|CANANDAIGUA NATIONAL CORPORATION
|--------------------------------
|72 South Main Street            
|Canandaigua, New York 14424     
|Phone: 585-394-4260 or          
|1-800-724-2621                  
|Fax: 585-394-4001               
|Internet: www.cnbank.com        
|                                
|                                
|2005 Annual Report              
|                                

|Table of Contents |                                                                                                                                                                                                             
|----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |                                                                                                                                                                                                             
|                  |                                                                                                                                                                                                             
|                  | Financial Highlights                                                                                                                                                                                        
|                  |                                                                                                                                                                                                             
|                  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                       
|                  |                                                                                                                                                                                                             
|                  | Our Common Stock                                                                                                                                                                                            
|                  |                                                                                                                                                                                                             
|                  | Management's Report on the Effectiveness of Internal Controls over Financial Reporting                                                                                                                      
|                  |                                                                                                                                                                                                             
|                  | Report of Independent Registered Public Accounting Firm on Management's Report                                                                                                                              
|                  |                                                                                                                                                                                                             
|                  | Consolidated Financial Statements                                                                                                                                                                           
|                  | Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements                                                                                                                
|                  |                                                                                                                                                                                                             
|                  | Consolidated Balance Sheets                                                                                                                                                                                 
|                  |                                                                                                                                                                                                             
|                  | Consolidated Statements of Income                                                                                                                                                                           
|                  |                                                                                                                                                                                                             
|                  | Consolidated Statements of Stockholders' Equity                                                                                                                                                             
|                  |                                                                                                                                                                                                             
|                  | Consolidated Statements of Cash Flows                                                                                                                                                                       
|                  |                                                                                                                                                                                                             
|                  | Notes to Consolidated Financial Statements                                                                                                                                                                  
|                  |                                                                                                                                                                                                             
|                  |                                                                                                                                                                                                             
|                  | Annual Meeting:                                                                                                                                                                                             
|                  |                                                                                                                                                                                                             
|                  | The Annual Meeting of Stockholders will be held at the Main Office of The Canandaigua National Bank and Trust Company, 72 South Main Street, Canandaigua, New York 14424, March 8, 2006, at 1:00 p.m.       
|                  |                                                                                                                                                                                                             
|                  | Form 10-K:                                                                                                                                                                                                  
|                  |                                                                                                                                                                                                             
|                  | A copy of the Corporation's Form 10-K Annual Report is available without charge to stockholders upon   written request to: Robert G. Sheridan, Secretary, 72 South Main Street, Canandaigua, New York 14424.
|                  |                                                                                                                                                                                                             
|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.
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|2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           





|We present below a summary of selected financial highlights to help you see a snapshot of our performance during each of the past five years and at their year's end.  This and all information concerning our financial performance should be read in conjunction with the following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as the 2005 Consolidated Financial Statements.  These sections help to provide context for the information you see here.
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|Financial Highlights                        
|--------------------------------------------
|(Dollars in thousands except per share data)



|                                  |   |           |   | %      |    |         |   |         |   |         |   |         |  
|--------------------------------- | - | --------- | - | ------ | -- | ------- | - | ------- | - | ------- | - | ------- | -
|                                  |   | 2005      |   | Change |    | 2004    |   | 2003    |   | 2002    |   | 2001    |  
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Income Statement Information:     |   |           |   |        |    |         |   |         |   |         |   |         |  
|Net interest income               | $ | 38,613    |   | 7.54   | %  | 35,906  |   | 33,481  |   | 29,850  |   | 26,114  |  
|Provision for loan losses         |   | 2,087     |   | 24.23  | %  | 1,680   |   | 1,250   |   | 2,306   |   | 1,431   |  
|Other income                      |   | 12,817    |   | 1.59   | %  | 12,617  |   | 12,997  |   | 11,880  |   | 10,545  |  
|Operating expenses                |   | 33,860    |   | 4.73   | %  | 32,331  |   | 30,917  |   | 29,478  |   | 27,147  |  
|Income taxes                      |   | 4,258     |   | 8.82   | %  | 3,913   |   | 3,970   |   | 2,764   |   | 2,419   |  
|Net income                        |   | 11,225    |   | 5.91   | %  | 10,599  |   | 10,341  |   | 7,182   |   | 5,662   |  
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Balance Sheet Data:               |   |           |   |        |    |         |   |         |   |         |   |         |  
|Total investments(1)              | $ | 219,273   |   | 7.56   | %  | 203,860 |   | 188,189 |   | 165,443 |   | 120,996 |  
|Total loans, net                  |   | 770,853   |   | 15.07  | %  | 669,873 |   | 595,915 |   | 580,663 |   | 529,481 |  
|Total assets                      |   | 1,071,832 |   | 9.96   | %  | 974,757 |   | 907,775 |   | 825,703 |   | 726,044 |  
|Total deposits                    |   | 967,124   |   | 10.26  | %  | 877,141 |   | 818,158 |   | 744,399 |   | 670,843 |  
|Total borrowings(2)               |   | 21,107    |   | 0.02   | %  | 21,102  |   | 21,094  |   | 20,457  |   | 1,097   |  
|Total stockholders' equity        |   | 76,539    |   | 9.07   | %  | 70,173  |   | 61,569  |   | 53,417  |   | 48,132  |  
|Average assets                    |   | 1,017,116 |   | 8.39   | %  | 938,421 |   | 851,091 |   | 766,326 |   | 645,868 |  
|Average stockholders' equity      |   | 72,248    |   | 13.22  | %  | 63,810  |   | 55,429  |   | 49,266  |   | 45,665  |  
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Assets Under Administration(3)    |   |           |   |        |    |         |   |         |   |         |   |         |  
|Book value (cost basis)           | $ | 752,939   |   | 10.23  | %  | 683,033 |   | 645,307 |   | 651,288 |   | 654,491 |  
|Market value                      |   | 870,856   |   | 7.12   | %  | 812,953 |   | 745,858 |   | 667,747 |   | 745,857 |  
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Per Share Data:                   |   |           |   |        |    |         |   |         |   |         |   |         |  
|Net income, basic                 | $ | 23.39     |   | 5.65   | %  | 22.14   |   | 21.67   |   | 15.07   |   | 11.89   |  
|Net income, diluted               | $ | 22.74     |   | 7.82   | %  | 21.09   |   | 21.10   |   | 14.91   |   | 11.81   |  
|Cash dividends                    | $ | 6.05      |   | 14.15  | %  | 5.30    |   | 4.75    |   | 4.10    |   | 4.03    |  
|Book value                        | $ | 159.48    |   | 9.36   | %  | 145.83  |   | 129.02  |   | 111.94  |   | 100.98  |  
|Weighted average shares - diluted |   | 493,629   |   | (1.78  | )% | 502,592 |   | 490,016 |   | 481,675 |   | 479,571 |  
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Other ratios:                     |   |           |   |        |    |         |   |         |   |         |   |         |  
|Return on average assets          |   | 1.10      | % | (2.34  | )% | 1.13    | % | 1.22    | % | 0.94    | % | 0.88    | %
|Return on average equity          |   | 15.54     | % | (6.46  | )% | 16.61   | % | 18.66   | % | 14.58   | % | 12.40   | %
|Return on beginning equity        |   | 16.00     | % | (7.05  | )% | 17.21   | % | 19.36   | % | 14.92   | % | 12.79   | %
|Dividend payout                   |   | 26.61     | % | 5.87   | %  | 25.13   | % | 22.51   | % | 27.50   | % | 34.12   | %
|Average equity to average assets  |   | 7.10      | % | 4.46   | %  | 6.80    | % | 6.51    | % | 6.43    | % | 7.07    | %
|Net interest margin               |   | 4.32      | % | (1.82  | )% | 4.40    | % | 4.56    | % | 4.45    | % | 4.56    | %
|Efficiency                        |   | 65.84     | % | (1.19  | )% | 66.63   | % | 66.52   | % | 70.64   | % | 74.05   | %
|                                  |   |           |   |        |    |         |   |         |   |         |   |         |  
|Employees (year end):             |   |           |   |        |    |         |   |         |   |         |   |         |  
|Actual                            |   | 360       |   | 1.98   | %  | 353     |   | 355     |   | 332     |   | 324     |  
|Full-time equivalent              |   | 311       |   | 2.98   | %  | 302     |   | 304     |   | 290     |   | 287     |  

|(1)Includes the Company's investment in Federal Reserve Bank stock and Federal Home Loan Bank stock.               
|-------------------------------------------------------------------------------------------------------------------
|(2)Includes junior subordinated debentures.                                                                        
|(3)These assets are held in a fiduciary or agency capacity for customers and are not included in our balance sheet.
|                                                                                                                   
|3                                                                                                                  



|Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Management Discussion and Analysis (MD&A) is intended to provide, in one section, material historical and prospective disclosure enabling investors and other users to assess the financial condition and results of operations of the Company, with particular emphasis on our prospects for the future.  It is intended to give you an opportunity to look through the eyes of your Company's management (we/us) by providing both a short term and long-term analysis of our business.  On the following pages we will discuss the dynamics of our business and analyze our financial information through text and tables. (Dollar and percentage changes are calculated before rounding.  Per share amounts reflect the three-for-one stock split in 2002.)                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Throughout this and other documents we prepare from time to time, we include our predictions (or "forward-looking information"). Of course, any discussion of the future is subject to many risks and uncertainties, and, while we seek ways to manage these risks and develop programs to control those we can, we ultimately cannot predict the future. Our actual results may differ materially from those indicated by our forward-looking statements. A number of these most significant risks and uncertainties affecting our business are enumerated below.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- The strength of the United States economy in general and the strength of the local economy in particular; general
          economic conditions, either nationally or locally could be less favorable than expected, resulting in, for example, a 
          deterioration in credit quality of assets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- The effects of and changes in United States trade, monetary, and fiscal policies and laws, including and most importantly 
          the interest rate policy of the Federal Reserve Board, which can have an immediate and significant impact on earnings;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- The impact of changes in laws and regulations governing financial services and public companies, including laws and 
          regulations concerning taxes, accounting, auditing and reporting standards;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- The impact of technological changes;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- The development of new products, their competitiveness and their acceptance by customers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- Changes in commercial and consumer spending and saving habits;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- The commission of fraud by customers and non-customers against the Company; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- Our success in managing these risks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|OVERVIEW                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Mr. Hamlin's message to shareholders provides an overview of the Company's 2005 results.  He includes a discussion of the economy, the banking industry, the regulatory environment, and their impact on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|RESULTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|For the year ended December 31, 2005, we reported net income of $11.2 million compared to $10.6 million for the year ended December 31, 2004, and $10.3 million for the year ended December 31, 2003.  Diluted earnings per share for each of these years were $22.74, $21.09, and $21.10, respectively.  The major components of these results, which include net interest income, provision for loan losses, other income, operating expenses, and income taxes, are discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Net interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Net interest income is the difference between the interest and dividend income earned on loans and investments and the interest expense paid on deposits and borrowings.  Net interest income is the Company's principal source of earnings.  Net interest income is affected by a number of factors, including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, interest rate fluctuations and asset quality, as well as general economic conditions and regulatory policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|As we looked toward 2005, we had anticipated asset yields to stabilize or even increase slightly as an increasing interest rate environment would allow us to price our assets higher and formerly lower-yielding assets would be replaced with higher-yielding ones.  Rates paid on deposits were also likely to increase; so we did not expect any improvement in the net interest margin percentage.  Our growth in assets was expected to offset any possible decline and result in higher total net interest income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Our predictions were fairly accurate, with an increase in net interest income, caused by growth in assets, higher asset yields and liability costs, and a lower net interest spread and net interest margin.  For 2005, tax-equivalent net interest income grew $2.8 million or 7.4%.  Contributing to this increase was an $81.7 million increase in average earning assets or 9.4%, and  a $52.5 million (7.1%) growth average interest-bearing liabilities. During the year, the tax-equivalent yield on earning assets grew 49 basis points to 5.92%, while the cost of interest-bearing liabilities grew 70 basis points to 1.92%. The combination of these reductions led to a 21 basis point decrease in net interest spread (the difference between rates earned and rates paid).  Furthermore, net interest margin (net interest income divided by average earning assets, or asset profit margin) declined 8 basis points to 4.32%.  The two following tables analyze the components of net interest income.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|For 2006 we anticipate asset yields to continue rising as the increasing interest rate environment allows us to price our new assets higher and replace or reprice lower-yielding assets at higher rates.  Offsetting these increases, though will be higher rates paid on deposits and borrowings.  We anticipate the combination of these factors, along with growth in assets, to result in higher net interest income and net interest margin, but a lower net interest spread.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



|We believe the Federal Reserve Board's Federal Open Market committee (FOMC) will continue to increase rates, perhaps by as much as 50 basis points (0.5%) before year-end 2006.  This will leave the target federal funds rate (the rate banks pay each other for overnight funds) at 4.75%, up from 4.25% at the end of 2005.  In the Interest Rate Risk Management section below, we discuss what tools we use to manage interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|In 2004, tax-equivalent net interest income grew $2.5 million or 6.9%, due to a 10.7% increase in average earning assets, offset by an 8.7% increase in average interest-bearing liabilities.  In that year, both spread and margin declined due to a larger decrease in yields on earning assets than costs on interest bearing liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The following table provides additional details of net interest income and shows average balances, tax-equivalent interest earned or paid, and average rates for the years ended December 31, 2005, 2004, and 2003.  Taxable securities includes the Company's required investments in Federal Reserve Bank Stock and Federal Home Loan Bank Stock. The mark-to-market adjustments on securities available for sale are included in non-interest earning assets. Nonaccrual loans are included in the average balances of loans.   Non-interest-bearing demand deposit accounts are included in non-interest bearing-liabilities. Borrowings include junior subordinated debentures. Tax-exempt interest includes a tax equivalency adjustment of $2,481,000 in 2005, $2,351,000 in 2004, and $2,311,000 in 2003.  A marginal federal income tax rate of 35% was applied in 2005, 2004 and 2003. Interest on loans includes a deduction for amortization of net deferred loan costs of $1,569,000 in 2005, $1,335,000 in 2004, and $984,000 in 2003 (dollars in thousands).
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|                              |   |           |   | 2005     |  |         |   |   |         |   | 2004     |  |         |   |   |         |   | 2003     |  |         |  
|----------------------------- | - | --------- | - | -------- |  | ------- | - | - | ------- | - | -------- |  | ------- | - | - | ------- | - | -------- |  | ------- | -
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   | Average   |   |          |  | Average |   |   | Average |   |          |  | Average |   |   | Average |   |          |  | Average |  
|                              |   | Balance   |   | Interest |  | Rate    |   |   | Balance |   | Interest |  | Rate    |   |   | Balance |   | Interest |  | Rate    |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Assets                        |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-earning assets:      |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing deposits     |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|with  others                  | $ | 4,959     | $ | 145      |  | 2.92    | % | $ | 3,383   | $ | 55       |  | 1.63    | % | $ | 6,072   | $ | 61       |  | 1.02    | %
|Federal funds sold            |   | 13,709    |   | 403      |  | 2.94    |   |   | 35,236  |   | 489      |  | 1.39    |   |   | 27,970  |   | 310      |  | 1.10    |  
|Securities:                   |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Taxable                       |   | 66,038    |   | 2,974    |  | 4.50    |   |   | 62,013  |   | 2,647    |  | 4.27    |   |   | 51,251  |   | 1,753    |  | 3.42    |  
|Tax-exempt                    |   | 150,429   |   | 7,490    |  | 4.98    |   |   | 139,804 |   | 6,952    |  | 4.97    |   |   | 119,800 |   | 6,870    |  | 5.73    |  
|Loans, net                    |   | 716,754   |   | 45,356   |  | 6.33    |   |   | 629,735 |   | 37,124   |  | 5.90    |   |   | 580,868 |   | 37,335   |  | 6.43    |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Total interest-earning        |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|assets                        |   | 951,889   |   | 56,368   |  | 5.92    |   |   | 870,171 |   | 47,267   |  | 5.43    |   |   | 785,961 |   | 46,329   |  | 5.89    |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Non-interest-earning          |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|assets                        |   | 65,227    |   |          |  |         |   |   | 68,250  |   |          |  |         |   |   | 65,130  |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Total assets                  | $ | 1,017,116 |   |          |  |         |   | $ | 938,421 |   |          |  |         |   | $ | 851,091 |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Liabilities and               |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Stockholders' Equity          |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing liabilities: |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Interest-bearing demand       | $ | 101,943   |   | 160      |  | .16     | % | $ | 93,778  |   | 116      |  | .12     | % | $ | 85,068  |   | 152      |  | .18     | %
|Savings and money             |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|market                        |   | 415,327   |   | 6,427    |  | 1.55    |   |   | 435,978 |   | 3,887    |  | .89     |   |   | 366,115 |   | 3,543    |  | .97     |  
|Time deposits                 |   | 249,695   |   | 6,995    |  | 2.80    |   |   | 190,176 |   | 3,883    |  | 2.04    |   |   | 209,491 |   | 5,762    |  | 2.75    |  
|Borrowings                    |   | 26,523    |   | 1,692    |  | 6.38    |   |   | 21,094  |   | 1,124    |  | 5.33    |   |   | 21,098  |   | 1,080    |  | 5.12    |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Total interest-bearing        |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|liabilities                   |   | 793,488   |   | 15,274   |  | 1.92    |   |   | 741,026 |   | 9,010    |  | 1.22    |   |   | 681,772 |   | 10,537   |  | 1.55    |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Non-interest-bearing          |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|liabilities                   |   | 151,380   |   |          |  |         |   |   | 133,585 |   |          |  |         |   |   | 113,890 |   |          |  |         |  
|Stockholders' equity          |   | 72,248    |   |          |  |         |   |   | 63,810  |   |          |  |         |   |   | 55,429  |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Total liabilities and         |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|stockholders' equity          | $ | 1,017,116 |   |          |  |         |   | $ | 938,421 |   |          |  |         |   | $ | 851,091 |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Interest rate spread          |   |           |   |          |  | 4.00    | % |   |         |   |          |  | 4.21    | % |   |         |   |          |  | 4.34    | %
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|Net interest margin           |   |           | $ | 41,094   |  | 4.32    | % |   |         | $ | 38,257   |  | 4.40    | % |   |         | $ | 35,792   |  | 4.56    | %
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  
|                              |   |           |   |          |  |         |   |   |         |   |          |  |         |   |   |         |   |          |  |         |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The rate/volume analysis on the next page is meant to show separately the relative contribution that changes in rates and in volume have on total net interest income year over year.  By looking at these components separately, we can identify from what sources of revenue growth arises - changes in balances or changes in rates.  Because each component requires different management techniques, for example: customer demand in the case of balances, and market interest rate changes in the case of rates, separating them gives us a clearer view for analyzing our results.  In deriving the information, volume changes are computed by multiplying the volume difference by the prior year's rate.  Rate changes are computed by multiplying the rate difference by the prior year's balance.  The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



|                                      |   | 2005 compared to 2004 |   | 2004 compared to 2003 |  
|------------------------------------- | - | --------------------- | - | --------------------- | -
|                                      |   | Increase/(decrease)   |   | Increase/(decrease)   |  
|                                      |   | Due to change in      |   | Due to change in      |  
|                                      |   | Volume                |   | Rate                  |  
|                                      |   |                       |   |                       |  
|Interest-earning assets:              |   |                       |   |                       |  
|Interest-bearing deposits with others | $ | 33                    |   | 57                    |  
|Federal funds sold                    |   | (417                  | ) | 331                   |  
|Securities, taxable                   |   | 177                   |   | 150                   |  
|Securities, tax-exempt                |   | 529                   |   | 9                     |  
|Loans, net                            |   | 5,376                 |   | 2,856                 |  
|                                      |   |                       |   |                       |  
|Total                                 |   | 5,698                 |   | 3,403                 |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|Interest-bearing liabilities:         |   |                       |   |                       |  
|Interest-bearing demand               |   | 11                    |   | 33                    |  
|Savings and money market              |   | (192)                 |   | 2,732                 |  
|Time deposits                         |   | 1,422                 |   | 1,690                 |  
|Borrowings                            |   | 322                   |   | 246                   |  
|                                      |   |                       |   |                       |  
|Total                                 |   | 1,563                 |   | 4,701                 |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|Net change                            | $ | 4,135                 |   | (1,298                | )
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  
|                                      |   |                       |   |                       |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Provision for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The provision for loan losses (a charge to earnings) in each period is a result of our judgment about the credit quality of the Company's assets.  We present a detailed discussion and analysis in a following section entitled "Loan Loss Experience and Allowance for Loan Losses."                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Other Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Other income is an important component of our total revenue, accounting for approximately 25%.  It is composed mainly of revenues from (a) service charges, (b) trust and investment services, and (c) mortgage banking operations.  For the year ended December 31, 2005, other income increased $0.2 million or 1.6% from 2004, and for the year ended December 31, 2004, other income decreased $0.4 million or 2.9% from 2003.                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Service charges on deposit accounts rose 4.0% in 2005 from 2004, attributable to increased transaction volume derived from increases in underlying deposit accounts and the number of customers.  The rate of service charge income growth is lower than the 10.7% growth in demand accounts as customers with higher balances and Options TM accounts were able to offset some service charges.  As we look to 2006 ,we anticipate this income category to grow at a rate faster than recent years due to further increases in transaction volume and our recent increase in charges for certain transaction services.                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Trust and investment services income increased $0.5 million or 14.5% in 2005 from 2004 ($0.5 million and 15.2% in 2004 over 2003).  This income is principally derived from a combination of (1) the average market value of assets under management, and (2) the mix of those underlying accounts.  For the year ended December 31, 2005, the average market value of assets under management increased 8.5%, with higher fee-yielding accounts growing to a greater extent.                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In 2005, we initiated a five-year program to substantially increase our assets under management.  This plan will include increased marketing expenses, new product development and sales, and a review of current fees.  We will focus on the population in our market area, including individuals, for-profit businesses, and not-for-profit entities.                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Our efforts are already producing strong results, as was shown not only in the revenue growth discussed above, but also in the assets we hold and manage for customers.  The book value of total assets under management amounted to $752.9 million at year end 2005, which represented a $69.9 million or 10.2% growth over 2004's year-end balance. We expect 2006 to show similar increases in both income and assets.                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Our residential mortgage originations are handled through CNB Mortgage Company (CNB Mortgage), where its results are primarily reflected in the net gain on sale of mortgage loans.  The line item has shown a consistent decline from 2003 through 2005, associated with the end of the nation's refinance boom. We expect a further decline in this revenue for 2006.  While we expect a similar volume of loan originations during the year, we expect more of these will be sold to the Bank than to third parties.  Selling to the Bank reduces the one-time income from a sale to a third party, but creates more income (interest) over the long term as the loans remain in the Bank's portfolio.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|We usually sell long-term, fixed-rate residential mortgages with loan-to-value ratios less than 85% to the Federal Home Loan Mortgage Corporation (Freddie Mac) to: (1) provide mortgage financing to homeowners we could not otherwise accommodate, because of our inability to fund such high originations with local deposits, and (2) to reduce our long-term interest rate risk.  However, we continue to service these loans locally with our staff.  Generally all residential mortgage loans with an original loan-to-value ratio greater than 85% are sold, with servicing released to third parties.                                                                                           
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|6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|The revenue generated by CNB Mortgage is dependent upon the volume of loans originated.  This volume is composed of purchase money loans (loans to purchase a property) and refinance loans (loans that change the terms of an already existing loan).  CNB Mortgage generally must originate approximately $85 million to break even based on its current operating expense structure.  During years without a refinance boom, the Company is more dependent upon purchase money mortgages.  Since the refinance boom has abated, CNB Mortgage's profitability and resulting gain on sales of mortgages will be closer to 2005's results, rather than 2003's . For the years ended December 31, 2005, 2004, and 2003, CNB Mortgage originated the following types of loans (dollars in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |   | 2005    |  | 2004    |  | 2003   
|--------------------------- | - | ------- |  | ------- |  | -------
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|Purchase money mortgages    | $ | 86,628  |  | 75,918  |  | 64,464 
|Refinance mortgages         |   | 31,897  |  | 48,527  |  | 184,872
|                            |   |         |  |         |  |        
|Total mortgage originations | $ | 118,525 |  | 124,445 |  | 249,336
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|Of which:                   |   |         |  |         |  |        
|Sold to third parties       | $ | 96,065  |  | 112,251 |  | 237,029
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|Sold to Bank                | $ | 22,460  |  | 12,194  |  | 12,307 
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        
|                            |   |         |  |         |  |        



|Offsetting some of the decline in the gain on sale of mortgage loans was an increase in net mortgage servicing income, which is composed primarily of service fees earned on loans sold to Freddie Mac, but serviced by us and service fees we earn on commercial loan participations.  These loans, the balances of which have grown, and we expect to continue to increase in 2006, are not included in the consolidated balance sheet. We generally earn 25 basis points (1/4 of 1.00%) of the loan balance outstanding.  Also included in this line is the amortization of mortgage servicing rights.  We discuss these in great detail in Note 6 to the Consolidated Financial Statements.  At each of the three years ended December 31, 2005, 2004, and 2003, we were servicing the following types of loans (dollars in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |   | 2005    |  | 2004    |  | 2003   
|---------------------------------------------------- | - | ------- |  | ------- |  | -------
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        
|Residential mortgages (sold to Freddie Mac)          | $ | 313,694 |  | 312,957 |  | 294,703
|Commercial loans and mortgages (participations sold) |   | 74,901  |  | 59,929  |  | 55,174 
|                                                     |   |         |  |         |  |        
|Total loans serviced for others                      | $ | 388,595 |  | 372,886 |  | 349,877
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        
|                                                     |   |         |  |         |  |        



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|All other sources of other income decreased $0.3 million in 2005 from 2004 and increased $0.3 million in 2004 from 2003.  The decrease in 2005 was mainly associated with both (1) lower earnings from non-marketable investments and (2) a one-time legal recovery we recorded in 2004. The increase in 2004 over 2003 came mainly in loan fees, due to a combination of fee increases, a higher volume of overall loans, and a comparative fee reduction in 2003 as a result of an accounting change and our handling of construction loan fees.  In 2003, we implemented FASB Interpretation Number 45 (FIN 45), which required us to capitalize and amortize letter of credit fees, reducing this income line item. Additionally, we changed the way we earn fees on certain construction loans, allowing customers a rebate under certain circumstances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Operating Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In 2005, operating expenses increased $1.5 million or 4.7% over 2004, and in 2004 increased $1.4 million or 4.6% over 2003.  Increases in these years came in nearly all major expense categories and were attributed to continued growth in our operations and expansion in Monroe County. For 2006, we expect similar increases as our customer base grows along with the cost to provide services to them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|About half of the 4.3% increase in salaries and employee benefits in 2005, was attributable to wages increases and the other half attributable to benefit expenses, primarily for retirement plans.  These same factors accounted for the 2.5% increase in 2004 over 2003.  In 2005 and 2004, occupancy expenses continued to grow with the growth in the number of offices, customers and costs.  Included in this line are hardware and software maintenance costs, which are tied to the number of our customer accounts.  Marketing expenses grew in 2005 associated with Trust services, discussed above, and fell in 2004 from 2003, due to one-time expenses in 2003.  We expect these expenses to rise again in 2006 with a variety of programs.  The remainder of expenses will also see increases, mostly associated with customer growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Our effective income tax rate was approximately 28% in 2005, 2004 and 2003.  These effective rates differ substantially from our marginal rate of about 39%, mainly due to our substantial non-taxable interest income from state and municipal obligations. We anticipate our 2006 effective tax rate will be in the 26% to 30% range.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Governor Pataki proposed in his fiscal 2007 budget, a change in the tax treatment for certain mortgage investments, which if implemented would add approximately $0.3 million to tax expense for the Company in 2006.  If passed by the New York State Legislature, we would, in order to retain our current profit margins, have to increase the cost of residential loans to borrowers by between one-eighth and one-quarter of a percentage point.  We do not believe this proposed hidden tax on New York State residents is sound fiscal policy. We believe this ultimately will lead more financial institutions to move investments out of New York State into jurisdictions with lower tax rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|FINANCIAL CONDITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|As of December 31, 2005, total assets of the Company were $1,071.8 million, up from $974.8 million at year-end 2004. Cash and due from banks increased $11.5 million to $35.2 million, due to higher balances on hand at year end, associated with customer account growth and account activity.  At year-end 2004, this balance was $23.7 million associated with a combination of lower cash reserves held with the Federal Reserve Bank of New York and accelerated credit for cash items received from the Federal Reserve Bank of New York upon our implementation of image exchange associated with the Check Clearing for the 21st Century (Check 21) Act.  Check 21 allows banks to exchange check images, rather than paper, speeding the inter-bank clearing time for checks not drawn on our bank.  The Canandaigua National Bank and Trust Company was one of the first banks in the nation to fully implement the provisions of Check 21, benefiting our customers with faster credit for their deposits.  While this balance can fluctuate from day to day, depending upon customer transactions, we expect it to range between $25 million and $40 million on average.                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The total of Interest bearing accounts with other financial institutions and federal funds sold fell at year-end 2005 from 2004. These balances generally reflect liquidity (cash) not invested in securities or loans.  These balances are managed on a daily basis by representatives of our Asset / Liability Management Committee (ALCO).  This liquidity is used to manage daily inflows and outflows of deposits and loans.  Our target for these combined balances is $5 million to $20 million, but day-to-day balances will fluctuate within and around this range.  During 2005, we averaged about $18.7 million, compared to $38.6 million in 2004, mostly as a result of using this excess liquidity to make loans to customers and purchase investment securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|For the past few years, we've purchased about $2.0 million in premises and equipment, mostly for office improvements and technology upgrades.  We expect a similar amount of investment in 2006, for facility renovations, equipment replacements and software and hardware purchases.  All of these investments are funded from current operating cash flow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|A more detailed discussion of the Company's principal interest-earning assets (securities and loans), and interest-bearing liabilities (deposits and borrowings), follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Securities Portfolio                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|We maintain our portfolio of (investment) securities mostly in U.S. Treasury and other U.S. agency securities and municipal obligations. We invest in securities with short to intermediate average lives in order to better match the interest rate sensitivities of our assets and liabilities. You can find more information about the carrying value of our securities at December 31, 2005, 2004 and 2003 in Note 3 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Investment decisions are made within policy guidelines established by our Board of Directors.  The investment policy is based on and supplements the Bank's Interest Rate Risk and Funds Management Policy (ALCO Policy), also established by our Board.  Together these policies set financial and investment goals, which direct investment in all assets, including securities.  The investment policy states that "...the Company shall invest funds not needed for local loans and mortgages in United States Government Bonds, United States Agency Bonds, Municipal Bonds, Corporate Obligations, and Money Market Instruments.  The goal of the investment portfolio shall be to provide sufficient safety and liquidity in order to help meet the Company's needs and to produce income for the Company consistent with the safety features of quality, maturity, marketability, and risk diversification". The investment policy further limits total investments to no more than 40% of total Company assets.  There are additional limits on asset classes (U.S. Treasury, U.S. Agency, etc.), issuers, ratings and maturities. Though allowed within our policy, we currently do not engage in securities hedging activities, interest rate risk swaps, or other programs involving the use of off-balance-sheet derivatives, and we do not anticipate doing so.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|We classify securities as either "available for sale" or "held to maturity." The classifications result in differing management and accounting treatments.  Securities "available for sale" are used to absorb our available liquidity not used for lending purposes.  These securities may or may not be held to their stated maturity, as demand for loan and deposit in- and out-flows change.  Securities which we have both ability and intent to hold to maturity are classified as "held-to-maturity." Substantially all of these securities are pledged to collateralize municipal deposits.  Municipalities in New York State are generally required to ensure deposits, in excess of FDIC insurance limits, are collateralized with eligible securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|During both 2005 and 2004, securities increased approximately $16.0 million. The growth came as a result of our investing funds from deposit growth not used for originating loans or maintaining fed funds.  Most of the portfolio is pledged to federal financial agencies and to secure municipal deposits.  These deposits, in turn, are used to purchase securities of local municipalities, thereby recycling local deposits within our communities.  Other securities consist mainly of high-grade corporate bonds, foreign bonds denominated in U.S. dollars and other local investments.  We will vary the mix of taxable and tax-exempt securities from time to time depending upon the amount of our taxable income, the securities' tax-equivalent yield, and the supply of high-grade tax-exempt securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|The continued increase in interest rates during 2005 had a negative impact on the market value of our securities, resulting in a decline to approximately 99.2% of amortized cost at year end 2005 from 101.2% at year end 2004.  We expected this decline, and it is likely to continue in 2006.  However, there are no securities whose value is considered to be other than temporarily impaired, requiring a write-down of carrying value in the income statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|The following table summarizes the maturities and weighted average yields of debt securities available for sale and held to maturity at their carrying value at December 31, 2005. In this table, we do not reflect yields on a tax equivalent basis.  Our small balance in mortgage backed securities is reported at its final stated maturity, notwithstanding that principal is prepaid regularly, reducing its effective maturity (dollars in thousands).
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|                    |   |         |  |       |   |   | After   |  |       |   |   | After   |  |       |   |   |        |  |       |  
|------------------- | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------ |  | ----- | -
|                    |   |         |  |       |   |   | One     |  |       |   |   | Five    |  |       |   |   |        |  |       |  
|                    |   | One     |  |       |   |   | through |  |       |   |   | through |  |       |   |   | After  |  |       |  
|                    |   | Year or |  |       |   |   | Five    |  |       |   |   | Ten     |  |       |   |   | Ten    |  |       |  
|                    |   | Less    |  |       |   |   | Years   |  |       |   |   | Years   |  |       |   |   | Years  |  |       |  
|                    |   | Amount  |  | Yield |   |   | Amount  |  | Yield |   |   | Amount  |  | Yield |   |   | Amount |  | Yield |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Available for Sale  |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|U.S. Treasuries     | $ | 1,497   |  | 3.42  | % | $ | -       |  | -     | % | $ | -       |  | -     | % | $ | -      |  | -     | %
|U.S. Agencies       |   | -       |  | -     |   |   | 28,613  |  | 4.16  |   |   | 27,325  |  | 4.83  |   |   | -      |  | -     |  
|State and municipal |   | 3,648   |  | 3.04  |   |   | 8,388   |  | 3.31  |   |   | 21,702  |  | 3.59  |   |   | -      |  | -     |  
|Other               |   | -       |  | -     |   |   | 308     |  | 5.10  |   |   | 809     |  | 6.75  |   |   | 2,977  |  | 3.64  |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Total               | $ | 5,145   |  | 3.15  | % | $ | 37,309  |  | 3.98  | % | $ | 49,836  |  | 4.33  | % | $ | 2,977  |  | 3.64  | %
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  

|                    |   |         |  |       |   |   | After   |  |       |   |   | After   |  |       |   |   |        |  |       |  
|------------------- | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------- |  | ----- | - | - | ------ |  | ----- | -
|                    |   |         |  |       |   |   | One     |  |       |   |   | Five    |  |       |   |   |        |  |       |  
|                    |   | One     |  |       |   |   | through |  |       |   |   | through |  |       |   |   | After  |  |       |  
|                    |   | Year or |  |       |   |   | Five    |  |       |   |   | Ten     |  |       |   |   | Ten    |  |       |  
|                    |   | Less    |  |       |   |   | Years   |  |       |   |   | Years   |  |       |   |   | Years  |  |       |  
|                    |   | Amount  |  | Yield |   |   | Amount  |  | Yield |   |   | Amount  |  | Yield |   |   | Amount |  | Yield |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Held to Maturity    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|U.S. Treasury       | $ | -       |  | -     | % | $ | 3,995   |  | 3.44  | % | $ | -       |  | -     | % | $ | -      |  | -     | %
|U.S. Agencies       |   | 1       |  | 8.00  |   |   | -       |  | -     |   |   | -       |  | -     |   |   | 20     |  | 8.00  |  
|State and municipal |   | 25,399  |  | 3.51  |   |   | 58,838  |  | 3.93  |   |   | 32,944  |  | 3.69  |   |   | 701    |  | 4.60  |  
|Other               |   | 200     |  | 5.78  |   |   | -       |  | -     |   |   | -       |  | -     |   |   | 232    |  | 5.71  |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|Total               | $ | 25,600  |  | 3.53  | % | $ | 62,833  |  | 3.90  | % | $ | 32,944  |  | 3.69  | % | $ | 953    |  | 4.94  | %
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  
|                    |   |         |  |       |   |   |         |  |       |   |   |         |  |       |   |   |        |  |       |  

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|Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|We describe below the types of loans we make and also present a table of their balances.  The Bank's loan policies establish the general parameters of the types of loans that are desirable, emphasizing cash flow and collateral coverage. Credit decisions are made at the Bank by officers who have extensive personal experience with commercial and consumer lending, helping to ensure thorough underwriting and sound credit decisions. We have commercial, consumer, and residential mortgage loan policies approved by our Board. These policies establish the lending authority of individual loan officers as well as the loan authority of the Bank's Officers' Loan Committee (OLC). The Bank's President and certain Senior Vice Presidents each have loan authority up to $1,000,000 while other officers' lending authorities are $250,000 or less. A combination of officers and credit analysts can jointly approve certain loans up to $500,000 and OLC up to $2,500,000.  Loans over that amount generally must be approved by the Board or a designated committee of the Board.
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|Loans are originated in our primary market area (Rochester Metropolitan Statistical Area (MSA)).  We use the same credit principles and guidelines for small, medium, and large credits.  A borrower's cash flow, overall financial condition/capacity, character, and the collateral securing a loan are considered during the credit decision process.  Specific emphasis is placed on the borrower's ability to generate cash sufficient to cover operations and financing costs when assessing the overall quality of a borrower's financial condition.  The commercial policy limits loans to one borrower and any borrowing relationship, as well as concentrations of credit to particular industries.  Federal banking regulations limit loans to one borrower (as defined) to 15% of the lending institution's regulatory capital.  At December 31, 2005, this limit was approximately $14.0 million, and the Bank's largest committed borrowing relationship under these regulations was $11.8 million.                                                                                    
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|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, we attempt to secure real estate as collateral 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).                                       
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|Commercial Mortgages: We make commercial real estate loans to finance the purchase 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.  The loans typically have variable 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 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 75% of appraised value of the property.                                                                                                                                                                           
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|Residential Mortgages: We originate fixed-rate and three- to ten-year callable, one-to-four family residential real estate loans collateralized by owner-occupied properties located in our market area. These loans 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, mortgage loans with a maturity or call date of ten years or less are retained in our portfolio.  For longer term fixed-rate residential mortgages without escrow, we retain the servicing, but sell the right to receive principal and interest to Freddie Mac.  All loans not retained in the portfolio or sold to Freddie Mac are sold to unrelated third parties with servicing released.  This policy allows us to manage interest rate risk, liquidity risk and loss risk.                                                                                                                                                                                       
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|In originating these loans, we usually use Freddie Mac 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|We also make construction, home equity lines of credit and second mortgages (loans secured by a second 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 or secured by an incomplete dwelling in the case of construction loans.  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|Consumer Loans:  We fund a variety of consumer loans, including direct and indirect automobile loans, recreational vehicle loans, boat loans, aircraft loans, home improvement loans, personal loans (collateralized and uncollateralized), and education loans. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|The loan portfolio was composed solely of domestic loans with their concentrations set forth in the schedule of loan classifications below. We are not aware of any material concentrations of credit risk to any industry or individual borrower.  The following summary shows the classifications of loans by category as of the past five year-ends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|Composition of Loan Portfolio
|-----------------------------
|As of December 31,           
|(Dollars in thousands)       

|                                        |   | 2005    |   |  | 2004    |   |  | 2003    |   |  | 2002    |   |  | 2001    |  
|--------------------------------------- | - | ------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Commercial, financial, and agricultural | $ | 167,750 |   |  | 151,343 |   |  | 120,920 |   |  | 109,317 |   |  | 96,772  |  
|Commercial mortgage                     |   | 311,652 |   |  | 279,731 |   |  | 273,512 |   |  | 264,132 |   |  | 228,447 |  
|Residential mortgage- first lien        |   | 65,238  |   |  | 47,479  |   |  | 44,487  |   |  | 51,291  |   |  | 57,382  |  
|Residential mortgage - junior lien      |   | 59,758  |   |  | 56,492  |   |  | 47,488  |   |  | 39,041  |   |  | 28,020  |  
|Consumer                                |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Automobile - indirect                   |   | 142,141 |   |  | 111,506 |   |  | 90,336  |   |  | 87,775  |   |  | 83,591  |  
|Other                                   |   | 24,077  |   |  | 22,401  |   |  | 20,887  |   |  | 22,371  |   |  | 23,093  |  
|Other                                   |   | 3,681   |   |  | 5,051   |   |  | 2,438   |   |  | 10,926  |   |  | 16,004  |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|                                        |   | 774,297 |   |  | 674,003 |   |  | 600,068 |   |  | 584,853 |   |  | 533,309 |  
|Plus: Net deferred loan costs           |   | 4,542   |   |  | 3,085   |   |  | 2,178   |   |  | 1,972   |   |  | 1,652   |  
|Less: Allowance for loan losses         |   | (7,986  | ) |  | (7,215  | ) |  | (6,331  | ) |  | (6,162  | ) |  | (5,480  | )
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Loans, net                              | $ | 770,853 |   |  | 669,873 |   |  | 595,915 |   |  | 580,663 |   |  | 529,481 |  
|                                        |   |         |   |  |         |   |  |         |   |  |         |   |  |         |  
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|Gross loans increased $100.3 million in 2005 on growth in all categories, but mostly in commercial-related assets and consumer automobile-indirect. We were encouraged by market demand for our products in 2005, which led to higher loans to businesses for working capital and permanent financing.   Consumer loans increased, driven mainly by indirect automobile loans.  Early in 2005, several competitors exited our market, allowing us to originate a higher volume of loans than we had expected. First lien mortgages grew at a faster rate than in most recent years, associated with the rise in mortgage interest rates.  As rates rise, customers are attracted to our portfolio products, and we retain more originations in portfolio as they carry more attractive interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|Excluded from the balances in the table are loans serviced for others, the balances of which are shown in the Other Income section. We sell some residential and commercial loans, but retain the servicing to manage liquidity and interest rate risk, while continuing to meet the needs of our customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|Overall we are projecting the net balance of loans will increase 10% in 2006, with a focus on greater net growth in the non-commercial portfolios (loans to individuals).  Since our expansion beginning in 1998, the loan portfolio mix has moved from 50% commercial, 50% individual to 62% commercial, 38% individual.  We believe a more balanced mix of these assets provides an optimal level of credit, interest rate, and liquidity risk.  To accomplish these goals over time, we plan to increase consumer loans as well as first-and second-lien residential real estate loans.  Additionally, we will continue to utilize commercial loan participations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Loan Quality                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|Poor credit quality can cause a bank to fail.  Therefore, we are diligent in initial underwriting and subsequent asset management to measure, monitor and manage credit risk.  The quality of the loan portfolio, as measured by the ratio of non-performing loans to total loans, has mirrored the economy, with the measure worsening in the early years of the decade and improving since then.  The highest balances of non-performing assets are concentrated within a relatively few relationships primarily in the health-care and real estate investment sectors.  We are actively working with the borrowers to resolve the credit difficulties, and we do not anticipate significant loan losses as a result of these relationships.  We generally seek to work with borrowers in resolving their credit issues, rather than forcing business bankruptcy, liquidation, or sale.  We believe this strategy provides longer term value to the Company, local economy and customers and their employees, but it can result in a higher ratio of non-performing assets relative to our peers.  At December 31, 2005, we are not aware of any potential problem loans not already reported in the table below.  Given the nature of our business, we can say with certainty that it is reasonable to assume there will be problem loans in the future.
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|To ensure that we only report income we have or expect to receive, we discontinue the accrual of interest on commercial and real estate loans, and reverse previously accrued and unpaid interest, when the loans become 90 days delinquent or when, in our 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 collectibility.  For consumer loans, we generally charge off the loan and its related accrued interest upon its becoming 120 days past due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|Interest can be earned on a cash basis for these loans in non-accrual status, and it amounted to $53,000 in 2005, $52,000 in 2004, and $557,000 in 2003.  We saw a decrease in this amount from 2003 as many of the non-accrual loans paying interest in that year either returned to accrual status or were paid off.  Had all non-accrual loans been current in accordance with their original terms, we would have recognized additional interest income approximating $752,000, $700,000, and $799,000 during 2005, 2004, and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Occasionally we will foreclose on mortgaged properties.  These foreclosures are carried in Other real estate owned in the Other assets section of the balance sheet.  We have one residential property in other real estate owned. During 2005, we sold for $0.1 million, a residential development property we were carrying as Other real estate with a book value of $-0-.   As with non-performing loans, we can anticipate additions and dispositions of other real estate in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|The following table summarizes non-performing assets as of December 31 for each of the last five years (dollars in thousands).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|Loans past due 90 days or more and accruing:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Commercial, financial, and agricultural                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Real estate-commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Real estate-residential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Consumer and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total past due 90 days or more and accruing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Loans in non-accrual status:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Commercial, financial, and agricultural                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Real estate-commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Real estate-residential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Consumer and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total non-accrual loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total non-performing loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Other real estate owned:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Residential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total other real estate owned                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total non-performing assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Non-performing loans to total period-end loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Non-performing assets to total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|period-end loans and other real estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Allowance to non-performing loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|11                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





|Loan Loss Experience and Allowance for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Our policy for and the determination of the appropriate balance of the allowance for loan losses is our most difficult, subjective, and complex accounting estimate.  It is also inherently uncertain, since it is a projection of the future, based on past results.  Therefore, we consider this a critical accounting policy.  Our policy and methodology for its calculation are set forth in Note 1 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Changes in the allowance for loan losses may arise as a result of factors both within and outside of our direct control.  For example, we may change the concentration of the loan portfolio to a particular industry, a particular loan type -- commercial, residential, consumer -- or a particular geographic location.  These changes may increase or decrease the level of allowance necessary to reflect probable losses within the portfolio. The effect of the economy, including resulting changes in the value of collateral securing loans, are outside of our control, but can have significant impact on the allowance for loan losses.  Generally, a declining economy will negatively impact the ability of borrowers to repay loans in a timely manner and can also negatively impact collateral values.  These factors usually cause probable losses within the portfolio to increase, resulting in the need for a higher allowance for loan losses.



|The following table summarizes the changes in the allowance for loan losses for each of the last five years (dollars in thousands).
|-----------------------------------------------------------------------------------------------------------------------------------



|                                        |   | 2005   |   |  | 2004   |   |  | 2003   |   |  | 2002   |   |  | 2001   |  
|--------------------------------------- | - | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Balance at beginning of year            | $ | 7,215  |   |  | 6,331  |   |  | 6,162  |   |  | 5,480  |   |  | 4,712  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Provision charged to operations         |   | 2,087  |   |  | 1,680  |   |  | 1,250  |   |  | 2,306  |   |  | 1,431  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Charge-offs:                            |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial, financial and  agricultural |   | (351   | ) |  | (612   | ) |  | (903   | ) |  | (886   | ) |  | (201   | )
|Real estate-commercial                  |   | (327   | ) |  | -      |   |  | -      |   |  | -      |   |  | -      |  
|Real estate-residential                 |   | (8     | ) |  | -      |   |  | (6     | ) |  | -      |   |  | (3     | )
|Consumer and other                      |   | (1,289 | ) |  | (842   | ) |  | (714   | ) |  | (1,189 | ) |  | (839   | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   | (1,975 | ) |  | (1,454 | ) |  | (1,623 | ) |  | (2,075 | ) |  | (1,043 | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Recoveries:                             |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Commercial, financial and agricultural  |   | 115    |   |  | 165    |   |  | 172    |   |  | 51     |   |  | 27     |  
|Real estate-commercial                  |   | -      |   |  | -      |   |  | -      |   |  | -      |   |  | -      |  
|Real estate-residential                 |   | 1      |   |  | 2      |   |  | -      |   |  | 5      |   |  | 1      |  
|Consumer and other                      |   | 543    |   |  | 491    |   |  | 370    |   |  | 395    |   |  | 352    |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   | 659    |   |  | 658    |   |  | 542    |   |  | 451    |   |  | 380    |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Net charge-offs:                        |   | (1,316 | ) |  | (796   | ) |  | (1,081 | ) |  | (1,624 | ) |  | (663   | )
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Balance at end of year                  | $ | 7,986  |   |  | 7,215  |   |  | 6,331  |   |  | 6,162  |   |  | 5,480  |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Net charge-offs to average loans        |   | 0.18   | % |  | 0.13   | % |  | 0.19   | % |  | 0.30   | % |  | 0.14   | %
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Allowance to total loans                |   | 1.03   | % |  | 1.07   | % |  | 1.06   | % |  | 1.05   | % |  | 1.03   | %
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  
|                                        |   |        |   |  |        |   |  |        |   |  |        |   |  |        |  



|The allowance for loan losses was $8.0 million at December 31, 2005, up from $7.2 million at December 31, 2004. Net charge-offs to average loans increased for the year, but within our most recent historical range.  The most significant increase was associated with consumer loans, which were impacted by changes in the federal bankruptcy law near year-end 2005.  At that time, there was a spike in bankruptcy filings.  We believe, but cannot be sure, that some of these filings would have occurred in the first half of 2006, if not for the change in the law.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|The following table presents an allocation of the allowance for loan losses and the percentage of loans in each category to total gross loans at December 31 for each of the last five years.  In addition to an allocation for specific problem loans, each category includes a portion of the general allowance for loan losses based upon loans outstanding, credit risk and historical charge-offs.  Notwithstanding the following allocation, the entire allowance for loan losses is available to absorb charge-offs in any category of loans (dollars in thousands).   



|              |   | 2005  |  |       |   | 2004 |   |       |  | 2003  |   |  |   | 2002  |  |       |   | 2001 |  
|------------- | - | ----- |  | ----- | - | ---- | - | ----- |  | ----- | - |  | - | ----- |  | ----- | - | ---- | -
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              |   | $(1)  |  | % (2) |   |      |   | $(1)  |  | % (2) |   |  |   | $(1)  |  | % (2) |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|Commercial(3) | $ | 4,103 |  | 61.9  | % |      | $ | 4,399 |  | 64.0  | % |  | $ | 4,706 |  | 65.5  | % |      | $
|Residential   |   | 563   |  | 16.1  |   |      |   | 412   |  | 15.4  |   |  |   | 60    |  | 15.3  |   |      |  
|Consumer      |   | 3,320 |  | 22.0  |   |      |   | 2,404 |  | 20.6  |   |  |   | 1,565 |  | 19.2  |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              | $ | 7,986 |  | 100.0 | % |      | $ | 7,215 |  | 100.0 | % |  | $ | 6,331 |  | 100.0 | % |      | $
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  
|              |   |       |  |       |   |      |   |       |  |       |   |  |   |       |  |       |   |      |  



|(1)Amount of allowance for loan losses                                      
|----------------------------------------------------------------------------
|(2)Percent of loans in each category to total loans                         
|(3)Includes Commercial, financial, agricultural, and commercial real estate.
|                                                                            
|12                                                                          





|Though the largest portfolio balance is commercial loans and the largest allocation of the allowance is for commercial loans, the highest percentage of net charge-offs relative to the underlying portfolio is the consumer portfolio, as these are charged-off faster than commercial loans, and the collateral securing the loans tends to be of lower value, resulting in lower recoveries.  Thus the allocation of the allowance to the consumer portfolio has increased since 2003.  We have also increased our allocation to the residential loan portfolio in recognition of the growth in home equity loans and lines of credit.  Annually we anticipate an overall net charge-off to average loan ratio between 20 and 30 basis points, but we cannot determine the actual amount, timing, or types of loans to be charged off.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|We consider the allowance for loan losses to be at a level adequate enough to cover probable losses in the loan portfolio. The allowance for loan losses stood at 104.0% of non-performing loans at year-end 2005 and 84.3% at year-end 2004. We saw improvement in loan quality in 2005, as measured by a reduction in non-performing loans.  We also experienced significant portfolio growth; therefore, the provision for loan loss increased to $2.1 million in 2005 versus $1.7 million in 2004.                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|Funding sources - Deposits and Borrowings                                                                                                                                                                                                            
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                     
|Our principal sources of funding assets are deposits and borrowings.  Set forth below and in Notes 7, 8 and 9 of the Consolidated Financial Statements is more detailed information about deposits and borrowings at period ends and during the year.
|                                                                                                                                                                                                                                                     
|The following tables summarize the average deposits and average rates paid during each of the three years presented (dollars in thousands).                                                                                                          
|                                                                                                                                                                                                                                                     



|                            |   | 2005    |  |      |   | 2004 |   |         |  | 2003 |  
|--------------------------- | - | ------- |  | ---- | - | ---- | - | ------- |  | ---- | -
|                            |   |         |  |      |   |      |   |         |  |      |  
|                            |   | Amount  |  | Rate |   |      |   | Amount  |  | Rate |  
|                            |   |         |  |      |   |      |   |         |  |      |  
|Non-interest-bearing demand | $ | 144,663 |  | --   | % |      | $ | 126,301 |  | --   | %
|Interest-bearing demand     |   | 101,943 |  | .16  |   |      |   | 93,778  |  | .12  |  
|Savings and money market    |   | 415,327 |  | 1.55 |   |      |   | 435,978 |  | .89  |  
|Time                        |   | 249,695 |  | 2.80 |   |      |   | 190,176 |  | 2.04 |  
|                            |   |         |  |      |   |      |   |         |  |      |  
|                            | $ | 911,628 |  | 1.49 | % |      | $ | 846,233 |  | .93  | %
|                            |   |         |  |      |   |      |   |         |  |      |  
|                            |   |         |  |      |   |      |   |         |  |      |  
|                            |   |         |  |      |   |      |   |         |  |      |  



|The following table sets forth time deposits of $100,000 or greater classified by the time remaining until maturity which were on deposit as of December 31, 2005 (dollars in thousands).
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 months or less    | $ | 125,899
|------------------- | - | -------
|4 through 6 months  |   | 8,963  
|7 through 12 months |   | 27,470 
|Over 12 months      |   | 20,986 
|                    |   |        
|                    | $ | 183,318
|                    |   |        
|                    |   |        
|                    |   |        



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total deposits at December 31, 2005, were $967.1 million and were up $90.0 million (10.3%) from December 31, 2004, due mainly to the success of our OptionsTM and ChoiceTM checking products for consumers, businesses and municipalities. Checking accounts and time deposits were up for the year, while savings and money market accounts fell.  With interest rates rising, consumers, businesses and municipalities opted to move their excess cash from lower yielding savings and money market accounts to higher yielding time deposits, locking in these higher rates.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Overall, most of the deposit growth was attributable to expansion in Monroe County driven by the introduction of new products and services.  Retail deposits in our Ontario County offices grew approximately 4.7% during the year, while they grew 14.3% in our Monroe County offices.  For 2006, we anticipate an overall 6% deposit growth rate.                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|There were no short-term borrowings outstanding at either year-end 2005 or 2004 and no material change in long-term borrowings.  Depending upon our liquidity needs, we might use short-term borrowings in 2006 from time to time, as we did in 2005. Short-term borrowings from the Federal Home Loan Bank of New York, collateralized by residential mortgages, are used from time to time to fund near-term liquidity needs. More information about our borrowings and borrowing capacity can be found in Notes 8 and 9 to the Consolidated Financial Statements.         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Also, depending upon market interest rates, we may issue long-term debt, including additional junior subordinated debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|13                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             





|Liquidity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Our Board of Directors has set general liquidity guidelines for management to meet, which can be summarized as: the ability to generate adequate amounts of cash to meet the demand from depositors who wish to withdraw funds, borrowers who require funds, and capital expansion.  Liquidity is produced by cash flows from our operating, investing, and financing activities.                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Liquidity needs generally arise from asset originations and deposit outflows. Liquidity needs can increase when asset origination (of loans and investments) exceed net deposit inflows.  Conversely, liquidity needs are reduced when the opposite occurs.  In these instances, the needs are funded through short-term borrowings, while excess liquidity is sold into the Federal Funds market.                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|We have two primary sources of non-customer (wholesale) liquidity: the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York, the details of which are set out in Note 8 of the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Secondarily, we use the liquidity source of time deposit sales in the national brokered market.  We will use this source from time to time to manage both liquidity and interest rate risk as conditions may require.  At December 31, 2005, we had $20.2 million outstanding of these "brokered deposits" and none at December 31, 2004.  It is possible we will renew existing or increase the balance of brokered deposits if our internal models dictate the need for additional long-term funds.                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|We measure our liquidity on a daily basis with reference to our fed funds and clearing account balances.  This is supplemented by a monthly Liquidity Report, which projects expected liquidity sources and uses over a twelve-month period.  The results of this model provide ALCO with a near-term view of liquidity and allow us to make appropriate plans and adjustments in a comprehensive manner, consistent with short- and long-term financial goals.  This use of the model reduces the risk of short-term, unplanned liquidity crises, which can be costly to net interest income.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|As measured using the Consolidated Statement of Cash Flows, for the year ended December 31, 2005, we used $21.2 million in net cash and equivalents versus using $21.6 million in 2004.                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Net cash provided by operating activities was $17.0 million in 2005 versus $12.2 million in 2004.  Both the largest source and use of operating cash in each year were mortgage banking-related activities.  However, activity in 2005 continued to fall from previous years.  We expect 2006 to be at or slightly below 2005's level of activity.                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Cash used by investing activities increased substantially in 2005 over 2004 and in 2004 over 2003.  Net purchases of securities declined in both 2005 and 2004, while net loan originations rose during these same years, which is consistent with what we had planned - using available liquidity to fund local loans.  We expect similar results in 2006.                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Cash provided by financing activities was $85.6 million in 2005 versus $57.0 million in 2004.  Deposit increases were the main contributor in both years, reflecting the Company's growth in customers and market share, but the source shifted to time deposits.                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|For 2006, cash required for anticipated growth is expected to come from customer deposits, which in turn will mainly come from Monroe County sources.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Less material, but a part of our ongoing operations, and expected to be funded by normal operations, are liquidity uses such as lease obligations and long-term debt repayments. A summary of these required commitments is included in the table below and details can be found in Notes 8, 9, 15 and 16 of the Consolidated Financial Statements.  Contingent funding commitments associated with extensions of credit to customers are set out in Note 16 of the Consolidated Financial Statements. Long-term debt below includes junior subordinated debentures (dollars in thousands).   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|                            |   |         |  | After   |  | After   |  |        |  |       
|--------------------------- | - | ------- |  | ------- |  | ------- |  | ------ |  | ------
|                            |   |         |  | One     |  | Three   |  |        |  |       
|                            |   |         |  | Year    |  | Years   |  |        |  |       
|                            |   | One     |  | Through |  | Through |  | After  |  |       
|                            |   | Year or |  | Three   |  | Five    |  | Five   |  |       
|                            |   | Less    |  | Years   |  | Years   |  | Years  |  | Total 
|                            |   |         |  |         |  |         |  |        |  |       
|Long-term debt              | $ | 36      |  | 72      |  | 706     |  | 20,690 |  | 21,504
|Operating leases            |   | 1,172   |  | 2,416   |  | 1,687   |  | 4,461  |  | 9,736 
|Trillium Lakefront Partners |   | 403     |  | -       |  | -       |  | -      |  | 403   
|                            |   |         |  |         |  |         |  |        |  |       
|Total                       | $ | 1,611   |  | 2,488   |  | 2,393   |  | 25,151 |  | 31,643
|                            |   |         |  |         |  |         |  |        |  |       
|                            |   |         |  |         |  |         |  |        |  |       
|                            |   |         |  |         |  |         |  |        |  |       



|  
|--
|14





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Interest Rate Risk Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Because our biggest source of revenue is net interest income, interest rate risk management is an important function at our Company.  We consider interest rate risk to be our most significant market-based risk.  We realize net interest income principally from the differential or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of our loans and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base, which could alter our sensitivity to future changes in interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Interest rate risk management focuses on maintaining consistent growth in net interest income within Board approved policy limits while taking into consideration, among other factors, overall credit risk, operating income, operating costs, and available capital. Our Asset/Liability Committee (ALCO) includes the Bank's Chief Executive Officer, Chief Economist, Chief Financial Officer, Senior Vice President of Retail Services, Senior Vice President of Commercial Services, and Senior Vice President of Customer Value Management.  The Committee reports to the Board on its activities to monitor and manage interest rate risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Management of interest rate risk leads us to select certain techniques and instruments to utilize after considering the benefits, costs and risks associated with available alternatives.  Since we do not utilize derivative financial instruments, we usually consider one or more of the following: (1) interest rates offered on products, (2) maturity terms offered on products, (3) types of products offered, and (4) products available to us in the wholesale market such as advances from the FHLB and brokered time deposits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|We use a net interest margin shock simulation model as one method to identify and manage our interest rate risk profile.  The model measures projected net interest income "at-risk" and anticipated resulting changes in net income and economic value of equity.  ALCO's principal focus is net interest income at risk. The model is based on expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates our market-based assumptions regarding the impact of changing interest rates on these financial instruments over a twelve-month period. We also incorporate assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. While actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, this model has proven an important guidance tool for ALCO.  The following table sets forth the results of this model at December 31, 2005.

|                    |  |                           
|------------------- |  | --------------------------
|Changes in Interest |  | Estimated                 
|Rates               |  | Percentage Change in      
|(basis points)      |  | Future Net Interest Income
|                    |  |                           
|+200                |  | (6                        
|+100                |  | (4                        
|No change           |  | -                         
|-100                |  | (2                        
|-200                |  | (9                        
|                    |  |                           

|We measure net interest income at risk by estimating the changes in future 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 ALCO to manage the Company's interest rate risk profile.  At December 31, 2005, an upward shock would cause a modest reduction in net interest income, due to our gap position (discussed below).  A downward shock would also result in a decline in net interest income, because rates earned on assets would fall at an amount and percentage greater than would rates paid on liabilities.  However, the model only provides a benchmark, because it makes the simplifying assumptions that: (1) interest rates will move in a parallel direction with no change in the yield curve; (2) the interest rate moves will be instantaneous and sustained; and (3) there will be no change in the product mix as determined by customer demand or pricing policies by management.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|For 2006, we expect market interest rates to rise up to 50 basis points from their year-end values on the short end of the treasury yield curve (under 3 years) and 50 to 75 basis points at the middle and long end of the curve.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|A second tool used by ALCO is its proprietary Cost of Funds model.  This model is used weekly and measures actual interest rates paid on deposit accounts and earned on loans and investments.  This model takes into consideration current interest rates, interest rate trends, product and portfolio spreads, and projected and historical net interest income data.  Using this model, we can adjust and determine the financial impact on net interest income on a more rapid basis than the net interest margin shock simulation model, which is prepared monthly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|15                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|A third method used to identify and manage our interest rate risk profile is the static gap analysis. Interest sensitivity gap ("gap") analysis measures the difference between interest-earning assets and interest-bearing liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons.  This generally implies a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position generally implies a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates.                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The following table presents an analysis of our interest rate sensitivity gap position at December 31, 2005. Interest-earning assets are shown based on the earlier of their contractual maturity or repricing date.  Securities include the market value of available for sale securities, amortized cost of held-to-maturity securities, FRB and FHLB stock.  Callable securities are shown at their stated maturity.  Loans, without deferred costs, include principal amortization adjusted for estimated prepayments and non-accrual loans. All interest-bearing liabilities are shown based on the earlier of their contractual maturity or repricing date with no adjustment for decay (withdrawal) rates. Borrowings include the junior subordinated debentures.  Because the interest rate sensitivity levels shown in the table could be changed by external factors such as loan prepayments and liability decay rates, or by factors controllable by us such as asset sales, it does not necessarily reflect our potential interest rate risk profile.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The maturities set forth are based upon contractual maturities.  Demand loans, overdrafts and certain time loans, the principal of which may be renewed in whole or in part, are included in the " One Year or Less" classification.  Our loan policy encourages a repayment schedule to be established whenever possible for loans that do not have stated contractual maturities. The policy provides that a demand loan should mature within one year of its origination, with any renewals at the then prevailing interest rate and with the assurance that the borrower demonstrates the ability to repay on maturity of the loan.                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The table indicates that $263.9 million more of interest-bearing liabilities (than interest-earning assets) will reprice in the 0-3 month range. For the 4-12 month period, we are asset sensitive, as $42.4 million more of interest-earning assets are repricing than interest-bearing liabilities.  For the entire one-year range, we are repricing $221.4 million more interest-bearing liabilities than assets, and at 70.7% is within our gap ratio targets of 30% to 125%. We are also asset sensitive at $250.7 million for the one-to-three year range, $70.2 million for the three-to-five year range, and $76.4 million over five years. For the entire portfolio range, we are asset sensitive at $175.9 million versus asset sensitive of $169.1 million last year, mostly reflecting the growth in non-interest-bearing demand accounts and reduction in cash.                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Our product mix is such that nearly all assets and liabilities reprice or mature within three years.  With such a balance sheet profile, we face interest rate risk over the short term. We consider this interest rate gap manageable, as substantially all of the NOW accounts and savings balances are considered insensitive to rate changes.  However, we have seen a long-term declining trend in net interest margin as a result of local competitive pricing pressure.  We continue to pursue a margin stabilization policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                             
|-----------------------------
|Interest Rate Sensitivity Gap
|December 31, 2005            
|(Dollars in thousands)       
|                             

|                                          |   | Maturity/Repricing Period |   
|----------------------------------------- | - | ------------------------- | --
|                                          |   |                           |   
|                                          |   | Within 3                  |   
|                                          |   | Months                    |   
|                                          |   |                           |   
|Interest-earning assets:                  |   |                           |   
|Interest-bearing deposits                 |   |                           |   
|and federal funds sold                    | $ | 14,003                    |   
|Securities                                |   | 7,389                     |   
|Loans                                     |   | 347,560                   |   
|                                          |   |                           |   
|Total interest-earnings assets            |   | 368,952                   |   
|                                          |   |                           |   
|                                          |   |                           |   
|Interest-bearing liabilities:             |   |                           |   
|NOW accounts                              |   | 106,125                   |   
|Savings and money market                  |   | 359,925                   |   
|Time deposits                             |   | 166,743                   |   
|Borrowings                                |   | 9                         |   
|                                          |   |                           |   
|Total interest-bearing liabilities        |   | 632,802                   |   
|                                          |   |                           |   
|                                          |   |                           |   
|Interest rate sensitivity gap             | $ | (263,850                  | ) 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap                            | $ | (263,850                  | ) 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap ratio(1)                   |   | 58.3                      | % 
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   
|Cumulative gap as percent of total assets |   | (24.6                     | )%
|                                          |   |                           |   
|                                          |   |                           |   
|                                          |   |                           |   

|(1)Cumulative total interest-earning assets divided by cumulative total interest-bearing liabilities.
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|16                                                                                                   



|Included within "Loans" in the previous table are commercial, financial and agricultural loans.  More specific information with respect to these loans' maturities and sensitivity to changes in interest rates at December 31, 2005, is set forth in the table below (dollars in thousands).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |   |         |  |   | After   |  |   |       |  |   |        
|-------------------------------------- | - | ------- |  | - | ------- |  | - | ----- |  | - | -------
|                                       |   |         |  |   | One     |  |   |       |  |   |        
|                                       |   | One     |  |   | through |  |   | After |  |   |        
|                                       |   | Year or |  |   | Five    |  |   | Five  |  |   |        
|                                       |   | Less    |  |   | Years   |  |   | Years |  |   | Total  
|                                       |   |         |  |   |         |  |   |       |  |   |        
|Commercial, financial and agricultural | $ | 126,951 |  | $ | 38,254  |  | $ | 2,545 |  | $ | 167,750
|Loans maturing after one year:         |   |         |  |   |         |  |   |       |  |   |        
|with a predetermined interest rate     |   |         |  |   | 29,902  |  |   | 2,545 |  |   | 32,447 
|with a floating or adjustable rate     |   |         |  |   | 8,352   |  |   | -     |  |   | 8,352  

|Capital and Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The Company and Bank are each subject to certain regulatory capital requirements.  We believe that as of December 31, 2005, the Company and Bank each exceeded all capital requirements to which they were subject.  A full description of these requirements and applicable calculations are set out in Note 17 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Our goal is to maintain the Company's and Bank's categorization as "well capitalized."  As reported in previous filings, the accelerated expansion plan set out in 1998 anticipated a reduction in the capital ratios.  Our current plan calls for the Company and Bank to remain at well-capitalized status.  This will be accomplished mainly through asset growth being slower than net capital formation (net income less dividends and treasury stock purchases).  We can take other steps to improve capital ratios as considered necessary, such as dividend reductions, asset sales, issuing equity securities, or issuing additional debt qualifying as regulatory capital and other means.  None of these are contemplated in 2006.                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|We expect capital to increase in 2006.  Considering our strong results in 2005, we raised our semi-annual dividend in January 2006, to $3.30 compared to $2.85 in the first half of 2005.  We also paid a semi-annual cash dividend of $3.20 per share in August 2005.  Together these totaled $2.9 million or $6.05 per outstanding common share in 2005 versus $2.5 million or $5.30 per outstanding common share in 2004. Payment of dividends by the Bank to the Company is limited in certain circumstances, which are discussed in Note 11 to the Consolidated Financial Statements.  You can find historical dividend information in the Common Stock Data section below.  While we cannot provide assurance that the amount and timing of dividends paid in recent years will continue, we have no knowledge of current activities that would require us to reduce dividends or change the timing of their payment.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|We expect common shares to be available in the open market resulting from stock option exercises and shareholders' sales.  From time to time, we may buy shares into treasury which we use to fund our ESOP and other employee awards, including the annual Arthur S. Hamlin Award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Off Balance Sheet Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|We offer certain financial products which are not recorded on our balance sheet because actual funds have not been extended.  These are in the form of standby letters of credit and loan commitments.  We have enumerated these in Note 16 of the Consolidated Financial Statements. At December 31, 2005, there were no material commitments to extend credit which represent unusual risks outside of our normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|New Accounting Standard Affecting Our 2006 Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|In December 2004, FASB issued Statement No. 123 (revised 2004), Share-Based Payment. The FASB's intent in issuing this statement was to provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. In 2005, the FASB extended the standard's implementation date, so it will be applicable for our first quarter of 2006.                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Statement 123(R) covers a wide range of share-based compensation arrangements, which include our stock option plan, phantom stock awards (PSA), and stock appreciation rights (SAR), details of which you can find in Note 14 to the Consolidated Financial Statements.  Until 2006, in accordance with existing accounting guidance, we recognized no expense for stock options.  Beginning in 2006 and for the next two years thereafter, we will recognize an approximate total of $200,000 pre-tax of compensation cost (in salaries and employee benefits), representing the estimated fair value of currently unvested stock options, that will vest during that time                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Despite no near-term financial statement impact, the accounting treatment for PSA's and SAR's (instruments) will change dramatically in the future.  Where we once accounted for these instruments based upon the current market value of the Company's stock price, we will now value the liabilities at the estimated fair value of the instrument through their vesting period.  Fair value will be estimated using the Black-Scholes model we currently use for stock options.  Upon full vesting, the instrument's accounting treatment will return to the current practice of measurement based on the Company's stock price.  Upon implementation at January 1, 2006, there was no change in the underlying liability.                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|17                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|Summary Quarterly Financial Data                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                         
|In the tables below, we present summary quarterly financial results for each of the quarters in the years ended December 31, 2005, and 2004.  The sum of each quarter's earnings per share data may differ from the full year's results due to rounding (in thousands except share data).
|                                                                                                                                                                                                                                                                                         

|2005 Quarters:             |   | 1st   |  |   | 2nd   |  |   | 3rd   |  |   | 4th  
|-------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | -----
|                           |   |       |  |   |       |  |   |       |  |   |      
|Net interest income        | $ | 9,234 |  | $ | 9,795 |  | $ | 9,689 |  | $ | 9,895
|Provision for loan losses  |   | 420   |  |   | 460   |  |   | 420   |  |   | 787  
|Non-interest income        |   | 3,181 |  |   | 3,366 |  |   | 3,000 |  |   | 3,270
|Operating expenses         |   | 8,205 |  |   | 8,534 |  |   | 8,255 |  |   | 8,866
|Income taxes               |   | 1,056 |  |   | 1,202 |  |   | 1,160 |  |   | 840  
|                           |   |       |  |   |       |  |   |       |  |   |      
|Net income                 | $ | 2,734 |  | $ | 2,965 |  | $ | 2,854 |  | $ | 2,672
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|Basic earnings per share   | $ | 5.70  |  | $ | 6.17  |  | $ | 5.95  |  | $ | 5.56 
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|Diluted earnings per share | $ | 5.43  |  | $ | 5.99  |  | $ | 5.79  |  | $ | 5.42 
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      

|                           |   |       |  |   |       |  |   |       |  |   |      
|-------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | -----
|2004 Quarters:             |   |       |  |   |       |  |   |       |  |   |      
|Net interest income        | $ | 8,530 |  | $ | 8,860 |  | $ | 9,100 |  | $ | 9,416
|Provision for loan losses  |   | 490   |  |   | 420   |  |   | 300   |  |   | 470  
|Non-interest income        |   | 2,859 |  |   | 3,209 |  |   | 3,282 |  |   | 3,267
|Operating expenses         |   | 7,876 |  |   | 8,067 |  |   | 8,123 |  |   | 8,265
|Income taxes               |   | 817   |  |   | 885   |  |   | 1,045 |  |   | 1,166
|                           |   |       |  |   |       |  |   |       |  |   |      
|Net income                 | $ | 2,206 |  | $ | 2,697 |  | $ | 2,914 |  | $ | 2,782
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|Basic earnings per share   | $ | 4.62  |  | $ | 5.64  |  | $ | 6.08  |  | $ | 5.79 
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|Diluted earnings per share | $ | 4.42  |  | $ | 5.38  |  | $ | 5.77  |  | $ | 5.50 
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      
|                           |   |       |  |   |       |  |   |       |  |   |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|We recorded a fairly substantial provision for loan losses during the fourth quarter of 2005, primarily associated with a charge-off of a portion of a non-accrual, commercial real-estate loan and additional consumer loans driven by a change in federal bankruptcy law.  Also in the fourth quarter of 2005, we recorded higher operating expenses than in prior quarters of the year.  These increases were associated with higher retirement and incentive compensation accruals; higher costs for marketing, postage and stationery; higher processing fees for electronic banking services; and higher external audit fees associated with the myriad financial, regulatory, and compliance examinations to which we are subject.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|There were no significant transactions in the fourth quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|18                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



|Our Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|At January 31, 2006, we had approximately 1,200 shareholders of record. Information about beneficial ownership of the Company's stock by directors and certain officers is set forth in the Proxy Statement. Market value and dividend information is set forth in the table below, and a performance graph comparing the total return of the Company's common stock to related stock market indices can be found in the Proxy Statement.                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|The Company's stock is not actively traded. In addition, it is not listed with a national securities exchange; therefore, no formal bid and asked-for quotations are available. Due to the limited number of known transactions, the weighted average sale price may not be indicative of the actual market value of the Company's stock. The following table sets forth a summary of the weighted average (known open-market) sales price, book value at quarter end, and semi-annual dividends paid per share since the first quarter of 2001. All per share calculations have been restated to reflect the three-for-one stock split in 2002.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|            |  |   | Average     |  |   | Book   |  |   | Dividend
|----------- |  | - | ----------- |  | - | ------ |  | - | --------
|            |  |   | Sales Price |  |   | Value  |  |   | Paid    
|2005        |  |   |             |  |   |        |  |   |         
|4th Quarter |  | $ | 361.07      |  | $ | 159.48 |  |   |         
|3rd Quarter |  | $ | 373.20      |  | $ | 154.86 |  | $ | 3.20    
|2nd Quarter |  | $ | 371.88      |  | $ | 153.75 |  |   |         
|1st Quarter |  | $ | 382.67      |  | $ | 146.57 |  | $ | 2.85    
|            |  |   |             |  |   |        |  |   |         
|2004        |  |   |             |  |   |        |  |   |         
|4th Quarter |  | $ | 361.01      |  | $ | 145.83 |  |   |         
|3rd Quarter |  | $ | 384.25      |  | $ | 140.19 |  | $ | 2.70    
|2nd Quarter |  | $ | 361.46      |  | $ | 134.38 |  |   |         
|1st Quarter |  | $ | 328.61      |  | $ | 131.64 |  | $ | 2.60    
|            |  |   |             |  |   |        |  |   |         
|2003        |  |   |             |  |   |        |  |   |         
|4th Quarter |  | $ | 293.85      |  | $ | 129.02 |  |   |         
|3rd Quarter |  | $ | 241.06      |  | $ | 124.67 |  | $ | 2.60    
|2nd Quarter |  | $ | 213.07      |  | $ | 120.69 |  |   |         
|1st Quarter |  | $ | 188.43      |  | $ | 115.23 |  | $ | 2.15    
|            |  |   |             |  |   |        |  |   |         
|2002        |  |   |             |  |   |        |  |   |         
|4th Quarter |  | $ | No sales    |  | $ | 111.94 |  |   |         
|3rd Quarter |  | $ | 171.88      |  | $ | 106.56 |  | $ | 2.05    
|2nd Quarter |  | $ | No sales    |  | $ | 106.10 |  |   |         
|1st Quarter |  | $ | No sales    |  | $ | 102.76 |  | $ | 2.05    
|            |  |   |             |  |   |        |  |   |         
|2001        |  |   |             |  |   |        |  |   |         
|4th Quarter |  | $ | No sales    |  | $ | 100.98 |  |   |         
|3rd Quarter |  | $ | 157.64      |  | $ | 98.46  |  | $ | 2.02    
|2nd Quarter |  | $ | 152.73      |  | $ | 96.46  |  |   |         
|1st Quarter |  | $ | No sales    |  | $ | 93.41  |  | $ | 2.01    
|            |  |   |             |  |   |        |  |   |         

|The following table sets forth, for monthly period indicated in 2005, 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 affiliated purchasers of the Company under Item 703 of Regulation S-K.  The Company and Bank purchase prices per share were determined based on the latest open-market transaction.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Date            |  | # shares |  | Price    |  | Purpose               
| | --------------- |  | -------- |  | -------- |  | ----------------------
| | February, 2005  |  | 2,176    |  | $ 361.01 |  | Treasury              
| | March, 2005     |  | 25       |  | $ 361.01 |  | Treasury              
| | June, 2005      |  | 9        |  | $ 382.67 |  | Arthur S. Hamlin Award
| | June, 2005      |  | 1,058    |  | $ 382.67 |  | Treasury              
| | September, 2005 |  | 1,080    |  | $ 373.20 |  | Treasury              
| | November, 2005  |  | 335      |  | $ 369.75 |  | Treasury              
| | December, 2005  |  | 681      |  | $ 365.16 |  | Treasury              

|  
|--
|19



|Management Report on the Effectiveness of Internal Controls over Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Management of Canandaigua National Corporation (Company) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in its annual report. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, as such, include amounts based on informed judgments, assumptions and estimates made by management.                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Management is also responsible for establishing and maintaining adequate and effective internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and the Federal Financial Institutions Examination Council instructions for Consolidated Reports of Condition and Income (call report instructions) and as defined in Exchange Act Rules 13a-15(f).  This internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|There are inherent limitations in any internal control, including the possibility of human error and the circumvention of overriding controls.  Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation.  Further, because of changes in conditions, the effectiveness of internal control may vary over time.                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Management assessed the Company's internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and call report instructions as of December 31, 2005.  This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control-An Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management believes that, as of December 31, 2005, the Company maintained effective internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and call report instructions.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|KPMG LLP, a registered public accounting firm, has audited the consolidated financial statements included in the annual report, and has issued an attestation report on management's assessment of the Company's internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Management is also responsible for complying with federal laws and regulations concerning dividend restrictions and loans to insiders, designated by the FDIC as safety and soundness laws and regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Management assessed compliance with the aforementioned designated safety and soundness laws and regulations.  Based on this assessment, management believes that Company complied, in all material respects, with such designated laws and regulations relating to safety and soundness during the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|February 8, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                      |                                                  
|------------------------------------- | -------------------------------------------------
|/s/George W. Hamlin, IV               | /s/Lawrence A. Heilbronner                       
|George W. Hamlin, IV                  | Lawrence A. Heilbronner                          
|President and Chief Executive Officer | Senior Vice President and Chief Financial Officer
|                                      |                                                  
|                                     
|20                                   



|Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Board of Directors and Stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Canandaigua National Corporation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|We have audited management's assessment, included in the accompanying Management Report on the Effectiveness of Internal Controls over Financial Reporting, that Canandaigua National Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because management's assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of the Company's internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Federal Financial Institutions Examination Council for Consolidated Reports of Condition and Income (call report instructions).  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|In our opinion, management's assessment that Canandaigua National Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, Canandaigua National Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|We do not express an opinion or any other form of assurance on management's statement referring to compliance with laws and regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Canandaigua National Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 8, 2006expressed an unqualified opinion on those consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|/s/KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Rochester, New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|February 8, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|21                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



|Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The Board of Directors and Stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Canandaigua National Corporation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|We have audited the accompanying consolidated balance sheets of Canandaigua National Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Canandaigua National Corporation and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Canandaigua National Corporation's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 8, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|/s/KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Rochester, New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|February 8, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|22                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                    
|---------------------------------------------------------------------
|                                                                     
|Consolidated Balance Sheets                                          
|                                                                     
|December 31, 2005, and 2004 (dollars in thousands, except share data)
|                                                                     

|Assets                                                        |  |  |   | 2005      |   |  | 2004    |  
|------------------------------------------------------------- |  |  | - | --------- | - |  | ------- | -
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Cash and due from banks                                       |  |  | $ | 35,177    |   |  | 23,725  |  
|Interest-bearing deposits with other financial institutions   |  |  |   | 5,718     |   |  | 2,751   |  
|Federal funds sold                                            |  |  |   | 9,949     |   |  | 45,554  |  
|Securities:                                                   |  |  |   |           |   |  |         |  
|- Available for sale, at fair value                           |  |  |   | 95,360    |   |  | 85,031  |  
|- Held to maturity (fair value approximated                   |  |  |   |           |   |  |         |  
|$122,227 in 2005 and $119,131 in 2004)                        |  |  |   | 122,330   |   |  | 116,689 |  
|Loans - net of allowance of $7,986 in 2005 and $7,215 in 2004 |  |  |   | 770,853   |   |  | 669,873 |  
|Premises and equipment - net                                  |  |  |   | 14,902    |   |  | 15,251  |  
|Accrued interest receivable                                   |  |  |   | 5,357     |   |  | 4,103   |  
|Federal Home Loan Bank stock and Federal Reserve Bank stock   |  |  |   | 1,583     |   |  | 2,140   |  
|Other assets                                                  |  |  |   | 10,603    |   |  | 9,640   |  
|                                                              |  |  |   |           |   |  |         |  
|Total Assets                                                  |  |  | $ | 1,071,832 |   |  | 974,757 |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Liabilities and Stockholders' Equity                          |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Deposits:                                                     |  |  |   |           |   |  |         |  
|Demand                                                        |  |  |   |           |   |  |         |  
|Non-interest-bearing                                          |  |  | $ | 154,881   |   |  | 138,084 |  
|Interest-bearing                                              |  |  |   | 106,125   |   |  | 97,700  |  
|Savings and money market                                      |  |  |   | 359,925   |   |  | 448,974 |  
|Time deposits                                                 |  |  |   | 346,193   |   |  | 192,383 |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Total deposits                                                |  |  |   | 967,124   |   |  | 877,141 |  
|Borrowings                                                    |  |  |   | 885       |   |  | 942     |  
|Junior subordinated debentures                                |  |  |   | 20,222    |   |  | 20,160  |  
|Accrued interest payable and other liabilities                |  |  |   | 7,062     |   |  | 6,341   |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Total Liabilities                                             |  |  |   | 995,293   |   |  | 904,584 |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Commitments and contingencies (Notes 15 and 16)               |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Stockholders' Equity:                                         |  |  |   |           |   |  |         |  
|Common stock, $20 par value; 2,000,000 shares authorized,     |  |  |   |           |   |  |         |  
|486,624 shares issued in 2005 and 2004                        |  |  |   | 9,732     |   |  | 9,732   |  
|Additional paid-in capital                                    |  |  |   | 7,856     |   |  | 7,430   |  
|Retained earnings                                             |  |  |   | 62,117    |   |  | 53,797  |  
|Treasury stock, at cost (6,690 shares in 2005                 |  |  |   |           |   |  |         |  
|and 5,443 shares in 2004)                                     |  |  |   | (2,179    | ) |  | (734    | )
|Accumulated other comprehensive loss                          |  |  |   | (987      | ) |  | (52     | )
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Total Stockholders' Equity                                    |  |  |   | 76,539    |   |  | 70,173  |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|Total Liabilities and Stockholders' Equity                    |  |  | $ | 1,071,832 |   |  | 974,757 |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  
|                                                              |  |  |   |           |   |  |         |  

|                                                            
|------------------------------------------------------------
|See accompanying notes to consolidated financial statements.
|                                                            
|23                                                          
|                                                            



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
|-------------------------------------------------
|                                                 
|Consolidated Statements of Income                
|                                                 
|Years ended December 31, 2005, 2004, and 2003    
|(dollars in thousands, except per share data)    
|                                                 

|Interest income:                                    |  |   | 2005   |  |  | 2004   |  |  | 2003   | 
|--------------------------------------------------- |  | - | ------ |  |  | ------ |  |  | ------ | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Loans, including fees                               |  | $ | 45,356 |  |  | 37,124 |  |  | 37,335 | 
|Securities                                          |  |   | 7,983  |  |  | 7,248  |  |  | 6,312  | 
|Other                                               |  |   | 548    |  |  | 544    |  |  | 371    | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Total interest income                               |  |   | 53,887 |  |  | 44,916 |  |  | 44,018 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Interest expense:                                   |  |   |        |  |  |        |  |  |        | 
|Deposits                                            |  |   | 13,582 |  |  | 7,886  |  |  | 9,457  | 
|Borrowings                                          |  |   | 219    |  |  | 31     |  |  | 34     | 
|Junior subordinated debentures                      |  |   | 1,473  |  |  | 1,093  |  |  | 1,046  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Total interest expense                              |  |   | 15,274 |  |  | 9,010  |  |  | 10,537 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Net interest income                                 |  |   | 38,613 |  |  | 35,906 |  |  | 33,481 | 
|Provision for loan losses                           |  |   | 2,087  |  |  | 1,680  |  |  | 1,250  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Net interest income after provision for loan losses |  |   | 36,526 |  |  | 34,226 |  |  | 32,231 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Other income:                                       |  |   |        |  |  |        |  |  |        | 
|Service charges on deposit accounts                 |  |   | 5,610  |  |  | 5,393  |  |  | 5,233  | 
|Trust and investment services income                |  |   | 4,235  |  |  | 3,698  |  |  | 3,210  | 
|Net gain on sale of mortgage loans                  |  |   | 962    |  |  | 1,247  |  |  | 2,823  | 
|Mortgage servicing income, net                      |  |   | 667    |  |  | 631    |  |  | 408    | 
|Loan fees and other charges                         |  |   | 745    |  |  | 624    |  |  | 270    | 
|Gain on call of securities                          |  |   | 46     |  |  | 37     |  |  | -      | 
|Other operating income                              |  |   | 552    |  |  | 987    |  |  | 1,053  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Total other income                                  |  |   | 12,817 |  |  | 12,617 |  |  | 12,997 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Operating expenses:                                 |  |   |        |  |  |        |  |  |        | 
|Salaries and employee benefits                      |  |   | 18,387 |  |  | 17,629 |  |  | 17,191 | 
|Occupancy                                           |  |   | 6,450  |  |  | 6,369  |  |  | 5,780  | 
|Marketing and public relations                      |  |   | 1,273  |  |  | 1,073  |  |  | 1,230  | 
|Supplies, printing and postage                      |  |   | 1,200  |  |  | 1,252  |  |  | 1,106  | 
|FDIC insurance                                      |  |   | 121    |  |  | 121    |  |  | 118    | 
|Other operating expenses                            |  |   | 6,429  |  |  | 5,887  |  |  | 5,492  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Total operating expenses                            |  |   | 33,860 |  |  | 32,331 |  |  | 30,917 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Income before income taxes                          |  |   | 15,483 |  |  | 14,512 |  |  | 14,311 | 
|Income taxes                                        |  |   | 4,258  |  |  | 3,913  |  |  | 3,970  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Net income                                          |  | $ | 11,225 |  |  | 10,599 |  |  | 10,341 | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Basic earnings per share                            |  | $ | 23.39  |  |  | 22.14  |  |  | 21.67  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|Diluted earnings per share                          |  | $ | 22.74  |  |  | 21.09  |  |  | 21.10  | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 
|                                                    |  |   |        |  |  |        |  |  |        | 

|                                                            
|------------------------------------------------------------
|See accompanying notes to consolidated financial statements.
|                                                            
|24                                                          
|                                                            



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
|-------------------------------------------------
|                                                 
|Consolidated Statements of Stockholders' Equity  
|                                                 
|Years ended December 31, 2005, 2004, and 2003    
|(dollars in thousands, except share data)        
|                                                 

|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  | Accumulated   |   |  |        |  
|--------------------------------- |  | ----------- | - | - | ------ |  |  | ---------- |  |  | -------- | - |  | -------- | - |  | ------------- | - |  | ------ | -
|                                  |  | Number of   |   |   |        |  |  | Additional |  |  |          |   |  |          |   |  | Other         |   |  |        |  
|                                  |  | Shares      |   |   | Common |  |  | Paid-in    |  |  | Retained |   |  | Treasury |   |  | Comprehensive |   |  |        |  
|                                  |  | Outstanding |   |   | Stock  |  |  | Capital    |  |  | Earnings |   |  | Stock    |   |  | (Loss) Income |   |  | Total  |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Balance at December 31, 2002      |  | 477,203     |   | $ | 9,732  |  |  | 6,958      |  |  | 37,655   |   |  | (1,159   | ) |  | 231           |   |  | 53,417 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Comprehensive income:             |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Change in unrealized gain on      |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|securities available for sale,    |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|net of taxes of $45               |  |             |   |   | -      |  |  | -          |  |  | -        |   |  | -        |   |  | 77            |   |  | 77     |  
|Net income                        |  |             |   |   | -      |  |  | -          |  |  | 10,341   |   |  | -        |   |  | -             |   |  | 10,341 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  | -           |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Total comprehensive income        |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  | 10,418 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Cash dividend $4.75 per share     |  |             |   |   | -      |  |  | -          |  |  | (2,267   | ) |  | -        |   |  | -             |   |  | (2,267 | )
|Sale of shares of treasury stock  |  | 6           |   |   | -      |  |  | -          |  |  | -        |   |  | 1        |   |  | -             |   |  | 1      |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Balance at December 31, 2003      |  | 477,209     |   | $ | 9,732  |  |  | 6,958      |  |  | 45,729   |   |  | (1,158   | ) |  | 308           |   |  | 61,569 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Comprehensive income:             |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Change in unrealized gain (loss)  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|on securities available for sale, |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|net of taxes of $(248)            |  |             |   |   | -      |  |  | -          |  |  | -        |   |  | -        |   |  | (360          | ) |  | (360   | )
|Net income                        |  |             |   |   | -      |  |  | -          |  |  | 10,599   |   |  | -        |   |  | -             |   |  | 10,599 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Total comprehensive income        |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  | 10,239 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  | -           |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Cash dividend $5.30 per share     |  |             |   |   | -      |  |  | -          |  |  | (2,531   | ) |  | -        |   |  | -             |   |  | (2,531 | )
|Sale of shares of treasury stock  |  | 848         |   |   | -      |  |  | 112        |  |  | -        |   |  | 91       |   |  | -             |   |  | 203    |  
|Purchase of shares for            |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|treasury stock                    |  | (90         | ) |   | -      |  |  | -          |  |  | -        |   |  | (36      | ) |  | -             |   |  | (36    | )
|Exercise of stock options,        |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|including tax benefit of $343     |  | 3,214       |   |   | -      |  |  | 360        |  |  | -        |   |  | 369      |   |  | -             |   |  | 729    |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Balance at December 31, 2004      |  | 481,181     |   | $ | 9,732  |  |  | 7,430      |  |  | 53,797   |   |  | (734     | ) |  | (52           | ) |  | 70,173 |  
|Comprehensive income:             |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Change in unrealized loss         |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|on securities available for sale, |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|net of taxes of $(596)            |  |             |   |   | -      |  |  | -          |  |  | -        |   |  | -        |   |  | (935          | ) |  | (935   | )
|Net income                        |  |             |   |   | -      |  |  | -          |  |  | 11,225   |   |  | -        |   |  | -             |   |  | 11,225 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Total comprehensive income        |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  | 10,290 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Cash dividend $6.05 per share     |  |             |   |   | -      |  |  | -          |  |  | (2,905   | ) |  | -        |   |  | -             |   |  | (2,905 | )
|Sale of shares of treasury stock  |  | 9           |   |   | -      |  |  | 2          |  |  | -        |   |  | 1        |   |  | -             |   |  | 3      |  
|Purchase of shares for            |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|treasury stock                    |  | (5,355      | ) |   | -      |  |  | -          |  |  | -        |   |  | (1,976   | ) |  | -             |   |  | (1,976 | )
|Exercise of stock options,        |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|including tax benefit of $367     |  | 4,099       |   |   | -      |  |  | 424        |  |  | -        |   |  | 530      |   |  | -             |   |  | 954    |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|Balance at December 31, 2005      |  | 479,934     |   | $ | 9,732  |  |  | 7,856      |  |  | 62,117   |   |  | (2,179   | ) |  | (987          | ) |  | 76,539 |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  
|                                  |  |             |   |   |        |  |  |            |  |  |          |   |  |          |   |  |               |   |  |        |  

|                                                            
|------------------------------------------------------------
|See accompanying notes to consolidated financial statements.
|                                                            
|25                                                          
|                                                            



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                    
|---------------------------------------------------------------------
|                                                                     
|Consolidated Statements of Cash Flows                                
|Years ended December 31, 2005, 2004 and 2003 (dollars in thousands)  
|                                                                     
|                                                                     
|                                                                     
|Cash flows from operating activities:                                
|Net income                                                           
|Adjustments to reconcile net income to net cash                      
|provided by operating activities:                                    
|Depreciation, amortization and accretion                             
|Provision for loan losses                                            
|(Gain on sale) write-down of other real estate                       
|Deferred income tax (benefit) expense                                
|Loss (income) from equity-method investments                         
|Gain on sale or call of securities                                   
|Gain on sale of loans                                                
|Originations of loans held for sale                                  
|Proceeds from sales of loans held for sale                           
|(Increase) decrease in all other assets                              
|Increase (decrease) in accrued interest payable and other liabilities
|                                                                     
|                                                                     
|Net cash provided by operating activities                            
|                                                                     
|                                                                     
|Cash flows from investing activities:                                
|Purchase of FHLB and FRB stock                                       
|Proceeds from calls of FHLB stock                                    
|Securities available for sale:                                       
|Proceeds from maturities and calls                                   
|Purchases                                                            
|Securities held to maturity:                                         
|Proceeds from maturities and calls                                   
|Purchases                                                            
|Loan originations and principal collections - net                    
|Fixed asset purchases - net                                          
|Investment in equity-method investments                              
|Proceeds from sale of other real estate                              
|                                                                     
|                                                                     
|Net cash used in investing activities                                
|                                                                     
|                                                                     
|Cash flows from financing activities:                                
|Net (decrease) increase in demand, savings and money market deposits 
|Net increase (decrease) in time deposits                             
|Principal repayments on borrowings                                   
|Proceeds from sale of treasury stock                                 
|Payments to acquire treasury stock                                   
|Proceeds from exercise of stock options                              
|Dividends paid                                                       
|                                                                     
|                                                                     
|Net cash provided by financing activities                            
|                                                                     
|                                                                     
|Net (decrease) increase in cash and cash equivalents                 
|Cash and cash equivalents - beginning of year                        
|                                                                     
|                                                                     
|Cash and cash equivalents - end of year                              
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Supplemental disclosures of cash flow information:                   
|Cash paid during the year for:                                       
|Interest                                                             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Income taxes                                                         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Supplemental disclosure of non-cash investing activities:            
|Additions to other real estate acquired through foreclosure,         
|net of loans to facilitate sales                                     
|                                                                     
|                                                                     
|                                                                     

|                                                            
|------------------------------------------------------------
|See accompanying notes to consolidated financial statements.
|                                                            
|26                                                          
|                                                            



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(1) Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Canandaigua National Corporation (the Company) provides a full range of financial services, including banking, trust, and insurance services to individual, corporate, and municipal customers. The Company is subject to competition from other financial institutions. The Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Its principal operations comprise the activities of The Canandaigua National Bank and Trust Company (the Bank) and CNB Mortgage Company (CNBM). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for investments in minority-owned entities under the equity method. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles and conform with predominant practices within the financial services industry.                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In preparing the consolidated financial statements, management made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, particularly with respect to the allowance for loan losses.                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Amounts in prior years' consolidated financial statements are reclassified whenever necessary to conform with the current year's presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits with other financial institutions, and federal funds sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company classifies its debt securities as either available for sale or held to maturity as the Company does not hold any securities considered to be trading. Held to maturity securities are those that the Company has the ability and intent to hold until maturity. Held to maturity securities are recorded at amortized cost. All other securities not included as held to maturity are classified as available for sale.                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on these securities are excluded from earnings and are included in accumulated other comprehensive income (loss) in stockholders' equity until realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  A decline in fair value of any security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Interest income and dividends are recognized when earned. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Realized gains and losses are included in earnings and are determined using the specific identification method.                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The accrual of interest on commercial and real estate loans is 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 doubt no longer exists about the loan's collectibility. Consumer loans are generally charged off upon becoming 120 days past due.                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|27                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(1) Summary of Significant Accounting Policies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Loans held for sale are carried at the lower of cost or fair value. Fair value is estimated based on outstanding investor commitments, or in the absence of such commitments, is based on current yield requirements or quoted market prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Allowance for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|The allowance for loan losses is a valuation reserve for probable 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 identified problem loans and the calculation of general reserves, which is a formula-driven allocation. Specific reserves are determined through assessment of the borrower's ability to repay and the fair value of the underlying collateral, for collateral dependent loans. If the carrying value of a loan exceeds the discounted expected cash flows or the value of the underlying collateral, the excess is specifically reserved or charged off. The level of specific reserves is generally the smallest component of the allowance for loan losses.                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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 loss migration analysis for commercial loans. For all other loans, a portfolio-wide, trailing eight-quarter loss migration analysis is used. Adjustments are then made to the historical loss factors based on quantitative objective elements (delinquency, non-performing assets, classified/criticized loan trends, charge-offs, concentrations of credit and recoveries, etc.) and the 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.                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|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, 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 market price or the fair value of collateral if the loan is collateral dependent. Impairment losses 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 impairment, management generally excludes smaller balance, homogeneous loans: residential mortgage loans, home equity loans, and all consumer loans. These loans are collectively evaluated for impairment as discussed above.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Premises and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Land is carried at cost. Land improvements, buildings, leasehold improvements, equipment and software are carried at cost, less accumulated depreciation and amortization. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets, 3-25 years. Amortization of leasehold improvements is provided over the lesser of the term of the lease or the estimated useful lives of the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Other Real Estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Real estate acquired through foreclosure or deed in lieu of foreclosure (other real estate) is included in other assets and is recorded at the lower of the unpaid loan balance on the property at the date of transfer, or fair value. Adjustments made to the value at transfer are charged to the allowance for loan losses. After transfer, the property is carried at the lower of cost or estimated fair value less estimated costs to sell. Adjustments to the carrying values of such properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. Operating earnings and costs associated with the properties are charged to other operating expense as incurred. Gains on the sale of other real estate are included in results of operations when the sale occurs.                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|28                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(1) Summary of Significant Accounting Policies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Mortgage Servicing Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company services residential mortgage loans for the Federal Home Loan Mortgage Corporation (Freddie Mac) and earns servicing fees, which are recognized when payments are received, based upon the outstanding principal balance of the loans. The Company capitalizes servicing assets when servicing rights are retained after selling loans to Freddie Mac. Mortgage servicing assets are reported in other assets and are amortized to mortgage servicing income in proportion to, and over the period of, the estimated future net servicing income. Servicing assets are evaluated for impairment based upon the fair value of the rights.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|In computing amortization expense, the Company uses historical prepayment rates for similar loan pools and applies this amortization rate to each pool. If prepayments occur at a rate different than the applied rate, the Company adjusts the specific pool's amortization in the period in which the change occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|To estimate the fair value of servicing rights, the Company considers market prices for similar assets and the present value of expected future cash flows associated with the servicing rights 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. For purposes of evaluating and measuring impairment of mortgage servicing rights, the Company stratifies these assets based on predominant risk characteristics of the underlying loans that are expected to have the most impact on projected prepayments, cost of servicing, and other factors affecting future cash flows associated with the servicing rights, such as loan type, rate, and term. The amount of impairment recognized is the amount by which the carrying value of the mortgage servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Debt Issuance Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Costs incurred to issue long-term debt are deferred and amortized on a straight-line basis to interest expense over the expected life of the debt instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company uses a fixed-award stock option plan to compensate certain members of management of the Company and its subsidiaries. The Company accounts for the issuance of stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, compensation expense is recorded the date the options are granted only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed under SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above and has adopted only the disclosure requirements of SFAS No. 123.                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company applies APB Opinion No. 25 in accounting for its stock option plan, and accordingly, no compensation cost has been recognized for its fixed-award stock options in the consolidated statements of income. Had compensation cost been determined based on the fair value at the grant date of the stock options using option valuation models consistent with the approach of SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 2005, 2004, and 2003, would have been reduced to the pro forma amounts indicated in the following table (in thousands, except per share amount):                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                       | 2005 |       | 2004   |         | 2003
|---------------------- | ---- | ----- | ------ | ------- | ----
|                       |      |       |        |         |     
|Net income as reported |      | $     | 11,225 |         |     
|Compensation expense   |      | $     | 99     |         |     
|Pro forma net income   |      | $     | 11,126 |         |     
|                       |      |       |        |         |     
|Earnings per share     |      | Basic |        | Diluted |     
|                       |      |       |        |         |     
|As reported            | $    | 23.39 | $      | 22.74   |     
|Pro forma              | $    | 23.18 | $      | 22.54   |     
|                       |      |       |        |         |     
|                      
|29                    



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(1) Summary of Significant Accounting Policies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Company's only derivative financial instruments are commitments to originate fixed-rate residential real estate loans to be held for sale and commitments to sell fixed-rate residential loans. Commitments to originate and commitments to sell fixed-rate residential real estate loans are recorded in the consolidated balance sheet at estimated fair value.                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Neither of these derivatives instruments is considered a hedge; therefore, periodic changes in the fair value of these instruments are recognized in mortgage banking income in the period in which the change occurs. However, due to the short-term nature of these instruments, the impact of a change in fair value from the instruments' initially recognized fair value is generally immaterial.                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Accumulated Other Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Company's comprehensive income consists of only net income and the net unrealized holding gains and losses of securities available for sale, net of the related tax effect. Accumulated other comprehensive income (loss) on the consolidated statements of stockholders' equity is presented net of taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Trust and Investment Services Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Assets, at cost, held in fiduciary or agency capacity for customers, amounting to $752,939,000 and $683,033,000 at December 31, 2005, and 2004, respectively, are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Company. Fee income is recognized on the accrual method.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Treasury stock is shown on the consolidated balance sheet at cost as a reduction of stockholders' equity. Shares are released from Treasury at original cost on a first-in, first-out basis, with any gain on the sale reflected as an adjustment to additional paid-in capital. Losses are reflected as an adjustment to additional paid-in capital to the extent of gains previously recognized, otherwise as an adjustment to retained earnings.                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share includes the maximum dilutive effect of stock issuable upon conversion of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|On January 1, 2003, the Company implemented the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which was an interpretation of a number of FASB Statements. The Interpretation elaborated on the disclosures to be made by a guarantor in its periodic financial statements. It also clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Upon implementation, the Company recognized a liability and corresponding reduction of income of approximately $200,000.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|30                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                        
|-----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                         
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                              
|                                                                                                                                         
|(2) Federal Funds Sold                                                                                                                   
|                                                                                                                                         
|Income from Federal funds sold for the years ended December 31, 2005, 2004, and 2003, was $403,000, $489,000, and $310,000, respectively.
|                                                                                                                                         
|(3) Securities                                                                                                                           
|                                                                                                                                         
|Information about the securities portfolios follows (dollars in thousands):                                                              
|                                                                                                                                         

|                                    |   |                  
|----------------------------------- | - | -----------------
|                                    |   | December 31, 2005
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   | Amortized        
|                                    |   | Cost             
|                                    |   |                  
|                                    |   |                  
|Securities Available for Sale:      |   |                  
|U.S. Treasuries                     | $ | 1,493            
|U.S. Agencies                       |   | 57,167           
|State and municipal obligations     |   | 34,027           
|Corporate and foreign obligations   |   | 4,218            
|Equity securities                   |   | 93               
|                                    |   |                  
|                                    |   |                  
|Total securities Available for Sale | $ | 96,998           
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|Securities Held to Maturity:        |   |                  
|U.S. Treasury                       | $ | 3,995            
|U.S. Agencies                       |   | 21               
|State and municipal obligations     |   | 117,882          
|Corporate and foreign obligations   |   | 432              
|                                    |   |                  
|                                    |   |                  
|Total securities Held to Maturity   | $ | 122,330          
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   | December 31, 2004
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   | Amortized        
|                                    |   | Cost             
|                                    |   |                  
|                                    |   |                  
|Securities Available for Sale:      |   |                  
|U.S. Agencies                       | $ | 48,159           
|State and municipal obligations     |   | 32,667           
|Corporate and foreign obligations   |   | 4,219            
|Equity securities                   |   | 93               
|                                    |   |                  
|                                    |   |                  
|Total securities Available for Sale | $ | 85,138           
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|Securities Held to Maturity:        |   |                  
|U.S. Treasury                       | $ | 4,000            
|U.S. Agencies                       |   | 28               
|State and municipal obligations     |   | 111,767          
|Corporate and foreign obligations   |   | 894              
|                                    |   |                  
|                                    |   |                  
|Total securities Held to Maturity   | $ | 116,689          
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|31                                 



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003
|                                                                           
|(3) Securities(continued)                                                  

|                                    |   |                  
|----------------------------------- | - | -----------------
|                                    |   | December 31, 2003
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   | Amortized        
|                                    |   | Cost             
|                                    |   |                  
|                                    |   |                  
|Securities Available for Sale:      |   |                  
|U.S. Agencies                       | $ | 32,883           
|State and municipal obligations     |   | 26,636           
|Corporate and foreign obligations   |   | 4,682            
|Equity securities                   |   | 93               
|                                    |   |                  
|                                    |   |                  
|Total securities Available for Sale | $ | 64,294           
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|Securities Held to Maturity:        |   |                  
|U.S. Treasury                       | $ | 16,034           
|State and municipal obligations     |   | 104,321          
|Corporate and foreign obligations   |   | 845              
|                                    |   |                  
|                                    |   |                  
|Total securities Held to Maturity   | $ | 121,200          
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  
|                                    |   |                  

|The amortized cost and fair value of securities by years to maturity as of December 31, 2005, 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 Sale |  | Held to Maturity
|----------- | - | ------------------ |  | ----------------
|            |   | Amortized Cost     |  | Fair Value      
|            |   |                    |  |                 
|Years       |   |                    |  |                 
|Under 1     | $ | 5,145              |  | 5,145           
|1 to 5      |   | 37,985             |  | 37,309          
|5 to 10     |   | 50,856             |  | 49,836          
|10 and over |   | 2,919              |  | 2,977           
|            |   |                    |  |                 
|            |   |                    |  |                 
|Total       | $ | 96,905             |  | 95,267          
|            |   |                    |  |                 
|            |   |                    |  |                 
|            |   |                    |  |                 

|At December 31, 2005, and 2004, securities at amortized cost of $181,752,000 and $176,756,000, respectively, were pledged to secure municipal deposits and for other purposes required or permitted by law.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                           
|There were no security sales in any year presented.                                                                                                                                                        
|                                                                                                                                                                                                           
|Interest on securities segregated between taxable interest and tax-exempt interest for the years ended December 31, 2005, 2004, and 2003, follows (in thousands):                                          
|                                                                                                                                                                                                           

|           |   | 2005  |  | 2004  |  | 2003 
|---------- | - | ----- |  | ----- |  | -----
|           |   |       |  |       |  |      
|Taxable    | $ | 2,974 |  | 2,647 |  | 1,753
|Tax-exempt |   | 5,009 |  | 4,601 |  | 4,559
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      
|Total      | $ | 7,983 |  | 7,248 |  | 6,312
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      
|           |   |       |  |       |  |      

|  
|--
|32



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                        
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                         
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                              
|                                                                                                                                                                                                                                         
|(3) Securities(continued)                                                                                                                                                                                                                
|                                                                                                                                                                                                                                         
|The following table presents information (in thousands) about securities with gross unrealized losses at December 31, 2005, aggregated by category and length of time that individual securities have been in a continuous loss position.

|                                      |   | Less than 12 months |  | Over 12 months
|------------------------------------- | - | ------------------- |  | --------------
|                                      |   |                     |  |               
|                                      |   | Fair                |  | Unrealized    
|Securities Available for Sale         |   | Value               |  | Losses        
|                                      |   |                     |  |               
|U.S. Agencies                         | $ | 30,231              |  | 509           
|State and municipal obligations       |   | 19,496              |  | 178           
|Corporate and foreign obligations     |   | -                   |  | -             
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Total temporarily impaired securities | $ | 49,727              |  | 687           
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Securities Held to Maturity           |   |                     |  |               
|U.S. Treasury                         | $ | 3,953               |  | 42            
|State and municipal obligations       |   | 48,626              |  | 440           
|Corporate and foreign obligations     |   | 27                  |  | 1             
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Total temporarily impaired securities | $ | 52,606              |  | 483           
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               

|The unrealized losses on the Company's investments in U.S. Treasury, U.S. Agency, and State and municipal obligations were caused by market interest rate increases from those in effect when the securities were purchased by the Company. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be, and is likely to be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company's unrealized loss on investments in corporate and foreign obligations relates principally to a $1 million investment in General Motors Acceptance Corp. (GMAC) 6.75% callable debentures, due 2012. The unrealized loss was primarily caused by (a) a decrease in profitability of GMAC's parent, General Motors Corp., and its profit forecasts by industry analysts; and (b) a sector (automotive) downgrade by industry analysts. The contractual terms of this investment do not permit GMAC to settle at a price less than the amortized cost of the investment. While GMAC's credit rating is below investment grade, the rating is due to GM's rating and does not reflect the underlying profitability and cash flow of GMAC. Management does not believe it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that the debentures would not be settled at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold this investment until a recovery of fair value, which may be maturity, it does not consider the investment in GMAC to be other-than-temporarily impaired at December 31, 2005.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The aggregate cost of the Company's cost-method investments totaled $2 million at December 31, 2005, of which $1.6 million are in Federal Home Loan Bank stock and Federal Reserve Bank stock, required by law, and are not evaluated for impairment. The remaining $0.4 million were not evaluated for impairment because (a) in accordance with accounting principles, the Company did not estimate their fair value, and (b) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The following table presents information (in thousands) about securities with gross unrealized losses at December 31, 2004, aggregated by category and length of time that individual securities have been in a continuous loss position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                      |   | Less than 12 months |  | Over 12 months
|------------------------------------- | - | ------------------- |  | --------------
|                                      |   |                     |  |               
|                                      |   | Fair                |  | Unrealized    
|Securities Available for Sale         |   | Value               |  | Losses        
|                                      |   |                     |  |               
|U.S. Agencies                         | $ | 13,207              |  | 30            
|State and municipal obligations       |   | 3,214               |  | 51            
|Corporate and foreign obligations     |   | 1,754               |  | 246           
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Total temporarily impaired securities | $ | 18,175              |  | 327           
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Securities Held to Maturity           |   |                     |  |               
|U.S. Treasury                         | $ | 1,998               |  | 3             
|State and municipal obligations       |   | 9,019               |  | 68            
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|Total temporarily impaired securities | $ | 11,017              |  | 71            
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|                                      |   |                     |  |               
|33                                   



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                        
|-----------------------------------------------------------------------------------------
|                                                                                         
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003              
|                                                                                         
|(4) Loans                                                                                
|                                                                                         
|The major classifications of loans at December 31, 2005, and 2004, follow (in thousands):

|                                        |   | 2005    |   |  | 2004    |  
|--------------------------------------- | - | ------- | - |  | ------- | -
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Commercial, financial, and agricultural | $ | 167,750 |   |  | 151,343 |  
|Mortgages:                              |   |         |   |  |         |  
|Commercial                              |   | 311,652 |   |  | 279,731 |  
|Residential - first lien                |   | 65,238  |   |  | 47,479  |  
|Residential - junior lien               |   | 59,758  |   |  | 56,492  |  
|Consumer:                               |   |         |   |  |         |  
|Automobile - indirect                   |   | 142,141 |   |  | 111,506 |  
|Other                                   |   | 24,077  |   |  | 22,401  |  
|Other                                   |   | 277     |   |  | 163     |  
|Loans held for sale                     |   | 3,404   |   |  | 4,888   |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Total loans                             |   | 774,297 |   |  | 674,003 |  
|Plus - Net deferred loan costs          |   | 4,542   |   |  | 3,085   |  
|Less - Allowance for loan losses        |   | (7,986  | ) |  | (7,215  | )
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|Loans - net                             | $ | 770,853 |   |  | 669,873 |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  
|                                        |   |         |   |  |         |  

|                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Commercial loan participations sold to others amounted to $74,901,000 and $59,929,000 at December 31, 2005, and 2004, respectively.  Residential mortgage loans serviced for others, amounted to $313,694,000 and $312,957,000 at December 31, 2005, and 2004, respectively.  None of these loans are included in the consolidated financial statements or the table above.
|                                                                                                                                                                                                                                                                                                                                                                           

|A summary of the changes in the allowance for loan losses follows (in thousands):
|---------------------------------------------------------------------------------

|                                 |   | Years Ended December 31, |  
|-------------------------------- | - | ------------------------ | -
|                                 |   |                          |  
|                                 |   |                          |  
|                                 |   | 2005                     |  
|                                 |   |                          |  
|                                 |   |                          |  
|Balance at the beginning of year | $ | 7,215                    |  
|Provision charged to operations  |   | 2,087                    |  
|Loans charged off                |   | (1,975                   | )
|Recoveries of loans charged off  |   | 659                      |  
|                                 |   |                          |  
|                                 |   |                          |  
|Balance at end of year           | $ | 7,986                    |  
|                                 |   |                          |  
|                                 |   |                          |  
|                                 |   |                          |  

|                                                                                                           
|-----------------------------------------------------------------------------------------------------------
|A summary of information regarding nonaccruing loans and other nonperforming assets follows (in thousands):
|                                                                                                           

|                                              |   | 2005  |  | 2004  |  | 2003  
|--------------------------------------------- | - | ----- |  | ----- |  | ------
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|Accruing loans 90 days or more delinquent     | $ | 412   |  | 342   |  | 116   
|Nonaccruing loans                             |   | 7,268 |  | 8,217 |  | 9,959 
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|Total nonperforming loans                     |   | 7,680 |  | 8,559 |  | 10,075
|Other real estate owned                       |   | 62    |  | -     |  | 480   
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|Total nonperforming assets                    | $ | 7,742 |  | 8,559 |  | 10,555
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|Impact of nonaccrual loans on interest income | $ | 752   |  | 700   |  | 799   
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       
|                                              |   |       |  |       |  |       

|                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------
|At December 31, 2005, the Company had no firm commitments to lend additional funds to borrowers with loans in nonaccrual status.
|                                                                                                                                
|34                                                                                                                              



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003
|                                                                           
|(4) Loans (continued)                                                      
|                                                                           
|A summary of information regarding impaired loans follows (in thousands):  
|                                                                           

|                                                           |   | 2005  |  | 2004  |  | 2003  
|---------------------------------------------------------- | - | ----- |  | ----- |  | ------
|                                                           |   |       |  |       |  |       
|                                                           |   |       |  |       |  |       
|Recorded investment at December 31,                        | $ | 7,268 |  | 8,218 |  | 9,980 
|Impaired loans with related allowance at December 31,      | $ | 555   |  | 2,047 |  | 152   
|Amount of related allowance at December 31,                | $ | 225   |  | 226   |  | 23    
|Average investment for year ended December 31,             | $ | 9,503 |  | 8,873 |  | 10,219
|Interest income recognized on a cash basis during the year | $ | 53    |  | 52    |  | 557   
|                                                           |   |       |  |       |  |       

|The Company's market area is generally Western 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 table of loan classifications. The concentrations of credit risk in 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.                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Certain executive officers, directors and their business interests are customers of the Company. Transactions with these parties are based on substantially the same terms as similar transactions with unrelated third parties and do not carry more than normal credit risk. Borrowings by these related parties amounted to $3,593,000 and $3,848,000 at December 31, 2005, and 2004, respectively. During 2005, new borrowings amounted to $665,000 (including borrowings of officers that were outstanding at the time of their election) and repayments and other reductions were $920,000.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(5) Premises and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A summary of premises and equipment at December 31, 2005, and 2004, follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                               |   | 2005   |  | 2004  
|---------------------------------------------- | - | ------ |  | ------
|                                               |   |        |  |       
|Land and land improvements                     | $ | 1,418  |  | 1,386 
|Buildings and leasehold improvements           |   | 21,240 |  | 20,874
|Furniture, fixtures, equipment, and software   |   | 18,655 |  | 17,400
|                                               |   |        |  |       
|                                               |   |        |  |       
|                                               |   | 41,313 |  | 39,660
|Less accumulated depreciation and amortization |   | 26,411 |  | 24,409
|                                               |   |        |  |       
|                                               |   |        |  |       
|Premises and equipment - net                   | $ | 14,902 |  | 15,251
|                                               |   |        |  |       
|                                               |   |        |  |       
|                                               |   |        |  |       

|                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------
|Depreciation and amortization expense amounted to $2,397,000, $2,497,000, and $2,482,000, for the years ended December 31, 2005, 2004, and 2003, respectively.
|                                                                                                                                                              

|(6) Mortgage Servicing Assets                                       
|--------------------------------------------------------------------
|                                                                    
|Changes in mortgage servicing assets were as follows (in thousands):
|                                                                    

|                  | Year ended December 31,
|----------------- | -----------------------
|                  |                        
|                  |                        
|Beginning balance | $                      
|Originations      |                        
|Amortization      |                        
|                  |                        
|                  |                        
|Ending balance    | $                      
|                  |                        
|                  |                        
|                  |                        

|  
|--
|35



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(6) Mortgage Servicing Assets (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The estimated fair value of mortgage servicing rights was approximately $2,420,000 at December 31, 2005, and $2,517,000 at December 31, 2004. The estimated fair value of mortgage servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. Additionally, estimated fair value assumes there is a willing buyer and willing seller in the transaction. Management does not intend to sell these servicing rights. Amortization expense is estimated to be $300,000 per year for each of the next five years.                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The key economic assumptions used to determine the fair value of mortgage servicing rights at December 31, 2005, and the sensitivity of such value to changes in those assumptions are summarized in the table that follows (dollars in thousands). These calculated sensitivities are hypothetical, and actual changes in the fair value of mortgage servicing rights may differ significantly from the amounts presented herein. The effect of a variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption. However, in practice, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. The changes in assumptions are presumed to be instantaneous.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|Weighted-average prepayment speed                      |   | 196  | %
|------------------------------------------------------ | - | ---- | -
|Impact on fair value of 20% adverse change             | $ | (204 | )
|Impact on fair value of 20% positive change            |   | 233  |  
|                                                       |   |      |  
|Weighted-average current coupon for similar loans      |   | 5.47 | %
|Impact on fair value of 50 basis point adverse change  | $ | (408 | )
|Impact on fair value of 50 basis point positive change |   | 117  |  

|(7) Time Deposits                                                                           
|--------------------------------------------------------------------------------------------
|                                                                                            
|At December 31, 2005, the scheduled maturity of time deposits was as follows (in thousands):

|2006 | $ | 288,547
|---- | - | -------
|2007 |   | 35,067 
|2008 |   | 15,855 
|2009 |   | 2,878  
|2010 |   | 3,846  
|     |   |        
|     |   |        
|     | $ | 346,193
|     |   |        
|     |   |        
|     |   |        

|                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Time deposits of $100,000 or more amounted to $183,318,000 at December 31, 2005, and $55,418,000 at December 31, 2004. Interest expense on all time deposits of $100,000 or more was as follows: $2,564,000 in 2005, $1,004,000 in 2004, and $1,840,000 in 2003.
|                                                                                                                                                                                                                                                                

|(8) Borrowings                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                             
|There were no short-term borrowings outstanding at December 31, 2005, or 2004. The following table presents information about short-term borrowings during each of the three years ended December 31, (dollars in thousands):
|                                                                                                                                                                                                                             

|                                    |   | 2005   |   | 2004 |  | 2003 |  
|----------------------------------- | - | ------ | - | ---- |  | ---- | -
|                                    |   |        |   |      |  |      |  
|                                    |   |        |   |      |  |      |  
|Highest amount at a month end       | $ | 34,200 |   | None |  | None |  
|Daily average amount outstanding    | $ | 5,422  |   | None |  | 15   |  
|Weighted average interest rate paid |   | 3.51   | % | N/A  |  | 1.33 | %

|  
|--
|36



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                           
|(8) Borrowings (continued)                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                           
|The following table presents information about the Company's formal available lines of credit and related loan collateral at December 31, 2005 (in thousands).  Amounts outstanding include borrowings, and undrawn letters of credit in the Company's favor of $3,124,000.
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Federal Home Loan Bank of New York                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                           
|Federal Reserve Bank of New York                                                                                                                                                                                                                                           

|Borrowings consisted of the following at December 31, 2005, and 2004 (in thousands):
|------------------------------------------------------------------------------------

|                   |   | 2005 |  | 2004
|------------------ | - | ---- |  | ----
|                   |   |      |  |     
|                   |   |      |  |     
|FHLB term Advances | $ | 754  |  | 783 
|Other              |   | 131  |  | 159 
|                   |   |      |  |     
|                   |   |      |  |     
|                   | $ | 885  |  | 942 
|                   |   |      |  |     
|                   |   |      |  |     
|                   |   |      |  |     

|                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------
|In 1995, the Bank borrowed $1,023,000 from the FHLB at an average effective rate of 2.56% to fund low-income housing projects.
|                                                                                                                              
|Scheduled maturities of the Company's borrowings at December 31, 2005, follows (in thousands):                                

|               |   |        |  | Weighted Average |     
|-------------- | - | ------ |  | ---------------- | ----
|               |   | Amount |  | Interest Rate    |     
|               |   |        |  |                  |     
|2006           | $ | 36     |  |                  | 3.87
|2007           |   | 36     |  |                  | 3.87
|2008           |   | 36     |  |                  | 3.87
|2009           |   | 36     |  |                  | 3.87
|2010           |   | 670    |  |                  | 2.63
|2011 and after |   | 71     |  |                  | 6.50
|               |   |        |  |                  |     
|               |   |        |  |                  |     
|Total          | $ | 885    |  |                  | 3.14
|               |   |        |  |                  |     
|               |   |        |  |                  |     
|               |   |        |  |                  |     

|Advances under the overnight line of credit with the FHLB of New York are payable on demand and generally bear interest at the federal funds rate plus .10 %. The Company also has access to the FHLB's Term Advance Program, which allows the Bank to borrow up to $75,467,000 at various terms and rates, subject to the Bank's pledging eligible collateral. Advances under the Federal Reserve Bank of New York are payable the following business day and bear interest at the federal funds rate plus 1.00%.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) Junior Subordinated Debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|On June 26, 2002, the Company issued $20.6 million of 30-year floating rate junior subordinated deferrable interest debentures through a wholly owned business trust. The debentures carry an interest rate of 3-month LIBOR plus 3.45% (7.97% at December 31, 2005) capped at 11.95% for the first five years. Interest is payable quarterly. The debentures' final maturity is June 26, 2032, and is callable, in whole or in part, at par after five years at the Company's option. Interest payments can be deferred for up to five years, but would restrict the Company's ability to pay dividends. All of the debentures are considered Tier I capital of the Company. The Company incurred approximately $0.6 million of issuance costs, which are amortized over ten years.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|37                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                  
|-------------------------------------------------------------------------------------------------------------------
|                                                                                                                   
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                        
|                                                                                                                   
|(10) Income Taxes                                                                                                  
|                                                                                                                   
|Total income taxes for the years ended December 31, 2005, 2004, and 2003, were allocated as follows (in thousands):
|                                                                                                                   

|                                              |   | 2005  |  |  | 2004  |  |  | 2003  | 
|--------------------------------------------- | - | ----- |  |  | ----- |  |  | ----- | 
|                                              |   |       |  |  |       |  |  |       | 
|                                              |   |       |  |  |       |  |  |       | 
|Income from operations                        | $ | 4,258 |  |  | 3,913 |  |  | 3,970 | 
|Income tax benefit from stock option exercise |   | (367) |  |  | (343) |  |  | -     | 
|Change in stockholders' equity for unrealized |   |       |  |  |       |  |  |       | 
|(loss) gain on securities available for sale  |   | (596) |  |  | (248) |  |  | 45    | 
|                                              |   |       |  |  |       |  |  |       | 
|                                              |   |       |  |  |       |  |  |       | 
|                                              | $ | 3,295 |  |  | 3,322 |  |  | 4,015 | 
|                                              |   |       |  |  |       |  |  |       | 
|                                              |   |       |  |  |       |  |  |       | 
|                                              |   |       |  |  |       |  |  |       | 

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|The components of income tax expense (benefit) relating to income from operations follow (in thousands):
|                                                                                                        

|          |   | Years ended December 31, |  
|--------- | - | ------------------------ | -
|          |   |                          |  
|          |   |                          |  
|Current:  |   | 2005                     |  
|          |   |                          |  
|          |   |                          |  
|Federal   | $ | 4,058                    |  
|State     |   | 699                      |  
|          |   |                          |  
|          |   |                          |  
|          |   | 4,757                    |  
|          |   |                          |  
|          |   |                          |  
|Deferred: |   |                          |  
|Federal   |   | (440                     | )
|State     |   | (59                      | )
|          |   |                          |  
|          |   |                          |  
|          |   | (499                     | )
|          |   |                          |  
|          |   |                          |  
|          | $ | 4,258                    |  
|          |   |                          |  
|          |   |                          |  
|          |   |                          |  

|                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Income tax expense differed from the amounts computed by applying the applicable U.S. Federal corporate tax rates to pretax income from operations as follows (in thousands):
|                                                                                                                                                                             

|                                                      |   | Years ended December 31, |  
|----------------------------------------------------- | - | ------------------------ | -
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   | 2005                     |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|Tax expense at statutory rate of 34%; 35% in 2003     | $ | 5,264                    |  
|Tax-exempt interest                                   |   | (1,703                   | )
|Nondeductible interest expense                        |   | 138                      |  
|State taxes, net of Federal benefit                   |   | 422                      |  
|Change in valuation allowance for deferred tax assets |   | (2                       | )
|Change in rate                                        |   | -                        |  
|Other                                                 |   | 139                      |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|Total                                                 | $ | 4,258                    |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|Effective tax rate                                    |   | 27.5%                    |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                      |   |                          |  
|                                                     
|38                                                   



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                
|                                                                                                                                                                                           
|(10) Income Taxes(continued)                                                                                                                                                               
|                                                                                                                                                                                           
|The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004, are presented below:
|                                                                                                                                                                                           

|Deferred tax assets                                  |   | 2005  |   |  | 2004  |  
|---------------------------------------------------- | - | ----- | - |  | ----- | -
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Allowance for loan losses - books                    | $ | 3,135 |   |  | 2,877 |  
|Incentive stock plan and retirement                  |   | 464   |   |  | 336   |  
|NOL credit from subsidiaries                         |   | 64    |   |  | 75    |  
|Interest on nonaccrual loans                         |   | 776   |   |  | 631   |  
|Minority-owned entities                              |   | 52    |   |  | 130   |  
|Net unrealized loss on available for sale securities |   | 651   |   |  | 55    |  
|Other                                                |   | 251   |   |  | 461   |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax assets before allowance                 |   | 5,393 |   |  | 4,565 |  
|Valuation allowance                                  |   | (90   | ) |  | (92   | )
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax assets                                  |   | 5,303 |   |  | 4,473 |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax liabilities:                            |   |       |   |  |       |  
|Allowance for loan losses - tax                      |   | 70    |   |  | 59    |  
|Depreciation                                         |   | 10    |   |  | 265   |  
|Mortgage servicing rights                            |   | 616   |   |  | 641   |  
|Other                                                |   | 4     |   |  | -     |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Deferred tax liabilities                             |   | 700   |   |  | 965   |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|Net deferred tax asset                               | $ | 4,603 |   |  | 3,508 |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  
|                                                     |   |       |   |  |       |  

|Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of deferred tax liabilities, the level of historical taxable income, and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets are deductible. Based on its assessment, management determined that a valuation allowance against its nonbank subsidiaries' mortgage tax credits was necessary.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(11) Stockholders' Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Payment of dividends by the Bank to the Company is limited or restricted in certain circumstances. According to federal banking law, the approval of the Office of the Comptroller of the Currency (OCC) is required for the declaration of dividends in any year in which dividends exceed the total of net income for that year plus retained income for the preceding two years. At December 31, 2005, $25,197,000 was available for dividends to the Company without the approval of the OCC.                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|39                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                               
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                    
|                                                                                                                                                               
|(12) Earnings Per Share                                                                                                                                        
|                                                                                                                                                               
|Basic and diluted earnings per share for the years ended December 31, 2005, 2004, and 2003, were computed as follows (dollars in thousands, except share data):

|                                             |   | 2005    |  | 2004    |  | 2003   
|-------------------------------------------- | - | ------- |  | ------- |  | -------
|                                             |   |         |  |         |  |        
|Basic Earnings Per Share                     |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|Net Income applicable to common shareholders | $ | 11,225  |  | 10,599  |  | 10,341 
|Weighted average common shares outstanding   |   | 479,961 |  | 478,776 |  | 477,206
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|Basic earnings per share                     | $ | 23.39   |  | 22.14   |  | 21.67  
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        
|                                             |   |         |  |         |  |        



|                                              |   |         |  |         |  |        
|--------------------------------------------- | - | ------- |  | ------- |  | -------
|Diluted Earnings Per Share                    |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Net income applicable to common shareholders  | $ | 11,225  |  | 10,599  |  | 10,341 
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Weighted average common shares outstanding    |   | 479,961 |  | 478,776 |  | 477,206
|Effect of dilutive securities - stock options |   | 13,668  |  | 23,816  |  | 12,810 
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Total                                         |   | 493,629 |  | 502,592 |  | 490,016
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|Diluted earnings per share                    | $ | 22.74   |  | 21.09   |  | 21.10  
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        
|                                              |   |         |  |         |  |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(13) Employee Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Profit Sharing Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company has a combined profit sharing and 401(k) plan covering substantially all Bank employees and a 401(k) plan for non-Bank employees upon completion of 1,000 hours of service with respect to full-time employees, and 870 hours of service for part-time employees. Contributions to the Bank plan are determined by a mathematical formula which takes into account average net income of the Bank for the current and prior year, and the level of the Bank's stockholders' equity. Both plans are subject to a minimum contribution of 3% of eligible compensation. It is the Company's policy to fund current costs as they accrue. Retirement plan expense amounted to $1,740,000, $1,415,000, and $1,645,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Employee Stock Ownership Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company has an employee stock ownership plan (ESOP) for employees of the Bank. Annual contributions are made at the discretion of the Board of Directors. ESOP expense amounted to $125,000, $121,000, and $112,000 for the years ended December 31, 2005, 2004, and 2003, respectively. Shares distributed to a participant upon termination of service are subject to a put option whereby the participant may cause the Company to purchase the shares at fair value. At December 31, 2005, and 2004, the plan held 6,558 and 6,920 shares with an estimated fair value, at the respective dates, of $2,363,000 and $2,498,000.                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|40                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                               
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                               
|(14) Incentive Stock Plans                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                               
|Stock Option Plan                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                               
|The Company's incentive stock option program for employees authorizes grants of options to purchase up to 48,000 shares of common stock. The options are granted with an exercise price equal to the estimated fair value of the common stock on the grant date. The options are exercisable at times to 25 years from the grant date. The options have no set expiration date.
|                                                                                                                                                                                                                                                                                                                                                                               
|The following summarizes outstanding and exercisable options at December 31, 2005, 2004 and 2003:                                                                                                                                                                                                                                                                              

|                                    | 2005   |   | 2004          |        | 2003
|----------------------------------- | ------ | - | ------------- | ------ | ----
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   | Weighted      |        |     
|                                    | #      |   | Average Price |        | #   
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|Options outstanding, January 1      | 44,786 |   | $             | 169.05 |     
|Granted                             | -      |   |               | -      |     
|Exercised                           | (4,099 | ) |               | 142.93 |     
|Expired                             | -      |   |               | -      |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|Options outstanding, December 31    | 40,687 |   | $             | 171.68 |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|Options exercisable, December 31    | 23,561 |   | $             | 159.87 |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|Options available for future grants | -      |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     
|                                    |        |   |               |        |     

|Options outstanding (both exercisable and unexercisable) at December 31, 2005, had exercise prices ranging from $120.17 to $293.85. The weighted average expected life of the options is seven years. Since the options have no stated expiration date, the expected life is calculated as the number of years from grant date to the grantee's 65th birthday.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                              
|The per-share fair value of stock options granted during 2004, and 2003, was $67.50 and $31.74, respectively, and was determined using the Black-Scholes option-pricing model with the following weighted average assumptions for each year:                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                              

|                        |  |  | 2004       |  | 2003      
|----------------------- |  |  | ---------- |  | ----------
|                        |  |  |            |  |           
|                        |  |  |            |  |           
|Expected dividend yield |  |  | 2.03%      |  | 2.49%     
|Risk-free interest rate |  |  | 4.27%      |  | 3.83%     
|Expected life           |  |  | 10.6 years |  | 12.2 years
|Volatility              |  |  | 13.95%     |  | 12.99%    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Phantom Stock and Stock Appreciation Rights Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company also has an incentive stock plan for management which allows for the issuance of Phantom Stock Awards (PSA) and Stock Appreciation Rights (SAR) to key employees based upon return on beginning equity. PSAs represent the right to receive, for each phantom share of common stock covered by the PSA, payment equal to the higher of the book value or market value per share of common stock on the date of exercise. Payment can be made in cash, shares of the Company, or both, at the discretion of the Board of Directors. PSAs are exercisable at the later of age 55 or 15 years of continuous employment with the Company or at normal retirement age (65). SARs represent the right to receive payment equal to the amount, if any, by which the higher of the book value or market value per share of common stock on the date of exercise exceeds the SARs' grant value. SARs are exercisable five years from the date of grant. At December 31, 2005, 2,806 PSAs were outstanding, and 1,633 SARs were outstanding at prices ranging from $38.04 to $129.02.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company had accrued a liability of $864,000 and $620,000 at December 31, 2005 and 2004, respectively, representing the vested obligation under the plan. Expenses of the plan amounted to $429,000, $404,000, and $169,000, for the years ended December 31, 2005, 2004, and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|There is no difference between the Company's method of accounting for its incentive plan and the provisions of SFAS No. 123; therefore, no pro forma information is provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|41                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

#### 

#### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                        
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                        
|(15) Leases                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                        
|The Company leases certain buildings and office space under operating lease arrangements. Rent expense under these arrangements amounted to $1,252,000 in 2005, $1,250,000 in 2004, and $1,092,000 in 2003. Real estate taxes, insurance, maintenance, and other operating expenses associated with leased buildings and office space are generally paid by the Company.
|                                                                                                                                                                                                                                                                                                                                                                        
|A summary of noncancellable, long-term operating lease commitments as of December 31, 2005, follows (in thousands):                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                        

|Years ending December 31, |  |   | Amount
|------------------------- |  | - | ------
|                          |  |   |       
|                          |  |   |       
|2006                      |  | $ | 1,172 
|2007                      |  |   | 1,206 
|2008                      |  |   | 1,210 
|2009                      |  |   | 997   
|2010                      |  |   | 690   
|2011 and after            |  |   | 4,461 
|                          |  |   |       
|                          |  |   |       
|Total                     |  | $ | 9,736 
|                          |  |   |       
|                          |  |   |       
|                          |  |   |       

|                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(16) Commitments and Contingencies                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                          
|In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the notional amount of the Company's significant commitments and their respective carrying amount, where applicable. Most of these commitments are not included in the Company's consolidated balance sheet (in thousands).
|                                                                                                                                                                                                                                                                                                                                                          



|                                        |   | Year ended December 31, | 
|--------------------------------------- | - | ----------------------- | 
|                                        |   |                         | 
|                                        |   |                         | 
|                                        |   | 2005                    | 
|                                        |   |                         | 
|                                        |   | Notional                | 
|                                        |   | Amount                  | 
|                                        |   |                         | 
|Commitments to extend credit:           |   |                         | 
|Home equity lines of credit             | $ | 49,571                  | 
|Commercial real estate and construction | $ | 40,760                  | 
|Residential real estate at fixed rates  | $ | 3,344                   | 
|Commercial and other                    | $ | 87,772                  | 
|Standby letters of credit               | $ | 12,368                  | 
|Commitments to sell real estate loans   | $ | 3,404                   | 
|                                        |   |                         | 



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Commitments to extend credit are agreements to lend to customers and generally have fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and also require payment of a fee. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and third party. 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 credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. The Company's credit policy generally requires customers to provide collateral, usually in the form of customers' operating assets or property, prior to disbursement of approved loans.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|42                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(16) Commitments and Contingencies(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Commitments to originate fixed-rate loans are made when a borrower executes a rate-lock agreement. At the time of execution, the Company generally charges a rate-lock fee, which approximates the fair value of the Company's commitment. These commitments usually have terms ranging from 30 to 45 days. The Company enters into commitments to sell certain fixed-rate residential real estate loans (usually those subject to the foregoing rate-locks) upon funding of the underlying loan. These commitments to sell are usually funded within five days of the commitment and are recorded in the consolidated balance sheet at estimated fair value.                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company has committed $500,000 for an investment in Trillium Lakefront Partners, LLC.  This venture capital fund is a community-backed initiative in support of new business and jobs growth in the company's market area.  At December 31, 2005, the Company had funded $97,000 of this commitment and reported the investment in other assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Bank is required to maintain reserve balances in cash on hand and with the Federal Reserve Bank. The average amount of such reserve balances for the year ended December 31, 2005, was approximately $2,461,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In the normal course of business, the Company has various contingent liabilities outstanding that are not included in the consolidated financial statements. Management does not anticipate any material losses as a result of these contingent liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(17) Regulatory Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (as set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2005, that the Company and Bank meet all capital adequacy requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|As of December 31, 2005 and as of the most recent notification from its regulators, the Company and the Bank are well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company and Bank must maintain a minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.                                                                                                                                                                                                                                                                                                                                                                                           

|                                        |   |                          
|--------------------------------------- | - | -------------------------
|                                        |   | December 31, 2005        
|                                        |   |                          
|(Dollars in thousands)                  |   | Actual Regulatory Capital
|                                        |   |                          
|                                        |   | Amount                   
|                                        |   |                          
|                                        |   |                          
|Leverage capital (Tier 1) as percent of |   |                          
|three-month average assets:             |   |                          
|Company                                 | $ | 97,344                   
|Bank                                    | $ | 85,532                   
|As percent of risk-weighted,            |   |                          
|period-end assets                       |   |                          
|Core capital (Tier 1)                   |   |                          
|Company                                 | $ | 97,344                   
|Bank                                    | $ | 85,532                   
|Total capital (Tiers 1 and 2)           |   |                          
|Company                                 | $ | 105,330                  
|Bank                                    | $ | 93,518                   
|                                        |   |                          
|                                        |   |                          
|43                                     

##### 

##### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003
|                                                                           
|(17) Regulatory Matters(continued)                                         
|                                                                           
|                                                                           
|                                                                           
|(Dollars in thousands)                                                     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Leverage capital (Tier 1) as percent of                                    
|three-month average assets:                                                
|Company                                                                    
|Bank                                                                       
|As percent of risk-weighted,                                               
|period-end assets                                                          
|Core capital (Tier 1)                                                      
|Company                                                                    
|Bank                                                                       
|Total capital (Tiers 1 and 2)                                              
|Company                                                                    
|Bank                                                                       
|                                                                           

##### 

|(18) Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company is organized into two reportable segments: (a) the Company and its banking subsidiary (Bank), and (b) CNB Mortgage Company (CNBM). These have been segmented due to differences in their distribution channels, the volatility of their earnings, and internal and external financial reporting requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Bank segment provides a wide range of credit products and banking services to retail and commercial customers, largely within the markets the Company serves. Among the services provided by this segment are commercial and consumer lending, including junior lien residential mortgage loans, loan servicing, deposit products, cash management services, securities, and other related products. These products and services are offered through several delivery channels which include traditional community banking offices, automated teller machines, telephone banking, and internet banking. CNBM originates residential mortgage loans for consumers and sells all of those loans either to the Bank or to third-party investors in the secondary market.                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The financial information of these segments has been compiled utilizing the accounting policies described in Note 1. Intersegment revenue, mainly servicing release premiums, is earned on the basis of similar third-party transactions. Indirect administrative expenses are allocated among segments based upon the segments' use of indirect resources. Income taxes are allocated to segments based on the Company's marginal statutory tax rate adjusted for any tax-exempt income or non-deductible expenses.  The accounting policies and processes utilized in compiling segment financial information is based on U.S. generally accepted accounting principles, as CNBM is subject to stand-alone external financial reporting. The reportable segment information as of and for the years ended December 31, 2005, 2004, and 2003 follows (dollars in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|44                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003
|                                                                           
|(18) Segment Information(continued)                                        

|                          |   |           | 
|------------------------- | - | --------- | 
|                          |   | 2005      | 
|                          |   |           | 
|                          |   |           | 
|                          |   | Bank      | 
|                          |   |           | 
|Net interest income       | $ | 39,014    | 
|Non-interest income       |   | 11,759    | 
|                          |   |           | 
|                          |   |           | 
|Total revenues            |   | 50,773    | 
|                          |   |           | 
|                          |   |           | 
|Provision for loan losses |   | 2,087     | 
|Operating expenses        |   | 32,966    | 
|                          |   |           | 
|                          |   |           | 
|Total expenses            |   | 35,053    | 
|                          |   |           | 
|                          |   |           | 
|Income before tax         |   | 15,720    | 
|Income tax                |   | 4,258     | 
|                          |   |           | 
|                          |   |           | 
|Net income                | $ | 11,462    | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|Total identifiable assets | $ | 1,071,488 | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   | 2004      | 
|                          |   |           | 
|                          |   |           | 
|                          |   | Bank      | 
|                          |   |           | 
|Net interest income       | $ | 35,906    | 
|Non-interest income       |   | 11,997    | 
|                          |   |           | 
|                          |   |           | 
|Total revenues            |   | 47,903    | 
|                          |   |           | 
|                          |   |           | 
|Provision for loan losses |   | 1,680     | 
|Operating expenses        |   | 31,396    | 
|                          |   |           | 
|                          |   |           | 
|Total expenses            |   | 33,076    | 
|                          |   |           | 
|                          |   |           | 
|Income before tax         |   | 14,827    | 
|Income tax                |   | 3,913     | 
|                          |   |           | 
|                          |   |           | 
|Net income                | $ | 10,914    | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|Total identifiable assets | $ | 974,566   | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   | 2003      | 
|                          |   |           | 
|                          |   |           | 
|                          |   | Bank      | 
|                          |   |           | 
|Net interest income       | $ | 33,481    | 
|Non-interest income       |   | 12,531    | 
|                          |   |           | 
|                          |   |           | 
|Total revenues            |   | 46,012    | 
|                          |   |           | 
|                          |   |           | 
|Provision for loan losses |   | 1,250     | 
|Operating expenses        |   | 29,872    | 
|                          |   |           | 
|                          |   |           | 
|Total expenses            |   | 31,122    | 
|                          |   |           | 
|                          |   |           | 
|Income before tax         |   | 14,890    | 
|Income tax                |   | 2,924     | 
|                          |   |           | 
|                          |   |           | 
|Net income                | $ | 11,966    | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|Total identifiable assets | $ | 907,252   | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|                          |   |           | 
|45                       

#### 

#### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                               
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                    
|                                                                                                                                                               
|(19) Condensed Financial Information - Parent Company Only                                                                                                     
|                                                                                                                                                               
|The following are the condensed balance sheets, statements of income, and statements of cash flows for Canandaigua National Corporation (dollars in thousands).

|Balance Sheets                             |   |              |  |  |        | 
|------------------------------------------ | - | ------------ |  |  | ------ | 
|                                           |   | December 31, | 
|                                           |   |              | 
|                                           |   |              |  |  |        | 
|                                           |   | 2005         |  |  | 2004   | 
|                                           |   |              |  |  |        | 
|Assets:                                    |   |              |  |  |        | 
|Cash in subsidiary bank                    | $ | 230          |  |  | 4,097  | 
|Securities available for sale              |   | 8,636        |  |  | 6,988  | 
|Investment in Bank                         |   | 84,727       |  |  | 76,299 | 
|Investment in nonbank subsidiaries         |   | 2,278        |  |  | 1,914  | 
|Other assets                               |   | 918          |  |  | 1,063  | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total assets                               | $ | 96,789       |  |  | 90,361 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Liabilities:                               |   |              |  |  |        | 
|Junior subordinated debentures             | $ | 20,222       |  |  | 20,160 | 
|Other liabilities                          |   | 28           |  |  | 28     | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total liabilities                          |   | 20,250       |  |  | 20,188 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Stockholders' Equity                       |   | 76,539       |  |  | 70,173 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|Total liabilities and stockholders' equity | $ | 96,789       |  |  | 90,361 | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 
|                                           |   |              |  |  |        | 

|Statements of Income                               |   |                          |   |  |        |   |  |        |  
|-------------------------------------------------- | - | ------------------------ | - |  | ------ | - |  | ------ | -
|                                                   |   | Years ended December 31, |  
|                                                   |   |                          |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   | 2005                     |   |  | 2004   |   |  | 2003   |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  
|Dividends from Bank                                | $ | 2,560                    |   |  | 2,400  |   |  | 480    |  
|Dividends from nonbank subsidiaries                |   | -                        |   |  | 500    |   |  | 2,100  |  
|Other income                                       |   | 442                      |   |  | 425    |   |  | 459    |  
|Interest and other expenses                        |   | (1,505                   | ) |  | (1,160 | ) |  | (1,118 | )
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  
|Income before undistributed income of subsidiaries |   | 1,497                    |   |  | 2,165  |   |  | 1,921  |  
|Undistributed current year income of subsidiaries  |   | 9,501                    |   |  | 8,192  |   |  | 7,462  |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  
|Income before taxes                                |   | 10,998                   |   |  | 10,357 |   |  | 9,383  |  
|Income tax benefit                                 |   | 227                      |   |  | 242    |   |  | 958    |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  
|Net income                                         | $ | 11,225                   |   |  | 10,599 |   |  | 10,341 |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  
|                                                   |   |                          |   |  |        |   |  |        |  

##### 

|  
|--
|46

##### 

##### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                          
|---------------------------------------------------------------------------
|                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003
|                                                                           
|(19) Condensed Financial Information - Parent Company Only(continued)      

|Statements of Cash Flow                             |   |                          |   |  |        |   |  |        |  
|--------------------------------------------------- | - | ------------------------ | - |  | ------ | - |  | ------ | -
|                                                    |   | Years ended December 31, |  
|                                                    |   |                          |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   | 2005                     |   |  | 2004   |   |  | 2003   |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Cash flows from operating activities                |   |                          |   |  |        |   |  |        |  
|Net income                                          | $ | 11,225                   |   |  | 10,599 |   |  | 10,341 |  
|Adjustments to reconcile net income to net cash     |   |                          |   |  |        |   |  |        |  
|from operating activities:                          |   |                          |   |  |        |   |  |        |  
|Depreciation and amortization and accretion         |   | 76                       |   |  | 81     |   |  | 93     |  
|Undistributed current year earnings of subsidiaries |   | (9,501                   | ) |  | (8,192 | ) |  | (7,462 | )
|Other                                               |   | 108                      |   |  | (276   | ) |  | 447    |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Net cash provided by operating activities           |   | 1,908                    |   |  | 2,212  |   |  | 3,419  |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Cash flows from investing activities:               |   |                          |   |  |        |   |  |        |  
|Purchase of securities available for sale           |   | (1,484                   | ) |  | (999   | ) |  | (2,459 | )
|Proceeds from call of securities available for sale |   | -                        |   |  | 2,544  |   |  | 2,000  |  
|Fixed assets purchased, net                         |   | -                        |   |  | (1     | ) |  | -      |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Net cash (used in) provided by investing activities |   | (1,484                   | ) |  | 1,544  |   |  | (459   | )
|                                                    |   |                          |   |  |        |   |  |        |  
|Cash flows from financing activities:               |   |                          |   |  |        |   |  |        |  
|Proceeds treasury stock transactions, net           |   | (1,386                   | ) |  | 553    |   |  | 1      |  
|Dividends paid                                      |   | (2,905                   | ) |  | (2,531 | ) |  | (2,267 | )
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Net cash used in financing activities               |   | (4,291                   | ) |  | (1,978 | ) |  | (2,266 | )
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Net (decrease) increase in cash                     |   | (3,867                   | ) |  | 1,778  |   |  | 694    |  
|Cash at beginning of year                           |   | 4,097                    |   |  | 2,319  |   |  | 1,625  |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|Cash at end of year                                 | $ | 230                      |   |  | 4,097  |   |  | 2,319  |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  
|                                                    |   |                          |   |  |        |   |  |        |  

|                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(20) Fair Values of Financial Instruments                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                               
|The following methods and assumptions were used to estimate the fair value of each class of financial instrument:                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                               
|Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                               
|For these short-term instruments that generally mature 90 days or less, the carrying value approximates fair value.                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                               
|Securities                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                               
|Fair values for securities are based on quoted market prices or dealer quotes, where available. Where quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Included herein are the Bank's required investments in stock of the Federal Home Loan Bank and the Federal Reserve Bank.
|                                                                                                                                                                                                                                                                                                                                               
|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, consumer, and other.                                                                                     
|                                                                                                                                                                                                                                                                                                                                               
|47                                                                                                                                                                                                                                                                                                                                             

#### 

#### 

|CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES                                                                                                                                                                                                                                                                                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                           
|Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                           
|(20) Fair Values of Financial Instruments(continued)                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                           
|The fair value of performing loans is calculated by discounting scheduled cash flows through the 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. 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.                            
|                                                                                                                                                                                                                                                                                                                                           
|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 on time deposits.
|                                                                                                                                                                                                                                                                                                                                           
|Borrowings                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                           
|The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity using market rates presently available for new borrowings.                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                           
|Junior Subordinated Debentures                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                           
|The fair value of the adjustable-rate junior subordinated debentures approximates their carrying amount.                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                           
|The estimated fair values of the Company's financial instruments are as follows (dollars in thousands):                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                           

|                                  |   | December 31, 2005 |  | December 31, 2004
|--------------------------------- | - | ----------------- |  | -----------------
|                                  |   |                   |  |                  
|                                  |   |                   |  |                  
|                                  |   | Carrying          |  | Fair             
|                                  |   | Amount            |  | Value(1)         
|                                  |   |                   |  |                  
|Financial Assets:                 |   |                   |  |                  
|Cash and equivalents              | $ | 50,844            |  | 50,844           
|Securities                        | $ | 219,273           |  | 219,170          
|Loans-net                         | $ | 770,853           |  | 736,338          
|Mortgage servicing rights         | $ | 1,569             |  | 2,420            
|                                  |   |                   |  |                  
|Financial Liabilities:            |   |                   |  |                  
|Deposits:                         |   |                   |  |                  
|Demand accounts, savings and      |   |                   |  |                  
|money market accounts             | $ | 620,931           |  | 620,931          
|Time deposits                     | $ | 346,193           |  | 342,605          
|Borrowings                        | $ | 885               |  | 728              
|Junior subordinated debentures    | $ | 20,222            |  | 20,619           
|                                  |   |                   |  |                  
|Off-balance-sheet commitments(2): |   |                   |  |                  
|Letters of credit                 | $ | 186               |  | 186              
|Unused lines of credit            | $ | -                 |  | -                
|Commitments to originate loans    | $ | 2                 |  | 2                
|                                  |   |                   |  |                  

|(1)Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                               
|(2)Fair value of off balance-sheet commitments approximates the fee charged to make the commitments.                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                               
|48