirect automobile lending volume.  Also using funds in 2008 was the purchase of GVT.Cash provided by financing activities was $102.4 million in 2009 versus $52.9 million in 2008.  The main contributor in both years was deposit activity, which was twice as much in 2009 than in 2008.For the remainder of 2009, cash for growth is expected to come primarily from operating activities and customer deposits.  Customer deposit growth is mainly expected to come from Monroe County retail sources and Ontario County municipalities.   21     Contractual obligations and commitmentsLess 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. Other than the information disclosed in our 2008 Annual Report, since then we have executed two operating leases for new branch offices, which in total will cost approximately $1.5 million each over the fifteen years from their anticipated openings in 2010 and 2011, respectively.Also, as discussed more fully in our 2008 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, 2009December 31, 2008NotionalNotionalAmountAmountCommitments to extend credit:Commercial lines of credit$102,553106,873Commercial real estate and construction$26,03528,492Residential real estate at fixed rates$8,5154,176Home equity lines of credit$93,38779,653Unsecured personal lines of credit$16,18915,945Standby and commercial letters of credit$10,7739,046Commitments to sell real estate loans$10,0432,053Capital ResourcesUnder the regulatory framework for prompt corrective action, as of June 30, 2009, the Company and Bank are categorized as "well-capitalized."   This is unchanged from December 31, 2008, and management anticipates no change in this classification for the foreseeable future.  Credit-Related Information

Allowance for Loan Losses and Net Charge-offsChanges in the allowance for loan losses for the six-month periods ended June 30, 2009, and 2008 follow (dollars in thousands):  June 30,20092008Balance at beginning of period$11,9929,679Provision for loan losses2,5552,025Loans charged off(1,137)(964)Recoveries on loans previously charged off298300Balance at end of period$13,70811,040Allowance as a percentage of total period end loans1.23%1.13%Allowance as a percentage of non-performing loans78.1%108.4%  The provision for loan losses for the six-month period ended June 30, 2009 was higher than the same period in 2008.  The balance in the allowance and the provision for loan losses have increased with growth in the total loan portfolio from 2008 and changes in asset quality. As discussed more fully in the 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, 2009, is adequate at $13.7 million. However, should the trend of higher non-performing and non-accrual loans continue, or should we experience further declines in customers credit quality measured through loan impairment or internal loan classifications, we may need a higher allowance for loan losses as a percentage of total loans.  This would necessitate an increase to the provision for loan losses.   22     Non-Performing Assets and Impaired Loans and  Non-Performing AssetsNon-Performing Assets(Dollars in thousands)  June 30,December 31,June 30,200920082008Loans past due 90 days or more and accruing:Commercial and industrial$151106-Real estate-commercial342--Real estate-residential62444775Consumer and other13924389Total past due 90 days or more and accruing1,256796164Loans in non-accrual status:Commercial and industrial12,0993,1344,055Real estate-commercial2,9992,3853,317Real estate-residential1,1973,2502,635Consumer and other--11Total non-accrual loans16,2958,76910,018Total non-performing loans17,5519,56510,182Other real estate ownedCommercial639639434Residential2,72990303Total other real estate owned3,368729737Total non-performing assets$20,91910,29410,919Non-performing loans to total period-end loans1.58%0.88%1.04%Non-performing assets to total period-endloans and other real estate1.88%0.95%1.12%  There were no troubled debt restructurings during these periods.Total non-performing loans increased $6.2 million to $17.6 million at June 30, 2009 from $11.4 million at March 31, 2009 and $9.6 million at December 31, 2008.  The increase in non-performing loans during the year has come in commercial and industrial loans and was principally due to a small number of large commercial relationships falling past due on loan payments.  The loans underlying these relationships are deemed impaired and we have established impairment reserves, as summarized in the "Impaired Loans" section below.Non-performing residential real estate loans declined as a result of a foreclosure tied to one real estate investor.  This led, concurrently to the increase in residential other real estate owned.  Given the current economic climate, and growth in non-performing loans, we can expect additional foreclosures in the coming periods.The percentage of non-performing loans to total loans has risen substantially over the last twelve months.  While this increase is large, it is lower than the percentage in the last recession earlier in the decade of 1.93%.  Also it is about one third of nationwide community banks of similar size at 0.00%, using March 31, 2009 federal reporting data.  Impaired LoansInformation on impaired loans for the six-month periods ended June 30, 2009, and 2008 and twelve months ended December 31, 2008, follows (dollars in thousands):  Six MonthsTwelve MonthsSix MonthsEndedEndedEndedJune 30,December 31,June 30,200920082008Recorded investment at period end$16,2958,76910,318Impaired loans as percent of total loans1.47%0.79%1.06%Impaired loans with related allowance$8,822-2,825Related allowance$3,436-1,130Average investment during period$11,9997,8647,085Interest income recognized during periodn/mn/mn/mn/m  not meaningful  23       As noted in the Non-Performing Assets section, we experienced a significant increase in non-performing loans during the year. This increase resulted from a small number of large Commercial and industrial loans becoming past due on scheduled principal and interest payments. Collateral for these loans (accounts receivable, inventory, and equipment) tend to be of lower liquidation value relative to commercial mortgage loans.  Therefore the risk of loss is higher when these loans reach non-performing status. Reserves for impaired loans increased to $3.4 million at June 30, 2009 versus $1.1 million at June 30, 2008. We believe the level of impaired loans and the related reserve is consistent with current economic conditions. We are working with the borrowers to seek sources of repayment for these loans. We also believe, given current condition, additional loans will become impaired, while existing impaired loans will be liquidated. Though we are not aware of loans which will likely be impaired in the near future, it is inevitable there will be some.  We do not expect the level of impaired loans to substantially decline before year end.  Recent Accounting Standards to be implemented in Future PeriodsIn June 2009, the FASB issued Statement No. 168, Accounting Standards CodificationTM(Codification) and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162, and implements the FASBs Accounting Standard Codification. The Codification is the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities, including our Company. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants like our Company. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will be non-authoritative.   This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not believe it will have an impact on our financial statements.Also in June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R). Statement 167 amends the guidance in FASB Interpretation 46R related to the consolidation of variable interest entities. It requires reporting entities to evaluate former Qualifying Special Purpose Entities (QSPEs) for consolidation, changes the approach to determining a VIEs primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. This Statement requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. The Statement is effective for us beginning on January 1, 2010. Though we have not fully evaluated this statements effect on our financial statements, we do not believe it will have an impact since we do not have any QSPEs or other entities currently subject to FIN 46R.Relating to Statement No. 167, in June 2009 the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets.Statement 166 amends the guidance in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. This Statement requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. The Statement is effective for our Company on January 1, 2010 and must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. This Statement has the potential to impact our accounting for participation loans sold, and in certain instances, could require the sold portion of the loan to be returned to the balance sheet with an equivalent amount recorded as a liability (secured borrowing). We are currently evaluating its impact.   24      Item 3. Quantitative and Qualitative Disclosures about Market RiskInterest Rate Sensitivity and Asset / Liability Management ReviewAs set forth in our 2008 Annual Report, we predicted market interest rates for 2009 would remain fairly steady for most of the year at current historic lows.  We have not changed our outlook at this time.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, 2009 and December 31, 2008.EstimatedChanges in InterestPercentage Change inRatesFuture Net Interest Income(basis points)20092008+200(11)%n/m*+100(6)(4)%No change---100(1)3-200(4)(4)*not meaningfulOur model suggests our interest rate risk has increased from year end for both an increase and decrease in rates. Our exposure to increasing rates has increased, because if interest rates move upwards, our liability costs (deposits and borrowings) will rise faster than our assets yields will.  This is the opposite effect of what we experienced earlier in the year when rates fell.  Our exposure has also increased in a downward rate scenario, as we have less opportunity to lower liability costs further, yet asset yields continue to move downward as maturing and called investments and amortizing loans are replaced with lower rate instruments.    Item 4. Controls and ProceduresThe Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of June 30, 2009, 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 2009, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.   25      PART II -- OTHER INFORMATIONCANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESItem 1.  Legal proceedingsNoneItem 1A.  Risk FactorsThere has been no material change to the risk factors disclosed in the Company's Form 10-K for the year ended December 31, 2008.Item 2.Unregistered Sales of Equity Securitiesand Use of ProceedsThe following table sets forth, for the monthly periods indicated in 2009, the total number of shares purchased and the price paid per share by The Canandaigua National Bank and Trust Company (Bank) for the Arthur S. Hamlin Award and the Canandaigua National Corporation for treasury.  Each of these entities is considered an affiliated purchaser of the Company under Item 703 of Regulation S-K.  The Company and Bank purchase prices per share were determined based on the most recent open-market transaction know to us immediately preceding the purchase.  TotalAverageSharesPrice PerDatePurchased (#)Share ($)PurposeJanuary 2009(60)$ 315.91CompensationMarch 2009549$ 315.91TreasuryMarch 2009(35)$ 315.91CompensationJune 200911$ 314.74Arthur S. Hamlin Award   Item 3.  Defaults Upon Senior SecuritiesNoneItem 4.  Submission of Matters to a Vote of Security HoldersNoneItem 5.  Other information - Common Stock TradeWhile the Company's stock is not actively traded, it trades sporadically on the Over-the-Counter Bulletin Board system and periodically in auctions conducted by the Banks Trust Department as agent for selling shareholders at their request. In addition, it is not listed with a national securities exchange. Due to the limited number of transactions, the 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 information about the Company's common stock during the period for transactions which were administered by the Banks Trust Department:  Dates of Open-Market TransactionsNumber of
Shares
SoldAverage
Price
Per ShareHighest Accepted
BidLowest
Accepted
BidMarch 12, 2009811$ 314.74$ 355.00$ 302.00June 18, 2009766$ 323.73$ 350.00$ 315.24   26     Item 6.  Exhibits  ExhibitWhere exhibit may be found:(3.i)Certificate of Incorporation of the RegistrantExhibit (3.i) on Form 10-K for the year ended December 31, 2008(3.ii.)By-laws of the RegistrantExhibit (3.ii) on Form 10-K for the year ended December 31, 2008(10.1)Canandaigua National Corporation Stock Option PlanExhibit (10.1) on Form 10-K for the year ended December 31, 2008(10.2)Canandaigua National Corporation Incentive Stock PlanExhibit (10.2) on Form 10-K for the year ended December 31, 2008(10.3)The Canandaigua National Bank and Trust Company Supplemental Executive Retirement Plan #1Exhibit (10.3) on Form 10-K for the year ended December 31, 2008(10.4)The Canandaigua National Bank and Trust Company Supplemental Executive Retirement Plan #2Exhibit (10.4) on Form 10-K for the year ended December 31, 2008(11)Calculations of Basic Earnings Per Share and Diluted
Earnings Per ShareNote 3 to the Condensed Consolidated Financial Statements(20)Letter to shareholders dated August 1, 2009Filed Herewith(31.1)Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002Filed Herewith(31.2)Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002Filed Herewith(32)Certification of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed Herewith   27      SIGNATURESCANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  CANANDAIGUA NATIONAL CORPORATION(Registrant)August 7, 2009/s/ George W. Hamlin, IVDateGeorge W. Hamlin, IVPresident and Chief Executive OfficerAugust 7, 2009/s/ Lawrence A. HeilbronnerDateLawrence A. HeilbronnerExecutive Vice President and
Chief Financial Officer    28